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Buoyed by Chesapeake, Gastar Hopes to Secure Marcellus JV

The news that Chesapeake Energy Corp. secured StatoilHydro ASA as a joint venture (JV) partner in its Marcellus Shale leasehold has come at an opportune time for Gastar Exploration Ltd., which, as it struggles with the credit crisis, also is looking for a capital infusion into its Appalachian holdings.

Gastar CEO J. Russell Porter delighted in the news that StatoilHydro agreed to pay Chesapeake $3.38 billion for an exploration and development interest in the Marcellus Shale (see related story).

"We are pleased to see it and commend them on their timing," Porter said of Chesapeake's transaction during a quarterly earnings conference call. "We are in active discussions with a couple of interested parties on a Marcellus JV, and this may drive a few others into the conversation as well."

Gastar owns and operates exploration and development acreage in the deep Bossier Sand gas play of East Texas and the Marcellus Shale, and it has a coalbed methane stake in the Powder River Basin of Wyoming. Gastar also explores for gas in Australia.

The Marcellus leasehold extends from northern West Virginia into southwestern Pennsylvania, where Gastar has accumulated around 42,000 net acres. Gastar is planning to drill 10 shallow wells by the end of December, and then plans to drill 13 shallow wells in 2009 for a total cost of around $475,000 gross per well.

As a junior explorer, Gastar has never had a lot of wiggle room financially. Its shares began 2008 selling at around $1.25, but in the wake of the financial crisis Gastar's stock has tumbled; it closed at 48 cents/share Monday. The management team made clear Tuesday that the company has to secure a JV partner in the Marcellus play, or it may have to sell some of its East Texas, Wyoming or Australian leasehold to avoid defaulting on a financing covenant.

Preliminary talks have begun with its bankers to waive the covenant if need be, but Porter said he was confident that a partner soon would be secured.

"Our goal is to get a transaction up before the end of the year, and we're making progress on that," Porter said. "I don't want to say a whole lot, because it's very likely that whoever we're negotiating with is listening to this..." However, "we're more likely than not to get it accomplished by year-end."

At the end of September Gastar had cash and cash equivalents of $14.1 million. Because of the turmoil in the credit markets, and following a review of its capital programs through 2009, Gastar cut its previously announced capital spending plan by $4.9 million through 2008 and by $30.1 million for 2009.

"If we are not successful in raising the additional capital required for our current plan, we may further reduce our drilling and development program," Porter said. Because Gastar operates its East Texas and Marcellus Shale properties, "much of our budget can be adjusted at our discretion."

Gastar's net income in 3Q2008 rose to $3.0 million (1 cent/share), compared with a net loss of $5.5 million (minus 3 cents) in 3Q2007. The latest quarter's results included a $3.4 million (1 cent/share) unrealized natural gas hedging gain. Net cash flow from operations was up 273% to reach $16.8 million compared with $4.5 million in the same period a year ago.

Average daily output fell to 20.2 MMcfe/d in the quarter from 22.5 MMcfe/d in 2Q2008 and 22.7 MMcfe/d in 3Q2007. The production drop was attributed to the natural decline in production volumes, the temporary shut-in of five wells during recompletion operations and "the fact that no new wells were completed," Gastar noted.

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