Gastar Exploration Ltd. announced a three-way deal with Chesapeake Energy Corp. on Monday, in which Gastar purchased proven reserves in the prospective Hunton Limestone formation in Oklahoma, as well as close to 10% of its common stock. The companies also agreed to settle outstanding litigation.
In the first transaction, the operator paid $85 million for some proven reserves and undeveloped leasehold interests in Oklahoma's Kingfisher and Canadian counties, which extend into the prospective Hunton Limestone formation. The acquisition, expected to close by June 7, includes drilling rights in 157,000 net acres that adjoin the producer's existing Midcontinent acreage and 2.8 million boe of proven reserves.
"This acquisition of undeveloped acreage and producing properties in our Midcontinent area will provide us a tremendous opportunity to secure a much larger position in what we believe has the potential to be a highly prolific new oil play," said CEO J. Russell Porter. "Based on existing data, nearly half of the acquired acreage lies within what we expect to be the most prospective area for horizontal drilling of the Hunton Limestone formation. Found at depths of 8,000 to 9,000 feet, this formation is the horizontal target of our previously undisclosed Midcontinent oil play.
"We are currently seeing compelling results from the second well in our Mid-continent joint venture, the Mid-Con 2H well, which has averaged production of more than 968 bbl (87% oil) of crude oil equivalent per day for the last 10 days, with only a small percentage of the completion fluids recovered since production began in mid-February. Based on internal projections, we believe that Hunton formation wells have the potential for average gross recoverable reserves of approximately 430,000 boe. With an estimated $5.2 million drilling and completion cost per well, we are anticipating very attractive rates of return."
Gastar's current plan, said the CEO, is to drill 12 gross (six net) wells this year, eight of which would be within an existing area of mutual interest (AMI) established previously. The first well outside the AMI is expected to spud late in the third quarter. Eight wells (four net) are planned in 2014 within the existing AMI, with 16 operated wells (eight net) planned outside the AMI. The wells would target the Hunton Limestone with lateral lengths of 4,000-4,500 feet.
"With this acquisition, we now have over 250 net potential drilling locations in our Mid-Continent play," Porter said.
Included in the transaction are 176 producing wells (half to be operated by Gastar) with an estimated present value of proved reserves of $32.4 million, which holds 19% of the acreage by production. Current net production averages 177 b/d of crude oil, 54 b/d of natural gas liquids (NGL) and 3.5 MMcf/d of natural gas. Net proved reserves, all classified as proven developed producing, include 494,269 bbl of oil, 270,508 bbl of NGLs and 12.5 Bcf of natural gas, for a total of 2.8 million boe.
In its second transaction, Gastar is repurchasing 6.78 million shares of its common stock, about 9.9% of its total outstanding common shares, for $1.44/share, which represented all of Chesapeake's holdings in Gastar. The stock transaction is worth an estimated $9.8 million.
In addition, the producers agreed to settle all current litigation between them, conditioned upon the stock purchase closing. Chesapeake had filed a lawsuit against Gastar in October in U.S. District Court for the Southern District of Texas, alleging that it was owed $130 million from a failed joint venture in Texas (Chesapeake Exploration LLC et al. vs. Gastar Exploration Ltd. et al., No. 4:12-cv-2922).
Seven years ago Chesapeake had agreed to help fund and share in Gastar's development of the Hilltop Prospect in the Deep Bossier of East Texas, an area encompassing about 54,000 gross acres, or 38,000 net acres. The agreement allowed Chesapeake to acquire at the time about 19.9% of Gastar's outstanding common shares, or 29.9 million shares, for about $2.80/share.
If Gastar does not close the property acquisition by June 7, Chesapeake may terminate it, but Gastar may elect to pay for the stock repurchase and effect the lawsuit settlement assuming sufficient funding is available.
The transactions are to be funded from a combination of Gastar's available borrowings under its revolving credit facility, proceeds from the possible sale of East Texas assets and by issuing debt or preferred stock. Subsequent to closing, Gastar also intends to pursue a joint venture partner in the Hunton Limestone formation to reduce debt and help fund the planned exploration and development program.
Gastar's previously acquired Midcontinent oil play acreage consists of 51,700 gross (21,700 net) acres in Oklahoma's Major, Garfield and Kingfisher counties that were acquired in a joint venture with a third-party operator. Gastar's second well in the play began producing on Feb. 15 and has produced a average rate for the most recent 10 days of 853 b/d of oil, 687 Mcf/d of natural gas and 411 b/d of completion fluids. Less than 7% of completion fluids have been recovered to date, Gastar noted.
Completion operations are underway on a third horizontal well in the existing acreage, with initial flow back operations expected to begin later this month. The well has a 4,300-foot horizontal lateral that is being completed using the same techniques employed on the second well. A fourth horizontal well was spud on Feb. 16.
"Gastar's existing acreage is subject to a joint venture with a third-party operator which includes an AMI that includes approximately 20,000 net acres that are being acquired in these transactions," the operator stated. "Our existing partner will have the right to participate in the acquisition of 50% of the proved reserves and leasehold within the existing AMI on the same terms as Gastar is acquiring these interests."