Forestar posts Q3 net income of US$36.4M, up from US$8.9M last year, on revenues slightly higher at US$26.2M; CEO says timberland sales and increase in share of oil production contributed

AUSTIN, Texas , November 2, 2011 (press release) – Well Positioned To Benefit from Increasing Oil Production and Declining Finished Lot Inventories in Texas Markets

“During third quarter, a substantial increase in our share of oil production generated the highest quarterly royalty revenues over the last two years, as we began to realize the benefit of increased oil production related to 2,800 acres in the Upper Wilcox formation located in Beauregard Parish, Louisiana. These wells are expected to significantly increase our reserves, a driver of future cash flow and earnings growth. In addition, our increased residential lot sales activity reflects declining finished lot inventories and relatively stable demand in the major markets of Texas. In addition, we sold 57,000 acres of timberland for approximately $87 million, generating a pre-tax gain on sale of almost $62 million, essentially completing the timberland sales portion of our near-term strategic initiatives,” said Jim DeCosmo, president and chief executive officer of Forestar Group.

Third Quarter Significant Highlights

Minerals – Oil & Gas
Nine new oil and gas wells completed; 510 active wells producing oil and natural gas operated by exploration and production lessees at quarter-end
Oil production up over 50% compared with third quarter 2010 and second quarter 2011

Real Estate
Sold 311 finished residential lots, a 66% increase compared with third quarter 2010 and a 10% increase compared with second quarter 2011 – Over 1,500 lots under option contracts
Sold 25 acres of raw entitled land for $1.9 million, representing the remaining 80 undeveloped lots in a residential community located near Dallas, Texas

Strategic Initiatives
Sold 50,000 acres of timberland in Georgia and Alabama to Plum Creek for $75 million
Sold 7,000 acres of timberland in Texas to The Conservation Fund for $12 million

Forestar Group Inc. (NYSE: FOR) today reported third quarter 2011 net income of approximately $36.4 million, or $1.02 per diluted share, compared with third quarter 2010 net income of $8.9 million, or $0.25 per diluted share outstanding. Third quarter 2011 results include a gain of $1.12 per diluted share, after-tax, from the sale of about 57,000 acres of timberland for approximately $87 million.

Forestar manages its operations through three business segments: Real Estate, Mineral Resources and Fiber Resources.

MINERAL RESOURCES

  • Nine new wells completed by exploration and production lessees, 510 active wells, up 19 compared with third quarter 2010
  • Oil production up over 50% compared with third quarter 2010 and second quarter 2011
  • Leased 380 net mineral acres in Louisiana and Texas
  • Over 67,000 net mineral acres put in play during 2011 through leases, seismic and exploration agreements, targeting oil and natural gas liquid opportunities
Mineral resources segment earnings declined in third quarter 2011 compared with third quarter 2010 principally due to lower lease revenues and increased costs associated with developing our water initiatives as a result of our acquisition of a water resources company in fourth quarter 2010. Segment earnings increased in third quarter 2011 compared with second quarter 2011 primarily due to increased royalties associated with a 50% increase in oil production.

REAL ESTATE
  • Sold 311 finished residential lots, a 66% increase compared with third quarter 2010 and a 10% increase compared with second quarter 2011 – Over 1,500 lots under option contracts
  • Sold 80 paper lots for $1.9 million, representing the remaining 25 acres of undeveloped entitled land in a residential community located near Dallas, Texas
  • Sold 550 acres of undeveloped land for $2,800 per acre
  • Acquired 180 fully developed lots for $9 million in a master-planned, mixed-use community located in Houston, Texas - including the right to receive about $4 million in reimbursements through a development agreement with the City of Houston
  • Acquired two multifamily development sites for $9 million – located in Austin and Dallas
Third quarter 2011 real estate segment earnings were down compared with third quarter 2010 and second quarter 2011 due to $3.4 million in charges principally related to environmental remediation activities at our San Joaquin River project located near Antioch, California.

FIBER RESOURCES
  • Sold over 108,000 tons of fiber
  • Recreational leasing activity remains strong, almost 99% of available land leased
Third quarter 2011 fiber resources segment earnings declined compared with third quarter 2010 principally due to reduced harvest volumes associated with the sale of 30,000 acres of timberland during 2010 and postponing harvest plans on acres previously held for sale. Recreational leasing activity remained strong during the quarter, with almost 99% of available land leased for recreation. Second quarter 2011 fiber resources segment earnings include a $0.2 million gain on the termination of a timber lease.

OUTLOOK
“Higher oil prices have increased exploration and production in Louisiana, creating additional opportunities to deliver value through increasing royalty income and working interests. Since first quarter 2011, we have elected to take working interests in three oil wells in Beauregard Parish, Louisiana. These working interests provide Forestar with an additional low-cost, low-risk opportunity to realize the greatest value from every acre by securing a greater interest in oil and gas production.

“Natural gas prices have remained soft during 2011, principally due to increased production and high levels of inventory. As a result, we have experienced lower demand for mineral leases as operators focus primarily on drilling wells to hold existing leases. Longer-term, we are bullish on the outlook for natural gas as there are abundant domestic supplies which reduces Middle Eastern geopolitical risk, natural gas is currently much cheaper than oil on an energy equivalent basis, it is a cleaner burning fuel compared with oil and coal and demand will benefit from continued population growth and increased economic activity.

“We continue to see improving housing fundamentals in our Texas markets, driven by continued tightening of finished residential lot inventories and relatively stable market demand. In addition, we remain confident that underlying fundamental demand for single and multifamily housing will improve as markets recover from the economic downturn.

“During third quarter 2011 we sold 57,000 acres of timberland, essentially completing the sale of 175,000 acres of timberland associated with our near-term strategic initiatives. In addition, excluding $26.5 million of non-recourse debt associated with the acquisition of a multifamily project during fourth quarter 2010, we have reduced debt over $150 million since first quarter 2009, and repurchased 1.2 million shares of our common stock since second quarter 2010. Through the successful execution of our strategic initiatives, we have transformed our balance sheet, significantly improving liquidity and financial flexibility, positioning the company to maximize long-term value for shareholders,” concluded Mr. DeCosmo.

The Company will host a conference call on November 2, 2011 at 10:00 am ET to discuss results of third quarter 2011. The meeting may be accessed through webcast or by conference call. The webcast may be accessed through Forestar’s Internet site at www.forestargroup.com. To access the conference call, listeners calling from North America should dial 1-866-804-6927 at least 15 minutes prior to the start of the meeting. Those wishing to access the call from outside North America should dial 1-857-350-1673. The password is Forestar. Replays of the call will be available for two weeks following the completion of the live call and can be accessed at 1-888-286-8010 in North America and at 1-617-801-6888 outside North America. The password for the replay is 72520808.

About Forestar Group
Forestar Group Inc. operates in three business segments: real estate, mineral resources and fiber resources. At the end of the third quarter 2011, the real estate segment owns directly or through ventures over 159,000 acres of real estate located in nine states and twelve markets in the U.S. The real estate segment has 16 real estate projects representing approximately 27,600 acres currently in the entitlement process, and 75 entitled, developed and under development projects in seven states and eleven markets encompassing almost 16,000 acres, comprised of approximately 28,000 residential lots and over 2,300 commercial acres. The mineral resources segment manages about 602,000 net acres of oil and gas mineral interests located principally in Texas, Louisiana, Alabama, and Georgia. Also included in the mineral resources segment is a 45% nonparticipating royalty interest in groundwater produced or withdrawn for commercial purposes from approximately 1.4 million acres in Texas, Louisiana, Georgia and Alabama and about 17,800 acres of groundwater leases in central Texas. The fiber resources segment includes the sale of wood fiber and management of our recreational leases. Forestar’s address on the World Wide Web is www.forestargroup.com.

IndustryIntel Editor's Note: In an omitted table, the company reported Q3 net income of US$36.4 million and revenue of $26.2 million. For the same quarter a year ago, the company reported net income of $8.9 million and revenue of $24.0 million.

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