Gastar Exploration Inc. (NYSEMKT:GST) Q2 2018 Earnings Conference Call August 10, 2018 9:00 AM ET
Executives
Lisa Elliott – IR, Dennard Lascar
Michael Gerlich – SVP & CFO
Stephen Roberts – SVP &COO
Trent Determann – Vice President of Finance
Analysts
Operator
Greetings, and welcome to the Gastar Exploration Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions].
It is now my pleasure to introduce your host, Lisa Elliott, with Dennard Lascar Investor Relations. Thank you. You may begin.
Lisa Elliott
Thank you, operator, and good morning, everyone. We appreciate you joining us for this review of Gastar’s second quarter 2018 operational and financial results.
With us today are Mike Gerlich, Chief Financial Officer; and Stephen Roberts, Chief Operating Officer.
Today’s call will contain forward-looking statements. Although Management believes these statements are based on reasonable expectations, they can give no assurances that they will be prove to be correct. These statements are subject to certain risks, uncertainties and assumptions as described in the earnings announcement Gastar released yesterday and the Company’s Form 10-K for 2017 and Form 10-Q filed yesterday. These documents can be found in the Investor Relations section of Gastar’s Web site. Should one more of these risks materialize or should underlying assumptions prove incorrect, actual results may vary materially.
Today’s call may also include discussions probable or possible reserves or use terms like reserve potential, upside or other descriptions of non-proved reserves which are more speculative than estimates of proved reserves and accordingly are subject to greater risk. As a reminder, information reported on this call speaks only as of today, August 10, 2018, thus any time-sensitive information may no longer be accurate as at the time of the replay. A replay of today’s call will be available via webcast by going to the IR section of Gastar’s Web site and also by telephone replay. You can find the replay information on yesterday’s news release.
Now I’d like to turn the call over to Mike Gerlich, Gastar’s Senior Vice President and Chief Financial Officer. Mike?
Michael Gerlich
Thanks, Lisa. Good morning, everyone. As you know the prolonged down turn in the energy sector plays a substantial pressure on the balance sheet of many oil and gas companies, particularly smaller ones like Gastar. During this time, Gastar’s management and Board Of Directors who worked diligently and prudently to invest noncore assets and refinances debt to improve the company’s financial condition and give it time to benefit it from a potentially better commodity price environment.
Although oil prices have improved over the last few quarters, the capital markets, investor sentiment and asset buyers have remained cautious. Given that it takes a substantial amount of capital to fund the development of oil and gas properties, market conditions like these put a squeeze on the E&P companies and Gastar is no exception.
Since Gastar’s last asset sale which was the WEHLU properties in February of this year, our ability to raise capital — additional capital or generate sufficient cash from operations to fund an ongoing development program and build strong cash flow and cash position to manage the company’s debt obligations have not improved.
Although Gastar has been historically able to reduce its capital expenditures to match its available resources, with the recent suspension of our operated drilling program we believe that we cannot reduce capital expenditures materially at this point, without creating the potential or deterioration to our core business. The company believes it needs to consummate a substantial financing, refinancing or other financial restructuring in a relative near-term to engage in normal operated drilling activities.
In May of this year, the Board of Directors created a Strategy Committee comprised of directors not affiliated with Ares Management LLC, tasked with exploring, financial, transactional and strategic alternatives, which could include a sale, business combination, strategic merger or potential restructuring of Gastar’s balance sheet.
Members of the Strategy Committee included Board member Harry Quarls, Randolph Coley, and Jerry Schuyler, our Interim CEO and Chairman of the Board. This committee group brings a wealth of experience around business improvement turnaround and restructuring situations in the upstream energy space.
In addition, the company has retained Kirkland & Ellis as its legal advisor and Perella Weinberg Partners and Tudor Pickering & Holt as its financial advisors to assist the company in analyzing and evaluating the financial, transactional and strategic alternatives including a potential restructuring of the company’s balance sheet. All these firms are highly experienced and well respected advising on these matters. So we feel that we’ve a solid team of advisors going forward.
As you know, there was a series of investments in the first half of 2017, Ares Management LLC, and the certain funds managed indirectly by it, became the holder of substantially all of the company’s indebtedness and our largest common shareholder. At that time, Ares was also granted the right to nominate two members to Gastar’s Board of Directors. As a result, Ronald Scott and Nathan Walton joined the Gastar Board as a designated Ares representative.
Prior to Ares failing their — filing their proposal on July 20, Mr. Scott, Mr. Walton resigned from the Board to avoid any proceed or direct conflicts of interest as the company moves forward exploring strategic alternatives. Ares will be exercising its right to nominate two Directors, both of which we expect will satisfy NYSE American Independent Standards.
As we announced on July 20, 2018, Ares and related funds delivered a nonbinding preliminary term sheet to the company proposing that the company considered sale of the company or other potential restructuring transactions. Ares proposed transactions were the company would sale substantially all of its assets and distribute proceeds in full satisfaction of company’s indebtedness or such sale is not successful, engage and researching the outstanding indebtedness of the company including a court approved bankruptcy sale process that pays Ares in full or a Chapter 11 plan of reorganization that provides for an exchange of a portion of the Ares indebtedness from 100% of the equity of the company.
Currently the Board, the Strategy Committee, Gastar’s Management and its restructuring advisors are working diligently to evaluate the Ares proposal. And currently we are considering potential strategic transactions, including financing alternatives, sale or merger transactions and/or the restructuring of Gastar’s balance sheet.
We’re working closely with Perella Weinberg and Tudor Pickering to actively solicit additional proposals from both existing stakeholders as well as interested third parties. We’re running an open process to consider all strategic transactions and alternatives in an effort to achieve long-term value for our shareholders. We intend to distribute a process later to prospective bidders and investors in the coming weeks that provides additional details regarding the company’s financial restructuring process, including key deadlines.
The process letter and other information related to the company’s finance restructuring process will be available on the company’s investor relations Web site. We realize that investors will be interested in receiving updates on our progress, but we need to be mindful about publicly announcing details of discussions or negotiations, so we may not comment further until the specific transaction or an alternative is approved by the Board of Directors, the process is concluded or is otherwise determined that further disclosure is appropriate or required.
Additionally, we feel that at this critical time of strategic process it would not be appropriate to take questions at the end of this call. Rest assured, we approach this process with an open mind and a commitment to strengthen the company and remain fully focused on serving the best interest of all our stakeholders.
Now I will turn the call over to Stephen for a review of our operations. Stephen?
Stephen Roberts
Thank you, Mike, and good morning, everyone. Our average daily production in the second quarter of 2017 was 5,700 barrels of oil equivalent or BOE per day, down from 6,100 BOE in the second quarter last year and down from 7,400 BOE per day in the first quarter of this year. This decline is due to the sale of our WEHLU production of February 28.
Looking at production from just our remaining acreage in the STACK play, production was up 104% from the second quarter of last year and up 4%, sequentially. Our second quarter 2018 production came in above our guidance range in terms of volume that we produced more natural gas than expected resulting in liquid as a percentage of total production being below guidance.
That was primarily due to one of our newer Osage well producing very high volumes of natural gas, which I will discuss further shortly. So, overall, we were pleased with the production during the quarter. Throughout the second quarter we remain focused on executing an efficient one rig drilling program based on the drilling practices we recently established and our operations team did an excellent job.
During the second quarter, we spud four gross, 3.7 net operated Osage wells and two gross 1.9 net operated Meramec wells. Gastar also participated an additional non-operated third-party wells. We executed our completion program employing our new Gen 3 completion design with 35 stage completions and in the second quarter completed five gross 4.9 net Osage operated wells.
We will have continued to delineate various areas of our acreage position for the Osage and Meramec formations as well as further test our new 35 stage completion design. As I mentioned a moment ago, we produce substantially higher natural gas than expected in the second quarter due to the production from one well. This well was the first well completed using our current new Gen 3 completion with 35 fracs at least. The BCO [ph] 7-1 well, which is on the western side of our acreage, initially produced in excess of 4x our peak time curve gas production.
On a two-stream basis, the max 30-day rate was 1,020 BOE per day, of which oil production was 313 barrels of oil per day. This well has been on production for just over 100-day and continues to flow [ph] naturally. We have completed an additional four Osage wells. These wells on average have been on flow back for less than 70 days, so they’re early in the flow back process.
To date, a couple of them are performing below expectations. However, we are testing electrical submersible pumps or ESP in these newer wells to see if we can improve recoveries and accelerate production. ESP installation in several offset operator’s wells have shown significant improvement in overall production profiles. Considering that company’s current liquidity constraints, we’ve made a difficult decision to suspend our operated drilling program this month and we will be releasing the rig after it completed drilling at current Osage wells.
Laying down the operated rig, will give us time to evaluate that results of the 35 stage completion design on 8 Osage and 2 Meramec wells to better understand how to optimally develop our acreage position and the impact of the electric submersible pump production.
We anticipate completing five operated wells during the third quarter, of which three will be Osage and two will be Meramec. We do plan on continuing to participate in select non-operated wells and renewing leases in order to maintain our acreage position.
I will now turn the call over to Mike for further remarks.
Michael Gerlich
Thanks, Stephen. I just have a few additional financial items to point out. While we are pleased with our production results, our financial results in the second quarter were mixed. Revenues from oil condensate natural gas and natural gas liquids before the effects of commodity derivative contracts totaled $19.5 million in the second quarter of 2018. Unfortunately commodity derivative contracts settled during the second quarter 2018 resulted in a $3.1 million realized increase in revenue.
For our midyear 2018 reserve report, we reclassified proved and developed or PUD reserves to unproved reserves due to the uncertainty regarding the funding required to develop those reserves. The reclass of PUD reserves of approximately 14.9 million barrels of oil equivalent, coupled with the sale of WEHLU’s proved reserves of 19.9 million barrels of oil equivalent resulted in midyear proved reserves of 10.5 million barrels of oil equivalent with an SEC PV 10 value of 124.9 million.
As a result of downward revision of our PUD reserve qualities, we recorded a non-cash pre-tax impairment of our oil and natural gas properties of approximately $18 million during the second quarter. As you can see from our guidance, we expect third-quarter net average daily production to the between 5,300 an d 5,600 barrels of oil equivalent.
The 5 wells Stephen mentioned being completed during the third quarter will most likely only marginally benefit Q3 production as they will be completed late in the quarter. As usual, you will find all guidance metrics in our earnings release.
Regarding liquidity, we ended the second quarter with approximately $51.1 million in available cash and cash equivalents, down from a $100.2 million for March 31, 2018. Our current cash position is approximately $32 million. Our capital budget for the remainder of 2018 is estimated to total approximately $45 million comprised of $34 million for drilling, completions in infrastructure cost, $6 million for unproved acreage extensions renewals and additions, and $5 million for other capitalized costs.
The remaining capital budget focuses on completing the five operated drill wells, participation in certain non-operated wells and lease renewal costs. We’ve established a large acreage position in the Oklahoma STACK play within a relatively contiguous acreage block comprising approximately 69,400 net course STACK surface acres that is currently 73% held by production.
We’ve worked to build an asset with substantial value in upside and worked hard to realize that value for the benefit of the company’s stakeholders. This is a challenging time for the company, its employees and its stakeholders. As mentioned earlier, the Board of Directors, Gastar’s Management and Company Advisors are working tirelessly to achieve the best outcome possible.
Again at this critical time and the strategic process, we don’t believe it is appropriate to take questions on this call. That concludes our remarks. Have a good day.
Operator
Great. Thank you ladies and gentlemen. This does conclude the teleconference. Thank you for your participation. You may disconnect your lines at this time.
Question-and-Answer Session
[No formal Q&A for this event]
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