Billionaire Steve Cohen’s Big Bet On Oil & Gas: Forest Oil Corporation (FST)

Forest remains a somewhat speculative play given its hindered liquidity and elevated debt levels. A couple other notable E&P companies include Quicksilver Resources Inc (NYSE:KWK), Newfield Exploration Co. (NYSE:NFX), and Pioneer Natural Resources (NYSE:PXD). By stacking these companies up against each other we see just how severe the balance sheet issue is:

Forest Oil has been under pressure of late and is now embarking on restructuring efforts and debt reduction. Forest Oil has been dumping assets, which includes Alaska, Gulf of Mexico, and old Permian Basin assets, including the spin-off of Lone Pine Resources Inc (NYSE:LPR) in September of 2011. During the last six months, management has sold roughly $600 million of non-core assets, and more recent divestment news includes plans to offload its assets in Texas for $325 million, which it will use for paying down debt. As a result of these initiatives the oil and gas company has reduced its long-term debt around 30% from a $3 billion high in 2009 to just over $2 billion now:

Although earnings are expected to remain below 2011 levels, when coupling its EPS with the industry average price to earnings the stock could well be undervalued. The industry average P/E multiple is around 30 times; put that multiple up against the 2013 expected EPS (Wall Street estimates) of $0.38 and the company shows over 60% upside. Furthermore, the industry trades at an average 8.8 price to operating cash flow multiple, whereas Forest Oil is at 2.5 times. It appears that concerns surrounding high leverage and over-exposure to natural gas are both being addressed by Forest Oil, and so some of the pressure on the stock might be overdone. Cohen is now one of the Forest’s top fund owners, topping Owl Creek Asset Management, which owned 9.8 million shares at quarter end (see all the hedge funds loving Forest Oil).

The article Billionaire Steve Cohen’s Big Bet On Oil & Gas originally appeared on Fool.com and is written by Marshall Hargrave.

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