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

Net income attributable to Gastar's common shareholders for the third quarter of 2011 was $1.0 million, or $0.02 per diluted share. This compares to a net loss of $16.4 million, or $0.33 per share, for the third quarter of 2010. Excluding the impact of an unrealized natural gas hedging gain of $2.4 million, adjusted net loss attributable to common shareholders was $1.4 million, or $0.02 per share, for the third quarter of 2011. Excluding the impact of an unrealized natural gas hedging gain of $5.5 million, litigation settlement expense of $21.2 million and other special items, adjusted net loss for the third quarter of 2010 was $776,000, or $0.02 per share.

Net cash flow used in operations for the third quarter of 2011 was $0.2 million compared to net cash flow provided by operations of $3.3 million for the third quarter of 2010. Net cash flow from operations for the first nine months of 2011 was $7.5 million, versus $8.5 million for the first nine months of 2010. Our cash flow from operations before working capital changes and as adjusted for special items for the third quarter of 2011 was $2.8 million versus $2.6 million in the third quarter of 2010, and $10.3 million for the first nine months of 2011 versus $6.9 million for the same period last year.

Natural gas and oil revenues increased 11% to $9.6 million in the third quarter of 2011, up from $8.7 million in the third quarter of 2010. The increase in revenues was the result of a 20% increase in realized commodity prices, partially offset by an 8% decrease in volumes. Average daily production was 20.9 million cubic feet of natural gas equivalent (MMcfe) for the third quarter, compared to 22.6 MMcfe per day for the same period in 2010. The decrease in production volumes was the result of natural declines from natural gas wells in East Texas and Wyoming, partially offset by higher Marcellus Shale sales in the third quarter, but which were negatively impacted by third-party pipeline issues that occurred late in the quarter.

During the third quarter of 2011, approximately 92% of our natural gas production was hedged. The realized effect of hedging on natural gas sales was an increase of $2.4 million in revenues and resulted in an increase in total price received from $3.37 per thousand cubic feet (Mcf) to $4.69 per Mcf. We continue to maintain an active hedging program covering a portion of our estimated future natural gas production.

Lease operating expense (LOE) was $2.4 million in the third quarter of 2011 compared to $1.5 million in the third quarter of 2010. LOE per Mcf equivalent (Mcfe) of production increased to $1.23 from $0.74 in the third quarter of 2010, primarily due to higher ad valorem taxes of $0.12 per Mcfe, higher workover costs of $0.29 per Mcfe and lower production volumes in the third quarter of 2011.

Depreciation, depletion and amortization (DD&A) was $3.7 million in the third quarter of 2011, up from $2.7 million in the third quarter of 2010. The DD&A rate for the third quarter of 2011 was $1.92 per Mcfe compared to $1.28 per Mcfe for the same period in 2010. The increase in the rate is primarily due to higher proved costs associated with recent East Texas wells drilled and additional allocation of undeveloped East Texas leasehold costs from unproved to proved properties based on recent drilling results. Additionally, the third 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 $3.1 million in the third quarter of 2011, down from $3.8 million for the third quarter of 2010, and includes non-cash stock-based compensation expense of $760,000 for the third quarter of 2011 and $713,000 for the third quarter of 2010. Excluding the non-cash stock-based compensation expense, cash G&A decreased 25%, or $789,000, to $2.3 million in the third quarter of 2011 compared to the third quarter of 2010 due to lower legal fees.

Operations Review and Update

Appalachia

In Marshall County, West Virginia, Gastar currently has two drilling rigs working in the Marcellus West area. By year-end 2011, the company expect to have nine horizontal Marcellus wells on sales and 10 horizontal Marcellus wells drilled and awaiting completion. All of its Marcellus Shale wells drilled in Marshall County are part of the joint venture with Atinum Partners Co. Ltd. After all drilling and completion costs have been incurred, working interest in these wells will range from 40% to 50%.

In mid-August 2011, Gastar began producing the Wengerd 1H and 7H horizontal wells at an initial combined 30-day average gross sales rate of approximately 7.1 MMcf per day of natural gas, 176 barrels of condensate and 347 barrels of natural gas liquids (NGLs). On September 23, 2011, the pipeline operator shut in the pipeline due to weather-related damage to the natural gas and condensate gathering system. While the pipeline was being repaired, Gastar installed tubing into the two Wengerd wells that would improve NGLs and condensate recovery and returned them to production on October 21, 2011. Initially, production was restricted due to excessively high line pressures following the pipeline repair, but this matter was recently resolved. The two wells' most recent combined four day average gross sales rate is 8.1 MMcf per day of natural gas, 200 barrels of condensate per day and 490 barrels of NGLs per day.

Also in Marshall County, the company completed fracture stimulation operations on the Corley pad (four horizontal wells), with first sales anticipated in mid-November 2011. Currently, Gastar is commencing fracture stimulation operations on the three-well Simms pad with first production anticipated mid-December 2011. As of September 30, 2011, drilling operations have been completed on the Hendrickson 1H, 2H and 4H wells, and the company completed drilling operations on the Hendrickson 3H and 5H wells in late October 2011. Fracture stimulation operations on all five Hendrickson wells are anticipated to commence in March 2012, and first sales are anticipated in the second quarter of 2012. Currently, the company has commenced drilling operations from the Hall pad (three wells) and the Burch Ridge pad (five wells), and expects to commence drilling operations on the Accettolo pad (three wells) prior to year end.

On the Marcellus East position in Preston County, West Virginia, Gastar has drilled one horizontal well to test this acreage, which is 100% owned by the company. In August 2011, Gastar completed the Hickory Ridge 2H horizontal Marcellus well, a 2,500-foot lateral completed with a 10-stage fracture stimulation, and is currently flowing back completion fluids. First sales from the Hickory Ridge 2H are anticipated by year end. Focus for the remainder of 2011 and through 2012 in the Marcellus East acquisition area is to perform a 3-D seismic survey over a portion of the acreage, with no additional wells currently planned during that time frame.

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

For the third quarter 2011, net production from the Appalachia area averaged approximately 2.9 MMcfe per day, compared to 0.4 MMcfe per day for the third quarter of 2010.

Capital expenditures net to Gastar for the third quarter of 2011 in Appalachia were $15.3 million after realization of approximately $9.0 million of joint venture drilling carry benefit during the quarter.

East Texas

In September Gastar completed the Belin #3 well and encountered 60 net feet of potential lower Bossier pay in four separate sands. Two lower formation zones were fracture stimulated, and production is currently averaging approximately 3.3 MMcf per day. At a later date, the company plans to complete additional Bossier formations uphole, including what is expected to be the most productive zone in the well.

In October Gastar added two recompletion zones in the Wildman #5 well, which is currently producing 3.0 MMcf per day after comingling all producing zones.

In East Texas, third quarter 2011 net production from the Hilltop area averaged 16.6 MMcfe per day, down from 20.1 MMcfe per day in the third 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 last 12 months.

Capital expenditures in East Texas were $4.2 million for the third quarter.

J. Russell Porter, Gastar's president and CEO, states, "Our drilling operations are more active than at any time in Gastar's history as we develop the liquids-rich area of the Marcellus Shale in Marshall County. We have identified at least 96 well locations and expect to have drilled and completed more than half of these by year-end 2012. As a result, we are looking forward to significant increases in our production throughout next year as we put these wells on sales. Additionally, we expect to report significant reserve growth from Appalachia for year-end 2011 as well as solid growth in 2012. For the remainder of this year in East Texas, we will continue to monitor the exploration activity of other operators that are currently testing potentially liquids-rich zones and horizontal development of the upper Bossier near our acreage for future opportunities. But with the continuing slump in natural gas prices, we will maintain our drilling focus on the Marcellus Shale, where the high-value liquids component of our production offers strong economics."

Liquidity and Capital Budget

At September 30, 2011, Gastar had cash and cash equivalents of $7.0 million and a net working capital deficit of approximately $26.7 million. This includes $28.6 million of advances from non-operators, of which $8.9 million will be applied to Gastar's net future share of costs pursuant to the carried interest provisions of the Atinum Joint Venture.

Availability under the company's revolving credit facility was $40.0 million at September 30, 2011. In addition, the Atinum Joint Venture will provide a cash source for our Marcellus Shale development program by providing carried interest funding of up to $40.0 million, of which $23.9 million remained available to fund the share of future drilling and completion costs on joint venture wells at September 30, 2011. This remaining unearned carry is anticipated to be realized by early first quarter 2012.

Capital expenditures for the remainder of 2011 are projected to be approximately $18.0 million, consisting of drilling, completion, infrastructure, lease acquisition and seismic costs of $13.1 million in Appalachia, $4.2 million in East Texas and an additional $0.7 million for capitalized interest and other costs. Gastar plans on funding these capital requirements through existing cash balances, internally generated cash flow from operations, borrowings under the company's revolving credit facility and possible continued at-the-market issuances of preferred equity securities by Gastar Exploration USA Inc.