Monday, May 12, 2014

Sabine and Forest to Merge; Haynesville Implications

Actually, the headline should read, "Sabine to Buy Forest," but technically it will be a merger.  Sabine Oil and Gas announced last week that it has entered into a definitive merger agreement to combine with Forest Oil in an all stock transaction to create a new entity with Sabine owning 73.5% of the new entity and the Forest shareholders owning 26.5%. The transaction itself is a little complicated but it basically allows Sabine to buy Forest and become a publicly traded company while still being managed by Sabine's executive team and controlled by private equity company First Reserve (Sabine is currently privately held and is the former NFR Energy). Here's the presentation. Forest's prospects have dimmed over the past several years, as reflected by its stock price, which dipped from the upper $20s in the first half of 2011 to $1.79, the day before the deal was announced.

The combined Sabine merges acreage positions that are fairly similar, as both have holdings in East Texas and the Eagle Ford Shale.  The East Texas holdings for both company are their largest acreage positions and are somewhat commingled.  The Eagle Ford positions do not overlap.  In terms of Haynesville activity, neither company has run a rig in the play for quite some time (Forest last ran a rig in April 2011 and Sabine in Jan. 2012), but Sabine has completed a small handful of wells over the past six months.  As the slides below show, the combined company does plan some activity in E. Texas this year, even in the Haynesville Shale, but the risk/reward economics are better right now in the Cotton Valley Sand.

As the slides above note, the new Sabine's focus in East Texas will remain the Cotton Valley Sands (four rigs), there is some hope that the company will re-approach the Haynesville with a new well design and some drilling dollars, but that remains to be seen.

It will be interesting to watch how Sabine operates post-transaction.  The company existed outside the glare of the public equity markets since inception (it did have public debt, but that is often a different set of analysts), but now there will be many more prying eyes.  I believe the company looks at the Haynesville acreage as major upside, but before it can truly sell this upside, it needs to be able to better tap into it and get a good return.  Fortunately, the economics of natural gas are favorable in the short term, and maybe the new Sabine can make some hay while the sun is shining.

1 comment:

Joel said...

This is interesting...CHK has seen some solid capital savings with improved operational efficiencies in their Haynesville drilling program (as seen in their investor analyst presentation this morning). It would be encouraging if Sabine is trying to follow in their footsteps. It appears the way to maximize profit from Haynesville wells (for now) is improving operational execution and ever so rising regional spot prices.