To rise fivefold from a January 2013 starting point of $1.23 per share to a recent investor-day closing price of $6.62 is no mean feat, even if, as a small-cap exploration and production (E&P) company, it is easier to chalk up growth off a smaller base of production. But in the case of Gastar Exploration Inc., the story that unfolds also mixes in drama, surprising twists and turns, and even a little intrigue.

For Gastar, the tale is about more than just engineering a turnaround. It is also about turning trials--almost literally--into triumphs. Gastar at one point faced litigation from a much larger independent producer claiming damages of more than $130 million. The claim soon exceeded Gastar’s entire market cap, as investors assumed the worst and largely abandoned the stock late in 2012.

The mounting drama in the Gastar story was matched by more than a measure of irony. Who was the E&P behind the litigation spooking investors out of Gastar’s stock, which--hurt further by year-end tax loss selling--reached sub-$1 levels in the final days of 2012?

None other than Chesapeake Energy Corp., Gastar’s largest shareholder, with just under a 10% holding.

Of course, the litigation by Chesapeake served as a major distraction to Gastar’s continuing efforts to ramp up its liquids-rich production in the Marcellus, as well as its developing (and as yet still unnamed) Hunton horizontal oil play in the Midcontinent. In response, Gastar was both emphatic and measured: Chesapeake Energy’s claims were deemed to be without merit and “frivolous.” And even in the event of a multiyear process leading to a full trial, the cost of litigating the plaintiff’s claims was estimated to be only around $1 million, according to Gastar president and CEO J. Russell Porter, speaking to investors in early 2013.

But in the end the litigation between Gastar and Chesapeake provided a huge opportunity for Gastar. In recognition of Gastar’s rebound, the company has earned Investor’s Best Turnaround award for 2013.

In early April 2013--some six months into the legal proceedings and two months after filing for dismissal of the case--Gastar made an eye-popping announcement that bolstered its Midcontinent strategy and lifted the cloud of litigation that had been hanging over its stock. From a prior day close of $1.76, Gastar’s stock rose 14% to $2.01 on the day of the announcement; in the following six months, the stock appreciated to $4.32 on October 1, 2013, a gain of almost 2.5 times.

Key points of the announcement included an asset transaction under which Gastar would purchase from Chesapeake drilling rights to 157,000 net acres adjoining Gastar’s existing Midcontinent acreage and approximately 2.8 million barrels equivalent of proved reserves; a stock transaction under which Gastar would buy back the entire 6.78 million shares held by Chesapeake at a price of $1.44 per share (an 18% discount to the prior day close); and the settlement of all litigation between the two parties. Of the total $85 million deal, the parties allocated $1 million to settling the litigation.

“This acquisition of undeveloped acreage and producing properties in our Midcontinent area will provide us with a tremendous opportunity to secure a much larger position in what we believe has the potential to be a highly prolific new oil play,” Porter said when announcing the deal. “Based on existing data, nearly half of the acquired acreage lies within what we expect to be the most prospective area for horizontal drilling of the Hunton Limestone Formation.”

The announcement was accompanied by Gastar’s release of results from the second well it had drilled under its Midcontinent joint venture, which targeted the Hunton Lime at depths of 8,000 feet to 9,000 feet. Describing the results as “compelling,” Porter said the Mid-Con 2H well over the prior 10 days had averaged production of more than 968 barrels of oil equivalent per day (boe/d), of which 87% was oil, with a 30-day average rate coming in at 738 boe/d.

The agreement, combining a major asset acquisition with resolution of litigation and a 10% stock repurchase, clearly provided a major springboard for Gastar to resume its growth trajectory, and with no need to issue common equity. But yet another catalyst was imminent.

In early July, Gastar announced an agreement to sell a portion of the undeveloped acreage it had bought three months earlier from Chesapeake to a third party for $62 million in cash. This represented outstanding economics in the wake of the Chesapeake deal, in which Gastar allocated the $85 million purchase as follows: $41 million to undeveloped acreage, comprising 157,000 net acres in Kingfisher and Canadian counties, Okla.; $33.2 million to proven reserves; $9.8 million to the repurchase of shares held by Chesapeake; and $1 million for litigation settlement.

Just how strong were the economics? The $62 million sale proceeds more than recouped the $41 million allocated to undeveloped acreage, even though the sale covered only 76,000 net acres--or just under half--of the Kingfisher and Canadian acreage purchased from Chesapeake. In addition, proceeds were supplemented by a further $12.1 million, stemming from Gastar’s Midcontinent joint venture partner electing to exercise rights and acquire 12,820 net acres that Gastar had purchased from Chesapeake, as well as reserves associated with their joint venture acreage.

After concluding the two transactions, Gastar’s total acreage in the Hunton Lime came to about 96,684 net acres, of which 70,206 net acres had been acquired from Chesapeake. The play offered the company plenty of potential running room, with 275 net drilling locations, exposing Gastar to roughly 100 million boe of net resource potential, according to an August 2013 Gastar presentation. And with a 10-year drilling inventory, it represented a new avenue of visible, oil-directed growth, buttressing the company’s existing liquids-rich inventory in the Marcellus.

Fast forward to Gastar’s latest investor day, held in mid-May, and where does the company stand?

With stock market sentiment on the name having recovered dramatically, Gastar’s market cap was above $375 million again, and heading higher in the ensuing weeks. Liquidity concerns were receding, given an undrawn $120 million credit facility and a little more than $25 million in cash at the end of March. Together with con- sensus cash flow estimates of around $80 million, visible funding was in place for a projected 2014 capex budget of $192 million.

A series of deals reset Gastar on the path to growth.

And, critically, the Street is now more inclined to embrace not only the upside in Gastar’s Marcellus-focused base in Appalachia--a liquids-rich area the company has been developing since late 2011--but also its exposure to the fast-emerging Utica-Point Pleasant play. Likewise, in its Midcontinent operations fo- cused originally on the lower and upper Hunton Lime, Gastar has added new targets in the Woodford Shale and Meramec (Mississippi Lime) Formation.

This breadth of liquids-oriented targets in the Midcontinent, as well as the liquids-rich Marcellus, was not achieved overnight. Gastar sold its former base of East Texas gas properties in October of last year, bringing in $39 million. Then, in November, the company made its $178 million acquisition of its WEHLU properties, involving 24,000 net acres located predominately in Oklahoma County, just south and east of Gastar's early activities in the Hunton Lime in Kingfisher County.

Gastar now has 128,500 net acres in the Hunton Lime play, exposing it to more than 130 million boe of net resource potential. In its joint venture with Husky Ven- tures, wells have been tracking a type curve of an IP rate of 608 boe/d and EUR of 436,000 boe. This provides an estimated internal rate of return of 67% based on a well cost of $5.4 million. The recent Kodiak well, the joint venture’s best to date, tested at an IP as high as 1,688 boe/d (84% oil).

While 96% of its drilling budget is directed to liquids, Gastar’s dry gas test of the Utica–Point Pleasant Formation is sure to be followed closely in light of recent industry successes. These include dry gas tests of 25 MMcf/d to 40 MMcf/d by Chevron, Gulfport Energy, Rice Energy and Magnum Hunter Resources. Results from Gastar's first test, in Marshall County, are expected in July. Gastar has some 22,800 gross/11,400 net acres prospective for both the Marcellus and dry Utica, providing for 118 gross/59 net Utica locations based on a very conservative 1,000 foot spacing between Utica laterals.

A second test is planned for Wetzel County.

And all this on top of a liquids-rich Marcellus base in Marshall and Wetzel counties that offers a gross undrilled potential of 1.4 Tcfe (0.7 Tcfe net)!

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