Houston-based Mariner Energy Inc. plans to acquire the offshore Gulf of Mexico operations of Forest Oil Corp., Denver, (NYSE: FST) for 0.8 Mariner share per Forest share in a deal valued at $1.17 billion. Forest will distribute the Mariner shares to its investors. Mariner plans to go public later this year. Mariner is Gulf-focused; Forest's assets will be wholly onshore after closing. "The spin-off will permit each management team to more clearly focus its efforts on the activities and types of assets that have made them successful," says H. Craig Clark, Forest president and chief executive. Scott D. Josey, Mariner chairman and CEO, says the transaction will more than double Mariner's asset base in the Gulf of Mexico. Eric Pipa, an analyst with Morgan Stanley, says that, after closing, Forest will have proved reserves of 1.1 trillion cu. ft. of gas equivalent and production of 267 million equivalent per day. Its proved reserves will be concentrated onshore North America, including Canada, Alaska, its Western U.S. unit and its Southern U.S. unit. Its reserve-life index will increase to 11.4 years, up from eight, Pipa says. Mariner will have proved reserves of 615 billion equivalent and production of 319 million equivalent per day from the Gulf and the Permian Basin. Citigroup Corporate and Investment Banking and Credit Suisse First Boston LLC were financial advisors and JP Morgan Securities Inc. provided advisory services to Forest. Lehman Brothers Inc. was advisor and provided a fairness opinion to Mariner. Pipa estimates Forest will receive approximately $3.40 per thousand cu. ft. of gas equivalent from Mariner for the Gulf reserves. Based on Forest's pre-announcement closing price of $46.17, Forest was trading at approximately $2.62 per thousand equivalent. Shares of Forest jumped upon the news to as much as $52. "We commend management for finding a creative method of monetizing a portion of its asset base at a price well above that reflected in the stock price prior to deal announcement," Pipa says. "However, with the stock up some 8% following the deal announcement, it appears the implied upside from the maneuver has been quickly discounted." Pipa rates Forest's stock Underweighted and says XTO Energy (NYSE: XTO) is a better buy. Mariner's debt will jump from $100- to $350 million following this deal. The current estimated value per thousand cu. ft. of gas equivalent for its Gulf of Mexico reserves is $3.13, giving Mariner an implied equity value of $1.5 billion, according to Pipa. John Herrlin, an analyst with Merrill Lynch, says the transaction is a "mixed bag" for Forest, as it will have a negative near-term impact on financial metrics, but favorable long-term benefits. "Forest has been in restructuring mode for some time and after lots of portfolio shuffling, there is now much greater clarity on where its management attention and capital will be directed...," Herrlin says. (For more on Forest's restructuring, see "Out of the Woods," Oil and Gas Investor, September 2005.) Herrlin adds that by spinning off the Gulf assets, Forest will have less risk in a longer-lived asset base and greater predictability in earnings and cash flow because of the lower cost base and the development focus of its remaining onshore properties. Standard & Poor's has given Forest's debt a rating of BB- and put the company on CreditWatch with negative implications, citing concern that Forest's spin-off of Gulf assets will lead to an increased debt-to-EBITDA ratio, as well as diminish Forest's near-term ability to generate free cash flow.