Gastar’s Basin Swap Nearing Completion Following Marcellus, Utica Deal

Gastar Exploration Inc. (NYSE: GST) managed to get a fair deal on its Appalachia assets, saying Feb. 22 it had found a buyer, giving it the ability to recalibrate.

When closed, the deal will position Gastar to come out of the downturn as a stronger company focused on the Midcontinent, which has recently attracted the interest of several large-cap companies including Devon Energy Corp. (NYSE: DVN).

Gastar entered into an agreement with an affiliate of investment firm Tug Hill Inc. for the sale of 11,000 net acres of Marcellus Shale and Utica/Point Pleasant properties, including some midstream assets. The sale marks the first Marcellus/Utica transaction in roughly eight months, according to Gabriele Sorbara, vice president of E&P/equity research at Topeka Capital Markets.

The $80 million deal includes substantially all of Gastar's producing Appalachia assets, proved reserves and a significant portion of its undeveloped acreage primarily in Marshall and Wetzel counties, W.Va. The company is getting a “solid price in this market” at about $8,000 per acre, said Gordon Douthat, senior analyst with Wells Fargo Securities LLC.

The Houston company, which has a field office in Oklahoma City, will emerge as the "only public 'pure play' company" focused on the Stack Play, said J. Russell Porter, Gastar's president and CEO.

"We continue to believe that de-risking and developing the Stack Play can create significant value for our shareholders and achieve solid returns, even at current prices," Porter said in a statement.

Because of the sale, Gastar will be able to avoid issuing equity while still improving its overall leverage, Porter said.

The sale goes a long way in improving Gastar’s liquidity, yet still has a drawback, Sorbara said in a report.

“With the loss of the production from the asset sale, its EBITDA drops off, placing risk on its financial covenants,” he said.

However, the divestiture also adds liquidity, which stands at about $45 million, Douthat said.

The company said its 2015 reserves are down 45%. Overall, the asset sale is a “positive, given doubts that a deal could get done at a reasonable valuation in the current market,” Douthat said.

Gastar is currently in discussions with its bank lending group to amend its revolving credit facility and expects to reach a "satisfactory agreement" by March 10. Proceeds from Gastar’s Appalachia sale will be used to reduce the $190 million outstanding borrowings on its revolver.

"We are confident in a positive outcome, and believe Gastar is positioned to emerge in a commodity price recovery with its position and running room in the Stack play” which consists of more than 60,000 net acres, Sorbara said.

In December, Gastar bought out its partner in the Meramec Shale, which includes the acquisition of 15,700 net acres in Kingfisher and Garfield counties, Okla.

RELATED: Deal Gears Gastar Up For Pure Midcontinent Focus

The Old Country

In the Appalachian Basin, Gastar develops producing wells and acreage located in the liquids-rich Marcellus Shale and dry gas Utica Shale/Point Pleasant plays in West Virginia and Pennsylvania.

The company also manages a 14-mile water system in Marshall County, W.Va., which is included in its divestiture with Tug Hill, according to Lisa Elliott, spokesperson for Gastar.

"The assets being divested, which we believe are high-quality Marcellus and Utica properties, are generating limited cash flow due to poor realized pricing in the Appalachian Basin," Porter said.

In 2015, Gastar slammed the brakes on its Appalachian Basin drilling program. The company hasn’t drilled or completed any wells on the acreage since June 2015.

The company holds about 37,400 net acres in the Marcellus and nearly 10,200 net acres in the Utica. Proved reserves are 53.3 million barrels of oil equivalent (MMboe), according to a December investor presentation.

During the third quarter, net production from Gastar's Appalachian properties averaged 8,000 boe/d—an increase of 300 boe/d from the previous quarter. Third-quarter production consisted of 8% oil and condensate, 31% NGL and 61% natural gas.

The company’s acreage is also supported by a processing system with total capacity to 720 million cubic feet per day operated by Williams Cos. (NYSE: WMB).

The sale is expected to close by the end of the first quarter, subject to customary closing conditions including certain required lessor consents to assign. The transaction will have an effective date of Jan. 1.

The deal follows WPX Energy Inc.'s (NYSE: WPX) $910 million sale of Piceance gas assets. At the time, Tudor, Pickering, Holt & Co., Gastar's financial adviser for its sale, said WPX's divestiture boded well for other companies looking to shed gas assets.

RELATED: From Broadsides To Bayonets: 2016 Buyers Will Be Selective

Stack Focus

Going forward, Gastar will limit and delay expenditures on capital projects to preserve liquidity, Porter said.

Gastar's preliminary capital budget for 2016 is about $37 million, excluding other capitalized costs. This is down by roughly $66 million compared to the company's 2015 capital budget of about $103 million.

"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’s board has not yet approved the company’s full-year 2016 capital plan.

"The continued strong production rate of our first Meramec well further confirms the viability and value of our Midcontinent holdings, and we are optimistic about the drilling of our second Meramec well located in Kingfisher County, Okla.," Porter said.

Gastar's Deep River 30-1H well, its first Stack Play Meramec Shale test, produced 803 boe/d (63% oil) at a gross post-IP 60-day average sales rate. The second Meramec Shale well began drilling on Feb. 10.

"Upon the closing of the announced sale of our Appalachian Basin properties and the results of our spring borrowing base redetermination, we will be in a better position to address additional drilling plans," Porter said.

Emily Moser can be reached at emoser@hartenergy.com.