Market Overview

Small-Cap Corner: Forlorn Forest Oil (FST, LPR)

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It has been said time and time again in recent weeks that oil and oil equities just aren't the places to be putting cash to to work. In the past month, the U.S. Oil Fund (NYSE: USO) has slid almost 17% and the Energy Select SPDR (NYSE: XLE), a collection of mainly large-cap oil names, is no peach either with a loss of nearly 10% over the same time.

All of that is to say small-cap energy names have really stunk up the joint with Colorado-based Forest Oil (NYSE: FST) front and center among the most egregious offenders. Shares of Forest Oil, an independent oil and natural gas producer with a footprint in the oil-rich Eagle Ford Shale in South Texas, have plunged more than 37% in the past month.

That tumble has taken Forest from a flirtation with mid-cap status down to a market cap of around $1 billion, firmly in small-cap territory. Forest's fiscal first-quarter results, reported early this month, were a mess. Forest's loss widened to $32.7 million, or 29 cents per share, from a loss of $3.3 million, or 3 cents per share, a year earlier. On an adjusted basis, the company earned 11 cents, well below the 19 cents analysts expected.

Revenue fell 5% to $158.9 million, far beneath the $189.6 million in revenue Wall Street expected. Sliding natural gas prices have impacted myriad energy producers, large and small, and Forest has not escaped that carnage.

Along those lines, Forest's entire capital program is now dedicated to more lucrative oil and liquids development and the company's Eagle Ford assets could one day prove to be a boon for the stock or potentially serve to make Forest a takeover target. However, the latter scenario is hard to envision at the moment with long debt in excess of $1.8 billion and a debt-equity ratio of 1.5.

The company is also facing litigation related to the 2011 IPO of Lone Pine Resources (NYSE: LPR), a Forest spin-off. Plaintiffs claim Lone Pine made misleading statements in its pre-IPO prospectus. Debt, legal woes and a rock environment for energy stocks make for ample reasons to shy away from Forest at this time.

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