--Forest Oil, Schlumberger to develop Forest's Eagle Ford Shale
land in Texas
--Future drilling between companies to be on a 50/50 basis
--Shares of both companies lower
(Updates with analyst comments, additional background)
By Alison Sider and Ben Fox Rubin
Forest Oil Corp. (FST) inked a strategic partnership with
oil-fields services giant Schlumberger Ltd. (SLB) to develop the
energy producer's Eagle Ford Shale land in Gonzales County, Texas,
allowing for accelerated production growth and improvement of the
project's economics.
Schlumberger will pay a $90 million drilling carry in the form
of future drilling and completion services and related development
capital in order to earn a 50% working interest in Forest's Eagle
Ford Shale acreage position. Forest and Schlumberger will then
participate in future drilling on a 50/50 basis.
"We believe that our Eagle Ford position is a valuable oil asset
and being aligned and working together cooperatively with a
strategic partner such as Schlumberger will greatly enhance the
value of this important asset," Forest Chief Executive Patrick R.
McDonald said.
As natural gas prices have tumbled, Forest and other companies
that focus on natural-gas production have seen revenue decline and
have struggled to shift production toward oil production, which is
more lucrative but also more costly.
The company has sold some of its noncore assets in an effort to
improve its balance sheet. In January, the company sold properties
in South Texas, excluding the Eagle Ford Shale, for about $307
million to raise cash to repay debt.
Last year Forest tried to find a joint venture partner for its
oil-rich Eagle Ford acreage, but later said it would go it alone in
the area, even at the costs of letting eases expire.
But with the agreement announced Friday, that won't be
necessary, Mr. McDonald said during a conference call following the
announcement. The company will be able to hold onto about 15,000
acres where its leases would have otherwise expired without extra
cash needed to drill there.
The deal will allow Forest to drill more quickly in the Eagle
Ford, and it will add two rigs by 2014 to the one to two it has
working there. The company expects its production in the region to
more than double by the end of 2014.
RBC Capital Markets analyst Scott Hanold said the price for
Forest's acreage was unimpressive, and having a services company on
the other end of the deal may indicate that Forest didn't have many
options.
"Having a service provider step in as its partner implies a lack
of interest by other E&Ps, private equity, or international oil
companies that have typically partnered in these transactions," Mr.
Hanold wrote Friday.
But Simmons & Co. International analyst Bill Herbert wrote
in a client note that the deal solves Forest's capital problems and
gives Schlumberger a chance to show off the "comprehensive breadth
and depth" of the technology it offers to domestic oil and gas
producers.
"And in order to do this, Schlumberger needed acreage and
opportunity and Forest needed capital. Accordingly the match was
made," Mr. Herbert wrote.
Shares of Forest Oil fell 1.8% Friday morning to $4.93. Shares
of Schlumberger fell 1.7% to $75.82.
Write to Ben Fox Rubin at ben.rubin@dowjones.com
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