Three Step Plan Management J. Russell Porter, President and CEO Michael Gerlich, SVP and CFO Michael McCown, SVP and COO Keith R. Blair, VP Exploration Henry J. Hansen, VP Land www.gastar.com EPG Commentary by Dan Steffens Gastar Exploration, Inc. (GST) is one of our Small-Cap Growth Portfolio companies. This company is now a pure play on the Mid-Continent STACK Play in Oklahoma. The SCOOP/STACK play in Central Oklahoma is turning into the next Big Thing in the United States. Our Sweet 16 members Continental Resources (CLR), Devon Energy (DVN), Newfield Exploration (NFX) and Cimarex Energy (XEC) are all reporting outstanding results near Gastar s leasehold. In the 4 th quarter Gastar made the strategic decision to sell the majority of their assets in the Marcellus/Utica and focus all of their attention on developing their leasehold in Oklahoma. The sale closed on April 8, 2016 and all sales proceeds were used to pay down their bank credit facility. Gastar is now in compliance with the amended terms of their credit facility that were negotiated with Wells Fargo (the lead bank) and became effective on March 9, 2016. This sale is part of a three step plan to get this small-cap back on solid ground and allow them to focus on developing their large inventory of STACK drilling locations. Step two is the sale of their South STACK leasehold; a 26,000 acre block primarily in northwest Canadian county, Oklahoma. The data room is open and bids are expected sometime in the second quarter.
STACK is one of the hottest oil plays in the country. There have been recent transactions by Devon Energy (DVN) and Vanguard Natural Resources (VNR) that should give Gastar shareholders hope that the company can get a good price for their South Stack acreage block. VNR sold approximately 25,000 acres of SCOOP/STACK leasehold for $280 million in a deal that was announced March 30. As you can see in the map below, 32 rigs are drilling in the STACK area. Chaparral Energy, Devon Energy and Newfield Exploration are active in areas adjacent to the block that Gastar is selling. Step three of Gastar s plan is the de-risking of their North Stack area. The company has completed two operated Meramec horizontal wells. The Deep River 30-1H well in Kingfisher County is producing at rates that are in-line with the type curve and the estimated 705,000 Boe estimated ultimate recovery ( EUR ) given by the company s 3 rd party reservoir engineers. The second Meramec well, the Holiday Road 2-1H, was successfully completed with 34 frack stages using approximately 12 million pounds of proppant. The Holiday Road 2-1H is also located in Kingfisher County and has a lateral length of 4,300 feet. The well will need to flow back the frack fluids for about a month before Gastar can provide an estimate of the oil & gas this well will produce.
Gastar has HUGE upside in the STACK play The company estimates that they have close to 1,000 net locations for horizontal wells in their North STACK area. The Meramec, Osage, Oswego, Woodford and Hunton are all productive in the area. Gastar has numerous Hunton wells in the block and since the Hunton is below the Meramec, they have logs showing them where the zone is and the thickness. Other operators continue to de-risk the area, including Chaparral Energy that has completed some very impressive Oswego wells within the area in yellow above. In 2016, Gastar plans to participate in 12-15 outside operated STACK wells. They will only have 3% to 10% working interest in these wells, but they will be entitled to see the well logs, which will help them plan their 2017 STACK development drilling program. Gastar is not out of the woods yet, but the sale that closed on April 8 helps calm the nerves of their creditors. They have more than enough cash flow from operations and cash on hand to fund this year s capital program. My Fair Value Estimate for GST is $2.00/share Compare to First Call s Price Target of $1.73 Disclosure: I have a long position in GST. I do not intend on buying or selling it in the next 72 hours. I wrote this profile myself, and it expresses my own opinions. I am not receiving compensation for it from the company. I have no business relationship with any company whose stock is mentioned in this article.
This is why they call it the STACK play Company Overview (NYSE: GST) is a Houston-based E&P company which is engaged in the exploration, development and production of natural gas, natural gas liquids, oil and condensate in the United States. Gastar s principal business activities include the identification, acquisition, and subsequent exploration and development of oil and natural gas properties with an emphasis on unconventional reserves, such as shale resource plays. In Oklahoma, Gastar is developing the primarily oil-bearing reservoirs of the Hunton Limestone horizontal oil play and they recently started developing the Meramec zone in the STACK Play. The company recently sold the majority of their assets in the Marcellus / Utica, so they can focus on the Stack Play in Oklahoma. They have completed two horizontal Meramec Shale (middle Mississippi Lime) wells and they also have potential in the Hunton, Osage, Oswego and Woodford formations.
1. The number of drilling locations included in the pie chart above includes approximately 500 locations in the South Stack area that is currently for sale. 2. Proved Reserves are based on the 12/31/2015 Wright & Company, Inc. reserve report that utilized SEC pricing. Gastar recently completed their first horizontal well in the Oklahoma STACK play. The Deep River 30-1H produced at a gross post IP 30-day average sales rate of 956 barrels of oil equivalent ("Boe") per day (68% oil). The well commenced flow back in late October 2015 and in December 2015, produced a peak 24-hour rate of 1,094 Boe per day (71% oil). Gastar's independent reservoir engineer has estimated the ultimate recovery ("EUR") for the Deep River 30-1H well to be 705,000 Boe as of December 31, 2015, with crude oil comprising 50% on a wet gas basis. Gastar has a 100% working (80% net revenue) interest in the well. The Deep River Meramec test well moved the productive outline of the Meramec play further northeast than previously defined. On March 30 the company updated production data from its Deep River 30-1H well in Kingfisher County, Oklahoma. The Deep River 30-1H produced for the first 90 days of post-peak production at a gross average sales rate of 713 barrels of oil equivalent ("Boe") per day (61% oil), which was in-line with initial production rates in the independent reservoir engineers' estimated ultimate recovery of 705 MBoe, with oil comprising 50%of total oil equivalent volumes on a wet gas basis. Gastar has a 100% working (80% net revenue) interest in the well. On March 30 the company also announced that it has completed its second Meramec Shale well, the Holiday Road 2-1H, with 34 frack stages using approximately 12 million pounds of proppant. The Holiday Road 2-1H is also located in Kingfisher County and has a lateral length of 4,300 feet. Production data from this well should be known by the end of the second quarter. Financial & Revenue Update Update Gastar s 4 th quarter production and cash flow from operations beat our forecast, but the company recorded a large impairment charge that caused a big reported loss. Net loss attributable to Gastar's common stockholders for the fourth quarter of 2015 was $161.1 million, or a loss of $2.07 per share. Adjusted net loss attributable to common stockholders for the fourth quarter of 2015 was $12.6 million, or a loss of $0.16 per share, excluding the impact of a $144.8 million non-cash, pre-tax ceiling test impairment charge, a $2.9 million loss resulting from the mark-to-market of outstanding hedge positions, $590,000 of non-
recurring costs related to our Mid-Continent acquisition and $310,000 of severance costs related to property divestment. This compares to fourth quarter 2014 net income of $26.7 million, or $0.34 per diluted share, and fourth quarter 2014 adjusted net income of $1.8 million, or $0.02 per diluted share, excluding the impact of a $24.9 million gain resulting from the mark-to-market of outstanding hedge positions. Adjusted EBITDA for the fourth quarter of 2015 was $17.4 million, a decrease of 33% compared to $25.9 million for the fourth quarter of 2014. Average daily production for the fourth quarter of 2015 was 14,000 barrels of oil equivalent per day as compared to 11,700 Boe/d in the fourth quarter of 2014 and 13,600 Boe/d in the third quarter of 2015. Oil, condensate and NGL as a percentage of production volumes were 56% in the fourth quarter of 2015 compared to 53% in both the fourth quarter of 2014 and the third quarter of 2015. Revenues from NGLs before the impact of hedging activities, declined 46% to $17.8 million in the fourth quarter of 2015 from $33.1 million in the fourth quarter of 2014, but increased 4% from revenues of $17.1 million in the third quarter of 2015. The reduction in oil, condensate, natural gas and NGLs revenues from the fourth quarter of 2014 to the fourth quarter of 2015 primarily resulted from a 55% decrease in weighted average realized equivalent prices, prior to the impact of hedges, partially offset by a 20% increase in production. The slight increase from third quarter 2015 revenues was due to a 3% increase in equivalent production volumes combined with a slight increase in equivalent product pricing, largely driven by a 145% increase in pre-hedge NGL prices.
Revenues from all liquids oil, condensate, and NGLs, represented approximately 84% of total production revenues in the fourth quarter of 2015, compared to 77% for the fourth quarter of 2014 and 80% for the third quarter of 2015. Gastar had hedges in place covering approximately 60% of their natural gas production, 43% of their oil and condensate production and 62% of our NGLs production for the fourth quarter of 2015. Commodity derivative contracts settled during the period resulted in a $7.7 million increase in revenue for the fourth quarter of 2015, compared to a $3.5 million increase in revenue for the fourth quarter of 2014 and a $6.8 million increase in revenue for the third quarter of 2015. "We are pleased to have generated a 33% increase in year-over-year production volumes, despite a 41% reduction in net capital spending over the same period. Our ability to grow production volumes despite a substantially reduced capital program highlights the quality of our Mid-Continent acreage and our success developing the Hunton play in Oklahoma as well as the early impact from the recent shift in our operating focus towards the initial de-risking and development of the STACK Play on our acreage. Based on the strong results of our first Meramec well, combined with the numerous successful Meramec, Osage and Oswego wells being drilled by other operators near our acreage, we are increasingly optimistic about our future STACK Play potential." J. Russell Porter, Gastar's President and CEO Operating Expense Update Lease operating expenses were $5.3 million for the fourth quarter of 2015, compared to $6.3 million in the fourth quarter of 2014 and $5.2 million in the third quarter of 2015. The decrease in LOE compared to the fourth quarter of 2014 was primarily due to lower water disposal costs as a result of decreased drilling activity partially offset by higher costs due to new wells. Compared to the third quarter of 2015, LOE in the fourth quarter of 2015 included lower workover costs that were offset by higher well operations as a result of road repair and increased water disposal costs. LOE per barrel of oil equivalent of production was $4.09 in the fourth quarter of 2015 versus $5.83 in the fourth quarter of 2014 and $4.17 in the third quarter of 2015. Depreciation, depletion and amortization expense was $16.9 million in the fourth quarter of 2015, up from $12.4 million in the fourth quarter of 2014 and $15.4 million in the third quarter of 2015. The DD&A rate for the fourth quarter of 2015 was $13.19 per Boe compared to $11.53 per Boe for the fourth quarter of 2014 and $12.32 per Boe in the third quarter of 2015. The increase in DD&A expense and the higher DD&A rate was a consequence of lower proved reserves, which was a result of lower commodity prices. General and administrative expense was $3.7 million in the fourth quarter of 2015 compared to $3.8 million in the fourth quarter of 2014 and $4.7 million in the third quarter of 2015. G&A expense for the fourth quarter of 2015 included $1.1 million of non-cash stock-based compensation expense, versus $1.2 million in both the fourth quarter of 2014 and the third quarter of 2015. Excluding stock compensation expense, cash G&A expense was $2.7 million in the fourth quarter of 2015, up slightly from $2.6 million in the fourth quarter of 2014 but down from $3.5 million in the third quarter of 2015. Compared to the third quarter of 2015, cash G&A was down due to reduced compensation expense offset by $310,000 in severance costs and $109,000 in acquisition costs.
Operations Update Mid-Continent A large, contiguous acreage position with multiple stacked horizontal targets
Net production from the Mid-Continent area increased to an average of 6,200 Boe/d in the fourth quarter of 2015, compared to 5,600 Boe/d in both the fourth quarter of 2014 and the third quarter of 2015. Fourth quarter 2015 Mid- Continent production consisted of approximately 54% oil, 26% natural gas and 20% NGLs. During the fourth quarter Gastar completed six gross (5.7 net) operated wells, consisting of one gross (1.0 net) Upper Hunton well, three gross (2.9 net) Lower Hunton wells, one gross (0.8 net) well in and one gross (1.0 net) operated Meramec well. After idling their drilling rig for much of the fourth quarter of 2015 to preserve liquidity and to evaluate the results from our first Meramec well, the Deep River 30-1H, they began drilling a second Meramec well, the Holiday Road 2-1H, on February 10, 2016. The well was completed in March. They have once again released the drilling rig to preserve liquidity as they focus capital on recompletion activity. Gastar has been very successful in developing the WEHLU area. This is not part of the South Stack area that is being sold. A high percentage of their current production is from WEHLU where the leasehold is held by production. WEHLU is being developed by drilling short laterals into the Hunton formation and completing the wells with multiple frack stages. See completed well costs and EURs below.
In the Mid-Continent, net capital expenditures in the fourth quarter of 2015 totaled $8.4 million, excluding acquisitions and other capitalized costs, comprised of $8.1 million for drilling and completions and $257,000 for unproved acreage. For the full-year 2015, total capital expenditures in the Mid-Continent, excluding acquisitions and other capitalized costs, totaled $99.8 million, comprised of $83.7 million of drilling and completion costs and $16.1 million for unproved acreage. The 2016 capital expenditure budget in the Mid-Continent, excluding other capitalized costs, is $37.0 million, of which $5.5 million is allocated to drilling and completion of a second operated Meramec well, $8.0 million is allocated for participation in non-operated STACK drilling, $3.5 million is allocated for recompletion projects on producing operated wells and $20.0 million is allocated to lease renewals and extensions in Oklahoma. Appalachian & Other On April 8, announced that it has completed the previously announced sale of substantially all of its producing assets and proved reserves and a significant portion of its undeveloped acreage in the Appalachian Basin for $80.0 million, subject to certain adjustments, to an affiliate of Tug Hill Inc. The effective date of the transaction is January 1, 2016.
In connection with the sale, the borrowing base of Gastar's revolving credit facility was automatically reduced to $100.0 million as required by Amendment No. 8 to the credit agreement. The proceeds from the sale were used to reduce outstanding borrowings under Gastar's revolving credit facility to achieve compliance with the reduction of the borrowing base. J. Russell Porter, Gastar's President and CEO, commented, "The closing of this transaction allows us to reduce our debt and exclusively focus our operations on the Mid-Continent STACK Play, one of the most economic plays in the U.S." Net production from the Appalachian Basin area averaged 7,800 Boe/d in the fourth quarter of 2015, compared to 6,100 Boe/d for the fourth quarter of 2014 and 8,000 Boe/d in the third quarter of 2015. Appalachian Basin fourth quarter of 2015 equivalent production consisted of 7% oil and condensate, 34% NGLs and 59% natural gas. Yearover-year production volumes increased 30% due to 7 gross (3.5 net) Marcellus Shale wells and one gross (0.5 net) Utica Shale/Point Pleasant well being brought online in 2015. The sequential decrease was due to natural declines and as a consequence of no new completion activity in the region since May 2015. Gastar has retained ~25,400 net acres in West Virginia with Utica Shale potential. Credit Revolver Revision Effective March 9, 2016 Gastar entered into an amendment to its revolving credit facility. Following is a summary of key amendment terms: Borrowing base reduced to $180 million (the current amount outstanding under the facility); $200 million A new covenant prohibits the payment of dividends on preferred stock commencing April of 2016 Revolver debt balance to be reduced to $100 million at the earlier of the close of the Appalachian Basin asset sale or April 10, 2016 Next borrowing base redetermination scheduled for August 2016
For second quarter 2016 through first quarter 2017, (i) overall leverage ratio is eliminated (with maximum ratio of 4.0 to 1.0 applying thereafter), (ii) maximum senior secured leverage ratio increased to 2.5 to 1.0 (2.0 to 1.0 thereafter, using a maximum of $5.0 million cash on hand to reduce net debt) and (iii) minimum interest coverage ratio reduced to 1.1 to 1.0 (2.50 to 1.0 thereafter), each as determined using adjusted EBITDA for previous four quarters Interest rate increased to LIBOR plus 4% from LIBOR plus a maximum of 3% Additional mortgage liens were granted on certain undeveloped acreage primarily located in Canadian County, Oklahoma and security interests and control agreements on certain cash accounts securing our revolving credit facility and our second lien 8.625% senior secured notes. Liquidity Gastar exited 2015 with approximately $50.1 million in available cash and cash equivalents after fully drawing their $200 million revolving credit facility in December 2015. Subsequent to year-end, Gastar repaid $20 million of the outstanding borrowings under the revolving credit facility and paid an additional $80 on April 8. Gastar currently has $100 million in borrowings outstanding under the revolving credit facility. Guidance for First Quarter 2016 Gastar has provided first quarter 2016 guidance. It should be noted that first quarter production will include production from the assets were sold on April 8. They are not issuing full year guidance for 2016 due to uncertainty about their plans for the coming year. The following table lays out the guidance they have provided. Based on our forecast, attached below, Gastar cash flow from operations should be $25 to $30 million in 2016.
Hedging Program Gastar did not transfer any of their hedges when they sold the Marcellus / Utica assets on April 8, 2016. Therefore, more than 150% of their estimated natural gas production for the remainder of 2016 is hedged at an average price of $3.38/Mmbtu. Gastar can monetize these hedges or just collect on them as they move through the year. Regardless, their hedge position is a valuable current asset. As of November 5, 2015, Gastar had the following hedges in place for 2016 and 2017: Crude Oil Total Volume Average Floor 2016 697,180 bbls $77.71 2017 518,800 bbls $74.73 Natural Gas 2016 8,859,000 Mmbtu $ 3.38 2017 7,300,000 Mmbtu $ 3.00 Natural Gas Liquids 2016 183,000 bbls $20.79
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