Gastar Exploration Ltd. (NYSE: GST) reported financial and operating results for the three months ended March 31, 2011.

Net loss for the first quarter of 2011 was $1.9 million, or $0.03 per share. Excluding the impact of an unrealized natural gas hedging loss of $1.9 million and other special items, adjusted net loss was $38,000, or $0.00 per share. This compares to net income of $9.4 million, or $0.19 per diluted share, for the first quarter of 2010. Excluding an unrealized natural gas hedging gain of $9.4 million and other special items, adjusted net loss for the first quarter of 2010 was $1.3 million, or $0.03 per share.

Cash flow provided by operations before working capital changes and adjusted for special items was $4.5 million for the first quarter of 2011 compared to $2.4 million for the first quarter of 2010. The cash flow provided by operating activities was $1.6 million for the first quarter of 2011 compared to $7.8 million for the first quarter of 2010.

Natural gas and oil revenues increased 48% to $10.0 million in the first quarter of 2011, up from $6.8 million for the same period a year ago. The increase in revenues was the result of a 29% increase in realized commodity prices combined with a 15% increase in volumes. Average daily production was 22.6 million cubic feet of natural gas equivalent (MMcfe) for the first quarter of 2011, compared to 19.6 MMcfe per day for the same period in 2010.

Operations Review and Update

East Texas

In East Texas, first quarter net production from the Hilltop area averaged 20.4 MMcfe per day, down from 23.8 MMcfe per day in the fourth quarter of 2010. The lower volumes were due to natural declines in field production that were not offset by incremental production from newly completed wells during the first quarter.

During 2011, Gastar is continuing to test the potential for oil production from the Eagle Ford Shale/Woodbine (Eaglebine) and Glen Rose formations on our East Texas acreage with a focus on determining the optimum drilling and completion techniques.

In January, the company began drilling the Wildman 7H horizontal well to test the Eaglebine, but drilling issues resulted in what Gastar believes to be an incomplete test of the targeted zone. The well is currently producing approximately 40 barrels of oil per day (BO/d) and a substantial amount of water. Gastar has opted to delay additional operations on the well and the drilling of an additional test nearby until we have completed the analysis of a core sample taken from the Eaglebine section of the Belin #3 well, which is a lower Bossier well currently being drilled in a nearby location.

Also during the first quarter, Gastar drilled the Wildman 8H, a horizontal Glen Rose well, and the Williams #2, a vertical well to test both the Eaglebine and Glen Rose formations. Both wells were fracture stimulated in the Glen Rose and completed in late February. Wildman 8H production currently averages approximately 160 BO/d and approximately 200 barrels of fracture stimulation fluids per day on artificial gas lift. The company is encouraged by initial results but plan to monitor the well's performance for a period of time before proceeding with further horizontal development of the Glen Rose formation. The Williams #2, which was initially flowing naturally after stimulation, has been placed on artificial lift and is currently producing approximately 6 BO/d. Later this year, Gastar plans additional Glen Rose perforations and ultimately will commingle the Glen Rose and Eaglebine in the Williams #2 well.

As previously stated, Gastar's 2011 drilling activity in East Texas targeting gas producing zones will primarily be focused on meeting lease obligations.

The Belin #2 well, an exploration well testing the deep Bossier in a separate fault block near the Belin #1, was drilled during the first quarter, and the lowest drilled formation zone was fracture stimulated in April. Production from this initial zone was marginal and a bridge plug has been set to enable us to test shallower zones. The company plans to fracture stimulate a zone up the hole in the lower Bossier this month. Although production from this zone cannot be assured, well log interpretation and pressure response following perforation in this zone are comparable to other lower Bossier wells completed with initial high production rates.

In late March, Gastar began drilling the Belin #3 well and expect to reach the target depth of 19,600 feet in early July. Assuming the well is successful, the company expects to have it fracture stimulated and on production by late summer.

In addition, in mid-April, Gastar recompleted the Streater #1 well in an uphole zone that achieved an initial production rate of 3.5 MMcf per day, and there are plans to commingle the new production with production from a lower zone at a later date.

Capital expenditures in East Texas were $15.8 million for the first quarter of 2011, and Gastar expects to spend approximately $36.2 million in this area for the full year 2011.

Appalachia

In Appalachia, Gastar currently has two rigs operating in Marshall County, West Virginia. In late April, drilling began on the Corley #1 and the Wengerd 7H, both horizontal Marcellus wells within the Atinum Joint Venture. Fracture stimulations of the previously drilled Wengerd 1H, along with the Wengerd 7H, are expected to commence in June, with first production expected in August.

Gastar plans to immediately drill five additional Corley wells from the Corley #1 location; fracture stimulation operations are scheduled to begin in September, and first production from the Corley wells is expected in late October.

Drilling operations are continuing on seven horizontal Marcellus wells in Butler County, Pennsylvania, that Gastar and Atinum are participating in with Rex Energy as operator. Initial sales are expected in the fourth quarter of this year.

Outside the Atinum Joint Venture, Gastar intends to drill the Hickory Ridge 2H horizontal Marcellus well in Preston County, West Virginia, with drilling operations anticipated to commence in June. This will be the first test of the acreage acquired in December 2010 in an area called "Marcellus East," with the objective of further de-risking the acreage and providing data to aid further development by Gastar or with a potential partner.

Capital expenditures net to Gastar for the first quarter in Appalachia were $8.1 million, and the company expects to spend approximately $43.9 million for the full year 2011, of which $23.7 million will be spent on drilling and completions and the remaining $20.2 million on land and seismic.

J. Russell Porter, Gastar's president and chief executive officer, stated, "Our increasing level of drilling activity in the liquids-rich areas of the Marcellus Shale and our continued analysis and testing of the production potential for oil on our East Texas acreage should position us for much higher liquids production volumes in late 2011 and in 2012. During 2011, we hope to be able to reduce our DD&A rate per Mcf and improve our net financial results as we benefit from the impact of the Atinum Joint Venture under which we pay 12.5% of the cost of the well for a 50% interest. Additionally, we believe that as we proceed with operations in East Texas and accumulate more data, we will be able to prove up more oil reserves on our acreage.

"Throughout 2011, our plan is to continue to de-risk our portfolio and better understand the production potential, along with continuing to improve the drilling and completion techniques needed to optimize our return on investment. We are encouraged by what we have achieved thus far in 2011 in both East Texas and in Appalachia, and we are looking forward to an active second half of 2011 that should result in significantly higher production levels as well as proven reserve increases," Porter said.

Liquidity and Capital Budget

At March 31, 2011, the company had cash and cash equivalents of $12.5 million and a net working capital deficit of approximately $3.8 million, including $7.5 million of operated prepayment liability. Currently, $27.5 million is available under the company's revolving credit facility.

Planned capital expenditures for the remainder of 2011 are projected to be approximately $59.4 million, consisting of drilling, completion and infrastructure costs of $15.4 million in East Texas and $22.4 million in Appalachia and an additional $15.7 million in lease acquisition costs, $3.1 million for seismic and $2.8 million for capitalized interest and other costs. Gastar plans on funding this capital activity through our existing cash balances, internally generated cash flows from operating activities, funding from Atinum for joint venture projects, availability under the revolving credit facility, possible debt or equity issuance and/or a possible joint venture for the development of a portion of Gastar's acreage.