Denver-based Gasco Energy on Thursday reported record-breaking production volumes for 2Q2007 of 1.1 Bcfe, which was 8% higher sequentially than in 1Q2007 and 30% above 2Q2006. However, with none of its production protected by hedging, the price differentials for Rocky Mountain natural gas played havoc with the company’s balance sheet and sent it to a loss for the quarter.
Gasco’s average realized gas price in the latest quarter was $4.31/Mcf, down from $5.18/Mcf for the same period of 2006. For natural gas liquids, average prices were $49.38/bbl, almost $10 off the $59.40 in 2Q2006.
All of Gasco’s output came from its Riverbend Project in the Uinta Basin, said COO Mike Decker. He noted that the increase in volumes occurred even with the delay in completion of Gasco’s recently drilled wells and curtailed production from some of its existing gas wells. Curtailed net production volumes for 2Q2007 were 100 MMcf or 1.1 MMcf/d.
Once the Rockies region starts to recover from the “current seasonally low natural gas prices, Gasco will return all wells to production and begin completing our inventory of new wells and recompleting our older, existing wells with behind-pipe potential,” said Decker. Gasco, like other Rockies operators, is anxiously awaiting the start-up of Phase One of the Rockies Express pipeline scheduled for January 2008, which should lead to higher market prices for the region’s natural gas.
For the quarter, Gasco reported a net loss of $66 million (minus 70 cents/share), compared with a net loss of $53 million (minus 62 cents) in 2Q2006. Earnings were affected by a write-down attributed to lower gas commodity prices and the way Gasco carries on its balance sheet the value of its gas and oil assets. In order to comply with accounting regulations, Gasco had to record a noncash impairment charge against the carrying value of its properties, which created a $64 million charge against operating expenses. Excluding the impairment charge, Gasco posted a net loss of $2 million (minus 20 cents/share).
About $10 million of the impairment was connected with Gasco’s Wyoming properties; the balance is associated with the Uinta Basin project. CFO King Grant said, “the price at which we would not have taken the ceiling test write-down would have been $5.82/Mcf.”
On a favorable note, Gasco’s total revenue in the period totaled $6.1 million, which was a 6% increase over the same period in 2006. It also reduced its general and administrative expenses by 15%. Cash flow was $2.3 million, nearly flat from 2Q2006’s $2.1 million. In addition, Gasco’s lease operating expenses decreased to 55 cents/Mcfe, compared with 85 cents/Mcfe a year ago.
The company is clearly benefiting from the dramatic improvement in the time it takes to drill wells and the costs associated with drilling and completion activities, said CEO Mark Erickson. “We are very aggressively bidding out all service costs both on the drilling and the completion side so we think we will continue to see improvements on the investment side for total wells.”
Erickson and Decker reiterated the importance of Gasco’s new business partnership with NFR Energy LLC, a joint venture formed by Nabors Industries Ltd. and First Reserve Corp., which focuses on the Uinta Basin Riverbend Project. NFR will contribute funds to a development program in the Wasatch/Mesaverde/Blackhawk zones in 2007 and the first part of 2008 (see Daily GPI, Aug. 2).
As an added benefit from the joint project, Gasco will avoid approximately $4.5 million in contract termination penalties to idle two of the three rigs it has under contract, said Erickson. The agreement also allows Gasco to “continue the momentum it has created” and move forward with additional Riverbend drilling plans independent of this agreement, including further testing of the Mancos/Dakota.
Erickson noted that NFR has expressed interest in further investment opportunities with Gasco. Gasco would prefer to gain investment capital through similar projects instead of raising capital in the equity markets because “we have somewhere between 3,000 and 6,000 gross locations, most of which aren’t getting capitalized into the story.”
“If we can accelerate drilling with other people’s money, the NAV [net asset value] pick-up, simply by moving the cash flows forward and exploiting the resource, [it] will enable us to move more of our reserves into the proved or highly probable category, given where the stock has been the last 12 months it’s a very minimally dilutive way to do it,” said Decker.
“As we’ve started to move into what we call more of the development phase, we’ve demonstrated lower costs and quicker drilling days,” said Erickson. “There appears to be no other sources of capital that are attracted to the project right now…where in the past we’ve had higher well costs and the economics were running a fine line, we pretty much had to continue with the equity path.”
Gasco now operates 99 gross producing wells with 10 additional wells awaiting initial completion activities. The company also has an inventory of 27 operated wells with up-hole recompletions. The independent plans to continue to build its recompletion inventory in advance of what it believes could be a stronger Rockies commodity price environment. In the second half of the year, the company said it plans to sell about $10 million of its nonstrategic assets. It also plans to “firm up” its gas market plan to provide a “secure flow path to solid gas markets.”
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