Gastar Exploration Inc. (NYSE: GST) landed itself several victories Oct. 20 set to provide the pure play Midcontinent company with much-needed firepower for the future.
Houston-based Gastar launched a joint venture (JV) in Oklahoma’s Stack Play that allows it to hang on to expiring acreage at a low cost. The company also agreed to sell $71 million noncore assets to the south of its position.
The moves shore up Gastar’s liquidity while the borrowing base under the company’s revolver remains at $100 million following its redetermination.
Gastar will have about $102.4 million cash on hand following the noncore sale, with total liquidity of $116.6 million, said Gabriele Sorbara, senior equity analyst with The Williams Capital Group.
“Based on our calculations and current drilling assumptions, we believe GST is fully funded through 2018 year-end,” Sorbara said in an Oct. 20 report.
Gastar’s capex for 2016 is $61.2 million, with $38.1 million anticipated for deployment in the second half of the year.
Stack JV
Gastar said it entered a drilling agreement in the Stack with an undisclosed large private global investment fund to delineate and de-risk about 18,000 undeveloped net acres in Kingfisher County, Okla.
The Stack JV covers up to 60 wells targeting the Meramec and Osage formations, with Gastar fronting just 10% of initial well costs. After its JV partner achieves a 20% internal rate of return (IRR), Gastar’s working interest grows to 90%.
Gastar found “a creative solution to hold expiring acreage without necessity for meaningful capital cost,” said Mike Kelly, senior analyst with Seaport Global Securities.
“While it’s still early to fully digest the impact of the JV on GST’s return profile, we believe it should ultimately provide a drastic uptick to drillbit IRRs,” Kelly said in an Oct. 20 report.
The acreage will be developed in three tranches of 20 wells each. The first 20 wells consist of 18 Meramec and two Osage wells. The second tranche of 20 wells will be at the election of its partner and the third tranche will require mutual consent.
Kelly estimates that each tranche could allow Gastar to hold up to about 12,000 net acres.
Gastar has already started drilling five wells in the drilling program's first batch, said J. Russell Porter, the company's president and CEO.
“We also plan to continue to drill and complete wells apart from the development agreement on acreage outside of the contract area as we further explore and develop our Oklahoma acreage,” Porter said in a statement.
Noncore Trim
Some proceeds from Gastar’s southern Stack divestiture will be used to pay down the balance on its $100 million revolver. The company said about 20%, or $14.2 million, of the sales price will pay debt.
The sale includes about 19,100 net acres and nearly 181 barrels of oil equivalent per day of production (32% oil) primarily in northeast Canadian County, Okla., as well as southeast Kingfisher.
Sorbara estimates Gastar received about $2,700 per acre, which was better than previous expectations of $39 million, he added.
Pro forma for the sale, Gastar has about 83,200 net acres in Oklahoma with roughly 1,031 net Stack locations. The transaction is expected to close on or before Nov. 8, with an Aug. 1 effective date.
Emily Moser can be reached at emoser@hartenergy.com.
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