Gastar Exploration Inc. (NYSE MKT: GST) has executed a definitive agreement with a private global investment fund to jointly develop up to 60 Gastar operated wells in the STACK Play in Kingfisher County, Oklahoma. The drilling program will target the Meramec and Osage formations within the Mississippi Lime on a contract area within three townships covering approximately 18,000 undeveloped net mineral acres under leases held by Gastar. Gastar will be the operator of all wells jointly developed under the agreement.
With the agreement, the investor will fund 90% of Gastar's working interest portion of drilling and completion costs to initially earn 80% of Gastar's working interest in each new well (in each case, proportionately reduced by other participating working interests in the well). As a result, Gastar will pay 10% of its working interest portion of such costs for 20% of its original working interest in the well.
The proposed drilling program wells will be mutually developed in three tranches of 20 wells each. The locations of the first 20 wells have been mutually agreed upon with 18 wells targeting the Meramec formation and two wells targeting the Osage formation. The locations of the second tranche will be at the election of the investor and the third tranche will require mutual consent. With respect to each 20 well tranche, when the investor has achieved an aggregate 15% internal rate of return (IRR), its interest will be reduced from 80% to 40% of Gastar's original working interest and Gastar's working interest increases from 20% to 60% of Gastar's original working interest. When a tranche IRR of 20% is achieved by the investor, its working interest decreases to 10% and Gastar's working interest increases to 90% of the working interest originally owned by it. The parties to the agreement can mutually agree to expand the drilling program's contract area and formation focus. Kirkland & Ellis LLP is representing the investor in connection with its drilling participation arrangement with Gastar.
"Given that a concern about GST's acreage has been a lack of well data, this deal should tie that up nicely," noted Wunderlich Securities analysts in a note Thursday morning. Overall, the deal is "good for the balance sheet and good for the operations," the analysts continued.
Non-core STACK sale
Gastar has entered into a purchase and sale agreement to sell certain non-core leasehold interests primarily in northeast Canadian County and also in southeast Kingfisher County, Oklahoma to a private third party for approximately $71 million (of which up to $10 million is contingent upon the satisfaction of certain conditions), subject to certain adjustments. The transaction is expected to close on or before November 18, 2016, with a property sale effective date of August 1, 2016.
The sale of the 19,100 net acres for a price just shy of $4,000 per acre, noted Wunderlich Securities, helps Gastar focus on its core STACK position. The sales price includes allocated value for the acreage and current production of approximately 181 barrels of oil equivalent per day from 25 gross (11.2 net) wells, of which 32% is oil. Following the sale, the company would retain 83,200 net surface acres in the Mid-Continent area.
"Upon closing of this sale, we expect to have ample liquidity to support our capital expenditure plans for the remainder of 2016 and 2017. On a pro forma basis as of September 30, 2016, and after payment of 20% of the Canadian County net sales proceeds to reduce revolving credit facility debt, Gastar would have a cash position of approximately $102.4 million,” said J. Russell Porter, Gastar's president and CEO.