S&P removes Forest Oil from watch

Standard & Poor's said it affirmed its BB- long-term corporate credit rating and B-2 short-term rating on Forest Oil Corp. and removed the ratings from CreditWatch with negative implications, where they were placed on Sept. 12 following the company's announced spinoff of its offshore Gulf of Mexico reserves to Mariner Energy Inc.

The outlook is negative.

Forest's offshore Gulf of Mexico reserves represent about 24% of the company's total reserves and almost half of production, the agency said. Forest shareholders will receive about 0.8 shares of Mariner common stock for each Forest share, representing an estimated 58% of the common shock of Mariner on a diluted basis. Forest will receive $200 million of cash, which S&P said the company intends to use to pay down debt. Total debt will be reduced by slightly more than 20%.

S&P said the spinoff could have favorable implications for Forest's business risk profile over the intermediate term. The offshore Gulf of Mexico assets are short lived, and significant future capital spending would be required to maintain current production levels.

The agency also said Forest's cost structure and reserve replacement record remain concerns. In 2004, lifting costs were $8.29 per barrel of oil equivalent and are expected by S&P to be higher following the spinoff.

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