Gastar Signs Agreement To Acquire Interest In West Edmund Hunton Lime Unit
To buy a 98.3% WI n 24,000 acres of the West Edmund Hunton Lime Unit in Kingfisher, Logan, Oklahoma and Canadian counties.
Gastar Exploration Ltd. (NYSE: GST) signed a purchase and sale agreement to acquire working interest in the West Edmund Hunton Lime Unit in Oklahoma for $187.5 million, the company announced Sept. 5.
Gastar will acquire a 98.3% working interest (80.5% net revenue interest) in 24,000 acres of the West Edmund Hunton Lime Unit located in Kingfisher, Logan, Oklahoma and Canadian counties, Okla. All of the acreage in the unit is held by production and located nearly adjacent to a portion of the Hunton Limestone assets that Gastar acquired earlier this year from Chesapeake Energy (see map). The transaction is expected to close in late November and a purchase effective date of Aug. 1.
The property currently produces at a daily net sales rate of 1,200 barrels (bbls) of oil, 2.7 million cubic feet (MMcf) of natural gas and 428 bbls of NGLs or 2,078 barrels of oil equivalent (BOE). Based on Gastar's internal estimates, total proved reserves are 11.1 million BOE, of which 66% is oil and 43% is proved developed. The estimated present value of proved reserves is $191.3 million, which was discounted at 10% using NYMEX futures pricing as of Aug. 28.
The transaction is expected to be funded from the potential issuance of additional long-term debt, the potential issuance of perpetual preferred stock, borrowings under the existing revolving credit facility, cash on hand and the expected proceeds from the sale of its East Texas assets. Gastar intends to pursue a potential partner to help acquire and develop the acreage.
"This transaction is another important step in our program to further balance Gastar's production profile between liquids and natural gas while also expanding our presence in the Hunton play," J. Russell Porter, Gastar president and CEO, said in the release. "This strategic 'tack-on' acquisition provides a stable producing asset base and meaningful upside potential. With this acquisition, we now have over 380 net potential drilling locations in our Mid-Continent oil play.
"The acquisition of the producing reserves, plus the PUD reserves to be developed on the HBP acreage, has attractive economics, and the transaction is projected to be immediately accretive to earnings, cash flow and EBITDA per share. It will also significantly increase our total reserves and production and further support our shift towards owning and producing high-value crude oil and natural gas liquids.
"In addition to the existing reserves and production included in this package, we expect significant, low-cost, low-risk upside potential from the development of the upper Hunton Limestone (Bois d'Arc formation), where proved undeveloped reserves booked to date cover less than 30% of the total acreage we are acquiring. We also see the potential for substantial, low-risk high-return drilling opportunities in the deeper lower Hunton Limestone (Chimney Hill formation) that has not yet been developed on this property. We believe the Chimney Hill resource could be proved up with limited drilling capital, given the recent nearby offsetting activity by other operators that is rapidly de-risking the play.
"We have identified 62 Bois d'Arc PUD locations — plus an additional 44 Chimney Hill 'probable' drilling locations just within a 7,000-acre northern portion of the block that has been the site of recent activity by the seller. Beyond this 7,000-acre initial development area, we've catalogued an additional 60 Bois d'Arc and 40 Chimney Hill well locations that could be developed in the southern portion of the HBP acreage. The Upper Hunton wells can be produced open-hole and drilled at a cost of approximately $2.3 million each, generating an estimated internal rate of return greater than 50%. We will also evaluate the use of multi-lateral wellbores in this formation to further enhance the economics. The lower Hunton wells cost an estimated $4.5 million each, with internal rates of return projected to exceed 60%," Porter said in the release.
Update on Existing Hunton Limestone Operations
The Mid-Con 2H well (50% working interest) continues to exhibit exceptional production, with current gross sales volumes of 671 BOE/d (66% crude oil) over the most recent 10 days. The Mid-Con 3H well (50% working interest) continues to produce at a 10-day gross average sales rate of 81 BOE/d (90% crude oil), and the Mid-Con 4H well (50% working interest) is currently producing at a 10-day gross average sales rate of 121 BOE/d (67% crude oil). The Mid-Con 5H well (50% working interest) was recently completed in the Hunton formation. Despite mechanical issues caused when the operator experienced problems during the clean-out phase of the completion and temporarily abandoned tools in the lateral section of the wellbore, the well immediately began naturally flowing oil and completion fluids. The Mid-Con 5H well is currently producing at a gross sales rate of 160 bbls/d of oil and 1,274 bbls/d of water without the aid of any artificial lift and with only an estimated one-third of the lateral well bore contributing to the well's flow.
Gastar recently reached total depth on the Mid-Con 6H well (50% working interest) with its operating partner and expect initial production by early October.
Gastar is participating with a 77% non-operated working interest in a Hunton Limestone well drilled by a second private operator located within the Chesapeake acquisition acreage. The well was successfully drilled in 22 days and currently awaits completion. Gastar is also participating in two other wells operated by a third private operator with minor working interest positions to test the Mississippi Lime and Woodford shale potential on the northeast portion of its leasehold.
Gastar is planning its first operated horizontal Hunton Limestone well on the acreage acquired from Chesapeake, with a planned spud date of mid-September. A total of three company-operated wells are planned to be commenced during the remainder of 2013, with the first well slated to be on production by the end of November.
"Recent drilling and production results on the Mid-Con 5H and 6H wells have further bolstered our confidence in the northern portion of our Hunton holdings, while successful results from other operators continues to confirm our type curve in the central portion of our leasehold. This acquisition provides an opportunity to expand our position and exposure in the Hunton play through the acquisition of high-quality proven reserves that provide a larger and more stable base of cash flow with which we can fund further development," Porter said in the release.
Gastar Exploration Ltd. is an independent energy company engaged in the exploration, development, and production of natural gas, condensate, oil, and NGLs in the U.S. The company is based in Houston.