Gastar Exploration Ltd., Houston, (NYSE: GST) reported financial and operating results for the three- and six-month periods ended June 30, 2011.

Net income attributable to Gastar's common shareholders for the second quarter of 2011 was $126,000, or $0.00 per diluted share. This compares to a net loss of $2.5 million, or $0.05 per share, for the second quarter of 2010. Excluding the impact of an unrealized natural gas hedging gain of $502,000 and other special items, adjusted net loss attributable to common shareholders was $377,000, or $0.01 per share for the second quarter of 2011. Excluding an unrealized natural gas hedging loss of $972,000 and other special items, adjusted net loss for the second quarter of 2010 was $1.5 million, or $0.03 per share.

Net cash flow provided by operations for the second quarter of 2011 was $6.1 million compared to net cash flow used in operations of $2.7 million in the same period last year. Net cash flow from operations for the first half of 2011 was $7.7 million, versus $5.1 million for first six months of 2010. Cash flow from operations before working capital changes and as adjusted for special items for the second quarter was $2.9 million versus $1.9 million in the second quarter of 2010, and $7.4 million for the first six months of 2011 versus $4.3 million for the same period last year.

Natural gas and oil revenues increased 26% to $8.5 million in the second quarter of 2011, up from $6.7 million for the same period a year ago. The increase in revenues was the result of an 18% increase in volumes combined with a 7% increase in realized commodity prices. Average daily production was 18.6 million cubic feet of natural gas equivalent (MMcfe) for the second quarter, compared to 15.8 MMcfe per day for the same period in 2010.

During the second quarter of 2011, approximately 79% of our natural gas production was hedged. The realized effect of hedging on natural gas sales was an increase of $1.7 million in revenues and resulted in an increase in total price received from $3.52 per thousand cubic feet (Mcf) to $4.59 per Mcf. Gastar continues to maintain an active hedging program covering a substantial portion of our estimated future natural gas production.

Lease operating expense (LOE) was $1.9 million in the second quarter of 2011, which is unchanged from the second quarter of 2010. LOE per Mcf equivalent (Mcfe) of production decreased to $1.10 from $1.33 in the second quarter of 2010. The decrease in the rate per Mcfe was primarily due to lower ad valorem taxes of $0.09 per Mcfe, lower workover costs of $0.22 per Mcfe and higher production volumes.

Depreciation, depletion and amortization (DD&A) was $3.0 million in the second quarter of 2011, up from $1.7 million in the second quarter of 2010. The increase in DD&A expense was the result of a 52% increase in the DD&A rate per Mcfe and an 18% increase in production. The DD&A rate for the second quarter of 2011 increased primarily due to higher proved costs associated with recent wells drilled to test oil prospects in East Texas and limited initial reserve increases related to these activities. By comparison, the second quarter 2010 DD&A rate was reduced by gathering system sales proceeds credited to proved property costs in the fourth quarter of 2009.

General and administrative (G&A) expense was $2.6 million in the second quarter of 2011, down from $3.9 million for the second quarter of 2010 and includes non-cash stock-based compensation expense of $538,000 and $880,000 for the quarter ended June 30, 2011 and 2010, respectively. The decrease in stock-based compensation expense is primarily due to the forfeiture of previously issued unvested awards as a result of employee resignations, prior-year awards being fully amortized and recently issued shares having a lower fair value. Excluding the non-cash stock based compensation, G&A expense decreased $1.0 million due to lower legal fees as a result of the settlement of the Classic Star litigation in November 2010.

Operations Review and Update

Appalachia

In late July, Gastar announced initial production test results of our first two horizontal Marcellus wells in Marshall County, West Virginia, which came in above expectations for individual well results. The Wengerd 1H and 7H, with lateral lengths of 4,700 and 5,700 feet, respectively, tested at a combined stabilized rate of approximately 15.5 MMcf per day of 1,285 Btu natural gas and 1,100 barrels of condensate per day. Currently, both wells are being placed on sales.

Gastar has identified approximately 72 additional well locations within the immediate vicinity of the Wengerd wells and plan to spud approximately 21 more wells in Marshall County before the end of 2011. Including the Wengerd 1H and 7H, we expect to have 8 to 10 wells on sales by year-end and another 8 to 11 wells on sales in the first half of 2012 with working interest of between 40-50% in these wells. We will have three rigs working in Marshall County, two drilling horizontal sections and one drilling the vertical sections. We have collected a full array of micro-seismic data during the two Wengerd completions and plan to use that data to improve our results and become more efficient with our completions. Gastar holds approximately 4,700 net (9,400 gross) acres in Marshall County within our Atinum Joint Venture.

The company has also recently finished drilling the Hickory Ridge 2H, our first well on its Marcellus East Acquisition acreage in Preston County, West Virginia. This well is outside Gastar's Atinum Joint Venture, and the company has a 100% working interest. The company is planning a multi-stage fracture stimulation in August 2011, with first natural gas sales anticipated in September. No additional wells are currently planned to be drilled on the Marcellus East Acquisition acreage in 2011 pending the completion of a 3-D seismic survey over a portion of the acreage.

In Butler County, Pennsylvania, Gastar and Atinum have been participating in seven wells with Rex Energy as operator, of which three are expected to be on sales by year-end, with the remaining four wells to go online in early 2012.

For the three and six months ended June 30, 2011, net production from the Appalachia area averaged approximately 0.6 MMcfe per day, compared to 0.4 MMcfe per day for the first and second quarters of 2010, respectively.

Capital expenditures net to us for the second quarter of 2011 in Appalachia were $7.0 million.

East Texas

Gastar recently completed the drilling of the Belin #3 deep Bossier well to a total depth of 20,100 feet and has run casing to a depth of 19,120 feet. The well encountered 60 net feet of potential lower Bossier pay in four separate lower Bossier sands. The well is scheduled to be fracture stimulated in the deepest potentially productive zone in September 2011.

In April 2011, the company fracture stimulated the initial formation zone in the previously drilled Belin #2 well, with marginal results. In early May 2011, Gastar fracture stimulated the next zone, which based on log interpretation should have been the most productive lower Bossier zone in the well. During this procedure, the company experienced equipment failure and the operation had to be stopped before it was completed. Gastar subsequently attempted to re-fracture the zone, but it appears there may have been reservoir damage from the first fracture attempt, and production from the well is minimal. The company is planning another re-fracture stimulation of the zone in November 2011. Gastar has a 67% before payout working interest and an approximate 50% before payout net revenue interest in the Belin #2 and #3 wells.

To help maintain current production levels in the field, Gastar is planning to add two recompletion zones in the Wildman #5 well in November 2011. Once completed and pressures are normalized, the company plans to commingle all zones in the well. Additionally, it is currently performing workover operations in the Holmes #1 well.

During the second quarter of 2011, Gastar continued to monitor the four wells previously drilled to test the productivity of the Glen Rose and Eagle Ford/Woodbine (Eaglebine) formations on its East Texas acreage. Production rates for these wells have been lower than expected, but the company believes that the drilling and completion methods that have been used so far have not been optimal. Due to drilling issues with our Wildman 7H horizontal well, Gastar does not believe that it has adequately tested the horizontal drilling potential of the Eaglebine formation. For the balance of 2011, Gastar is postponing further drilling tests on these formations and will instead continue monitoring the four wells, analyzing a core sample taken from the Eaglebine section of a nearby well and observing offset operator drilling activity in the zones.

In East Texas, second quarter of 2011 net production from the Hilltop area averaged 16.6 MMcfe per day, down from 20.4 MMcfe per day in the first quarter of 2011. The lower volumes were due to natural declines in field production that were not offset by incremental production from newly completed wells during the second quarter.

Capital expenditures in East Texas were $9.9 million for the second quarter.

"We are highly encouraged by the initial test results of our liquids-rich area of the Marcellus Shale in Marshall County, West Virginia and are excited to have our Marcellus drilling program underway," says J. Russell Porter, president and CEO. "Based on the early indications, we believe we are operating in a very productive area of the play that could generate excellent returns on investment. Additionally, we believe our active program positions us to achieve significant reserve growth by year end 2011, with escalating oil and gas production volumes later in the year and throughout 2012, as we put these wells on line."