Gastar Exploration Inc. (NYSE: GST) provided a positive update on its production results and revised 2015 capital budget, the company said in a Feb. 2 release.

Highlights:

  • Year-end 2014 Securities Exchange Commission (SEC) proved reserves increased 87% to 102.1 million barrels of oil equivalent (MMboe), of which 53% is liquids (oil, condensate and NGLs) and 47% is natural gas. The PV-10 grew 67% to $988.7 million.
  • In 2014, excluding acquisitions and divestitures, the company replaced about 1,284% of its 2014 preliminary annual production of 3.7 MMboe.
  • Fourth-quarter 2014 preliminary production averaged about 11.7 Mboe/d and consisted of 53% liquids and 47% natural gas.
  • The 2015 capital budget has been further reduced to about $103 million from the previously announced 2015 budget of $173 million. The 2015 plan is now comprised of $79 million of drilling, completion and infrastructure costs, $17 million in leasing costs and $7 million of other capitalized costs.

"2014 was another successful year for Gastar as we built upon our strong track record of production and reserve growth," said J. Russell Porter, Gastar's president and CEO, in a statement.

Porter said the company has increased its proved reserves during the last three years by 412%, balanced its product mix from more than 75% natural gas to just over 50% crude oil and NGL and built a multi-year inventory of quality drilling opportunities while maintaining a solid balance sheet.

Of particular note in 2014, the company added significant proved reserves and production from its West Edmond Hunton Lime Unit (WEHLU) property in Oklahoma and confirmed the productivity of the Utica/Point Pleasant formation on assets in West Virginia.

"The capital spending reduction was made in response to further commodity price declines and should allow us to maintain a strong balance sheet," he said. "As operator of the majority of our current capital program, we continue to maintain the ability to adjust our capital plans in response to commodity price and service cost changes."

In Oklahoma, the company plans to focus its drilling on the projected higher return Hunton formations in the WEHLU property and highly selective development drilling within the nonoperated areas of mutual interest (AMI).

In West Virigina, the company's Utica/Point Pleasant test on the Simms pad in the Appalachian Basin continues to produce at high rates with a recent five-day average of 8.5 million cubic feet per day (MMcf/d) of natural gas and cumulative production of 1.8 Bcf of natural gas since initial production as of Aug. 30, 2014.

"Despite these robust results, we do not believe that it is prudent to drill or complete additional Utica/Point Pleasant wells until natural gas prices in the region improve," he said.

Even with the reduced budget, the company's 2015 annual production is expected to increase about 22% due to its successful drilling program in 2014 and the impact of wells to be drilled and completed during 2015.

Porter added the company's hedging program protects a meaningful portion of its cash flow.

Gastar's plan to focus on sweet spots in Oklahoma while slowing down in the Utica/Marcellus is a prudent move in the current commodity price environment, but should be well received by the market, said Gabriele Sorbara, vice president of E&P/Energy Research at Topeka Capital Markets, in a Feb. 2 report.

"We reaffirm our Buy rating, and expect shares to react positively on the update," he said. "However, we lower our PT [price target] to $4 [from $6 previously] on our reduced estimates, due to the deteriorated Appalachian pricing environment."

Operations

During the fourth quarter of 2014 in the Appalachian Basin, 10 gross (five net) Marcellus Shale wells were completed and put on production in mid to late December, of which seven gross wells were on the Armstrong pad and three gross wells were on the Hansen pad.

In the Midcontinent, seven gross (2.3 net) Hunton wells were brought on production in the company's AMI during the fourth quarter. Additionally, it completed and brought on production two lower Hunton wells on its WEHLU acreage.

2015 Capital Budget And Drilling Plans

Gastar's board of directors approved a reduction in the previously announced 2015 capital budget of $173 million to about $103 million. The most recently revised budget is comprised of $79 million of drilling, completion and infrastructure costs, $17 million in leasing costs and $7 million for capitalized interest and administration costs.

The company has allocated about $76 million of its 2015 capital budget to the Midcontinent, of which $67 million is for drilling and completion and $9 million is for lease extensions.

Three drilling rigs are currently operating in its nonoperated AMI in the Midcontinent. With no long-term contractual obligations, the operator plans to release the three rigs and focus on completing the inventory of uncompleted wells. Within the AMI, the company expects to complete and bring on production four gross (1.7 net) wells in the first quarter of 2015 and five gross (2.1 net) wells in the second quarter. Along with its partner in the AMI, the company will continue to monitor oil prices, market conditions and/or service costs and re-evaluate additional spending accordingly.

On the southern portion of its operated WEHLU acreage, the company is currently completing one Upper Hunton, one Lower Hunton and a vertical test well of the Upper, Middle and Lower Hunton formations. It expects to have all three wells on production in February.

The company's 2015 drilling plan currently allocates capital for eight gross (7.9 net) horizontal wells and one gross (one net) vertical well commencing in mid-February on its WEHLU acreage. Of the horizontal wells, four will target the Upper Hunton formation and four will target the Lower Hunton formation. Based on the recent performance of wells drilled on its WEHLU acreage and current commodity prices, the company expects to receive solid economic returns from these wells in addition to the potential for booking substantial proved reserves.

The company allocated about $20 million of its 2015 capital budget to the Appalachian Basin, of which $12 million is for completion of five gross (2.5 net) previously drilled wells and $8 million is for acreage costs.

The company is currently completing the three remaining gross Marcellus Shale wells on the Goudy pad and expect to have them on production by late February. It plans to complete one gross Marcellus Shale well on the Blake pad and one gross Marcellus Shale well on the Hoyt pad, which will allow the company to hold the acreage by production. The Blake well should be placed on production by late first quarter and the Hoyt well by early second quarter of 2015. One gross Marcellus Shale well and one gross Utica/Point Pleasant well on the Blake pad and one gross Marcellus Shale well on the Hoyt pad will remain uncompleted until economic conditions are more favorable.