PostRock Energy Corp. (NYSE: PSTR) announced Feb. 5 an update, including a reduction of its 2015 capex by more than 80%.

Highlights:

  • 2014 production, at the realized 21:1 gas-to-oil economic equivalency, increased over 2% from the prior-year;
  • Oil production rose to 754 barrels per day (bbl/d), up 43% from the prior-year;
  • December 2014 oil production averaged 929 bbl/d of oil;
  • Gas production declined 9% to just over 36.2 million cubic feet per day (MMcf/d);
  • Revenue increased more than 15% from the prior-year.
  • Total operating expenses, including lease operating, gathering and G&A, decreased about $1.3 million from the prior year;
  • Bank debt decreased nearly 10% to $83 million during the year;
  • Cost reduction initiatives being implemented in 2015 are expected to further reduce operating costs by nearly $4 million annually;
  • On a preliminary basis the 2015 capital budget is set at $5.5 million, a reduction of over 80% from the prior year (this level of expenditures may be increased, depending on oil and gas prices); and
  • For 2015, about 73% and 28%, respectively, of the company's anticipated natural gas and oil production is hedged at $4.01 per million British thermal unit (MMBtu) and $92.73/bbl (hedges are in place through the end of 2016).

Staff Cuts

In response to the recent collapse of oil and natural gas prices, the company said it reduced its Oklahoma City headquarters staff by nearly 25% from 2014 levels. This will result in annualized savings of about $2.2 million.

Additional cost reductions are being implemented which should further reduce general and administrative and field operating expenses throughout the remainder of the year.

In total, once plans are fully implemented, the company said it expects to reduce ongoing operating costs by nearly $4 million annually.

Capex

On a preliminary basis, PostRock is setting its 2015 capital budget at $5.5 million, more than an 80% reduction from 2014.

The plan includes maintenance capital and completion of development projects under way at year-end 2014. At current prices, the company said it doesn't plan any drilling in 2015. However, this could change, depending on oil and gas prices. Excess operating cash flow will be used to reduce outstanding debt.

Hedges

Gas and oil hedges are in place through 2016. These hedges include 9 Bcf, or 24.6 MMcf/d, of natural gas hedged at $4.01/MMbtu. Also, 71,500 bbl, or 195 bbl/d, of oil hedged at $92.73/bbl.

Assuming no new drilling, this represents about 73% of gas and 28% of oil expected production forecasted in 2015.

Additionally, in 2016, 21.4 MMcf/d and 180 bbl/d are hedged at $4.01/MMbtu and $90.33/bbl.

Fourth-Quarter Update

During 2014, the Company performed 13 recompletions and drilled four Hunton horizontal wells. In addition, it participated in drilling two Woodford horizontal wells in a joint venture (JV) with Silver Creek Oil & Gas, LLC. Silver Creek is the operator of the JV.

Oil production in 2014 increased 43% to just more 275,000 net bbl of oil, an average of 754 bbl/d. Gas production totaled 13.2 net Bcf, a 9% decrease from the prior year, which is slightly less than historic annual decline rates of 12-13%. At the realized gas-to-oil equivalency of 21:1, production increased 2% from the prior year.

Two of the Hunton horizontal wells were placed on production in the fourth quarter and reached peak production of 330 bbl/d and 275 bbl/d of oil, before year-end.

The gross cost for the wells was $6.6 million. Combined, the four Hunton wells drilled during the year cost $13.4 million and have produced just shy of 100,000 gross bbl of oil.

Using actual revenue received through December and applying a recent strip, the projected combined internal rate of return for the wells exceeds 20%.

Unfortunately, the company said results from the two JV wells have, to date, been very disappointing. Thus far, after recovering about 50% of frack load, the wells have lower than expected oil and gas rates. The company has a 30% interest in the wells.