| FOREST OIL CORP Item 1A Risk Factors |
| The nature of the business activities conducted by Forest subject it to certain risks and hazards |
| The risks discussed below, any of which could materially and adversely affect our business, financial condition, cash flows, or results of operations, are not the only risks we face |
| We may experience additional risks and uncertainties not currently known to us or, as a result of developments occurring in the future, conditions that we currently deem to be immaterial may also materially and adversely affect our business, financial condition, cash flows, and results of operations |
| Oil and gas price declines could adversely affect Forestapstas revenue, cash flows, and profitability |
| Forestapstas revenues, profitability, and future rate of growth depend substantially upon the prevailing prices of oil and natural gas |
| Increases and decreases in prices also affect the amount of cash flow available for capital expenditures and our ability to borrow money or raise additional capital |
| The amount we can borrow from banks may be subject to redetermination based on changes in prices |
| In addition, we may have ceiling test writedowns when prices decline |
| Lower prices may also reduce the amount of oil and natural gas that Forest can produce economically |
| Any substantial or extended decline in the prices of or demand for oil and natural gas would have a material adverse effect on our financial condition and results of operations |
| We cannot predict future oil and natural gas prices |
| Oil and gas prices are currently at or near historical highs and may fluctuate and decline significantly in the near future |
| Factors that can cause price fluctuations include: relatively minor changes in the supply of and demand for oil and natural gas; market uncertainty; the level of consumer product demand; weather conditions; domestic and foreign governmental regulations; the price and availability of alternative fuels; political and economic conditions in oil producing countries, particularly those in the Middle East, Russia, and South America; the domestic and foreign supply of oil and natural gas; the price and quantity of oil and gas imports; or general economic conditions |
| Further, oil prices and natural gas prices do not necessarily fluctuate in direct relationship to each other |
| Because approximately 60prca of our estimated proved reserves as of December 31, 2005 were natural gas reserves, our financial results in 2006 are more sensitive to movements in natural gas prices |
| Lower oil and natural gas prices may not only decrease our revenues on a per unit basis but also may reduce the amount of oil and natural gas that we can produce economically |
| This may have a material adverse effect on our financial condition and results of operations |
| We may not be able to obtain adequate financing to execute our operating strategy |
| We have historically addressed our long-term liquidity needs through the use of bank credit facilities, cash provided by operating activities, and the issuance of debt and equity securities when market conditions permit |
| We also continue to examine alternative sources of long-term capital such as bank borrowings or the issuance of debt securities; the issuance of common stock, preferred stock or other equity securities; sales of properties; the issuance of non-recourse production-based financing or net profits interests; sales of prospects and technical information; and joint venture financing |
| The availability of these sources of capital will depend upon a number of factors, some of which are beyond our control |
| These factors include general economic and financial market conditions, oil and natural gas prices, the value and performance of Forest, and the credit ratings assigned to Forest by independent ratings agencies |
| We may be unable to execute our operating strategy if we cannot obtain adequate capital |
| 17 _________________________________________________________________ Availability under our bank credit facilities is based on a global borrowing base that is redetermined semi-annually, and may be redetermined at other times during a year at the option of the Company or the lenders |
| The global borrowing base may be reduced if oil and gas prices decline or we have downward revisions in our estimate of proved reserves |
| See "e Leverage will materially affect our operations, "e below |
| In addition, if availability under our credit facilities is reduced as a result of a borrowing base limitation or the covenants and financial tests contained in the credit agreements and indentures governing our debt securities, our ability to fund our planned capital expenditures could be adversely affected |
| After utilizing our available sources of financing, we could be forced to issue additional debt or equity securities to fund such expenditures |
| We cannot assure you that additional debt or equity financing or cash generated by operations will be available to meet our capital requirements |
| A curtailment of capital spending could adversely affect our ability to replace production and our future cash flow from operations and could result in a decline in our oil and gas reserves and production |
| Estimates of oil and gas reserves are uncertain and inherently imprecise |
| Estimating our proved reserves involves many uncertainties, including factors beyond our control |
| The estimates of proved reserves and related future net revenues described in this Form 10-K are based on various assumptions, which may ultimately prove inaccurate |
| Petroleum engineers consider many factors and make assumptions in estimating oil and gas reserves and future net cash flows |
| Lower oil and gas prices generally cause lower estimates of proved reserves |
| Ultimately, actual production, revenues, and expenditures relating to our reserves will vary from our estimates, and these variations may be material |
| Also, we may revise estimates of proved reserves to reflect production history, results of exploration and development, and other factors, many of which are beyond our control |
| See Note 14, items (D) and (F), to the Consolidated Financial Statements, below, for further discussion of a downward revision of our reserves in 2003 |
| As a result of lower oil and gas "e spot "e prices in the future or downward future reserve revisions, we could incur writedowns of our United States and Canadian full cost pools under "e ceiling test "e limitations pursuant to full cost accounting |
| If we were to record writedowns, shareholders &apos equity could be reduced significantly |
| In estimating future net revenues from proved reserves, future prices and costs are assumed to be fixed and a fixed discount factor is applied |
| Our revenues, profitability, and cash flow could be materially less than our estimates if these assumptions and discount factor are incorrect |
| The present value of future net revenues from our proved reserves is not necessarily the actual current market value of our estimated oil and natural gas reserves |
| In accordance with SEC requirements, we base the estimated discounted future net cash flows from our proved reserves on fixed prices and costs as of the date of the estimate |
| Actual future prices and costs fluctuate over time and may differ materially from those used in the SEC net present value estimate |
| The timing and amount of development expenditures and the rate and timing of oil, natural gas, and natural gas liquids production will affect both the timing of future net cash flows from proved reserves and their present value |
| In addition, the 10prca discount factor that we use to calculate the net present value of future net cash flows for reporting purposes in accordance with the SECapstas rules may not necessarily be the most appropriate discount factor |
| As a result, net present value estimates using actual prices and costs may be significantly less than the SEC estimate that is provided in this Form 10-K Lower oil and gas prices may cause us to record ceiling limitation writedowns |
| We use the full cost method of accounting to report our oil and gas operations |
| Accordingly, we capitalize the cost to acquire, explore for, and develop oil and gas properties |
| Under full cost accounting rules, the net capitalized costs of oil and gas properties may not exceed a "e ceiling limit, "e which is based upon the present value of estimated future net cash flows from proved reserves, discounted at 10prca |
| If net capitalized costs of oil and gas properties exceed the ceiling limit, we must charge the amount of the 18 _________________________________________________________________ excess to earnings |
| This is called a "e ceiling test writedown "e |
| Under the accounting rules, we are required to perform a ceiling test each quarter |
| A ceiling test writedown would not impact cash flow from operating activities, but it would reduce our shareholders &apos equity |
| The risk that we will be required to write down the carrying value of our oil and gas properties increases when oil and gas prices are low or volatile |
| In addition, writedowns may occur if we experience substantial downward adjustments to our estimated proved reserves or our undeveloped property values, or if estimated future development costs increase |
| We cannot assure you that we will not experience ceiling test writedowns in the future |
| Our Canadian full cost pool, in particular, could be adversely impacted by moderate declines in commodity prices |
| Leverage will materially affect our operations |
| As of December 31, 2005, the principal amount of our long-term debt was approximately dlra854 million, including approximately dlra154 million outstanding under our global bank credit facilities |
| On March 2, 2006, we used cash received from the Spin-off transaction of approximately dlra176 million to pay off the amount of borrowings under our US credit facility |
| Our long-term debt represented 34prca of our total capitalization at December 31, 2005 |
| Further, we may incur additional debt in the future, including in connection with acquisitions and refinancings |
| The level of our debt could have several important effects on our future operations, including, among others: • a significant portion of our cash flow from operations will be applied to the payment of principal and interest on the debt and will not be available for other purposes; • credit rating agencies have changed, and may continue to change, their ratings of our debt and other obligations as a result of changes in our debt level, financial condition, earnings, and cash flow; such ratings changes would in turn impact the costs, terms, conditions, and availability of financing; • covenants contained in our existing and future credit and debt arrangements will require us to meet financial tests that may affect our flexibility in planning for and reacting to changes in our business, including possible acquisition opportunities; • our ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate, and other purposes may be limited or burdened by increased costs or more restrictive covenants; • we may be at a competitive disadvantage to similar companies that have less debt; and • our vulnerability to adverse economic and industry conditions may increase |
| We may incur significant abandonment costs or be required to post substantial performance bonds in connection with the plugging and abandonment of wells, platforms, and pipelines |
| We are responsible for the costs associated with the plugging of wells, the removal of facilities and equipment, and site restoration on our oil and gas properties, pro rata to our working interest |
| Future liabilities for projected abandonment costs, net of estimated salvage values, are included as a reduction in the future cash flows from our reserves in our reserve reporting |
| As of December 31, 2005, our estimated discounted asset retirement obligation liability recorded in the balance sheet was approximately dlra211dtta6 million (including approximately dlra148 million related to those properties that were part of the Spin-off transaction completed on March 2, 2006), primarily for properties in offshore Gulf of Mexico and the Cook Inlet of Alaska |
| Approximately dlra32dtta7 million of abandonment costs were settled in 2005 and dlra33dtta3 million of abandonment costs are anticipated to be settled in 2006 (including dlra29dtta9 million related to those properties that were part of the Spin-off transaction completed on March 2, 2006), all of which are expected to be funded by cash flow from operations |
| Estimates of abandonment costs and their timing may change due to many factors, including actual drilling and production results, inflation 19 _________________________________________________________________ rates, changes in abandonment techniques and technology, and changes in environmental laws and regulations |
| We may not be able to replace production with new reserves |
| In general, the volume of production from oil and gas properties declines as reserves are depleted |
| The decline rates depend on reservoir characteristics |
| Our reserves will decline as they are produced unless we are successful in our exploration and development activities or acquire new producing properties |
| Forestapstas future natural gas and oil production is highly dependent upon its level of success in finding or acquiring additional reserves |
| The business of exploring for, developing, or acquiring reserves is capital intensive and uncertain |
| We may be unable to make the necessary capital investment to maintain or expand our oil and gas reserves if cash flow from operations is reduced and external sources of capital become limited or unavailable |
| We cannot assure you that our future exploration, development, and acquisition activities will result in additional proved reserves or that we will be able to drill productive wells at acceptable costs |
| Our operations are subject to numerous risks of oil and gas drilling and production activities |
| Oil and gas drilling and production activities are subject to numerous risks, including the risk that no commercially productive oil or natural gas reservoirs will be found |
| The cost of drilling and completing wells is often uncertain |
| Oil and gas drilling and production activities may be shortened, delayed, or canceled as a result of a variety of factors, many of which are beyond our control |
| These factors include unexpected drilling conditions; geological irregularities or pressure in formations; equipment failures or accidents; shortages in supplies of drilling rigs and related equipment; shortages in labor; weather conditions; delays in the delivery of equipment; and failure to secure necessary regulatory approvals and permits |
| Further, we cannot assure you that the new wells we drill will be productive or that we will recover all or any portion of our investment |
| Drilling activities can result in dry wells and wells that are productive but do not produce sufficient net revenues after operating and other costs and thus may be unprofitable |
| We may not be insured against all of the operating risk to which our businesses are exposed |
| The exploration, development, and production of oil and natural gas and the drilling activities performed by our drilling subsidiary involve risks |
| These operating risks include the risk of fire, explosions, blow-outs, pipe failure, damaged drilling and oil field equipment, abnormally pressured formations, and environmental hazards |
| Environmental hazards include oil spills, gas leaks, pipeline ruptures, or discharges of toxic gases |
| Substantial losses may be caused by injury or loss of life, severe damage to or destruction of property, natural resources, and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties, and suspension of operations |
| In accordance with industry practice, we maintain insurance against some, but not all, of the risks described above |
| Generally, pollution related environmental risks are not fully insurable |
| We cannot assure that our insurance will be fully adequate to cover these losses or liabilities |
| Also, we cannot predict the continued availability of insurance at premium levels that justify its purchase |
| Our international operations may be adversely affected by currency fluctuations and economic and political developments |
| We have significant oil and gas operations in Canada |
| The expenses and revenues of such operations, which represented approximately 10prca of our 2005 consolidated production costs, and 17prca of our 2005 consolidated oil and gas revenues, are denominated in Canadian dollars |
| As a result, the profitability of our Canadian operations is subject to the risk of fluctuations in the relative value of the Canadian and United States dollars |
| We have oil and gas assets in other countries including Italy, Gabon and South Africa |
| Although there are no material operations in these countries, our operations in these countries may also be adversely affected by political and economic developments, royalty and tax increases, and other laws or policies in these countries, as well as United States policies affecting trade, taxation, and investment in other countries |
| 20 _________________________________________________________________ In South Africa, we have an interest in offshore properties with the potential for gas production |
| While no proved reserves have been assigned to these properties as commercial sales contracts have not been established, if we are unable to arrange for commercial use of these properties, we may not be able to recoup our investment and will not realize our anticipated financial and operating results from these properties |
| The South African national government has recently adopted legislation to revise the process pursuant to which it grants petroleum exploration and production licenses |
| Under the new regulations, we have applied to the government to convert one existing prospecting sublease into an exploration right |
| In addition, we are in the process of applying for a production right covering the geographic area of our other existing prospecting sublease |
| Because the regulations implementing legislation are not yet final, we cannot predict whether these applications, if granted, will meet our economic or operational requirements, in which event we may choose to relinquish these leases and lose our investment |
| Hedging transactions may limit our potential gains |
| In order to manage our exposure to price risks in the marketing of our oil and natural gas, we enter into oil and gas price hedging arrangements with respect to a portion of our expected production |
| However, in connection with acquisitions, sometimes our hedges are for longer periods |
| While intended to reduce the effects of volatile oil and gas prices, such transactions may limit our potential gains if oil and gas prices rise over the price established by the arrangements |
| For example, in 2005, our hedging arrangements reduced the benefits we received from increases in oil and natural gas prices by approximately dlra222 million |
| In trying to maintain an appropriate balance, we may end up hedging too much or too little, depending upon how oil or natural gas prices fluctuate in the future |
| Also, hedging transactions may expose us to the risk of financial loss in certain circumstances, including instances in which our production is less than expected; there is a widening of price basis differentials between delivery points for our production and the delivery point assumed in the hedge arrangement; the counterparties to our future contracts fail to perform under the contracts; or a sudden unexpected event materially impacts oil or natural gas prices |
| We cannot assure you that our hedging transactions will reduce the risk or minimize the effect of any decline in oil or natural gas prices |
| For further information concerning prices, market conditions, and energy swap and collar agreements, see Part II, Item 7A— "e Quantitative and Qualitative Disclosures about Market Risk—Commodity Price Risk, "e of this Form 10-K, and Note 8 to the Consolidated Financial Statements |
| Competition within our industry may adversely affect our operations |
| We operate in a highly competitive environment |
| Forest competes with major and independent oil and gas companies in acquiring desirable oil and gas properties and in obtaining the equipment and labor required to develop and operate such properties |
| Forest also competes with major and independent oil and gas companies in the marketing and sale of oil and natural gas |
| Many of these competitors have financial and other resources substantially greater than ours |
| Our growth may partially depend on our ability to acquire oil and gas properties on a profitable basis |
| Acquisition of producing oil and gas properties is a key element of maintaining and growing reserves and production |
| Competition for these assets has been and will continue to be intense |
| The success of any acquisition will depend on a number of factors, including the acquisition price, future oil and gas prices, the ability to reasonably estimate or assess the recoverable volumes of reserves, rates of future production and future net revenues attainable from reserves, future operating and capital costs, results of future exploration, exploitation and development activities on the acquired properties, and future abandonment and possible future environmental liabilities |
| When acquiring new properties, there are numerous uncertainties inherent in estimating quantities of proved oil and gas reserves, future production rates, and associated costs and potential liabilities with respect to prospective acquisition targets |
| Actual results from an acquisition may vary substantially from those assumed in the purchase 21 _________________________________________________________________ analysis and acquired properties may not produce as expected, or there may be conditions that subject us to increased costs and liabilities including environmental liabilities |
| We operate a drilling subsidiary and it involves many operating risks, any one of which could prevent us from realizing profits |
| Forest seeks to increase its oil and gas reserves, production, and cash flow through exploratory and development drilling activities and conducting other production enhancement activities |
| In 2005, Forest formed a drilling subsidiary to hold drilling equipment and related assets that it acquired in a corporate transaction |
| The subsidiary performs services for Forest and its subsidiaries as well as third parties |
| Forest believes these new operations complement its business model and will lessen its exposure to the risks and delays associated with obtaining drilling equipment from third parties in an intensely competitive market |
| The drilling subsidiary is subject to risks, including shortages in labor and the risks associated with drilling oil and gas wells |
| These risks include: fires; explosions; blow-outs and surface cratering; pipe failures; casing collapses; natural disasters; and environmental hazards, such as natural gas leaks, oil spills, pipeline ruptures and discharges of toxic gases |
| If any of these events occur, we could incur substantial losses as a result of injury or loss of life, severe damage to and destruction of property, and environmental damage, clean-up responsibilities, regulatory investigation and penalties and suspension of our operations |
| Also, we have experienced significant increases in 2005 and 2006 in oil field service costs and encountered competition for equipment and skilled personnel |
| Rising costs and tight demand for drilling equipment and personnel in 2006 and could substantially impact the economic viability of our projects |
| Our oil and gas operations are subject to various environmental and other governmental regulations that materially affect our operations |
| Our oil and gas operations are subject to various United States federal, state, and local and Canadian federal and provincial governmental regulations |
| These regulations may be changed in response to economic or political conditions |
| Matters regulated include permits for discharge of waste and other substances generated in connection with drilling and production operations, bonds or other financial responsibility requirements to cover drilling contingencies and well plugging and abandonment costs, reports concerning operations, the spacing of wells, and unitization and pooling of properties and taxation |
| At various times, regulatory agencies have imposed price controls and limitations on oil and gas production |
| In order to conserve supplies of oil and gas, these agencies may restrict the rates of flow of oil and gas wells below actual production capacity |
| A substantial spill from one of our facilities could have a material adverse effect on our results of operations, competitive position, or financial condition |
| United States and non-United States laws regulate production, handling, storage, transportation, and disposal of oil and gas, by-products from oil and gas, and other substances and materials produced or used in connection with oil and gas operations |
| We cannot predict the ultimate cost of compliance with these requirements or their effect on our operations |
| We have limited control over the activities on properties we do not operate |
| Although we operate the properties from which most of our production is derived, other companies operate some of our other properties |
| We have limited ability to influence or control the operation or future development of these non-operated properties or the amount of capital expenditures that we are required to fund for their operation |
| The success and timing of drilling development activities on properties developed by others depend upon a number of factors that are outside of our control, including the timing and amount of capital expenditures, the operatorapstas expertise and financial resources, approval of other participants, and selection of technology |
| Our dependence on the operator and other working interest owners for these projects and our limited ability to influence or control the operation and future development of these properties could have a material adverse effect on the realization of our targeted returns on capital or lead to unexpected future costs |
| The Spin-off closing and transition activities may divert managementapstas attention away from normal operations |
| The Spin-off and Merger were completed on March 2, 2006 |
| Implementing the Spin-off 22 _________________________________________________________________ and Merger with Mariner included separating our offshore operations from Forest and has involved complexities and a great deal of time and effort by Forest employees |
| Going forward, for a limited period of time expiring in September 2006, Forest has agreed to provide Mariner with certain transitional services |
| The process of completing the Spin-off and Merger in the first quarter of 2006 and the performance of transitional activities following the Spin-off may cause Forest to experience interruptions in its remaining operations or slow its momentum in the completion of new projects as a result of employees &apos attention being diverted on post-closing activities |
| If we fail to realize the anticipated benefits of the Spin-off, Forest shareholders may experience lower returns than expected |
| The success of Forest following the completion of the Spin-off will depend, in large part, on our ability to realize expected benefits associated with a highly focused strategy, concentrated on long-lived assets |
| The new model is expected to provide Forest with a foundation for sustainable growth |
| Initially, the Spin-off will result in a significant reduction in our oil and gas reserves and production volumes and cash flow |
| We expect to make substantial capital investments for the exploration and development of new oil and gas reserves to replace the reserves and production volumes that are associated with the offshore Gulf of Mexico operations included in the Spin-off |
| Our ability to replace reserves may be negatively impacted if we are not able to quickly adjust our cost structures, realign staff and responsibilities, generate sufficient cash flow to fund capital investments for the acquisition, exploration, and development of new oil and gas properties, and successfully identify and acquire new properties |
| If we are not successful in our exploration and development activities and acquisition activities, it will negatively impact our rate of reserve and production growth, cause us to delay or defer capital expenditures, and impact our results of operations |
| Our Restated Certificate of Incorporation and By-laws have provisions that discourage corporate takeovers |
| Our directors are elected to staggered terms |
| Also, our Restated Certificate of Incorporation authorizes our board of directors to issue preferred stock without shareholder approval and to set the rights, preferences, and other designations, including voting rights of those shares as the board may determine |
| Additional provisions include restrictions on business combinations, the availability of authorized but unissued common stock, and notice requirements for shareholder proposals and director nominations |
| Also, our board of directors has adopted a shareholder rights plan |
| If activated, this plan would cause extreme dilution to any person or group that attempts to acquire a significant interest in Forest without advance approval of our board of directors |
| The provisions contained in our Bylaws and Certificate of Incorporation, alone or in combination with each other and with the rights plan, may discourage transactions involving actual or potential changes of control |