GASTAR EXPLORATION ORD (NYSEAMERICAN: GST) Is an Undervalued Play on Rising Crude Prices

As this is written, January US crude futures are trading at $58.61, up 2.11%, in the wake of Thursday’s OPEC meeting at Vienna, which agreed to extend their production cut deal through to the end of 2018.

The deal to cut 1.2 mb/d from OPEC, plus nearly 0.6 mb/d from non-OPEC countries, will run from January to December 2018. That timed with data from the EIA that showed U.S. oil production went through the roof in September, rising by a solid 290,000 bpd from a month earlier, hitting 9.48 mb/d. This is increasing evidence that oil prices above $50 per barrel have been a powerful incentive for the US shale industry to ramp up production. Oil prices have jumped 20% since the beginning of September.

These developments augur well for US crude oil producers, particularly the smaller sized ones. One such stock is GASTAR EXPLORATION ORD (NYSEAMERICAN: GST), a pure play Mid-Continent independent energy company that holds exploration acreage in the STACK Play, an area of central Oklahoma which is home to multiple oil and natural gas-rich reservoirs.

GASTAR EXPLORATION ORD (NYSEAMERICAN: GST) Revamps Drilling and Operating Procedures

Operational Glitches from Previous Quarters Hit Third Quarter Financials

Net loss attributable to shareholders was $15.9 million (loss of $0.08 per share) compared to a net loss of $3.8 million (loss of $0.03 per share) in the corresponding quarter last year.

The increase in loss was primarily due to higher expenditure on lease operating expenses, G&A expenses and depreciation and amortisation. A lot of this could be attributed to production delays owing to operational problems in previous quarters.

(However, the year ago quarter had a credit of $10.1 million on account of litigation settlement.)

Revenues totalled $18.2 million, before adjusting for hedge contracts, up 26% from $14.5 million in the year ago quarter, and a 6% increase from the previous quarter in 2017.

Drilling Improvements

However, the quarter is notable for improvements made in operating procedures. J. Russell Porter, Gastar’s President and CEO said the company had reduced the average number of days needed to drill a well from approximately 19 days to 11 days.  Drilling difficulties, which both lowered costs and created operating efficiencies, have been eliminated.  “With drilling time now nearly half of what it was previously, we can effectively execute our drilling plan with only one rig and expect to continue drilling with one rig into 2018,” he said.

It may be recalled that the company’s JV agreement with STACK Exploration LLC was cancelled when various problems arose during drilling or completion, such as equipment failures.

On the earnings call, the president and CEO gave much of the credit for the operational improvement to Stephen Roberts, who was appointed chief operating officer in June.

Well completion processes and design were also revamped, and the new design Gen 3 wells are producing significantly more total fluid volumes, the company stated.

It is estimated that the company now saves $300,000-$400,000 per well.

Management is also committed to running a tight ship, because executives hold nearly 10.2 million shares of the company’s capital.

GASTAR EXPLORATION ORD (NYSEAMERICAN: GST) Realisations

For the nine months ended September 30, the company realised average sales price of $52.78 per barrel of oil and condensate ($47.03 per barrel excluding the impact of hedging), and $2.80 per MCF of natural gas ($2.71 per MCF excluding the impact of hedging).

For the nine months “our oil and NGL pricing as a percent of WTI posted price was 102% and 43%, respectively, while natural gas averaged 91% of Henry Hub,” said Michael A. Gerlich, CFO, SVP, Treasurer and Corporate Secretary, on the earnings call.

This should work to the company’s advantage in a scenario of rising energy prices.

GASTAR EXPLORATION ORD (NYSEAMERICAN: GST) Divestment of WEHLU Acreage

The company has taken a strategic decision to dispose of the WEHLU acreage, located in Oklahoma County. It may be noted that the company is totally focused on the STACK play, and intends to use the WEHLU disposal proceeds for better financing its core activities.

“We’re pleased with the strong interest and offers we have received on our WEHLU acreage and are optimistic that we can come to an agreement that should result in a successful divestiture by year-end,” the company said on its earnings call.

Even without the WEHLU disposal, the company is not open to any stringent action from a bank or creditor because its long-term debt is held by Ares Management (NYSE:ARES), a major shareholder.

GASTAR EXPLORATION ORD (NYSEAMERICAN: GST) Is Undervalued

A recent analysis of the intrinsic value of the company put the net value of the assets, after adjusting debt, at $527 million or $2.41 per share, based on third-quarter numbers.

Compare that with the share price of $1.06 prevailing as at the time of writing today.

That’s a very substantial discount of over 56% being assigned by the market, and it perhaps does not realize that favourable conditions are coming together for the company.

GASTAR EXPLORATION ORD (NYSEAMERICAN: GST) Conclusion

In summary, investors should consider buying the stock as the company will benefit from:

  • rising crude oil prices
  • continuing improvement in drilling practices
  • successful new GEN 3 well design
  • the proposed WEHLU asset disposal
  • the likelihood of a merger with a contiguously located E&P company that will realize economies of scale and synergy savings
  • the market’s mis-pricing of the company’s intrinsic value

 

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