Forestar Group Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
Forestar operates in real estate, oil and gas, and other natural resources. Its real estate business is concentrated in Texas and Georgia; it also owns and leases oil and gas interests and manages timber, recreational leases, and water resources.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | First nine months 2015 | First nine months 2014 |
|---|---|---|---|---|
| Revenue | $43.2 | $58.8 | $148.4 | $226.5 |
| Operating income (loss) | ($94.8) | $12.7 | ($155.2) | $55.5 |
| Net income (loss) attributable to Forestar | ($164.2) | $5.2 | ($206.9) | $28.4 |
| Basic and diluted EPS | ($4.79) | $0.12 | ($6.04) | $0.66 basic; $0.65 diluted |
- Q3 revenue fell 27%; nine-month revenue fell 34%, reflecting lower real estate and oil and gas revenue.
- Oil and gas segment losses were $86.2 million in Q3 and $146.0 million for the nine months, principally reflecting non-cash asset impairments. Real estate segment earnings were $5.2 million and $29.7 million, respectively, down from $16.0 million and $66.9 million in the comparable periods.
- Q3 oil and gas impairment charges were $81.2 million; nine-month charges were $127.2 million, including $90.4 million on proved properties and $36.8 million on unproved leasehold interests. Nine-month results also included exploratory dry-hole and pre-drilling costs.
- The nine-month income tax expense was $39.1 million despite a pretax loss, including a $100.0 million deferred-tax-asset valuation allowance. The allowance reflected cumulative losses and uncertainty about realization of tax assets.
- Cash and cash equivalents were $92.6 million at quarter-end, down from $170.1 million at 2014 year-end. Nine-month operating cash use was $15.0 million; investing cash use was $60.5 million; financing cash use was $2.0 million.
- Debt was $435.3 million, compared with $432.7 million at year-end. The company had $283.8 million of unused borrowing capacity under its $300 million revolving facility, after $16.2 million of letters of credit. Reported covenant ratios were 2.67x interest coverage and 42.1% total leverage; tangible net worth was $473.8 million against a $379.0 million minimum.
- Assets totaled $1.04 billion and equity $508.4 million at quarter-end. Real estate was $620.8 million; oil and gas properties, net, were $121.8 million.
Material changes and management commentary
- Oil and gas revenue decreased despite higher production volumes: lower realized prices reduced Q3 oil revenue by $14.3 million and gas revenue by $1.0 million versus Q3 2014. Average realized total oil price, including NGLs, fell to $37.80 per barrel from $84.16; gas price fell to $2.31 per Mcf from $4.24.
- Real estate revenue declined as residential lot activity and undeveloped land sales were lower; management cited construction and inspection delays associated with unusually wet weather. Nine-month undeveloped land sales were 2,378 acres versus 12,916 acres a year earlier.
- Management described U.S. housing recovery as tentative, while multifamily conditions remained strong. Oil and gas markets faced low prices, high inventories, and weaker exploration activity. The company said 2015 oil and gas capital expenditures were expected to be significantly below 2014 and largely tied to existing commitments; spending could change with prices, liquidity, opportunities, and drilling results.
- Management reported a September 30 waiver of the senior credit facility’s tangible-net-worth maintenance covenant for Q3 and an amendment setting the requirement at 80% of tangible net worth calculated from quarter-end statements. The company said it was in compliance with its covenants after the amendment. It was restricted from share repurchases and other restricted payments because leverage exceeded 40% and interest coverage was below 3.0x.
- Departures of the former CEO and CFO resulted in $3.3 million of one-time severance charges. The company also incurred oil and gas restructuring costs, including a $1.8 million Fort Worth office lease-termination charge. It was reviewing strategic alternatives for its oil and gas business and warned that additional restructuring costs could occur.
- After quarter-end, Forestar obtained a $52 million secured construction loan for a 379-unit multifamily project in Charlotte. No formal earnings guidance was provided.
Risks, contingencies, and unusual items
- Further oil and gas impairments were possible if prices, production rates, development costs, or proved reserves changed. The filing reported no commodity-hedging positions at quarter-end.
- Forestar had $19.7 million of approved but unpaid Cibolo Canyons infrastructure reimbursements, excluding interest; the timing of collection depends on district funding. Total estimated district-reimbursable asset costs were $67.9 million.
- The company disclosed guarantees on construction loans for equity-method multifamily ventures. It also estimated maximum loss exposure of $3.8 million for one unconsolidated venture, exceeding its recorded investment.
- Environmental remediation costs near Antioch, California, were estimated at approximately $0.6 million, with potential additional work not yet quantifiable. The company said ordinary-course litigation was not expected to materially affect its position, though charges could be significant in an individual period.
Important facts for investors to verify
- Whether oil prices, production economics, and exploration plans lead to further impairments, cash-flow pressure, or changes in oil and gas strategy.
- Whether Forestar sustains credit-facility covenant compliance and preserves liquidity as cash declines and real estate development continues.
- Timing and collectability of Cibolo Canyons reimbursements, and exposure under venture-loan guarantees.
- Whether residential lot sales, undeveloped land sales, and multifamily project occupancy or dispositions improve; verify the scheduled December 2015 Midtown Cedar Hill sale.
- Whether the deferred tax asset valuation allowance changes as taxable-income expectations and cumulative-loss evidence evolve.