Gastar Sells Southern Midcontinent Assets To Fund Stack Ops

Editor's note: This article has been updated to include the buyer of Gastar's WEHLU asset.

Gastar Exploration Inc. (NYSE MKT: GST) used a divestiture to buy itself time and liquidity Jan. 25, reaching an agreement to sell its interests in the West Edmund Hunton Lime Unit (WEHLU) for $107.5 million.

Gastar did not identify the buyer, but regulatory filings show the WEHLU assets will be purchased by Revolution Resources LLC, a Mountain Capital Partners LP company. Mountain Capital reported raising nearly $646 million in an offering disclosed in January.

Gastar received 10% of the sale price in a deposit on Jan. 25. The deal, announced after markets closed, beat analysts’ value expectations and could lead Gastar down a path toward an eventual sale or merger.

The sale includes 26,100 net surface acres in Oklahoma and Logan counties, Okla., cleaving 30% of the company’s southeastern Midcontinent acreage and 46% of its third-quarter 2017 production. The acreage is 94% HBP.

The WEHLU assets averaged 2,836 barrels of oil equivalent (boe/d) in the quarter, comprised of 52% oil, 25% NGL and 23% natural gas.

Gastar divides the WEHLU into the Upper and Lower Hunton, with the Upper Hunton generating international rate of returns of 38% and the Lower 36%, based on type curves and 6,000-ft laterals. Its Stack assets cover 65,200 net surface acres and have provided strong results in the Meramec, Osage, Oswego and Hunton Limestone oil play.

Seaport Global Securities said in a Jan. 26 note that the noncore asset sale provides a “huge liquidity victory” for Gastar, which exited third-quarter 2017 with liquidity consisting solely of about $29 million cash.

Gastar likely would have exhausted its treasury by the end of first-quarter 2018, Seaport’s report said. Gastar said its WEHLU divestiture is expected to close on Feb. 28.

“We estimate the deal provides Gastar with about 12 to 15 months worth of liquidity to prove that its 65,200 net acres in the Stack are deserving of recent M&A multiples seen directly offsetting its footprint,” Seaport said, adding the company could then “potentially take the monetization route.”

J. Russell Porter, Gastar’s president and CEO, told Hart Energy via email that the company has said it is considering strategic alternatives, including a potential sale or merger.

“As a public company our goal is to maximize value for all of our stakeholders,” Porter said. “If a sale or combination allows our stakeholders to realize a higher valuation than currently assigned by the capital markets, then we must seriously consider any such opportunity.”

In a news release, Porter said the divestiture should provide Gastar with sufficient liquidity to fund its core Stack acreage development plan through 2018.

Gastar has restarted its one-rig drilling program and Porter expects to drill and complete about 20 operated wells this year to more fully delineate and develop the Meramec and Osage formations.

“Due to our large, contiguous acreage position, with as many as six potentially productive formations and multiple benches within certain prospective formations, we have a large inventory of undrilled horizontal locations to exploit to create value going forward,” he said.

Gabriele Sorbara, an analyst at The Williams Capital Group, said he models the company’s 2018 capex at $108.1 million, resulting in 5,400 boe/d of production. Gastar’s 2017 capex was an estimated 129.2 million, according to regulatory filings.

“We believe there is upside to our numbers should its Stack wells outperform our type curve expectations throughout the year,” Sorbara said.

Tudor, Pickering, Holt & Co. advised Gastar on the sale of its WEHLU assets. Vinson & Elkins LLP served as legal counsel to Gastar for the transaction.

Darren Barbee can be reached at dbarbee@hartenergy.com.