Gastar Exploration Inc. said Monday that it would sell its Marcellus and Utica shale assets to an affiliate of privately held investment developer Tug Hill Inc. for $80 million and exit the Appalachian Basin in favor of its Midcontinent assets. The company added, however, that it would mostly suspend exploratory drilling there until 2017 on low oil and gas prices.
The sale would include Gastar's producing assets and proved reserves across 19,600 net acres in Marshall and Wetzel counties, WV. Financial analysts had expected the assets to bring Gastar nearly $100 million when the company announced that it would seek a buyer for the properties last October (see Shale Daily, Oct. 15, 2015). But the commodities downturn has complicated the market for acquisitions and divestitures.
In announcing the deal, Gastar made clear that it needed the money. The company has been hammered by widening Appalachian basis differentials, which forced it to idle its operations in West Virginia last year and turn to oilier assets in the Midcontinent, where it has been earning higher returns (see Shale Daily, Nov. 9, 2015).
The sale marks Gastar's transformation into a Midcontinent pure-play. Its operations are now confined to the Hunton Limestone and the Sooner Trend Anadarko Canadian and Kingfisher (STACK) play in Oklahoma.
As Gastar presses ahead with the development of its Midcontinent assets, the company also said Monday that it has started to drill its second STACK well in the Meramec Shale. The company said last month that its first Meramec test well produced at an average 30-day sales rate of 956 boe/d (see Shale Daily, Jan. 12). But with its liquidity tight and the production it would lose from the Appalachian sale straining its cash flow, Gastar said it would suspend all proved undeveloped reserve drilling until 2017.
"With the pending divestiture of our Appalachian Basin acreage, we are able to improve our overall leverage without issuing equity in this depressed commodity price environment," said Gastar CEO J. Russell Porter. "...This sale results in Gastar emerging as the only public pure-play company focused on the Oklahoma STACK play and enhances our ability to emphasize further exploration and development of our STACK play acreage."
The sale is expected to close March 31 and have an effective date of Jan. 1. Gastar said the proceeds would be used to reduce borrowings under its $200 million revolving credit facility, of which $190 million is outstanding.
In 2014, Tug Hill formed a partnership with private equity firm Quantum Energy Partners to acquire and develop conventional and unconventional properties across North America (see Shale Daily, Aug. 22, 2014). Among other areas, the partnership said it would be looking at the Marcellus Shale. Since 2007, Tug Hill affiliates have participated in more than 750 horizontal Marcellus wells in Pennsylvania and West Virginia. The company currently owns working interest in more than 350 Marcellus wells.
While Tug Hill has a partnership with Chief Oil & Gas LLC to jointly develop acreage in Northeast Pennsylvania, its producer subsidiary, Tug Hill Operating LLC, would operate and develop the assets being acquired from Gastar, COO Evan Radler told NGI's Shale Daily.
Gastar also announced a preliminary 2016 budget of just $37 million, down from the $103 million it budgeted for 2015 (see Shale Daily, Feb. 3, 2015). Gastar's board has not yet approved a full-year budget and it won't until the Appalachian sale is completed and its borrowing base is redetermined this Spring, the company said.
"The overriding objective of our 2016 capital budget is to maintain our balance sheet, liquidity and extensive Midcontinent acreage position until commodity prices improve," Porter said.
Gastar is currently in discussions with its lending group to change its revolving credit facility to provide more flexibility for its financial covenants, which are at risk given the loss of production from the Appalachian Basin.
The company estimated that it produced 13,800-14,000 boe/d in the fourth quarter, up from 11,700 boe/d in 4Q2014 and 13,600 boe/d in 3Q2015. The higher production, Gastar said, was primarily due to successful drilling in the Midcontinent, which now accounts for 73% of its proved reserves.