Tickers in this Article: FST, MRO, PXP, MPC
Forest Oil (NYSE:FST) will put 80% of its 2011 capital budget into developing its oil and liquids properties, including the Granite Wash and Eagle Ford formations in Texas. The company will also conduct an initial public offering and eventual spinoff of its Canadian operations during the year. IN PICTURES: 5 "New" Rules For Safe Investing

2011 Capital Budget
Forest Oil released a 2011 capital budget of between $600 million and $650 million, down approximately 10% from the amount spent in 2010. Despite this reduction in spending, Forest Oil expects volumes in 2011 to increase 10% over 2010, and average 490 million cubic feet equivalent per day.

Granite Wash
The major focus for Forest Oil in 2011 will be the Granite Wash, which is located in the Texas and Oklahoma Panhandle areas. The company has allocated $300 million - or 48% - of its 2011 capital budget here, and will drill forty gross wells in 2011 on its acreage. This level of spending is significantly higher than the $220 million spent in 2010.

Forest Oil has 103,000 net acres that are prospective for the Granite Wash spread across several counties in Texas. The company likes the area because natural gas wells here produce a high amount of condensate and natural gas liquids, which raises returns for the operator.

Plains Exploration and Production (NYSE:PXP) is also active in the Granite Wash and recently reported a well with an initial production rate of 19 million cubic feet equivalent per day. This production was composed of 10.4 million cubic feet of natural gas, 344 barrels of oil and 1,076 barrels of natural gas liquids per day.

Eagle Ford Shale
Forest Oil will also develop the Eagle Ford Shale and has allocated $50 million in capital in 2011 to drill eight gross wells. The majority of the acreage is in the oil window of the play in Gonzales and Wilson Counties. The company has 106,000 net acres prospective for the play and spud its first well in the fourth quarter of 2010.

Canadian Spinoff
In December 2010, Forest Oil announced that the company would conduct an initial public offering of Lone Pine Resources, its Canadian exploration and production subsidiary. Forest Oil will offer 19.9% of Lone Pine Resources to the public, and then spinoff the balance of the company to Forest Oil shareholders.

Forest Oil's assets are quite extensive and include Deep Basin natural gas assets as well as several light oil plays in Western Canada. Lone Pine Resources reported proved reserves of 322 Bcfe at the end of 2009 (69% natural gas), and has around 790,000 net acres under lease. The company had net production of 76 million cubic feet equivalent per day in the third quarter of 2010.

spinoffs have come into fashion over the last few years in the energy sector. Another company planning to separate into two parts is Marathon Oil (NYSE:MRO), which is conducting a spinoff of its refining assets into a new company called Marathon Petroleum Corporation.

Bottom Line
Forest Oil is pouring the vast majority of its 2011 capital budget into liquids plays like the Granite Wash and Eagle Ford Shale. The company will also conduct an IPO of its Canadian operations as the first part of a separation of those assets from the company. (Investors looking into this industry are faced with a confusing amount of information. We explain the important concepts and terms in Natural Gas Industry: An Investment Guide.)

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