Forest Oil Corporation

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Forest Oil Corporation

1600 Broadway, Suite 2200
Denver, Colorado 80202-4722
U.S.A.
(303) 812-1400
Fax: (303) 812-1602

Public Company
Incorporated: 1916
Employees: 250
Sales: $317.5 million (1996)
Stock Exchanges: NASDAQ
SICs: 1311 Crude Petroleum and Natural Gas

A producer of oil and natural gas in the United States, Forest Oil Corporation is credited with developing and implementing the secondary recovery of oil technique (“waterflooding”) in the early 1900s, a revolutionary occurrence in the oil and gas industry at that time. The company acquires, explores, and develops reserve properties throughout the world, with concentrations in the United States and the Gulf of Mexico. Through the acquisition of new reserves and the increased production capacities of existing ones, Forest Oil produces approximately 1.5 billion barrels of oil and 40 billion cubic feet of natural gas each year. The company also actively pursues new reserves.

The Early Years, 1916–1939

Forest Dale Dorn and Clayton Glenville Dorn created Forest Oil Corporation in 1916 as an oil field waterflooding company in northern Pennsylvania. The company’s roots can be traced to an oil field in Bradford, Pennsylvania, that was discovered in 1871. By 1916, oil production at the Bradford site had declined to just under 40 barrels a day, and the reserve was considered by many to be dry. On this “dry” site, Forest Dale Dorn tried out a new waterflooding technique to initiate secondary recovery of oil. The process involved the injection of fluid into the oil reservoir to create energy to produce additional oil. The success of Dorn’s technique prompted him to create his own waterflooding company with his father and partner, Clayton Glenville Dorn.

Within 5 years, Forest Oil was widely recognized throughout the oil and gas industry as not only the innovator of waterflooding, but the authority and leader in secondary oil recovery systems. The company was quickly contracted by other companies to recover oil through waterflooding techniques at drilling sites around Pennsylvania that were either in the process of being depleted or completely exhausted. Forest Oil’s ideas were soon being applied throughout the industry, and were aiding in the extension of oil wells’ lives by as much as ten years, in some cases.

Meanwhile, Forest Oil continued drilling wells at the Bradford site. In the late 1920s and early 1930s, the company drilled over 1,000 wells per year, and production increased from the 1916 low of under 40 barrels per day to over 9,300 barrels per day in 1939. Soon thereafter, the reserve at the Bradford site was finally exhausted, and Forest Oil moved on to new properties in Illinois and Oklahoma.

Postwar Diversification

After contributing resources to the World War II effort, Forest Oil changed its emphasis. The company began to focus more on its own exploration endeavors as well as on secondary recovery techniques. To these ends came further geographic expansion into Texas, New Mexico, Louisiana, and several areas in the Rocky Mountains. Then came the decision to seek out not only the properties that were well-suited for implementation of secondary recovery techniques, but also properties that would yield oil and gas on their own. It was at this time that Forest Oil developed three guiding principles that would lead the company for years to come: (1) to explore only in areas of high potential, (2) to employ only the most-qualified personnel, and (3) to seek out and enter ventures and partnerships with others. Forest Oil began to deal more in the area of natural gas as well as in oil.

Forest Oil’s expansion and diversification following the war enabled it to join the major oil and gas companies when the industry moved its operations offshore in the early 1950s. Forest Oil entered into its first offshore lease agreement in 1952, and was one of the first and only independent companies to drill offshore in the Gulf of Mexico.

Within five years, Forest Oil was comprised of operations in 15 states and four countries on three different continents, and its international holdings were increasing. The company successfully produced oil in the United States, Canada, Colombia, and Cyprus. These foreign ventures, as well as others, continued to prosper for the next decade. In 1969, Forest Oil had grown to be large enough that the company issued its first public offering of stock in the beginning of that year.

A Strong Reputation in the 1970s and 1980s

Entering the 1970s, very few undeveloped areas existed in the United States any more. Companies began to battle for the exploration areas that required deep drilling, and Forest Oil proved that it was up to the task. It set up operations in the Deep Delaware Basin, which meant drilling wells at depths of more than 20,000 feet. The company soon built a solid reputation as a producer who could drill in deep and expensive territory with success, and continued its tradition of using its innovations to overcome technological problems in the industry.

The company’s expensive exploration and problem-solving ventures were funded by the high gas and oil prices from which the industry benefitted in the early 1970s. In 1974, Forest Oil sold the bulk of its oil properties to Sun Oil for over $114 million. The company then shifted the majority of its focus to the exploration for natural gas reserves, in the belief that natural gas would be the fuel of the future.

In the early 1980s, Forest Oil’s annual revenues continued to climb. Throughout the middle of the decade, however, the prices for natural energy such as oil and gas began to decline. Take-or-pay contracts, which had been popular in the past, soon became undesirable for buyers and Forest Oil was quickly subject to a lower earnings potential. As an independent, the small company had traditionally reinvested a good portion of its earnings into exploration and the development of new reserves. But as its cash flow decreased, so did its ability to explore.

The company braced itself to weather the economic storm by continuing its exploration operations at a slightly less aggressive level, while also beginning to focus more of its money on the acquisition of other small oil and gas companies at a time when price tags were reasonable. In 1987 and 1988, Forest Oil discovered two large reserves at its exploratory wells in the Gulf of Mexico, and scheduled production to begin in the early 1990s. In 1989, Forest’s revenues reached $131.6 million, but the company suffered a loss of $15 million for the year.

The 1990s and Beyond

In early 1990, as Forest Oil made plans to begin production at its new reserves in the Gulf, the company earned approximately $58 million in a secondary offering of its stock. Furthermore, a corporate restructuring was planned to save the company approximately $10 million per year. The restructuring included the consolidation of management’s operations to its Denver, Colorado, office, which subsequently led to the closing of its offices in Midland, Texas. It retained its office locations in Denver; Lafayette, Louisiana; Bradford, Pennsylvania; and Canada. In addition, the company had also reduced its staff by about 60 people since 1989.

By 1991, Forest Oil faced the lowest natural gas prices (adjusted for inflation) that it had seen in 15 years. This was problematic for the company, given that natural gas accounted for approximately 80 percent of the company’s production output; crude oil was the source of Forest’s remaining 20 percent of production. Once again, the company reduced its staff, this time by about 80 people. Forest Oil also explored new ways for the company to cut costs in order to stay afloat during the economic downturn. To these ends, Forest Oil entered into an almost-$48 million deal with Enron Corporation, owner of the largest pipeline system in the United States, in exchange for interest in its reserves and properties.

By early 1992, Forest Oil’s corporate management believed that the industry had cycled to its lowest point, and that it would begin to rebound soon. Management remained optimistic, as was noted in the company’s 1991 annual report, which stated: “Those independent producers who are able to expand quality reserve bases through exploration or acquisition at competitive prices in the face of this hostile industry environment will be positioned to reap the benefits as the cycle again turns upwards.” Regarding acquisitions, Forest Oil did well during that time period, purchasing Harbert Energy Corp. and Transco Exploration in 1992, as well as the working rights to property owned by both Amoco and ORYX.

Two years later, Forest Oil continued to expand its reach. The company acquired a 50 percent interest in Eugene Island Block 235, and an almost-67 percent interest in Ship Shoal Block 275. Sales for the year signified an upward trend; they topped off at $115.9 million—the highest yearly revenues since the 1991 low of $69.9 million. In 1995, the company sealed a deal involving earnings from stock with the Anschultz Corporation for $45 million, and purchased a controlling interest in Saxon Petroleum, Inc. Activity in 1996 followed suit, as Forest Oil acquired ATCOR Resources, Ltd. and made a limited partnership with Delaware called JEDI.

Company Perspectives:

“Management’s role in achieving success is to provide a work environment and performance incentives that will attract and retain superior talent. Success in the oil and gas business requires determination, innovative thinking, proper application of technology and the relentless pursuit of the highest standards of performance.”

Entering the end of the century, Forest Oil’s operational emphasis lay in acquiring additional reserves in the United States and increasing production from its existing production fields. Two 1996 acquisitions, Canadian Forest Oil Ltd. and ProMark, immediately yielded positive results for the company, helping Forest achieve 1996 sales of $317.5 million. Also contributing to that almost 400 percent increase in revenue for the year was the solid performance of the company’s reserves in the Gulf of Mexico, which were churning out over 40 million cubic feet of gas per day. With an improving financial situation and the apparent upswing of the oil and gas industry, Forest Oil seemed poised for future success as it neared the end of the decade.