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Gastar Taps Private Equity For 60-Well Program in STACK, Sells Noncore Assets

Backed by private equity, Gastar Exploration Inc. announced a 60-well drilling program Thursday for its leasehold in the Oklahoma STACK play (the Sooner Trend of the Anadarko Basin, mostly in Canadian and Kingfisher counties).

The Houston-based exploration and production company said it has reached an agreement with an unnamed “large private global investment fund” to drill 60 Gastar-operated wells targeting the Meramec and Osage formations across 18,000 undeveloped net mineral acres in Kingfisher County, OK.

Gastar also announced Thursday a $71 million deal to sell noncore assets mainly located in northeast Canadian County, OK, to an undisclosed third party. The sale involves allocated value for 19,100 net acres and current production of around 181 boe/d from 25 gross (11.2 net) wells 32% weighted to oil, the company said.

Gastar CEO J. Russell Porter said the noncore sale will improve liquidity and “allow us to focus on and accelerate our core STACK delineation program in northern Kingfisher and southern Garfield Counties” in Oklahoma.

For the 60-well program in Kingfisher County, Gastar’s private equity partner will finance 90% of the company’s drilling and completion cost obligations and earn 80% of its working interest for each new well drilled under the agreement, the company said.

The 60 wells will be split into three tranches of 20 wells each. Of the first 20 wells, 18 will target the Meramec and two will target the Osage. The investors will determine the locations of the next 20 wells, while the last 20 well locations will be determined by mutual consent, Gastar said.

For each 20-well tranche, once the investor has reached a 15% internal rate of return (IRR), its share of Gastar’s working interest will go from 80% to 40%, with the company’s share increasing from 20% to 40%. When 20% IRR has been achieved the investor’s share will further decrease to 10%.

“This Development Agreement greatly expands our ability to delineate and hold our acreage in the STACK Play without putting undue pressure on our balance sheet or requiring equity issuances in the current market,” Porter said. “The structure of this Drilling Program, which allows us to revert to 90% of Gastar's original interest after our partner receives a 20% return, reflects our confidence in the quality of our acreage.  

“We will also benefit from information garnered from the drilling program to develop future offset locations for our own interest. We have already commenced drilling five of the initial 20 wells that will be included in the first tranche of the drilling program. We also plan to continue to drill and complete wells apart from the development agreement on acreage outside of the contract area as we further explore and develop our Oklahoma acreage."

Meanwhile, the company expects the revenue generated from the noncore asset sale to leave it with “ample liquidity to support our capital expenditure plans for the remainder of 2016 and 2017,” Porter said.

The sale is expected to close by Nov. 18 with an effective date of Nov. 30. After deducting 20% of the proceeds from the transaction to pay down Gastar’s revolving credit facility, the company would have $102.4 million in cash on a pro forma basis as of Sept. 30, according to Porter.

Including the locations in its drilling agreement, Gastar would retain 83,200 net surface acres in the Midcontinent, with about 1,031 net STACK locations, Porter said.

Management also said Thursday that the terms of Gastar’s revolver have been amended, with its borrowing base reaffirmed at $100 million.

Gastar became a pure-play Midcontinent operator after selling its Appalachian Basin portfolio earlier this year (see Shale Daily, April 8).

During its 2Q2016 conference call in August, management hinted that the company might be looking to make a deal as it focused on proving the value of its STACK assets (see Shale Daily, Aug. 10).

For more on the producer outlook for Oklahoma’s stacked reservoirs, check out NGI’s special report The Sooner Boomer: How SCOOP, STACK and the OK Liquids Plays are changing the game in the Midcontinent.

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