Gastar Exploration: Sale Closes (great news)

[dan_s]

HOUSTON, April 8, 2016 /PRNewswire/ -- Gastar Exploration Inc. (NYSE MKT: GST) ("Gastar") today announced that it has completed the previously announced sale of substantially all of its producing assets and proved reserves and a significant portion of its undeveloped acreage in the Appalachian Basin for $80.0 million, subject to certain adjustments, to an affiliate of Tug Hill Inc. The effective date of the transaction is January 1, 2016.

In connection with the sale, the borrowing base of Gastar's revolving credit facility was automatically reduced to $100.0 million as required by Amendment No. 8 to the credit agreement. The proceeds from the sale will be used to reduce outstanding borrowings under Gastar's revolving credit facility to achieve compliance with the reduction of the borrowing base.

J. Russell Porter, Gastar's President and CEO, commented, "The closing of this transaction allows us to reduce our debt and exclusively focus our operations on the Mid-Continent STACK Play, one of the most economic plays in the U.S."
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This is Step 1 of their three step program to get the company back on its feet and growing again. This makes Wells Fargo happy and gets them off Gastar's back.

Step 2 is the successful completion of their second Meramec well in STACK. On March 30th Gastar said the following:
"The Company also announced that it has completed its second Meramec Shale well, the Holiday Road 2-1H, with 34 frack stages using approximately 12 million pounds of proppant. The Holiday Road 2-1H is also located in Kingfisher County and has a lateral length of 4,300 feet. Initial flow back is expected to commence in the next two weeks."
It will take a couple of months before they really know how good the well is, but if it is anywhere close to as good as their first Meramec horizontal well, the Deep River 30-1H, it will de-risk a large portion of their leasehold.

Step 3 is the sale of their "South STACK" leasehold. Go to the company's March 10 presentation (on their website under the Investor tab) and you can see where it is on slide #17.
Most of the 26,000 acres are in northeast Canadian county. Slides 18-22 shows how active and successful the drilling has been in the area.
I have no idea what this acreage block should sell for, but Vanguard Natural Resources (VNR) recently sold a similar size block of STACK leasehold for $280 million. The dataroom is open and several interested companies are looking at it now. Bids are expected to be in by the end of April, but the sales process will take awhile. They hope to close the sale by the end of June.

Gastar is not going to drill anymore operated wells in Oklahoma this year, but they are going to participate in 12-15 outside operated STACK wells. Gastar's working interests will be 3% to 10% in these wells. They will get all of the well logs and other data. This will help them plan their own STACK drilling program for 2017, plus it will help de-risk a lot more acreage.

[dan_s]

On Monday, April 25 our luncheon in Houston will focus on the STACK play. We should have details up on the website by Saturday.

Navport is hosting the event. See: http://navport.com/

Terry Starling, from the Raymond James energy sector team here in Houston, will open with an update on their oil price forecast and his firms view of the STACK play.

[Fosterplc]

Phew! Stock up nicely today.

[gjames]

Dan:
In the past you have stated that the safest way to play GST is the preferreds. Is your opinion still the same re. the best place to be in their capital structure?
Thanks!

[dan_s]

The safest bet is their publicly traded debt, which has risen sharply over the last two weeks from 0.50 to 0.62 on the dollar.

Obviously, they call it "preferred" stock for a reason. Someone has been accumulating the preferred for the last couple of weeks.

If someone was going to make a run at Gastar to take them over, the smart move would be to buy as much of their debt and preferred stock as they can in the market at a deep discount to par before making an offer to buy the common stock. If a company like NFX takes over GST, the preferred stock will move quickly to par ($25) and the debt holders will expect full payment. Gastar's public debt is due in 2018.

If Gastar is successful in completing their three step plan, which I have outlined above, AND the price of oil goes back to $60/bbl (Raymond James' forecast for Q3 of this year) then they should be able to resume paying dividends again on the preferred stock. When that is announced, the preferred stock should move back toward par.

The preferred stock is "cumulative", so they have to catch up on the dividends before the common stock gets a penny.

Each payment they make on the debt makes the preferred stock more valuable. Russ Porter said on the last conference call that most of the money they get from selling the South STACK leasehold will be used by buyback debt on the public market at a discount. I'm sure the person that has been buying up the debt lately is counting on that.