Gastar Exploration Announces Second Quarter 2016 Results

HOUSTON, Aug. 4, 2016 /PRNewswire/ -- Gastar Exploration Inc. (NYSE MKT: GST) ("Gastar" or the "Company") today reported financial and operating results for the three and six months ended June 30, 2016.

Net loss attributable to Gastar's common stockholders for the second quarter of 2016 was $18.1 million, or a loss of $0.17 per share.  This compares to a second quarter 2015 net loss of $118.0 million, or a loss of $1.52 per share.  Adjusted net loss attributable to common stockholders for the second quarter of 2016 was $12.5 million, or a loss of $0.12 per share, excluding the impact of a $3.3 million loss resulting from the mark-to-market of outstanding hedge positions, a $2.0 million allowance for bad debt related to a third-party production purchaser's bankruptcy and other special items as compared to a second quarter 2015 adjusted net loss of $10.1 million, or a loss of $0.13 per share, excluding the impact of a $100.2 million non-cash, pre-tax ceiling test impairment charge and a $7.8 million loss resulting from the mark-to-market of outstanding hedge positions. (See the accompanying reconciliation of net loss to net loss excluding special items at the end of this news release.)

Adjusted earnings before interest, income taxes, depreciation, depletion and amortization ("adjusted EBITDA") for the second quarter of 2016 was $6.8 million compared to adjusted EBITDA of $17.9 million for the second quarter of 2015 and $10.7 million for the first quarter of 2016.  (See the accompanying reconciliation of net loss to adjusted EBITDA, a non-GAAP number, at the end of this news release.)

Total revenues were $12.2 million in the second quarter of 2016, a 45% decline from $21.9 million in the second quarter of 2015 and an 18% decline from $14.8 million in the first quarter of 2016.  Revenues from the sale of oil, condensate, natural gas and natural gas liquids ("NGLs"), before the effects of commodity derivatives contracts, were $14.9 million in the second quarter of 2016, a 37% decline from $23.7 million in the second quarter of 2015 and a 3% increase from $14.5 million in the first quarter of 2016.  The reduction from second quarter of 2015 in oil, condensate, natural gas and NGLs revenues (excluding the impact of hedging activities) primarily resulted from a 54% decrease in equivalent production volumes offset by a 36% increase in weighted average realized equivalent prices. The increase from first quarter 2016 revenues was due to a 112% increase in equivalent product pricing offset by a 52% decrease in equivalent production volumes. On April 8, 2016, Gastar sold substantially all of its producing assets and proved reserves and a significant portion of its undeveloped acreage in the Appalachian Basin for an adjusted sales price of $76.6 million (the "Appalachian Basin Sale"). As a result of the sale, net production from the Appalachian Basin area averaged 200 barrels of oil equivalent per day ("Boe/d") in the second quarter of 2016, compared to 7,700 Boe/d for the second quarter of 2015 and 7,100 Boe/d in the first quarter of 2016.  Excluding the impact of Appalachian Basin production and the effects of commodity derivatives contracts, revenues from liquids (oil, condensate and NGLs) represented approximately 88% of total production revenues in the second quarter of 2016, compared to 89% in the second quarter of 2015 and 85% in the first quarter of 2016.

Commodity derivative benefits derived from hedge contracts monetized during the second quarter of 2016 resulted in a $565,000 increase in revenues compared to a $6.0 million increase in revenue for the second quarter of 2015.  During the first quarter of 2016, Gastar monetized all of its put spread and other hedge positions covering the production months April through July 2016 for net proceeds of $3.1 million.

During the second quarter of 2016, the impact of hedging on oil and condensates sales was an increase in the total price realized from $41.82 per Bbl to $43.59 per Bbl.  In the second quarter of 2015, the impact of hedging on oil and condensate sales was an increase in total price realized from $47.68 per Bbl to $52.20 per Bbl.

During the second quarter of 2016, Gastar allocated 15% of its oil hedges that were monetized to NGLs which resulted in an increase in the total price realized from $12.02 per Bbl to $12.62 per Bbl.  In the second quarter of 2015, the impact of hedging on NGLs sales resulted in an increase in total price realized from $7.34 per Bbl to $14.97 per Bbl. 

During the second quarter of 2016, Gastar did not have any natural gas volumes hedged as a result of hedge monetizations in the first quarter of 2016 and the average realized price for natural gas production was $1.84 per Mcf.  During the second quarter of 2015, the impact of hedging on natural gas sales was an increase in total price realized from $1.10 per Mcf to $1.68 per Mcf. 

We continue to maintain an active hedging program covering a portion of estimated future production for July 2016 to December 2018, which is reported in our periodic filings with the U.S. Securities and Exchange Commission ("SEC"). 

Average daily production for the second quarter of 2016 was 6,400 Boe/d as compared to 13,900 Boe/d in the second quarter of 2015 and 13,200 Boe/d in the first quarter of 2016. Second quarter 2015 and first quarter 2016 includes average daily production of 7,700 Boe/d and 7,100 Boe/d, respectively, attributable to our properties in the Appalachian Basin, substantially all of which were sold April 8, 2016 in the Appalachian Basin Sale with an effective date of January 1, 2016.  Excluding the Appalachian Basin, oil, condensate and NGLs as a percentage of production volumes were 71% in the second quarter of 2016 compared to 74% in the second quarter of 2015 and 71% for the first quarter of 2016.

The following table provides a summary of Gastar's total net production volumes and overall average commodity prices for the three and six months ended June 30, 2016 and 2015:

 

 

Lease operating expenses ("LOE") were $4.6 million for the second quarter of 2016, compared to $7.2 million in the second quarter of 2015 and $6.1 million in the first quarter of 2016.  Excluding the Appalachian Basin, LOE decreased $1.2 million, or 20%, to $4.5 million for the second quarter of 2016 from the second quarter of 2015 due primarily to a $1.6 million decrease in workover expense resulting from a decrease in workover activity and receipt of a $588,000 insurance reimbursement related to 2015 activity offset by a $538,000 increase in controllable LOE primarily due to new West Edmond Hunton Lime Unit, or WEHLU, wells drilled in the second half of 2015 and production enhancing operations.  LOE per barrel of oil equivalent ("Boe") of production as reported was $7.86 in the second quarter of 2016 versus $5.74 in the second quarter of 2015 and $5.05 in the first quarter of 2016, including workover costs.  Excluding the Appalachian Basin and workover expense, LOE per Boe for the second quarter of 2016 was $8.36 compared to $7.59 for the second quarter of 2015 and $7.93 per Boe for the first quarter of 2016.

Depreciation, depletion and amortization ("DD&A") expense was $5.6 million in the second quarter of 2016, down from $16.1 million in the second quarter of 2015 and $13.7 million in the first quarter of 2016.  The DD&A rate for the second quarter of 2016 was $9.59 per Boe compared to $12.74 per Boe for the second quarter of 2015 and $11.41 per Boe in the first quarter of 2016.  The decrease in DD&A expense and the DD&A rate was the result of a decrease in production resulting from the completion of the Appalachian Basin Sale coupled with a lower DD&A rate due to impairment charges incurred in 2015 and the first quarter 2016 and lower full cost property costs resulting from the Appalachian Basin Sale.

General and administrative ("G&A") expense was $6.3 million in the second quarter of 2016 compared to $4.4 million in the second quarter of 2015 and $5.7 million in the first quarter of 2016. G&A expense for the second quarter of 2016 included $702,000 of non-cash stock-based compensation expense, versus $1.2 million in the second quarter of 2015 and $1.6 million in the first quarter of 2016.  Excluding stock-based compensation expense, the higher G&A expense in the second quarter of 2016 compared to the prior year period is primarily due to an allowance for a bad debt expense charge of $2.0 million related to a third-party production purchaser's bankruptcy.

J. Russell Porter, Gastar's President and CEO, commented, "Our secondary equity offering in May 2016 yielded net proceeds of approximately $44.8 million, improving our liquidity position and allowing us to resume operated drilling on our extensive STACK acreage position.  We have developed a drilling program of up to nine wells that will test the STACK potential across our northern acreage in Kingfisher County, Oklahoma as well as allow us to pursue a drilling program to de-risk our southern acreage in Canadian County, Oklahoma.  We believe that drilling a select number of additional operated wells, coupled with the continuing success of offset operators developing the STACK Play near our acreage, should allow us to delineate and demonstrate the prospectivity of our acreage in multiple formations and confirm its value.  Well data from our own operated wells, combined with data from the numerous non-operated STACK wells that we are participating in, should provide additional options for funding further exploration and development of the STACK Play.  During the remainder of 2016 and into 2017, we will continue to evaluate potential opportunities to partner with other operators or investors in a drilling program to develop our undeveloped acreage, evaluate possible acreage divestments, or possibly raise funds in the capital markets to further enhance our liquidly and further fund the development of our acreage position in the STACK Play, which we believe is one of the most economic plays in North America."

Operations Review and Update

Mid-Continent

The following table provides a summary of Gastar's Mid-Continent production volumes and average commodity prices for the three and six months ended June 30, 2016 and 2015:

 

 

Net production from the Mid-Continent area averaged 6,200 Boe/d in the second quarter of 2016, which was flat compared to the second quarter of 2015 and up slightly from 6,100 Boe/d in the first quarter of 2016. Second quarter 2016 Mid-Continent production consisted of approximately 48% oil, 29% natural gas and 23% NGLs.  

In October 2015, Gastar commenced flowback of its first operated Meramec well, the Deep River 30-1H, which in December 2015, produced at a peak 24-hour rate of 1,094 Boe/d (71% oil) and has produced at a post-peak 230-day gross average daily rate of 513 Boe/d (53% oil).  Gastar's working interest in the Deep River 30-1H is 100% (NRI 80.2%). 

In April 2016, Gastar's second operated well testing the Meramec formation, the Holiday Road 2-1H, commenced flow-back.  In June 2016, the well was equipped with a larger gas lift system and oil and natural gas production from the well continues to gradually increase.  During the most recent 30-day period, the well averaged 267 gross Boe/d (81% oil) and 2,063 barrels of completion fluid.  During the most recent five-day period the well produced at a gross average rate of 343 Boe/d (82% oil) and 2,199 barrels of completion fluids.  Gastar has a 78.3% working (approximate 63.0% NRI) interest in the Holiday Road 2-1H well. 

On June 20, 2016, Gastar spudded its first operated Osage test well, the McGee 29-1H, with a projected vertical depth of approximately 7,600 feet and a 4,200 foot horizontal lateral in Garfield County, Oklahoma.  Gastar's current estimated working interest in the McGee 29-1H is 66.3% (NRI 53%).  The estimated gross cost to drill and complete the McGee 29-1H is $4.5 million, excluding costs associated with coring operations to evaluate the Osage and Woodford Shale formations. 

To gather additional data on drilling and completing each of the prospective targets, year to date in 2016, Gastar has participated in four gross (0.5 net) completed non-operated Meramec Shale wells, one gross (0.2 net) completed non-operated well targeting the Osage, three gross (0.4 net) completed non-operated wells targeting the Oswego and one gross (0.1 net) completed non-operated Woodford Shale well. 

In the Mid-Continent, Gastar's net capital expenditures in the second quarter of 2016 totaled $8.1 million, comprised of $4.3 million for drilling, completions and infrastructure costs, $2.8 million for unproved acreage extensions and renewals and $1.0 million for other capitalized costs.  Year to date 2016 net capital expenditures in the Mid-Continent totaled $23.1 million, comprised of $10.0 million for drilling, completions and infrastructure costs, $11.1 million for unproved acreage extensions and renewals and $2.0 million for other capitalized costs.     

For the remainder of 2016, Gastar's capital expenditure budget is $38.1 million, comprised of $25.9 million for drilling, completion and infrastructure costs, $9.2 million for lease renewal and extension costs and $3.0 million for other capitalized costs, resulting in a total 2016 capital expenditures budget of $61.2 million.  Gastar's capital expenditure budget remains subject to change based upon the commodity price environment and our liquidity position.

Appalachian Basin

On April 8, 2016, Gastar sold substantially all of its producing assets and proved reserves and a significant portion of its undeveloped acreage in the Appalachian Basin.  The following table provides a summary of Gastar's Appalachian Basin net production volumes and average commodity prices for the three and six months ended June 30, 2016 and 2015:

 

 

Liquidity

On April 8, 2016, we sold substantially all of our producing assets and proved reserves and a significant portion of our undeveloped acreage in the Appalachian Basin for an adjusted sales price of $76.6 million.  On May 12, 2016, we sold 50,000,000 shares of our common stock in an underwritten public offering for approximately $44.8 million of net proceeds.  At June 30, 2016, Gastar had approximately $50.8 million in available cash and cash equivalents, $99.6 million in borrowings outstanding and $370,000 in letters of credit issued under its revolving credit facility. 

As of June 30, 2016, we were in compliance with all financial covenants under the revolving credit facility.  We may, however, need to request a waiver of compliance with, or amendment to, certain of our financial covenants by year-end 2016, which may not be received.  The absence of such relief could result in significant adverse consequences and require us to pursue various alternatives. 

Guidance for Third Quarter and Full-Year 2016

Our guidance for the third quarter of and full-year 2016 is provided in the table below and represents the Company's best estimate of the range of likely future results.   Guidance could be affected by the factors described below in "Forward Looking Statements."

 

 

Mid-Year 2016 Reserve Update

SEC proved reserve estimates as of June 30, 2016 totaled 32.8 MMBoe, of which 42% is proved developed, and were comprised of 19.7 million barrels of crude oil and condensate, 6.0 million barrels of NGLs and 42.2 billion cubic feet of natural gas.  The pre-tax SEC-priced present value of future cash flows of these reserves, discounted at 10% ("PV-10") (a non-GAAP financial measure defined below in "Information on Reserves and PV-10 Value"), was $205.7 million, a 10% decline as compared to year-end 2015 as a result of lower proved reserve volumes and lower SEC prices.  The proved reserves volume decline of 23.1 MMBoe, or 41%, is primarily attributable to the sale of approximately 14.1 MMBoe of proved reserves in the Appalachian Basin and a declining commodity price environment that has rendered some proved undeveloped well locations uneconomic.  In accordance with SEC regulations, estimates of proved reserves as of June 30, 2016 were calculated using the 12-month unweighted arithmetic average of the first-day-of-the-month price for each month in the period July 1, 2015 through June 30, 2016.  For oil volumes, the average West Texas Intermediate price utilized was $43.12 per barrel, compared to $50.28 per barrel for year-end 2015, and for natural gas volumes, the average Henry Hub price utilized was $2.24 per million Btu (MMBtu), compared to $2.59 per MMBtu for year-end 2015.  These benchmark oil and natural gas prices were adjusted for energy content or quality, transportation and regional price differentials by area.

For a discussion of PV-10 and the standardized measure of future net cash flows, see "Information on Reserves and PV-10 Value."

Conference Call

Gastar has scheduled a conference call for 11:00 a.m. Eastern Time (10:00 a.m. Central Time) on Friday, August 5, 2016.  Investors may participate in the call either by phone or audio webcast.

For more information, please contact Donna Washburn at Dennard-Lascar Associates at 713-529-6600 or e-mail dwashburn@DennardLascar.com.

About Gastar Exploration

Gastar Exploration Inc. is a pure play Mid-Continent independent energy company engaged in the exploration, development and production of oil, condensate, natural gas and natural gas liquids. Gastar's principal business activities include the identification, acquisition, and subsequent exploration and development of oil and natural gas properties with an emphasis on unconventional reserves, such as shale resource plays. Gastar holds a concentrated acreage position in what is believed to be the core of the STACK Play, an area of central Oklahoma which is home to multiple oil and natural gas-rich reservoirs including the Meramec, Oswego, Osage, Woodford and Hunton formations. For more information, visit Gastar's website at www.gastar.com.

Information on Reserves and PV-10 Value

At June 30, 2016, future cash inflows were computed using the 12-month unweighted arithmetic average of the first-day-of-the-month prices for natural gas and oil (the "benchmark base prices") adjusted by lease in accordance with sales contracts and for energy content, quality, transportation, compression and gathering fees and regional price differentials, relating to the Company's proved reserves.  Benchmark base prices are held constant in accordance with SEC guidelines for the life of the wells but are adjusted by lease in accordance with sales contracts and for energy content, quality, transportation, compression, and gathering fees and regional price differentials. The average benchmark base prices used in our June 30, 2016 SEC compliant reserves report are significantly above current market commodity prices.

PV-10 represents the present value, discounted at 10% per annum, of estimated future net revenue before income tax of our estimated proved reserves.  PV-10 is a non-GAAP financial measure as defined by the SEC.  We believe that the presentation of PV-10 is relevant and useful to our investors because it presents the discounted future net cash flows attributable to our reserves prior to taking into account corporate future income taxes and our current tax structure.  We further believe investors and creditors use PV-10 as a basis for comparison of the relative size of our reserves as compared with other companies.

The financial measure most directly comparable to PV-10 is the standardized measure of future net cash flows ("Standardized Measure") which takes into account future income taxes and our current tax structure.  As a result of our current net operating tax loss position, no future income taxes are anticipated and the PV-10 value shown should be reflective of our Standardized Measure. 

The Company's June 30, 2016 total proved reserves estimates were prepared by Wright & Company, Inc.

Forward Looking Statements

This news release includes "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Forward looking statements give our current expectations, opinion, belief or forecasts of future events and performance.  A statement identified by the use of forward looking words including "may," "expects," "projects," "anticipates," "plans," "believes," "estimate," "will," "should," and certain of the other foregoing statements may be deemed forward-looking statements.  Although Gastar believes that the expectations reflected in such forward-looking statements are reasonable, these statements involve risks and uncertainties that may cause actual future activities and results to be materially different from those suggested or described in this news release.  These include risks inherent in natural gas and oil drilling and production activities, including risks with respect to continued low or further declining prices for natural gas and oil  that could result in further downward revisions to the value of proved reserves or otherwise cause Gastar to further delay or suspend planned drilling and completion operations or reduce production levels which would adversely impact cash flow; risks relating to the availability of capital to fund drilling operations that can be adversely affected by adverse drilling results, production declines and continued low or further declining prices for natural gas and oil; risks regarding Gastar's ability to meet financial covenants under its indenture or credit agreements or the ability to obtain amendments or waivers to effect such compliance; risks of fire, explosion, blowouts, pipe failure, casing collapse, unusual or unexpected formation pressures, environmental hazards, and other operating and production risks, which may temporarily or permanently reduce production or cause initial production or test results to not be indicative of future well performance or delay the timing of sales or completion of drilling operations; delays in receipt of drilling permits; risks relating to unexpected adverse developments in the status of properties; borrowing base redeterminations by our banks; risks relating to the absence or delay in receipt of government approvals or third-party consents; risks relating to our ability to integrate acquired assets with ours and to realize the anticipated benefits from such acquisitions; and other risks described in Gastar's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and other filings with the SEC, available at the SEC's website at www.sec.gov.  Our actual sales production rates can vary considerably from tested initial production rates depending upon completion and production techniques and our primary areas of operations are subject to natural steep decline rates. By issuing forward looking statements based on current expectations, opinions, views or beliefs, Gastar has no obligation and, except as required by law, is not undertaking any obligation, to update or revise these statements or provide any other information relating to such statements.

Targeted expectations and guidance for the third quarter and full year of 2016 are based upon the current 2016 planned capital expenditures budget, which may be subject to revision and reevaluation dependent upon future developments, including drilling results, our liquidity position, a further decline in commodity prices, availability of crews, supplies and production capacity, weather delays and significant changes in drilling costs.

Unless otherwise stated herein, equivalent volumes of production and reserves are based upon an energy equivalent ratio of six Mcf of natural gas to each barrel of liquids (oil, condensate and NGLs), which ratio is not reflective of relative value.  Our NGLs are sold as part of our wet gas subject to an incremental NGLs pricing formula based upon a percentage of NGLs extracted from our wet gas production.  Our reported production volumes reflect incremental post-processing NGLs volumes and residual gas volumes with which we are credited under our sales contracts.

Contacts:
Gastar Exploration Inc.
Michael A. Gerlich, Chief Financial Officer
713-739-1800 / mgerlich@gastar.com

Investor Relations Counsel:
Lisa Elliott, Dennard▪Lascar Associates:
713-529-6600 / lelliott@DennardLascar.com

– Financial Tables Follow –

 

 

 

 

NON-GAAP FINANCIAL INFORMATION AND RECONCILIATION

We use both GAAP and certain non-GAAP financial measures to assess performance.  Generally, a non-GAAP financial measure is a numerical measure of a company's performance, financial position or cash flows that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP.  Our management believes that these non-GAAP measures provide useful supplemental information to investors in order that they may evaluate our financial performance using the same measures as management.  These non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP.  In evaluating these measures, investors should consider that the methodology applied in calculating such measures may differ among companies and analysts.  A reconciliation is provided below outlining the differences between these non-GAAP measures and their most directly comparable financial measure calculated in accordance with GAAP.

 

 

 

 

 

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SOURCE Gastar Exploration Inc.