Gastar Exploration Announces 51% Increase In Proved Reserves

HOUSTON, Feb. 21, 2013 /PRNewswire/ – Gastar Exploration Ltd. (NYSE MKT: GST) (Gastar) today reported year-end 2012 proved natural gas, oil and condensate and natural gas liquids (NGLs) reserves of 180.9 billion cubic feet equivalent (Bcfe) as estimated in accordance with Securities Exchange Commission (SEC) regulations. This represents an increase of 51% over year-end 2011 proved reserves of 119.7 Bcfe. 

Of the total 2012 year-end proved reserves, 72% were natural gas, 11% were condensate and oil and 17% were NGLs, as compared to 77%, 9% and 14%, respectively, for year-end 2011.  The pre-tax present value of these reserves, discounted at 10% (PV-10), was $206.8 million, versus $217.1 million at year-end 2011, which reflects a year-over-year decline in natural gas, oil, condensate and NGLs prices. 

Marcellus Shale assets represented 85% of proved reserves volumes and 93% of the PV-10 value, with East Texas comprising the majority of the remainder of proved reserves and PV-10 value. 

Proved undeveloped (PUD) reserves at December 31, 2012 accounted for approximately 30% of total proved reserves, compared to approximately 34% at year-end 2011.  Proved undeveloped reserves at year-end 2012 were comprised of 54.3 Bcfe of Appalachian Basin reserves with a PV-10 value of $39.1 million.  At year-end 2012, Gastar recorded only 1.0 gross Marcellus PUD location adjacent to each gross producing location drilled (down from gross 1.3 PUD locations for each gross producing location at year-end 2011). Gastar believes all of its Marcellus acreage in Marshall and Wetzel Counties, West Virginia is prospective in the Marcellus and that the development of the acreage will result in natural gas production with high NGLs and condensate yields.

In accordance with SEC regulations, estimates of proved reserves as of December 31, 2012 were calculated using the 12-month un-weighted arithmetic average of the first-day-of-the-month price for each month in the period January through December 2012.  For natural gas volumes, the average Henry Hub price utilized was $2.76 per MMbtu.  For oil volumes, the average West Texas Intermediate (WTI) posted price and the WTI spot price utilized was $91.21 and $94.71 per barrel, respectively.  For NGLs volumes, the price per barrel used was $31.73.  The natural gas, oil, condensate and NGLs prices are adjusted for energy content or quality, transportation and regional price differentials by area.

For comparative purposes, utilizing the significantly higher forward closing prices on the New York Mercantile Exchange (NYMEX) for natural gas and oil as of December 31, 2012, total proved reserves were 190.4 Bcfe, with a PV-10 value of $333.2 million using un-weighted average prices of $5.28 per MMBtu of natural gas, $87.28 per barrel of oil and $29.24 per barrel of NGLs, assuming a historical spread to oil prices.   The natural gas, oil, condensate and NGLs prices are adjusted for energy content or quality, transportation and regional price differentials by area.

The Appalachian Basin and Mid-Continent proved reserves estimates were prepared by Wright & Company, Inc.  Netherland Sewell & Associates, Inc. prepared East Texas and other areas reserves. 

Operations Update

Marcellus Shale

In Marshall County, West Virginia, we began the fourth quarter of 2012 with 27 gross (12.3 net) operated Marcellus wells on production.  During the fourth quarter, we brought on production 11 gross (5.1 net) additional operated wells, bringing the total number of wells on production to 38 gross (17.4 net) at year-end. 

As of December 31, 2012, our operated wells on production in Marshall County were comprised of the following:

Five additional wells have been brought online subsequent to the end of the fourth quarter of 2012.  As of the date of this release, Gastar has the following drilling and completion operations underway in Marshall County:

Mid-Continent Oil Play

To date, Gastar has acquired a total of approximately 48,400 gross (20,200 net) acres of leases in an oil play located in the Mid-Continent region.  We expect to continue to build the position in partnership with our operating partner in 2013.  This program is focused on using modern horizontal drilling and multi-stage fracture stimulation technologies to exploit a predominately crude oil-bearing reservoir, which has been produced historically using vertical wells and conventional completion techniques.  If successful, the Mid-Continent play should result in a low-cost, repeatable horizontal oil development play.    

To date, Gastar and our operating partner have drilled three and completed two Mid-Continent wells.   As previously announced, the initial well with a 4,100 foot lateral was completed at an initial 30-day average gross rate of 105 BOE per day after processing, comprised of 84 barrels of oil per day, 12 barrels of NGLs per day, 57 Mcf of natural gas per day, and 428 barrels of completion fluids per day.  For the most recent 30-day period, the initial well produced at an after-processing gross rate of 105 BOE per day, comprised of 69 barrels of oil per day, 20 barrels of NGLs per day, 94 Mcf of natural gas per day, and 247 barrels of completion fluids per day.  Flow-back operations on the second well commenced on February 15, with encouraging initial results.   Gastar owns a 50% working interest and approximately a 39% net revenue interest in the producing wells.

Drilling operations have been completed on an approximately 4,300 foot horizontal lateral third well in the Mid-Continent play.  Completion operations are scheduled to commence early March 2013.  A fourth horizontal well was spud on February 16, 2013.  We will be paying 62.5% of these wells gross drill and complete costs to earn a 50% working interest and approximately 39% net revenue interest.

2013 Capital Budget

Gastar’s Board of Directors has approved a 2013 capital budget of approximately $93 million, comprised of $75 million of drilling, completion and infrastructure costs, $15 million in leasing and seismic costs and $3 million for other capitalized costs, which is materially lower than our 2012 capital expenditures of approximately $146 million.  The reduced capital program should still support a program that will allow us to continue our track record of strong volume and reserve growth.

Partly driving the reduced capital spending in 2013 is our plan to temporarily slow down drilling in the Marcellus Shale by mid-year 2013 to allow a thorough analysis of well spacing and drilling orientation tests to seek to further improve production rates and recoverable reserves per well.  The temporary slowdown in drilling and completion activity should also allow the gatherer and processor of our Marcellus production time to address recurring operational problems with their assets and to install additional processing and fractionation assets that will improve Gastar’s realizations on produced natural gas and NGLs.

In the Marcellus Shale, Gastar expects to spend approximately $60 million, comprised of $52 million for drilling, completion and infrastructure costs and an additional $8 million for lease acquisition and seismic costs.  In the Mid-Continent, Gastar has budgeted $27 million, comprised of $22 million for drilling and completion costs and $5 million for additional lease acquisition costs. No new wells are planned in East Texas due to continued depressed natural gas price realizations; however, we expect to spend $2 million primarily for selected well recompletions and lease maintenance. 

Drilling, completion and infrastructure costs account for $75 million of the 2013 capital budget, of which 69% is allocated for activities in the liquids-rich window of the Marcellus Shale, and 29% will be directed to drilling the Mid-Continent oil venture.  We expect to fund our 2013 capital program through existing cash balances, internally generated cash flow from operating activities, borrowings under the revolving credit facility and the possible divestiture of our East Texas assets.  Gastar exited 2012 with $98 million outstanding under our revolving credit facility and approximately $9 million in cash.      

As part of our 2013 capital program, Gastar expects to place on production an additional 19 gross (9.5 net) operated Marcellus horizontal wells in Marshall County, West Virginia.  In the Mid-Continent, we expect to drill and complete nine gross (4.5 net) non-operated wells bringing total wells on production to 10 gross (5.0 net).  Although no new wells are planned in East Texas during 2013, we will continue to monitor other nearby operators’ drilling activities in oil-bearing formations that also underlie a large portion of our East Texas acreage for future drilling opportunities.

Borrowing Base Increased 

Gastar’s Senior Secured Revolving Credit Facility was increased to $125 million from $110 million by the lending participants effective December 31, 2012.  Currently, Gastar has $27 million of unused borrowing capacity.  The next regularly scheduled borrowing base redetermination utilizing 2012 year-end reserves will be undertaken in May 2013.

Guidance for First Quarter of 2013

We are providing the following guidance for the first quarter of 2013:

(1)  Based on equivalent of 6 thousand cubic feet (Mcf) of natural gas to one barrel of oil, condensate or NGLs.

First quarter production assumes approximately seven days of planned shut-ins due to third party processing plant maintenance and additional production restraints related to high line pressures on the third-party-operated gathering system that impacted Gastar’s Marcellus production for much of 2012.   

“We ended another year in which we created significant asset value from our Marcellus Shale activities, delivering a 51% increase in total company proved reserves in 2012 and a 40% increase in PV-10 value using the more representative NYMEX forward strip valuation method,” said J. Russell Porter, Gastar’s President and CEO.

“We also continued to increase the portion of higher-value oil, condensate and natural gas liquids as a percentage of our total production. During 2013, we will look for opportunities to further improve the economics and reserve recovery from our Marcellus wells, and we will step up our drilling activities in our Mid-Continent oil play on the basis of the results of our initial drilling program and the attractive high returns that should be generated from those activities. We are continuing to add to our acreage position in the Mid-Continent area and will provide additional detail on the play and recent drilling results when doing so will not negatively impact our long-term plan for the area.”

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