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Financial Results
Net income for the third quarter of 2009 was $112.3 million, or $2.29 per diluted share, and contained several special items, including a $127.6 million gain on the sale of the Company's Australian assets, a foreign transaction gain of $7.6 million related to the sale of the Australian assets, early debt extinguishment expense of $15.9 million, a $3.3 million unrealized natural gas hedging loss and a $495,000 non-cash warrant derivative loss. For the third quarter of 2008, net income was $3.0 million, or $0.07 per diluted share, including a $3.4 million unrealized natural gas hedging gain. Excluding the special items, as described above for both periods, the Company would have recorded a net loss of $3.2 million, or $0.07 per share, for the third quarter of 2009, versus a net loss of $426,000, or $0.01 per share, for the third quarter of 2008.
Net cash flow from operations for the third quarter of 2009 was a deficit of $2.7 million, down from $16.8 million of positive cash flow for the third quarter of 2008. Our cash flow from operations before working capital changes for the third quarter of 2009 was a deficit of $1.1 million, compared to $7.0 million of positive cash flow in the third quarter of 2008.
Excluding the unrealized natural gas hedging loss, natural gas and oil revenues in the third quarter of 2009 decreased 39% to $7.6 million from revenues reported in the third quarter of 2008. This decrease was due to a 48% decline in realized natural gas prices, partially offset by a 16% increase in production volumes, primarily in East Texas. Average daily production for the third quarter of 2009 was 23.3 MMcfe, compared to 20.2 MMcfe for the third quarter of 2008 and 25.6 MMcfe for the second quarter of 2009. During the latest quarter, we elected to curtail our East Texas production by approximately 1.9 MMcf per day due to low natural gas prices. Due to recent improvements in natural gas prices, in late October, we discontinued production curtailments and returned our contracted rig to drilling in East Texas.
During the three months ended September 30, 2009, approximately 81% of our natural gas production was hedged. The realized effect of this hedging program was an increase of $2.2 million in revenues, reflecting an increase in total price received from $2.46 per Mcf to $3.50 per Mcf. The realized effect of hedging in the third quarter of 2008 was a decrease of $569,000 in revenues, reflecting a decrease in total price received from $6.98 per Mcf to $6.67 per Mcf. The unrealized non-cash effect of our hedging program was a loss of $3.3 million for the third quarter of 2009 and a gain of $3.4 million for the third quarter of 2008.
Lease operating expense (LOE) was $1.8 million in the third quarter of 2009, compared to $1.9 million in the third quarter of 2008 and $1.4 million in the second quarter of 2009. LOE per Mcfe decreased 20% to $0.82 in the third quarter, compared to $1.03 per Mcfe during the third quarter of last year. Excluding workover expense and other non-recurring costs, our lease operating expenses were $0.66 per Mcfe for the third quarter of 2009 compared to $0.95 per Mcfe for the same period in 2008. The decrease in the rate per Mcfe was primarily due to higher current quarter production volumes and a decrease in property taxes of $0.06 per Mcfe, due to lower natural gas prices.
Operations Review and Update
As previously reported, we completed the sale of our Australian assets in July 2009 and, to date, have received approximately $231.0 million (AU$298.0 million), excluding taxes and transaction expenses, of the aggregate purchase price of $232.6 million (AU$300.0 million). We are scheduled to receive the remaining approximate $1.6 million (AU$2.0 million) upon receipt of certain government approvals. We may be paid, assuming current foreign exchange rates, an additional approximate $17.5 million (AU$20.0 million) pre-tax in early 2010 if certain gross reserve certification targets for the PEL 238 coalbed methane project are achieved. The sale agreement also acknowledges the retention of our right to future cash payments of up to $10.0 million pursuant to a pre-existing farm-in agreement in the event that certain production thresholds are reached on PEL 238. Neither the gross reserve certification target receivable nor the production threshold receivables were accrued as of September 30, 2009, as the probability of earning the receivables was not determinable.
In East Texas, net production for the third quarter of 2009 from the Hilltop area averaged 20.0 MMcfe per day, down from 22.0 MMcfe per day in the second quarter of 2009, but up from 14.5 MMcfe per day in the third quarter of 2008. The 38% year-over-year increase in volumes is due to the production from three wells completed, eight wells recompleted and limited workover operations over the 12-month period. The sequential decline is due to the curtailment of approximately 1.9 MMcf per day due to low natural gas prices and natural decline as a result of no new wells being drilled during the period.
Capital expenditures for the third quarter of 2009 in East Texas were $1.9 million, which was primarily related to recompletion activities. In late October, we resumed our drilling program in East Texas with the spudding of the Donelson #4 well, an approximate 19,000-foot lower Bossier test. We expect this well will take approximately three months to drill. For the remainder of 2009 and fiscal year 2010, we are planning three additional lower Bossier exploratory wells and up to 11 recompletions in East Texas.
In October 2009, we commenced drilling our first vertical Marcellus Shale well, the Yoho #1, in West Virginia. The well was drilled to a depth of 6,600 feet and is waiting on fracture simulation and flow testing, which is scheduled to be completed during the first half of November. We are currently seeking pipeline capacity for the well's anticipated production but do not expect any sales until at least mid-2010. For the remainder of 2009 and fiscal year 2010, we currently anticipate that we will drill at least five additional vertical Marcellus wells. We plan on generating a development plan utilizing horizontal drilling based on the results of our initial vertical wells.
In the third quarter, we drilled five shallow vertical wells in Appalachia and now have a total of 15 shallow wells in the area. Currently, eight are on production, and the remaining wells are scheduled to be on production in the next 75 days. This shallow well drilling program continues to be conducted to hold certain leases by production. We plan to drill up to 15 additional shallow wells by the end of 2010. For the three months ended September 30, 2009, net production from the Appalachia area averaged approximately 0.4 MMcfe per day.
Our current acreage position in the Marcellus Shale play in West Virginia and Pennsylvania is approximately 39,300 gross (35,800 net) acres, of which the majority is considered to be in the core, over-pressured area of the Marcellus play in close proximity to wells being drilled by other operators.
Liquidity and Capital Budget
On July 13, 2009, we used proceeds from the sale of our Australian assets to repay the $13.0 million outstanding under our secured revolving credit facility and $27.5 million to repay in full our term loan. On August 7, 2009, we repurchased all of our outstanding $100.0 million 12A 3/4% senior secured notes at a price of 106.375% of par, plus accrued and unpaid interest, in accordance with the terms of the governing indenture by tendering payment of $108.7 million to the noteholders. During the third quarter, we also repaid, at par, $10.3 million of our convertible subordinated debentures and the remaining $300,000 of our subordinated unsecured note payable.
At September 30, 2009, the Company had cash and cash equivalents of $27.6 million and a net working capital deficit of approximately $18.2 million. The working capital deficit is primarily the result of $19.7 million of convertible subordinated debentures scheduled to mature on November 20, 2009 being classified as current portion of long-term debt. On October 28, 2009, we executed an amended and restated revolving credit facility with an available borrowing base of $47.5 million, of which only a $100,000 letter of credit is outstanding. The revolving credit agreement is scheduled to mature on January 2, 2013. The revolving credit facility has no monthly amortization and is subject to standard semi-annual redeterminations. We have sufficient cash and, if necessary, revolving credit capacity to repay the convertible subordinated debentures and not interrupt our planned exploration and development activities in East Texas and Appalachia.
Planned capital expenditures for our properties for the remainder of 2009 and 2010 are expected to be approximately $66.2 million, consisting of $37.8 million in East Texas, $24.6 million in the Marcellus Shale, $1.4 million in the Powder River Basin, and an additional $2.4 million for capitalized interest and other costs. We plan on funding this capital activity primarily through existing cash balances and internally generated cash flows from operating activities and, if necessary, short term access to availability under our revolving credit facility.
J. Russell Porter, Gastar's Chairman, President and CEO, stated, "After transforming our balance sheet through the sale of our Australian assets and eliminating essentially all of our outstanding debt, Gastar is moving forward with the exploitation of our existing assets and is positioned to evaluate new opportunities. We have resumed drilling in the deep Bossier play and are encouraged with the preliminary results from our first vertical Marcellus Shale well. We operate practically 100% of the projects within our 2010 capital budget and thus can respond quickly to changing market conditions and opportunities. With our new revolving credit facility and cash on hand, we have the financial strength and flexibility to carry out our planned activities and build value for our shareholders."
Gastar Exploration Conference Call
Gastar Exploration's management team will hold a conference call on Friday, November 6, 2009, at 11:00 a.m. Eastern Time (10:00 a.m. Central Time), to discuss these results. To participate in the call, dial 480-629-9821 at least 10 minutes prior to the scheduled time and ask for the Gastar Exploration conference call. A replay will be available approximately two hours after the call ends and will be accessible until November 13, 2009. To access the replay, dial (303) 590-3030 and enter the pass code 4176077#.
The call will also be webcast live over the Internet at www.gastar.com. To listen to the live call on the Internet, please visit Gastar's website at least 10 minutes prior to the scheduled time to register and download any necessary audio software. An archive will be available on Gastar's website shortly after the call. For more information, please contact Donna Washburn at DRG&E at (713) 529-6600 or e-mail dmw@drg-e.com.
About Gastar Exploration
Gastar Exploration Ltd. is an independent energy and production company focused on finding and developing natural gas assets in North America. The Company pursues a strategy combining deep natural gas exploration and development with lower risk shale resource and coal bed methane development. The Company owns and operates exploration and development acreage in the deep Bossier gas play of East Texas and Marcellus Shale play in West Virginia and Pennsylvania. Gastar's coal bed methane activities are conducted within the Powder River Basin of Wyoming and Montana. For more information, visit our web site at www.gastar.com.
Safe Harbor Statement and Disclaimer
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 risk inherent in natural gas and oil drilling and production activities, including 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; risks with respect to natural gas and oil prices, a material decline in which could cause Gastar to delay or suspend planned drilling operations or reduce production levels; risks relating to the availability of capital to fund drilling operations that can be adversely affected by adverse drilling results, production declines and declines in natural gas and oil prices; risks relating to unexpected adverse developments in the status of properties; risks relegating to the absence or delay in receipt of government approvals or third party consents; and other risks described in Gastar's Annual Report on Form 10-K and other filings with the SEC, available at the SEC's website at www.sec.gov. 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.
The NYSE Amex LLC has not reviewed and does not accept responsibility for the adequacy or accuracy of this release.
- Financial Tables Follow -
GASTAR EXPLORATION LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
------------- -------------
2009 2008 2009 2008
---- ---- ---- ----
(in thousands, except share and per share data)
REVENUES:
Natural gas and
oil revenues $7,553 $12,465 $32,976 $45,195
Unrealized natural gas
hedge gain (loss) (3,290) 3,432 (7,912) 1,506
------ ----- ------ -----
Total revenues 4,263 15,897 25,064 46,701
EXPENSES:
Production taxes 76 340 325 1,083
Lease operating expenses 1,759 1,919 5,085 5,869
Transportation and treating 172 518 990 1,475
Depreciation, depletion
and amortization 2,954 6,067 14,314 18,366
Impairment of natural gas
and oil properties - - 68,729 -
Accretion of asset
retirement obligation 90 86 265 250
General and
administrative expense 5,156 3,190 11,601 11,529
----- ----- ------ ------
Total expenses 10,207 12,120 101,309 38,572
------ ------ ------- ------
INCOME (LOSS) FROM
OPERATIONS (5,944) 3,777 (76,245) 8,129
OTHER (EXPENSES) INCOME:
Interest expense (1,031) (913) (3,330) (4,898)
Early extinguishment
of debt (15,902) - (15,902) -
Investment income
and other 499 163 522 1,467
Gain on sale of assets,
net of taxes of $65,776 127,600 - 127,600 -
Warrant derivative loss (495) - (495) -
Foreign transaction
gain (loss) 7,563 (21) 7,560 (59)
----- --- -----
INCOME BEFORE INCOME TAXES 112,290 3,006 39,710 4,639
Provision for income taxes - - - -
--- --- --- ---
NET INCOME $112,290 $3,006 $39,710 $4,639
======== ====== ======== =====
NET INCOME PER SHARE:
Basic $2.29 $0.07 $0.88 $0.11
===== ===== ===== =====
Diluted $2.29 $0.07 $0.88 $0.11
===== ===== ===== =====
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 48,990,509 41,419,714 45,126,907 41,419,714
========== ========== ========== ==========
Diluted 49,107,492 41,419,714 45,243,890 41,419,714
========== ========== ========== ==========
GASTAR EXPLORATION LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
2009 2008
(Unaudited)
(in thousands)
CURRENT ASSETS:
Cash and cash equivalents $27,618 $6,153
Term deposit 52,374 -
Accounts receivable, net of allowance
for doubtful accounts of $607 and $560,
respectively 5,251 5,296
Commodity derivative contracts 1,605 9,829
Due from related parties 253 2,382
Prepaid expenses 323 879
--- ---
Total current assets 87,424 24,539
PROPERTY, PLANT AND EQUIPMENT:
Natural gas and oil properties,
full cost method of accounting:
Unproved properties, not being amortized 126,971 141,860
Proved properties 329,912 309,103
------- -------
Total natural gas and oil properties 456,883 450,963
Furniture and equipment 855 997
--- ---
Total property, plant and equipment 457,738 451,960
Accumulated depreciation, depletion
and amortization (281,872) (199,433)
-------- --------
Total property, plant and equipment, net 175,866 252,527
OTHER ASSETS:
Restricted cash 70 70
Commodity derivative contracts 1,341 -
Deferred charges, net 112 6,849
Drilling advances 594 4,352
Other 100 100
--- ---
Total other assets 2,217 11,371
----- ------
TOTAL ASSETS $265,507 $288,437
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $3,351 $14,256
Revenue payable 3,533 5,005
Accrued interest 263 1,505
Accrued drilling and operating costs 1,872 2,915
Commodity derivative contracts 2,411 1,121
Other accrued liabilities 2,425 3,131
Due to related parties 2,218 2,143
Current portion of long-term debt 19,695 151,684
Accrued taxes payable 69,832 -
------ ---
Total current liabilities 105,600 181,760
LONG-TERM LIABILITIES:
Long-term debt - -
Commodity derivative contracts 2,198 -
Warrant derivative 495 -
Asset retirement obligation 5,584 5,095
----- -----
Total long-term liabilities 8,277 5,095
COMMITMENTS AND CONTINGENCIES (Note 14)
SHAREHOLDERS' EQUITY:
Common stock, no par value, unlimited
shares authorized, 50,030,819 and
41,926,494 shares issued and outstanding
at September 30, 2009 and December 31,
2008, respectively 263,809 249,980
Additional paid-in capital 25,390 22,883
Accumulated other comprehensive
gain - fair value of commodity hedging 448 2,629
Accumulated other comprehensive
gain - foreign exchange (3,798) 19
Accumulated deficit (134,219) (173,929)
-------- --------
Total shareholders' equity 151,630 101,582
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $265,507 $288,437
======== ========
GASTAR EXPLORATION LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months
Ended September 30,
2009 2008
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $39,710 $4,639
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 14,314 18,366
Impairment of natural gas and oil properties 68,729 -
Stock-based compensation 2,767 2,442
Unrealized natural gas hedge loss (income) 7,912 (1,506)
Realized gain on derivative contracts (424) -
Amortization of other comprehensive
income - commodity hedging (2,181) -
Amortization of deferred financing costs
and debt discount 1,635 1,461
Accretion of asset retirement obligation 265 250
Loss on early extinguishment of debt 7,027 -
Gain on sale of assets (127,600) -
Warrant derivative loss 495 -
Changes in operating assets and liabilities:
Restricted cash for hedging program - 1,000
Accounts receivable 5,473 (1,452)
Commodity derivative contracts 2,889 -
Prepaid expenses 497 444
Accounts payable and accrued liabilities (8,821) 15,438
------ ------
Net cash provided by operating activities 12,687 41,082
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Development and purchases of natural gas
and oil properties (40,868) (109,102)
Drilling advances (7,122) (3,203)
Proceeds from sale of natural gas and
oil properties 229,541 -
Purchase of furniture and equipment (15) (217)
Purchase of term deposit (52,374) -
------- ---
Net cash provided by (used in) investing
activities 129,162 (112,522)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common shares 13,829 -
Repayment of 12 3/4% senior secured notes (100,000) -
Repayment of term loan (25,000) -
Repayment of revolving credit facility (18,875) -
Repayment of convertible senior unsecured
subordinated debentures (10,305) -
Repayment of subordinated unsecured notes (3,250) -
Proceeds from term loan 25,000 -
Decrease in restricted cash - 3
Deferred financing charges (1,485) (343)
Other (298) -
---- ---
Net cash used in financing activities (120,384) (340)
-------- ----
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 21,465 (71,780)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,153 85,854
----- ------
CASH AND CASH EQUIVALENTS, END OF PERIOD $27,618 $14,074
======= =======
PRODUCTION AND PRICES
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
------------- ------------
2009 2008 2009 2008
---- ---- ---- ----
Production:
Natural gas (MMcf) 2,139 1,849 7,155 6,291
Oil (MBbl) 1 1 3 4
Total (MMcfe) 2,145 1,856 7,175 6,315
Total (MMcfed) 23.3 20.2 26.3 23.0
Average sales prices:
Natural gas (per Mcf), including
impact of realized hedging
activities $3.50 $6.67 $4.58 $7.12
Oil (per Bbl) $61.97 $111.49 $51.29 $104.58
Contact:
Gastar Exploration Ltd.
J. Russell Porter, Chief Executive Officer
713-739-1800 / rporter@gastar.com
Investor Relations Counsel:
Lisa Elliott / Anne Pearson
DRG&E: 713-529-6600
lelliott@drg-e.com / apearson@drg-e.com
SOURCE Gastar Exploration Ltd.
http://www.gastar.com
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