Dubious Strategy Means More Downside for This Oil and Gas Stock

Dubious Strategy Means More Downside for This Oil and Gas Stock

Forest Oil recently announced that it is selling its oil and gas assets located in the Texas Panhandle Area to Templar Energy for $1 billion. This is a big sum of money for a company with a market capitalization of $600 million. Is this sale going to bring value to shareholders? I seriously doubt it, and here's why.

Selling streak
Forest Oil is definitely on a selling streak. The company has sold its South Louisiana properties for $220 million back in November 2012. This sale was followed by the sale of properties in South Texas for $307 million in February 2013. In September, the company sold a portion of its undeveloped acreage in the Permian Basin of West Texas for $35 million. And this deal was followed by the sale of its Texas Panhandle Area assets.

The CEO of the company has stated that it's a part of the strategic deleveraging process. The long-term debt of Forest Oil is significant and stands at $1.6 billion. The proceeds from the recent sale are expected to be used to pay off a big part of this debt.

Was it really necessary to turn the company into an asset shop? The first big debt payment of $1 billion is due 2019, which is followed by $500 million in 2020. Surely, the company had enough time to deal with the problem.

Eagle Ford focus
Forest Oil has stated that it is planning to maintain development efforts in the Eagle Ford shale. Eagle Ford has shown good dynamics for Forest Oil, as gross sales volumes rose 59% in the second quarter in comparison with the first quarter of this year.

Focus on Eagle Ford is becoming popular. Swift Energy is looking to sell its Central Louisiana assets and focus on the Eagle Ford. EXCO Resources recently bought Eagle Ford assets from Chesapeake Energy. However, these moves were not a boon for these companies' stocks, which are down 21% and 15% respectively.

In the case of both Swift Energy and EXCO, the focus on the Eagle Ford looks optimal. EXCO acquired new assets, while Swift plans to use the proceeds of the Central Louisiana assets sale for its capital expenditures program.

On the contrary, Forest Oil is selling its asset to repay debt, the biggest part of which is due 2019. At the end of the second quarter, the company had less than $1 million of cash on its balance sheet. If Forest Oil spends most of the asset sale proceeds on debt, where would the growth come from?

Bottom line
This is a doubtful strategy. The company was unable to show growth with the assets that it had, and is now selling them back. Even if all the proceeds were used to repay debt, more than $600 million of debt would remain. And this debt must be serviced with a significantly decreased asset base.

To show growth, Forest Oil could be forced into acquiring new assets. This would mean new debt. Such a circle is not a good idea for any company.

Although the stock dropped significantly after the announcement of the sale, I believe there's more downside to come. The second-quarter growth in the Eagle Ford is good, but Forest Oil would have to show much more than this to impress investors.

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The article Dubious Strategy Means More Downside for This Oil and Gas Stock originally appeared on Fool.com.

Vladimir Zernov has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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