Forest Oil Bonds Reach Record High on Merger With SabineCaroline Chen
Forest Oil Corp. bonds surged to a record after Sabine Oil & Gas LLC agreed to buy the energy producer, which has been struggling with dwindling cash flow.
Forest’s $222.1 million of 7.5 percent notes due in 2020 climbed 16.5 cents to 104 cents on the dollar for a yield of 6.7 percent at 4:14 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The bonds of the Denver-based company had traded at an all-time low in March, yielding more than 11 percent, as it faced a potential breach of loan protections. The merger through an all-stock transaction with Sabine Oil & Gas, announced today, would make the combined business one of the biggest operators in East Texas.
The new entity, which will be called Sabine Oil & Gas Corp., will have “enhanced financial strength and flexibility,” Shane Bayless, Sabine’s chief financial officer, said during a conference call with investors today. Sabine plans to quickly assess opportunities to sell assets and reduce indebtedness, he said.
Forest’s senior unsecured debt is ranked Caa1 by Moody’s Investors Service, a grade that denotes “very high credit risk,” according to the ratings company. Moody’s today affirmed Forest’s unsecured notes rating, and changed its outlook to stable from negative.
The credit grader also placed Sabine’s unsecured debt rating of Caa2 under review for an upgrade.
The energy producer’s bondholders will have the option to exercise a change-of-control provision that allows them to sell their notes at 101 cents on the dollar plus accrued and unpaid interest.
If creditors don’t exercise that option, Forest may sell new bonds to finance a tender offer for the existing debt, according to the presentation slides during the call today. Forest also has the option to call its $578 million in 7.25 percent bonds due 2019, in the event that prices reach 102.42 cents on the dollar, Bloomberg data show. Its 7.5 percent notes due 2020 can be called starting 2016.
The two energy providers have “complementary asset positions” in their Texas and Louisiana shale properties “which will drive operating and capital synergies from the scale of a combined asset base,” Brian Gibbons, an analyst at New York-based CreditSights Inc., wrote in a note to clients today. The combined assets will be 2.4 times that of Forest alone, and 1.7 times that of Sabine, he said.
Gibbons recommended investors sell their bonds back to Forest under the change-of-control provision given the “unresolved Eagle Ford potential and uncertainty on the ultimate corporate structure.”
Forest’s bonds had fallen by the most on record in February when it said it would re-evaluate its Eagle Ford properties in Texas. Forest had said it would slow drilling in Eagle Ford, a shale formation that helped stoke the North American oil production renaissance, attracting billions of dollars in drilling and acquisitions.
The cost to protect Forest’s bonds against losses for five years fell 378.9 basis points to 550 basis points at 4:22 p.m. in New York, according to data provider CMA, which is owned by McGraw Hill Financial Inc. and compiles prices quoted by dealers in the privately negotiated market.
The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.