Gastar Exploration Inc. expects to cut its capital budget and scale back the number of wells it plans to drill next year, electing to take a more cautious approach as its Appalachian natural gas production continues to be impacted by declining basis differentials and crude oil prices remain weak.
Management highlighted the company's new tack less than two months after it issued a 2015 capital spending plan that called for a $257 million budget that would have largely been spent on its Hunton Limestone play in north-central Oklahoma (see Shale Daily, Sept. 17). Gastar cut that forecast by 33% last week to $173 million when it announced its third quarter earnings results. The company said it would now likely drill 35 gross wells in the Hunton Limestone and Appalachian Basin instead of the 52 it announced in September, before commodity price headwinds began to put a noticeable drag on markets.
"Despite our desire to aggressively develop our numerous locations, we're taking a conservative approach to managing our balance sheet given the recent decline in commodity prices and capital markets," said CEO J. Russell Porter during a conference call to discuss third quarter results. "By reducing capital expenditures (capex), we preserve capital and ensure that we maintain more than adequate liquidity for the foreseeable future."
Gastar is one of the earliest in its peer-group to detail 2015 plans. Other operators have provided only limited information as they wait to get a better grip on what direction oil prices will take and see how the winter heating season affects natural gas sales. Many are expected to provide capital budgets over the next three months or so.
"As a generalization, most companies thus far are speaking in broad terms and saying the right things about financial discipline, breakeven prices, liquidity, etc. and not committing too much," said Wells Fargo Securities analysts in discussing their takeaways from this earnings season. "Most operators have yet to release formal 2015 capex guidance -- nonetheless, final numbers are likely to end lower than investors/Steet envisioned just a few months ago, in our view."
Topeka Capital Markets analyst Gabriele Sorbara called Gastar's decision to scale back next year a "prudent move to preserve its balance sheet integrity" and said it "should be well received by the market."
Crude oil prices have yet to find equilibrium, and Gastar's oil production now accounts for 28% of its overall volumes, compared to just 14% a year ago before it ballooned its oil-rich Hunton position in a series of acquisitions (see Shale Daily, Sept. 9, 2013; April 2, 2013). The company produced 9,800 boe/d in 3Q2014, which was down by 1% from 3Q2013, as it continued to de-risk its Hunton asset and drilled its first Utica Shale well in West Virginia.
Fourth quarter production is expected to come in well above last quarter, though, with ten gross wells in the Marcellus Shale and 9 gross wells in the Midcontinent expected to come online. Porter said the company also believes it can increase production by 40% next year, even with a reduced capital budget.
"One of our near term goals is to prove-up non-producing formations on our acreage and producing formations on unexplored portions of our acreage," he said. "By doing so, we believe we can provide clarity on the company's true net asset value and extensive drilling inventory, grow our borrowing base and plan for future development of our assets. These efforts have been very effective and particularly important at a time when it's critical to understand where to best focus capital."
In the Hunton, Gastar last month placed on flowback its Shimanek well, which reached a peak production rate of 1,829 boe/d. While in West Virginia, the company turned its first Utica Shale well, the Simms U5H in Marshall County, online in September at a peak-production rate of 29.4 MMcf/d (see Shale Daily, Sept. 8). That well has produced at an average 30-day rate of 19.8 MMcf/d.
The company will still focus most of its efforts on the Midcontinent next year, with plans for 31 gross Hunton wells. In the Marcellus and Utica, the company will drill 4 gross wells by midyear.
At that point, Porter said "we'll pause drilling to evaluate further Marcellus/Utica capital in light of weak realized natural gas prices in the area."
CFO Michael Gerlich noted during the call that the company's average Appalachian basis has been widening since the first quarter, going from negative 22 cents at that time to negative 92 cents in the second quarter and dropping further in the third quarter to a negative $1.61.
The company's average natural gas price last quarter, including hedges, was $2.56/Mcf, down from $2.95/Mcf in the year-ago period. A wetter production mix, however, helped the company record net income of $9.8 million (15 cents/share), compared to a net loss of $3.9 million (7 cents/share) in 3Q2013.