Forest Oil Corporation (FST) reported its third-quarter 2009 earnings of 48 cents per share, compared with the Zacks Consensus Estimate of 53 cents and a year-ago profit of $1.26. Before adjusting one-time items, earnings were $1.53 per share. The results came in below expectations mainly due to lower sales volumes. Sales volumes for the quarter came in at 476 MMcfe/d (77% natural gas), down 9% from 520 MMcfe/d in the corresponding 2008 period. The decrease in production was due to deferred and divested volumes. During the quarter, production expenses decreased approximately 24% year-over-year to $1.17 per Mcfe, mainly on the back of a fall in production. Unit general and administrative expenses for the quarter was essentially flat year-over-year to 28 cents per Mcfe, while depreciation and depletion expenses for the quarter decreased 48% year-over-year to $1.49 per Mcfe due mainly to a non-cash ceiling test write-down of oil and gas properties. Forest invested $76.9 million during the quarter in exploration and development activities. At the end of the quarter, the company had $5.1 million in cash and net long-term debt of approximately $2.48 billion (debt-to-capitalization ratio of 71.1%). The company revised downward its net sales volume guidance to reflect the effects of asset sales and pipeline shut-ins. Total net sales volume for 2009 will be affected by 3 Bcfe of net sales. As a result of ongoing cost cutting initiatives, the company also reduced its previous production expense guidance by 8% and G&A expense by 17%. Despite the improving commodity-price environment, we remain concerned about the company's debt-heavy balance sheet as well as its weak production and reserve growth profile. Forest recently revised downward towards its net sales volume for 2009, citing assets sales and pipeline/infrastructure shut-ins. As such, we see limited upside from current levels and prefer other better positioned names in this space.

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