Moody's affirms Forest Oil

Moody's Investors Service said it affirmed Forest Oil Corp.'s ratings and retained its existing negative outlook upon its announced agreement to acquire The Houston Exploration Co.

The merger is likely a credit positive due to significant over-lapping core areas of operation, an enhanced ability to high-grade capital spending and sharply curtail spending in each firm's less attractive operating areas for potentially reduced reserve replacement costs, a more risk diversified prospect portfolio, an expected high grading of the existing reserve base and debt reduction with a planned $600 million of divestitures and due to increased pro-forma funded reserve-scale and diversification, Moody's said.

However, retaining a negative outlook reflects (i) Forest Oil's need to finally execute its divestiture of Alaskan reserves and extinguish the associated $375 million of gross non-recourse debt, (ii) a need for a demonstrated improving pro-forma first-half 2007 operating trends, (iii) the acquisition's nearly 50% of equity funding, (iv) the need for pending year-end 2006 reserve replacement, reserve replacement cost and production trends are supportive of the existing ratings and (v) further review of the acquisition shortly with Forest Oil management, the agency said.

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