This Oil Stock Is Not out of the Woods Yet

I've already written that I dislike Forest Oil's asset divestment strategy. The stock lost 20% since the article was published and is down 35% year-to-date. Forest Oil recently released its third-quarter results, and it's time to ask if the company has now become cheap enough to buy.

Focus on Eagle Ford yet to yield results
After the sale of its Panhandle Area assets, Forest Oil will be left holding 19,500 net acres in the Eagle Ford and 162,000 net acres in East Texas, North Louisiana, and Arkansas. The latter area is a natural gas play. Due to low natural gas prices, Forest Oil was relatively inactive in this area and drilled just five wells during 2013.

The goal of the company is to extract value from its Eagle Ford assets. Focusing on the Eagle Ford yielded positive results for companies like Penn Virginia and Rosetta Resources . Penn Virginia, which holds 62,300 net acres in the Eagle Ford, is enjoying a terrific year. Thanks to the fact that 90% of its Eagle Ford reserves are oil and liquid natural gas, the stock rallied 109%. Penn Virginia estimates that its production will grow by 65%-85% in 2014.

Rosetta Resources, which holds 65,000 acres in the Eagle Ford, benefits from the fact that 75% of its acreage is located in the liquids-rich area. Rosetta's total daily production grew 4% quarter-over-quarter. This news disappointed investors who were expecting better results, but the stock is still up 28% this year.

Can Forest Oil repeat the success of those companies? To do that, Forest Oil has to deliver good results. The company finished the third quarter with adjusted earnings of $7 million. Forest Oil states that it is on track to average 2,800 barrels of oil equivalent a day from Eagle Ford in 2013, and believes it could raise this number to 6,000 BOE in 2014.

To do that, the company plans to drill as much as 80 wells. Forest Oil states that the average cost to drill and complete wells was $5.75 million in the third quarter. This is a 10% improvement in cost if compared to the second quarter of this year.

It's important to note that the $1 billion that Forest Oil will receive from the sale of its Panhandle Area assets will go to reduce its indebtedness. Long-term debt stood at $1.6 billion at the end of the third quarter, so you can see that Forest Oil will still have $600 million of debt after this sale is completed. It is quite worrisome that none of this money is going to the purchase of new assets in the area of operational focus.

What to look for going forward
Forest Oil has yet to deliver on Eagle Ford. The company is going to drill 80 wells, but will it lead to the production increase that Forest Oil expects? Oil is a risky business, and currently the company is relying on the performance of a single asset.

Here's another point. Typically, there are two ways for a small independent oil company to deliver value to shareholders. The first is to succeed in the business. The second is to become a takeover target, and to be sold at a premium to a bigger player.

However, Forest Oil has little to offer now. The company turned itself into an asset shop and is left with the Eagle Ford assets and the gas play. The gas play cannot be sold at a high price due to the fact that natural gas prices are stubbornly stuck below $4. And, as I said before, Forest Oil is yet to show the worthiness of its Eagle Ford assets.

All in all, there may not be much additional downside ahead for Forest Oil, but I don't see much upside either.

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The article This Oil Stock Is Not out of the Woods Yet originally appeared on

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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