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Gastar Earnings Report Points to Economics Behind Planned Appalachian Divestiture

Hammered by Appalachian basis differentials, Gastar Exploration Inc. plans to continue focusing its capital on the Oklahoma liquids plays as it proceeds with plans to sell off its Marcellus and Utica acreage.

“As we’re all aware, these are challenging times for our industry. Gastar finds itself opportunity and asset rich, yet capital-constrained, just like many of our peers,” CEO J. Russell Porter told investors during the company’s third quarter earnings call Friday. “Fortunately, we have assembled assets in two basins that are core and highly valuable.

“Selling assets that are as high quality and valuable as our Marcellus and Utica is not an easy decision, however we believe it’s the right decision given our higher relative returns that we generated from our Midcontinent assets.”

Last month, Gastar announced its plans to sell its Marcellus and Utica acreage, focused primarily in Marshall and Wetzel counties in West Virginia, while also moving forward on a $43.3 million acquisition of 103 gross producing wells and other undeveloped acreage in the STACK and Hunton Limestone plays in Oklahoma from its joint venture (JV) with Husky Ventures Inc. (see Shale Daily, Oct. 15).

“We’re expecting bids early next week, and it will take a little while to evaluate those and hopefully move towards a definitive agreement with one of the bidders,” Porter said. “Some time before the end of this year, we should have some results that we can make public. If we decide not to sell, we can make that public, too.”

CFO Michael Gerlich said the proceeds from selling Gastar’s Appalachian assets will go to reduce the amount the company will borrow to finance the Midcontinent acquisition.

Gastar’s third quarter results tell the tale of the economics behind the planned Appalachian divestiture.

The company’s total natural gas production in the Marcellus for the quarter was up slightly year/year at just under 2 Bcf, with an average sales price per unit of 46 cents/Mcf, down from $2.14/Mcf for the year-ago period. The company produced 226,000 bbl of natural gas liquids (NGL) in 3Q2015 at an average loss of $1.56/bbl, compared to an average price of $26.98/bbl in 3Q2014.

Gastar’s Utica holdings fared similarly in terms of pricing, with production climbing year/year to 698 MMcf from 187 MMcf in 3Q2014, but at an average 3Q2015 sales price of 57 cents/Mcf, down from $1.44/Mcf in the year-ago period.

“Our Appalachian Basin natural gas revenues continue to be impacted by substantial negative basis differential,” Gerlich said, adding that Gastar’s average Appalachian basis differential for the quarter based on first-of-the-month prices was minus $1.56, worse than the $1.26 negative differential in 2Q2015.

Gastar reported a net loss for the quarter of $188.2 million (minus $2.47/share), driven by almost $182 million in impairments on its oil and natural gas properties. That compares with net income of $13.4 million (16 cents/share) in the year-ago period.

Porter expressed optimism about the potential returns from its Midcontinent holdings, noting promising, albeit early, results from its $5.8 million Meramec test well in Oklahoma. Porter said the company is hoping for 700 boe/d or more from the test well.

“While it’s too early to make any definitive statements about performance, we’re highly encouraged,” Porter said. “The well was initially flowing back frack water naturally at very high rates, which was an excellent sign.”

The company wasn’t ready to disclose its capital budget for 2016 to investors Friday, but Porter indicated Gastar would likely run a single-rig plan in the Midcontinent for most of the year, focused on returns more than production growth.

Porter said Gastar’s Midcontinent acreage, bordering on acreage held by Newfield Exploration Co., presents opportunities to tap into multiple plays, including the Hunton, the Meramec, the Woodford Shale STACK play and the Oswego and Osage formations in Oklahoma.

“We’re in a position where, without cataloguing the Osage and Oswego wells yet and with the Hunton, Woodford and Meramec, we’re easily in 1,000 net locations,” Porter said. “It’s just a really big opportunity set, and by holding this acreage, we lock in a lot of opportunities and, we believe, a tremendous amount of value going forward.”

For the quarter, Gastar reported total Midcontinent production of 274,000 bbl of oil and condensate, 805 MMcf of natural gas and 111,000 bbl of NGLs, with an average sales price of $29.80/boe.

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