First Reserve’s Sabine Oil to Buy Troubled Forest With StockJim Polson
First Reserve Corp.’s Sabine Oil & Gas agreed to buy struggling Forest Oil Corp. in an all-stock transaction to create one of the biggest energy producers in East Texas.
Sabine holders will own 73.5 percent of the combined company, leaving Forest Oil shareholders with 26.5 percent, according to a statement today. Sabine’s Chief Executive Officer David Sambrooks declined to give a value for the deal on a conference call. Combined debt will be $2.2 billion.
The announcement drove the bonds of Forest Oil to a record high and pushed the stock up as much as 40 percent. Forest Oil had burned cash for 12 straight quarters and the shares had plunged 97 percent since 2008 on disappointing results. Prospects in East Texas, site of the state’s first oil boom, have revived with the onset of horizontal drilling and hydraulic fracturing.
“We can do this more efficiently together,” Sambrooks said on today’s call. “There will be significant savings.”
Named Sabine Oil & Gas Corp., the new company will be listed on the New York Stock Exchange and led by Sabine’s current executive management team. The deal will be tax-free to Forest Oil’s shareholders and is expected to close in the third or fourth quarter, according to the statement.
The combined company will hold drilling rights on 207,000 net acres in East Texas, and another 65,000 acres in the Eagle Ford region of West Texas. It will have sufficient cash and credit to fund its drilling program through 2015 without accessing capital markets, Sabine Chief Financial Officer Shayne Bayless said on the call.
It plans unspecified asset sales to pare debt, Sambrooks said. Total net acreage on closing will be 424,000.
First Reserve owns more than 99 percent of Houston-based Sabine, formed as a joint venture in 2006 with Nabors Industries Ltd., according to the closely held producer’s annual report. Nabors sold out in 2012. Sponsors invested more than $1.5 billion in the business through Dec. 31, according to the filing.
First Reserve is among the oldest private-equity firms focused on energy, investing more than $26 billion since it was formed in 1983. Holdings range from stakes in Cobalt International Energy Inc., an international offshore explorer, to former Chesapeake Energy Corp. CEO Aubrey McClendon’s American Energy Utica.
At the beginning of April, Denver-based Forest Oil, which was formed in 1916, had agreed with lenders to cut the borrowing capacity on a credit line in exchange for loosening restrictions that the energy producer had expected to breach.
Forest’s $222.1 million of 7.5 percent notes due in 2020 climbed 15.6 cents to 103.1 cents on the dollar for a yield of 6.9 percent at 10:11 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That’s the highest price ever, Trace data show.
The cost to protect Forest’s bonds against losses for five years fell 609.4 basis points to 319.5 basis points at 9:35 a.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. That’s the lowest intraday level since May 2011.
Forest Oil shares increased 13 percent to $2.03 at the close in New York after earlier rising the most on an intraday basis since April 1995. Before today, the stock had plunged 60 percent in the past year.