Marcellus Shale Plays Starring Role in Gastar Q1 Results

Gastar Exploration released first quarter operating results and financials yesterday. Among the news for Gastar: although they had a net loss of $6.3 million for the first quarter, their production of natural gas, oil and natural gas liquids was up 32 percent from the first quarter of last year. Why the huge increase in production?

The reason why is because of hydraulic fracturing and horizontal drilling in the Marcellus Shale in liquids-rich Marshall County, WV. Gastar says they will bring another three wells online in the second quarter, and 10-15 more wells in the second half of this year—all in Marshall County. Gastar also has acreage in neighboring Wetzel County, WV. Looks like Gastar loves WV!

From the press release:

Gastar Exploration Ltd. today reported financial and operating results for the three months ended March 31, 2012.

Net loss attributable to Gastar’s common shareholders for the first quarter of 2012 was $6.3 million, or $0.10 per diluted share. This compares to a net loss of $1.9 million, or $0.03 per share, for the first quarter of 2011. Excluding the impact of an unrealized hedging loss of $1.5 million and litigation settlement expense of $1.3 million and other special items, adjusted net loss attributable to common shareholders was $3.5 million, or $0.06 per share for the first quarter of 2012. Excluding an unrealized hedging loss of $1.9 million and other special items, adjusted net loss for the first quarter of 2011 was $38,000, or $0.00 per share. (See the accompanying reconciliation of net loss per common share to this non-GAAP financial measure at the end of this news release.)

Our net cash flow provided by operations before working capital changes for the first quarter of 2012 was $1.7 million, and adjusted for the $1.3 million litigation settlement expense was $2.9 million, compared to net cash flow provided by operations before working capital changes of $4.5 million for the first quarter of 2011. (See the accompanying reconciliation of cash flow before working capital changes and as adjusted for special items to GAAP financial measures at the end of this news release.)

Natural gas, oil and natural gas liquids (NGLs) revenues increased 7% to $10.7 million in the first quarter of 2012, up from $10.0 million in the first quarter of 2011. The increase was the result of a 32% increase in production volumes partially offset by a 19% decrease in realized commodity prices. Average daily production was 29.4 million cubic feet of natural gas equivalent (MMcfe) per day for the first quarter of 2012, compared to 22.6 MMcfe per day for the same period in 2011. Liquids revenues (oil and NGLs, including condensate) represented approximately 47% of our total revenues before hedge impact for the first quarter of 2012 compared to 13% for the first quarter of 2011. Oil and NGLs daily production represented approximately 16% of total production for the first quarter of 2012 compared to 3% of daily production for the prior-year period. Sequentially, average daily production in the first quarter of 2012 increased 33% from fourth quarter 2011 production of 22.1 MMcfe per day.

Higher production volumes in the first quarter of 2012 were primarily due to the impact of our horizontal drilling activity in the liquids-rich area of the Marcellus Shale in Marshall County, West Virginia, partially offset by natural declines from our natural gas wells in East Texas. During the last several quarters, Gastar’s operated production and sales in West Virginia have been curtailed by issues with condensate handling, dehydration limitations and high line pressures on a third-party-operated gathering system. The operator has been gradually resolving these issues, with total resolution expected by the end of the second quarter.

J. Russell Porter, Gastar’s President and CEO, stated, "Throughout this year as we continue to develop our liquids-rich Marcellus Shale acreage, we should see substantial revenue growth resulting from our increasing production volumes of high-value condensate and natural gas liquids. Gastar’s operations in Marshall County are progressing on schedule, with at least three wells expected to come on production in the second quarter and another 10 to 15 wells expected to be brought on line in the second half of this year. As we continue to swap acreage with adjacent operators and block up our acreage to optimize our drilling positions, we believe we have identified an additional 70 locations for future development in Marshall County. This large opportunity set, coupled with our acreage in Wetzel County, West Virginia and the acreage position we are acquiring in a potential Mid-continent oil play gives us substantial running room for future liquids growth."

Approximately 78% of our first quarter natural gas production was hedged with downside price protection. The realized effect of our natural gas hedging was an increase of $2.5 million in revenues and an increase in total price received from $1.96 per thousand cubic feet (Mcf) to $3.09 per Mcf. Also during the first quarter of 2012, approximately 69% of our oil production was hedged, which resulted in a realized decrease of $78,000 in oil revenues and a decrease in total price realized from $74.74 per barrel to $71.76 per barrel. Approximately 13% of our first quarter 2012 NGLs production was hedged. The realized effect was a decrease of $2,000 in NGLs revenues and a decrease in total price realized from $39.80 per barrel to $39.76 per barrel. We continue to maintain an active hedging program covering a portion of our estimated future natural gas, oil and NGLs production.

Lease operating expense (LOE) was $2.4 million in the first quarter of 2012 compared to $1.7 million in the first quarter of 2011. LOE per Mcf equivalent (Mcfe) of production increased to $0.90 in the latest quarter from $0.84 in the first quarter of 2011. The increase in the expense per Mcfe was primarily due to higher workover costs of $0.07 per Mcfe and higher general LOE costs of $0.04 per Mcfe, partially offset by a $0.05 per Mcfe decrease in ad valorem taxes.

Depreciation, depletion and amortization (DD&A) was $5.7 million in the first quarter of 2012, up from $4.1 million in the first quarter of 2011. The DD&A rate for the first quarter of 2012 was $2.11 per Mcfe compared to $2.02 per Mcfe for the same period in 2011. The increase in DD&A expense was the result of a 4% increase in the DD&A rate per Mcfe and a 32% increase in production. The increase in the rate is primarily due to higher proved costs associated with East Texas wells drilled last year and a reclassification of undeveloped East Texas leasehold costs from unproved to proved properties in 2011.

General and administrative (G&A) expense was $3.2 million in the first quarter of 2012, up from $2.9 million for the first quarter of 2011, and includes non-cash, stock-based compensation expense of $892,000 for the first quarter of 2012 and $705,000 for the first quarter of 2011.

Operations Review and Update

Marcellus Shale Net production from the Marcellus Shale area averaged approximately 14.0 MMcfe per day in the first quarter of 2012, compared to 0.7 MMcfe per day for the first quarter of 2011 and 5.2 MMcfe per day in the fourth quarter of 2011.

In Marshall County, West Virginia, we began the first quarter with nine operated Marcellus wells on production. During March and April 2012 we placed on production the three-well Hall and five-well Hendrickson pads, respectively. Our average working interest (WI) in the currently producing 17 wells is 43.5%, and the average well lateral length is approximately 4,700 feet.

Our Marshall County horizontal drilling and fracture stimulation program continues to be very active, with fracture stimulation operations currently in progress on the three-well Accettolo pad (50% WI) to be followed by stimulation operations on the five-well Burch Ridge pad (50.0% WI). We anticipate first production from wells drilled from the Accettolo pad and the Burch Ridge pad in August 2012. We have commenced drilling operations on the four-well Wayne pad (45% WI) and on five of the 10 wells to be drilled on the Shields pad (50% WI). We anticipate returning to the Wengerd pad after the Wayne and Shield drilling operations have been completed to drill the remaining five wells on that pad. These wells are expected to be brought on production at various times in the second half of this year.

Liquids production yields currently are averaging about 25 to 30 barrels of condensate and 40 to 50 barrels of NGLs per MMcf of natural gas produced. We believe the condensate and NGLs production per MMcf of natural gas produced could increase once the associated gathering system line pressures are resolved, and we anticipate higher liquid yields as our drilling trends to the Western portion of the Marcellus Shale.

In Butler County, Pennsylvania, we participated in seven non-operated wells (19.2% WI). Three of the seven wells were placed on sales on December 1, 2011 but were subsequently shut-in to accommodate the fracture stimulation of the remaining four wells in January 2012. The four wells were stimulated and placed on production in February, with the first three wells being returned to production by April 2012.

Capital expenditures net to Gastar for the first quarter in the Marcellus Shale were $28.3 million. For the remainder of 2012, we have budgeted $74.7 million for drilling, completion, infrastructure, lease acquisition and seismic costs in the liquids-rich window of the Marcellus Shale, of which $63.6 million will be devoted to drilling activities.

East Texas In East Texas, first quarter net production from the Hilltop area averaged 14.1 MMcfe per day, down from 20.4 MMcfe per day in the first quarter of 2011 and 15.5 MMcfe per day in the fourth quarter of 2011. The lower volumes reflect natural declines in field production.

First quarter capital expenditures in East Texas were $1.9 million. While natural gas prices remain depressed, we intend to limit our new investments in East Texas to lease renewals and recompletions, with $4.7 million budgeted for the balance of 2012. We will also continue to monitor activity of other operators on nearby and adjacent acreage as they work to identify and develop various oil formations that may potentially underlie our acreage in East Texas.

Mid-Continent Acreage As of March 31, 2012, Gastar has acquired 12,500 gross (5,100 net) acres in its Mid-Continent oil-focused venture and expects to drill and complete three gross (1.5 net) initial horizontal wells in the second half of 2012.*

*Gastar Exploration (May 9, 2012) – Gastar Exploration Ltd. Reports First Quarter 2012 Results