Forest Oil and Small Cap Natural Gas Producers Well Positioned

By the signs we see, natural gas production should be a good business in the next few years.  There are likely to be several top performers in our small cap category.  Some of the stocks with higher McDep Ratios may have higher potential.  The highest McDep Ratio stock also has high debt.  Some of the lower McDep Ratio stocks have short reserve lives implying less predictability.   

After updating estimates for latest operating results and futures prices, we continue to recommend Forest Oil as a reasonable investment choice from a valuation point of view.  We have been tracking the stock for decades and have rarely if at all recommended it.  At times the company distinguished itself as in the Gulf of Mexico.  At other times it had too much debt.  Meanwhile management seemed top heavy with members from the same family.  Total return to stockholders has been undistinguished particularly during years of hard times in the industry.  Forest Oil today is a changed company as we discuss in our analysis.

Listening to the conference call last week we are further encouraged.  Reserve additions during the first nine months were somewhat better than the three-fold replacement rate we mentioned.  Moreover the source of gains was all in North America, leaving South Africa for future additions.  While the Cook Inlet of Alaska accounted for half the gains, there appears to be more good news ahead for that area also.

We like announcement of a deal with Anadarko to explore on Forest's lands in the Fort Liard area just across the border from Alberta in Canada's Northwest Territories.  That is the practical leading edge of natural gas exploration where drilling has been light and yet pipeline access is available.

Investors can expect Forest stock to perform in part like its peers - sometimes volatile.  We think the stock has some valuation advantage and it appears to be well positioned to benefit with any favorable developments.