0001564590-18-029432.txt : 20181114 0001564590-18-029432.hdr.sgml : 20181114 20181114094134 ACCESSION NUMBER: 0001564590-18-029432 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 75 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181114 DATE AS OF CHANGE: 20181114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Gastar Exploration Inc. CENTRAL INDEX KEY: 0001431372 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 383531640 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-35211 FILM NUMBER: 181180804 BUSINESS ADDRESS: STREET 1: 1331 LAMAR STREET STREET 2: SUITE 650 CITY: HOUSTON STATE: TX ZIP: 77010 BUSINESS PHONE: (713) 739-1800 MAIL ADDRESS: STREET 1: 1331 LAMAR STREET STREET 2: SUITE 650 CITY: HOUSTON STATE: TX ZIP: 77010 FORMER COMPANY: FORMER CONFORMED NAME: Gastar Exploration USA, Inc. DATE OF NAME CHANGE: 20080402 10-Q 1 gst-10q_20180930.htm 10-Q gst-10q_20180930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED September 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM           TO             

Commission File Number: 001-35211

 

GASTAR EXPLORATION INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

38-3531640

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

1331 Lamar Street, Suite 650

 

 

Houston, Texas

 

77010

(Address of principal executive offices)

 

(Zip Code)

(713) 739-1800

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes     No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes     No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The total number of outstanding shares of common stock, $0.001 par value per share, as of November 9, 2018 was 218,928,494.

 

 


GASTAR EXPLORATION INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

For the three and nine months ended September 30, 2018

TABLE OF CONTENTS

 

 

 

 

 

Page

PART I – FINANCIAL INFORMATION

 

 

 

Item 1.

 

Financial Statements

 

 

5

 

 

Gastar Exploration Inc. and Subsidiaries Condensed Consolidated Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017

 

 

5

 

 

Gastar Exploration Inc. and Subsidiaries Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017 (unaudited)

 

 

6

 

 

Gastar Exploration Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows for the  Nine Months Ended September 30, 2018 and 2017 (unaudited)

 

 

7

 

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

 

 

8

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

37

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

56

Item 4.

 

Controls and Procedures

 

 

57

PART II – OTHER INFORMATION

 

 

 

Item 1.

 

Legal Proceedings

 

 

58

Item 1A.

 

Risk Factors

 

 

58

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

62

Item 3.

 

Defaults Upon Senior Securities

 

 

62

Item 4.

 

Mine Safety Disclosure

 

 

62

Item 5.

 

Other Information

 

 

62

Item 6.

 

Exhibits

 

 

63

SIGNATURES

 

 

66

 

 

2


 

General information about us can be found on our website at www.gastar.com. The information available on or through our website, or about us on any other website, is neither incorporated into, nor part of, this report.  Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other filings that we make with the U.S. Securities and Exchange Commission (“SEC”), as well as any amendments and exhibits to those reports, will be available free of charge through our website as soon as reasonably practicable after we file or furnish them to the SEC.  Information is also available on the SEC website at www.sec.gov for our U.S. filings.

 

 

 

3


Glossary of Terms

AMI

 

Area of mutual interest, an agreed designated geographic area where co-participants or other industry participants have a right of participation in acquisitions and operations

 

 

 

Bbl

 

Barrel of oil, condensate or NGLs

 

 

 

Boe

 

One barrel of oil equivalent determined using the ratio of six thousand cubic feet of natural gas to one barrel of oil, condensate or NGLs

 

 

 

FASB

 

Financial Accounting Standards Board

 

 

 

Gross acres

 

Refers to acres in which we own a working interest

 

 

 

Gross wells

 

Refers to wells in which we have a working interest

 

 

 

MBbl

 

One thousand barrels of oil, condensate or NGLs

 

 

 

MBbl/d

 

One thousand barrels of oil, condensate or NGLs per day

 

 

 

MBoe

 

One thousand barrels of oil equivalent, calculated by converting natural gas volumes on the basis of 6 Mcf of natural gas per barrel

 

 

 

MBoe/d

 

One thousand barrels of oil equivalent per day

 

 

 

Mcf

 

One thousand cubic feet of natural gas

 

 

 

MMBtu

 

One million British thermal units

 

 

 

MMcf

 

One million cubic feet of natural gas

 

 

 

MMcfe/d

 

One million cubic feet of natural gas equivalent per day

 

 

 

Net acres

 

Refers to our proportionate interest in acreage resulting from our ownership in gross acreage

 

 

 

NGLs

 

Natural gas liquids

 

 

 

NYMEX

 

New York Mercantile Exchange

 

 

 

PBU

 

Performance based unit comprising one of our compensation plan awards

 

 

 

PUD

 

Proved undeveloped reserves`

 

 

 

STACK Play

 

An acronymic name for a predominantly oil producing play referring to the exploration and development of the Sooner Trend of the Anadarko Basin in Canadian and Kingfisher Counties, Oklahoma.  References to the STACK Play is extended to adjacent counties.  

 

 

 

U.S.

 

United States of America

 

 

 

U.S. GAAP

 

Accounting principles generally accepted in the United States of America

 

 

 

WTI

 

West Texas Intermediate

 

 

4


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

GASTAR EXPLORATION INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

 

 

 

 

 

 

(in thousands, except share and per share data)

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

17,570

 

 

$

13,266

 

Accounts receivable, net of allowance for doubtful accounts of $1,953

 

 

20,906

 

 

 

38,575

 

Commodity derivative contracts

 

 

 

 

 

1,370

 

Prepaid expenses

 

 

2,302

 

 

 

960

 

Total current assets

 

 

40,778

 

 

 

54,171

 

PROPERTY, PLANT AND EQUIPMENT:

 

 

 

 

 

 

 

 

Oil and natural gas properties, full cost method of accounting:

 

 

 

 

 

 

 

 

Unproved properties, excluded from amortization

 

 

144,386

 

 

 

131,955

 

Proved properties

 

 

1,343,162

 

 

 

1,344,329

 

Total oil and natural gas properties

 

 

1,487,548

 

 

 

1,476,284

 

Furniture and equipment

 

 

3,615

 

 

 

3,838

 

Total property, plant and equipment

 

 

1,491,163

 

 

 

1,480,122

 

Accumulated depreciation, depletion and amortization

 

 

(1,196,792

)

 

 

(1,155,027

)

Total property, plant and equipment, net

 

 

294,371

 

 

 

325,095

 

OTHER ASSETS:

 

 

 

 

 

 

 

 

Restricted cash

 

 

25

 

 

 

370

 

Advances to operators

 

 

79

 

 

 

82

 

Other

 

 

 

 

 

405

 

Total other assets

 

 

104

 

 

 

857

 

TOTAL ASSETS

 

$

335,253

 

 

$

380,123

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable

 

$

20,228

 

 

$

24,382

 

Revenue payable

 

 

11,993

 

 

 

11,823

 

Accrued interest

 

 

7,808

 

 

 

7,298

 

Accrued drilling and operating costs

 

 

8,841

 

 

 

9,381

 

Advances from non-operators

 

 

623

 

 

 

1,445

 

Commodity derivative contracts

 

 

13,211

 

 

 

4,416

 

Commodity derivative premium payable

 

 

 

 

 

135

 

Other accrued liabilities

 

 

6,457

 

 

 

2,706

 

Total current liabilities

 

 

69,161

 

 

 

61,586

 

LONG-TERM LIABILITIES:

 

 

 

 

 

 

 

 

Long-term debt

 

 

373,161

 

 

 

342,952

 

Commodity derivative contracts

 

 

2,634

 

 

 

2,572

 

Asset retirement obligation

 

 

2,577

 

 

 

4,841

 

Total long-term liabilities

 

 

378,372

 

 

 

350,365

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

STOCKHOLDERS’ DEFICIT:

 

 

 

 

 

 

 

 

Preferred stock, 40,000,000 shares authorized

 

 

 

 

 

 

 

 

Series A Preferred Stock, par value $0.01 per share; 10,000,000 shares designated;

   4,045,000 shares issued and outstanding at September 30, 2018 and December 31, 2017,

   respectively, with liquidation preference of $25.00 per share

 

 

41

 

 

 

41

 

Series B Preferred Stock, par value $0.01 per share; 10,000,000 shares designated;

   2,140,000 shares issued and outstanding at September 30, 2018 and December 31, 2017,

   respectively, with liquidation preference of $25.00 per share

 

 

21

 

 

 

21

 

Common stock, par value $0.001 per share; 800,000,000 shares authorized at September 30, 2018

        and December 31, 2017, respectively; 218,933,504 and 218,874,418 shares issued and

        outstanding at September 30, 2018 and December 31, 2017, respectively

 

 

219

 

 

 

219

 

Additional paid-in capital

 

 

821,229

 

 

 

819,554

 

Accumulated deficit

 

 

(933,790

)

 

 

(851,663

)

Total stockholders’ deficit

 

 

(112,280

)

 

 

(31,828

)

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

$

335,253

 

 

$

380,123

 

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

5


GASTAR EXPLORATION INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

For the Three Months Ended

September 30,

 

 

For the Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(in thousands, except share

and per share data)

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and condensate

 

$

17,436

 

 

$

12,952

 

 

$

54,497

 

 

$

37,886

 

Natural gas

 

 

1,986

 

 

 

2,519

 

 

 

5,618

 

 

 

7,452

 

NGLs

 

 

2,092

 

 

 

2,757

 

 

 

7,315

 

 

 

7,527

 

Total oil, condensate, natural gas and NGLs revenues

 

 

21,514

 

 

 

18,228

 

 

 

67,430

 

 

 

52,865

 

(Loss) gain on commodity derivatives contracts

 

 

(2,925

)

 

 

(2,896

)

 

 

(17,710

)

 

 

3,782

 

Total revenues and other (loss) gain

 

 

18,589

 

 

 

15,332

 

 

 

49,720

 

 

 

56,647

 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production taxes

 

 

1,131

 

 

 

721

 

 

 

2,734

 

 

 

1,675

 

Lease operating expenses

 

 

5,469

 

 

 

6,178

 

 

 

17,749

 

 

 

16,396

 

Transportation, treating and gathering

 

 

 

 

 

436

 

 

 

 

 

 

1,187

 

Depreciation, depletion and amortization

 

 

7,460

 

 

 

6,059

 

 

 

24,026

 

 

 

16,762

 

Impairment of oil and natural gas properties

 

 

 

 

 

 

 

 

17,993

 

 

 

 

Accretion of asset retirement obligation

 

 

43

 

 

 

62

 

 

 

139

 

 

 

171

 

General and administrative expense

 

 

11,567

 

 

 

4,067

 

 

 

25,396

 

 

 

12,482

 

Total expenses

 

 

25,670

 

 

 

17,523

 

 

 

88,037

 

 

 

48,673

 

(LOSS) INCOME FROM OPERATIONS

 

 

(7,081

)

 

 

(2,191

)

 

 

(38,317

)

 

 

7,974

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(10,468

)

 

 

(10,159

)

 

 

(30,605

)

 

 

(29,744

)

Loss on early extinguishment of debt

 

 

 

 

 

 

 

 

 

 

 

(12,172

)

Investment income and other

 

 

22

 

 

 

51

 

 

 

62

 

 

 

166

 

LOSS BEFORE PROVISION FOR INCOME TAXES

 

 

(17,527

)

 

 

(12,299

)

 

 

(68,860

)

 

 

(33,776

)

Provision for income taxes

 

 

 

 

 

 

 

 

 

 

 

 

NET LOSS

 

 

(17,527

)

 

 

(12,299

)

 

 

(68,860

)

 

 

(33,776

)

Dividends on preferred stock

 

 

 

 

 

(1,206

)

 

 

(7,236

)

 

 

(8,443

)

Undeclared cumulative dividends on preferred stock

 

 

(3,618

)

 

 

(2,412

)

 

 

(3,618

)

 

 

(2,412

)

NET LOSS ATTRIBUTABLE TO COMMON

   STOCKHOLDERS

 

$

(21,145

)

 

$

(15,917

)

 

$

(79,714

)

 

$

(44,631

)

NET LOSS PER SHARE OF COMMON STOCK ATTRIBUTABLE TO COMMON STOCKHOLDERS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.10

)

 

$

(0.08

)

 

$

(0.38

)

 

$

(0.23

)

Diluted

 

$

(0.10

)

 

$

(0.08

)

 

$

(0.38

)

 

$

(0.23

)

WEIGHTED AVERAGE SHARES OF COMMON STOCK

   OUTSTANDING:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

212,192,850

 

 

 

209,072,232

 

 

 

211,296,176

 

 

 

190,745,688

 

Diluted

 

 

212,192,850

 

 

 

209,072,232

 

 

 

211,296,176

 

 

 

190,745,688

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

6


GASTAR EXPLORATION INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) 

 

 

For the Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(68,860

)

 

$

(33,776

)

Adjustments to reconcile net loss to net cash provided by (used in)

   operating activities:

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

24,026

 

 

 

16,762

 

Impairment of oil and natural gas properties

 

 

17,993

 

 

 

 

Stock-based compensation

 

 

3,439

 

 

 

3,990

 

Mark to market of commodity derivatives contracts:

 

 

 

 

 

 

 

 

Total loss (gain) on commodity derivatives contracts

 

 

17,710

 

 

 

(3,782

)

Cash settlements of matured commodity derivatives contracts, net

 

 

(6,196

)

 

 

5,602

 

Cash premiums paid for commodity derivatives contracts

 

 

(552

)

 

 

 

Amortization of deferred financing costs and debt discount

 

 

10,030

 

 

 

8,218

 

Paid-in-kind interest

 

 

20,179

 

 

 

 

Accretion of asset retirement obligation

 

 

139

 

 

 

171

 

Gain on sale of furniture and equipment

 

 

7

 

 

 

 

Loss on early extinguishment of debt

 

 

 

 

 

12,172

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

16,800

 

 

 

(13,466

)

Prepaid expenses

 

 

(1,430

)

 

 

(412

)

Accounts payable and accrued liabilities

 

 

4,233

 

 

 

13,657

 

Net cash provided by operating activities

 

 

37,518

 

 

 

9,136

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Development and purchase of oil and natural gas properties

 

 

(112,828

)

 

 

(81,906

)

Acquisition of oil and natural gas properties

 

 

(269

)

 

 

(54,462

)

Proceeds from sale of oil and natural gas properties

 

 

96,349

 

 

 

28,798

 

Application of proceeds from non-operators

 

 

(822

)

 

 

(1,915

)

Advances to operators

 

 

(917

)

 

 

(22

)

Purchase of furniture and equipment

 

 

(41

)

 

 

(409

)

Net cash used in investing activities

 

 

(18,528

)

 

 

(109,916

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from term loan

 

 

 

 

 

250,000

 

Proceeds from convertible notes

 

 

 

 

 

200,000

 

Repayment of senior secured notes

 

 

 

 

 

(325,000

)

Repayment of revolving credit facility

 

 

 

 

 

(84,630

)

Loss on early extinguishment of debt

 

 

 

 

 

(7,011

)

Proceeds from issuance of common stock, net of issuance costs

 

 

 

 

 

56,366

 

Dividends on preferred stock

 

 

(13,267

)

 

 

(19,298

)

Deferred financing charges

 

 

 

 

 

(10,991

)

Tax withholding related to restricted stock award vestings

 

 

(1,253

)

 

 

(586

)

Cash settlement of restricted shares

 

 

(511

)

 

 

 

Net cash (used in) provided by financing activities

 

 

(15,031

)

 

 

58,850

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH

 

 

3,959

 

 

 

(41,930

)

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD

 

 

13,636

 

 

 

71,529

 

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD

 

$

17,595

 

 

$

29,599

 

 

 

 

 

 

 

 

 

 

RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

17,570

 

 

$

13,266

 

Restricted cash

 

 

25

 

 

 

370

 

Cash and cash equivalents and restricted cash at end of period

 

$

17,595

 

 

$

13,636

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

7


GASTAR EXPLORATION INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1.

Description of Business

Gastar Exploration Inc. (the “Company” or “Gastar”) is a pure play Mid-Continent independent energy company engaged in the exploration, development and production of oil, condensate, natural gas and NGLs in the United States.  Gastar’s principal business activities include the identification, acquisition, and subsequent exploration and development of oil and natural gas properties with an emphasis on unconventional reserves, such as shale resource plays.  Gastar holds a concentrated acreage position in the normally pressured oil window of the STACK Play, an area of central Oklahoma which is home to multiple oil and natural gas-rich reservoirs including the Oswego limestone, Meramec and Osage bench formations within the Mississippi Lime, the Woodford shale and Hunton limestone formations.    

 

2.

Going Concern

These unaudited condensed consolidated financial statements as of and for the three and nine months ended September 30, 2018 have been prepared assuming the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date of issuance of these condensed consolidated financial statements.    

As previously reported, the Company’s ability to raise additional capital to pursue corporate objectives such as a drilling and development program at a cost of capital that enables the Company to achieve a profit has been significantly adversely affected by its current capital structure. While, historically, the Company has been able to reduce capital expenditures to better match available capital resources, for the reasons described below, the Company has reduced capital expenditures by suspending its operated drilling program.  A sustained suspension of the operated drilling program could create the potential for deterioration of its core business.  In addition, as a result of the recent further significant deterioration of the Company’s equity trading values, the Company’s common and preferred stock were delisted from the NYSE American LLC stock exchange (the “NYSE American”) and began trading on the OTCQB Venture Market (“OTCQB”).  Upon the filing of the Company’s petition for voluntary relief under Chapter 11 of the United States Bankruptcy Code (as described below), the Company’s common and preferred stock were automatically removed from quotation on the OTCQB.  The Company’s common and preferred stock commenced trading on the OTC Pink Operated by the OTC Markets Group Inc. (also known as the “OTC Pink”) under the same symbols.

To address the foregoing concerns, the Company and its advisors have considered strategic alternatives for recommendation to the board of directors (the “Board”) of the Company.  In connection with developing and evaluating alternatives for the Board, the Company and its advisors engaged in a restructuring process to consider potential strategic transactions, including financing, refinancing, sale or merger transactions and encouraged proposals from existing stakeholders and interested third-parties.  The Company also elected to suspend its current operated drilling and development program in order to preserve capital for other cash needs including debt service while it considered other strategic alternatives or a possible restructuring of the Company’s debt and equity.    

On August 21, 2018, the Company publicly filed a process letter that again invited proposals and informed the public how any interested party could participate and make a proposal.  The process letter established the bid deadline of October 1, 2018 (the “Bid Deadline”).  The Company received three bids on the Bid Deadline, none of which provided a basis for repaying the Company’s indebtedness described below.  The Company’s Board determined that none of these proposals presented an actionable alternative.

In parallel with the foregoing marketing process, the Company engaged with funds affiliated with Ares regarding a comprehensive financial restructuring transaction.  On October 26, 2018, the Company entered into a restructuring support agreement (the “RSA”) with (i) AF V Energy I Holdings, L.P., an affiliate of Ares (the “Consenting Term Lender”) and party to the Third Amended and Restated Credit Agreement, dated March 3, 2017 (as amended, restated, modified, or supplemented form time to time, the “Term Loan”) (ii) certain holders affiliated with Ares (the “Consenting Noteholders”) of the Company’s Convertible Notes due 2022 (the “Notes”) issued pursuant to the indenture dated March 3, 2017 (as amended, restated, modified or supplemented from time to time, the “Indenture”), by and among the Company, as issuer, the guarantors specified therein and Wilmington Trust, National Association, as trustee (the “Trustee”) and collateral agent and (iii) certain holders affiliated with Ares (the “Ares Equity Holders” together with the Consenting Term Lender and the Consenting Noteholders, the “Consenting Parties”) of the Company’s outstanding shares of common stock (the “Existing Common Equity”), to support a restructuring (the “Restructuring”) on the terms set forth in the term sheet annexed to the RSA (the “Restructuring Term Sheet”).  The RSA contemplates that the Company and a subsidiary would file for voluntary relief under chapter 11 (the “Chapter 11 Cases”) of the United States Bankruptcy Code (the “Bankruptcy Code”) in a United States Bankruptcy Court (the “Bankruptcy Court”) to implement the Restructuring pursuant to a “prepackaged” plan of reorganization (the “Plan”) and the various related transactions set forth in or contemplated by the Restructuring Term Sheet, the DIP Term Sheet (defined below) and the Exit Facility Term Sheet (defined below).  Shortly after entering into the RSA, the Company commenced solicitation of the Plan consistent with section 1126(b) of the Bankruptcy Code, which solicitation concluded on October 30, 2018.    

 

8


On October 31, 2018 (the “Petition Date”), the Company and a subsidiary commenced chapter 11 proceedings and filed the Plan under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The Company has filed a motion with the Bankruptcy Court seeking joint administration of their Chapter 11 Cases.  The Company will continue to operate its businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The Company expects ordinary-course operations to continue substantially uninterrupted during and after the Chapter 11 Cases.

Pursuant to the terms of the RSA and the Restructuring Term Sheet, the Consenting Parties and other interest holders will receive treatment under the Plan summarized as follows:

 

holders of claims under the DIP Facility (defined below) arising on account of the New Money Loans (defined below) will receive pro rata participation in the First Lien Exit Facility (defined below) in an amount equal to such claims arising on account of New Money Loans;  

 

 

holders of claims under the DIP Facility, other than claims arising on account of the New Money Loans, will receive (a) pro rata participation in the Second Lien Exit Facility (defined below) up to an aggregate amount of $200.0 million and (b) to the extent any such claims exceed $200.0 million, such excess will receive a pro rata share of 100% of the common equity in the reorganized Company (the “New Common Equity”);

 

 

holders of claims under the Term Loan will receive (a) to the extent there is remaining availability under the Second Lien Exit Facility, pro rata participation in the Second Lien Exit Facility in an equal face amount not to exceed $200.0 million and (b) to the extent any such claims remain outstanding, their pro rata share of 100% of the New Common Equity, subject to dilution upon the issuance of common stock upon exercise of the New Warrants described below and pursuant to a new management incentive plan to be entered into at the discretion of the board of the reorganized Company following emergence from bankruptcy (the “Management Incentive Plan”);

 

holders of claims under the Indenture will receive their  pro rata share of 100% of the New Common Equity, subject to dilution upon the issuance of common stock upon exercise of the New Warrants described below and pursuant to the Management Incentive Plan;

 

 

holders of claims arising out of any termination of the Company’s hedging or swap arrangements with Cargill, Inc. and NextEra Energy Marketing, LLC (collectively, the “Hedge Parties”) will receive payment in full in cash in monthly installments through December 2019 pursuant to new secured notes;

 

 

holders of claims arising pursuant to statutory liens will receive payment in full in cash in two equal installments on the effective date of the Chapter 11 Cases and six months following such date;

 

 

holders of claims arising from general unsecured obligations will receive payment in full in cash as set forth in the Plan;

 

 

subject to certain conditions, including that such holders not seek official committee status or the appointment of a trustee or examiner, or object to or otherwise oppose the consummation of the Plan, holders of Gastar’s 8.625% Series A Cumulative Preferred Stock and 10.75% Series B Cumulative Preferred Stock (collectively, the “Existing Preferred Equity”) will receive their pro rata share based on their liquidation preference plus accumulated but unpaid dividends accrued through October 31, 2018 of warrants to purchase 2.5% of the New Common Equity; and

 

 

subject to certain conditions, including that such holders not seek official committee status or the appointment of a trustee or examiner, or object to or otherwise oppose the consummation of the Plan, holders of the Existing Common Equity will receive their pro rata share of warrants to purchase 2.5% of the New Common Equity (together with the warrants listed in the previous bullet, the “New Warrants”).

In the event that a DIP Toggle Event (as defined in the Restructuring Term Sheet) has occurred, (i) holders of claims arising from general unsecured obligations will receive a pro rata share of the New Common Equity and (ii) all Existing Preferred Equity and Existing Common Equity and Subordinated Securities Claims will be canceled, released, and extinguished without distribution.  The occurrence of a DIP Toggle Event will not affect the other treatments contemplated by the RSA as listed above.

The RSA contains certain covenants on the part of each of the Company and the Consenting Parties, including limitations on the parties’ ability to pursue alternative transactions, commitments by the Consenting Parties to vote in favor of the Plan and commitments of the Company and the Consenting Parties to negotiate in good faith to finalize the documents and agreements governing the Plan. The RSA also provides for certain conditions to the obligations of the parties and for termination upon the

 

9


occurrence of certain events, including without limitation, the failure to achieve certain milestones and certain breaches by the parties under the RSA.

On October 26, 2018, the Company and the Hedge Parties entered into that certain Hedge Party Restructuring Support Agreement (the “Hedge Party RSA”).  The Hedge Party RSA and term sheet appended thereto provide for the treatment of claims held by Hedge Parties described above.  The Hedge Party RSA contains certain covenants on the part of each of the Company and the Hedge Parties, including commitments by the Hedge Parties to vote in favor of the Plan and commitments of the Company and the Hedge Parties to negotiate in good faith to finalize certain documents and agreements. The Hedge Party RSA also provides for certain conditions to the obligations of the parties and for termination upon the occurrence of certain events, including without limitation, the failure to achieve certain milestones and certain breaches by the parties under the Hedge Party RSA.

In connection with the Chapter 11 Cases, certain Consenting Parties and/or their affiliates have agreed to provide, on a committed basis, the Company with superpriority debtor-in-possession financing (the “DIP Facility”) on the terms set forth in the term sheet attached to the RSA (the “DIP Term Sheet”). The DIP Term Sheet provides that, among other things:

 

the DIP Facility shall be comprised of term loans in an aggregate amount of approximately $383.9 million, consisting of $100 million of new money loans (the “New Money Loans”) and approximately $283.9 million of refinanced term loan obligations outstanding under the Term Loan;

 

 

upon entry of and subject to a Bankruptcy Court order granting interim approval of the DIP Facility and subject to the satisfaction or waiver of additional conditions precedent, up to $15.0 million of the New Money Loans (the “Interim DIP Tranche”) may be drawn by the Company upon three business days’ notice in one or more draws in an amount that is not less than $2.5 million for the initial draw and not less than $500,000 for each subsequent draw (or, if less, the entire amount of the unused balance of the Interim DIP Tranche);

 

 

upon entry of and subject to a Bankruptcy Court order granting final approval (the “Final Order”) of the DIP Facility, and subject to the satisfaction or waiver of additional conditions precedent and an approved budget, up to $100.0 million of New Money Loans, minus any amounts of New Money Loans previously drawn by the Company prior to such date (the resulting amount, the “Final DIP Tranche”) may be drawn by the Company upon three business days’ notice in one or more draws in an amount not less than $500,000 for each draw (or, if less, in the entire amount of the unused balance of the Final DIP Tranche);

 

 

upon entry of and subject to the Final Order and subject to the satisfaction or waiver of additional conditions precedent, including the Company having demonstrated to the reasonable satisfaction of the DIP Lenders acting in good faith, the bona fide need for additional liquidity to preserve lease operating rights in response to actions taken or proposed to be taken by third parties, an amount equal to $100.0 million minus the amount of New Money Loans previously drawn by the Company prior to such date (the resulting amount, the “Reserve DIP Tranche”) may be drawn by the Company upon three business days’ notice in one or more draws in an amount not less than $500,000 for each draw (or, if less, in the entire amount of the unused balance of the Reserve DIP Tranche); and

 

 

subject to entry of the Final Order, approximately $283.9 million in outstanding term loan obligations consisting of principal and accrued and unpaid interest under the Term Loan as of the date of the commencement of the Chapter 11 Cases will be refinanced by loans (not constituting New Money Loans) funded under the DIP Facility.

The Company’s entry into the DIP Facility has been approved by the Bankruptcy Court on an interim basis. The Company’s entry into the DIP Facility on a final basis will be considered by the Bankruptcy Court at a future date.  The foregoing description of the DIP Term Sheet does not purport to be complete and is qualified in its entirety by reference to the final, executed documents memorializing the DIP Facility, as approved by the Bankruptcy Court.

In connection with the Chapter 11 Cases, certain Consenting Parties and/or their affiliates have agreed to provide, on a committed basis, the Company with an exit financing term loan facility (the “Exit Facility”) on the terms set forth in the term sheet attached to the RSA (the “Exit Facility Term Sheet”). The Exit Facility Term Sheet provides for, among other things, (a) a $100.0 million secured delayed draw term loan facility (the “First Lien Exit Facility”) comprised of (i) term loans consisting of New Money Loans funded under the DIP Facility and deemed funded under the First Lien Exit Facility on the effective date of the Plan and (ii) term loan commitments consisting of an amount equal to any undrawn commitment under the DIP Facility and (b) a secured term loan facility (the “Second Lien Exit Facility”) comprised of up to $200.0 million (as may be reduced by the Exit Lenders in their sole discretion on or prior to the effective date of the Plan), in aggregate principal amount of term loans deemed funded on the effective date of the Plan and consisting of DIP Claims and Term Loan Claims (each as defined in the RSA), as applicable (the loans under the First Lien Exit Facility and the Second Lien Exit Facility, collectively, the “Exit Loans”).  The Exit Loans may not be reborrowed once repaid.

 

10


The Exit Facility is subject to customary closing conditions and approval by the Bankruptcy Court, which has not been obtained at this time. The foregoing description of the Exit Facility Term Sheet does not purport to be complete and is qualified in its entirety by reference to the final, executed documents memorializing the Exit Facility, as approved by the Bankruptcy Court.

The Company’s filing of its petition for voluntary relief under Chapter 11 of the Bankruptcy Code constitutes an event of default that accelerated the Company’s obligations under its Term Loan and its Notes. Under the Bankruptcy Code, the creditors under these debt agreements are stayed from taking any action against the Company as a result of an event of default.  The transactions described and contemplated by the Plan are all subject to the Bankruptcy Court approval at a future date.  There can be no assurances the Bankruptcy Court will ultimately approve the transaction as described above.

The Company intends to complete a supplemental marketing process seeking proposal for transactions that are higher and better than the transactions contemplated by the Plan during the Chapter 11 Cases, with a bid deadline of December 17, 2018.  The Company intends to publicly disclose further details regarding the supplemental marketing process, including informing interested parties how they may participate and make a proposal, at a future date.  In the absence of a higher or better proposal, the Company intends to seek confirmation of the Plan at a hearing currently scheduled for December 20, 2018.    

Voluntary Reorganization Under Chapter 11

On October 31, 2018, the Company and its subsidiary (collectively, the “Debtors”) commenced Chapter 11 proceedings and filed the Plan for reorganization under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court for the Southern District of Texas.  The Debtors have filed a motion with the Bankruptcy Court seeking joint administration of their Chapter 11 Cases under the caption In re: Gastar Exploration Inc., et al.

Subject to certain exceptions, under the Bankruptcy Code, the filing of the petitions for voluntary relief in the Chapter 11 Cases automatically enjoined, or stayed, the continuation of most judicial or administrative proceedings or filing of other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the date of the filing of the petitions.  Accordingly, although the filing of the voluntary petitions triggered defaults on the Debtors’ debt obligations, creditors are stayed from taking any actions against the Debtors as a result of such defaults, subject to certain limited exceptions permitted by the Bankruptcy Code.  Absent an order of the Bankruptcy Court, substantially all of the Debtors’ pre-petition liabilities are subject to settlement under the Bankruptcy Code.

For the duration of the Chapter 11 Cases, the Company’s operations and ability to develop and execute its business plan are subject to the risks and uncertainties associated with the Chapter 11 process.  As a result of these risks and uncertainties, the number of the Company’s shares of common stock and stockholders, assets, liabilities, officers and/or directors could be significantly different following the outcome of the Chapter 11 Cases, and the description of the Company’s operations, properties and capital plans included in this quarterly report may not accurately reflect its operations, properties and capital plans following the Chapter 11 process.

In particular, subject to certain exceptions, under the Bankruptcy Code, the Debtors may assume, assign or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions.  Generally, the rejection of an executory contract or unexpired lease is treated as a pre-petition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves the Debtors of performing their future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a pre-petition general unsecured claim for damages caused by such deemed breach.  Counterparties to such rejected contracts or leases may assert unsecured claims in the Bankruptcy Court against the applicable Debtors’ estate for such damages.  Generally, the assumption of an executory contract or unexpired lease requires the Debtors to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance.  Accordingly, any description of an executory contract or unexpired lease with the Debtor in this quarterly report, including where applicable a quantification of the Company’s obligations under any such executory contract or unexpired lease with the Debtor is qualified by any overriding rejection rights the Company has under the Bankruptcy Code.  Further, nothing herein is or shall be deemed an admission with respect to any claim amounts or calculations arising from the rejection of any executory contract or unexpired lease and the Debtors expressly preserve all of their rights with respect thereto.

Although the Company intends to pursue the restructuring in accordance with the terms set forth in the Plan and the RSA, the transactions necessary to implement that restructuring are subject to, among other things, Bankruptcy Court approval, and there can be no assurance that the Company will be successful in completing a restructuring or any other similar transaction on the terms set forth in the Plan and the RSA, on different terms or at all.  

Furthermore, although the Company will continue to operate its businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court, these factors raise substantial doubt about the Company’s ability to continue as a going concern.  These unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of the

 

11


going concern uncertainty.  If the Company cannot continue as a going concern, adjustments to the carrying values and classification of its assets and liabilities and the reported amounts of income and expenses could be required and could be material.

 

 

3.

Summary of Significant Accounting Policies

The accounting policies followed by the Company are set forth in the notes to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Form 10-K”) filed with the SEC. Please refer to the notes to the consolidated financial statements included in the 2017 Form 10-K for additional details of the Company’s financial condition, results of operations and cash flows. No material item included in those notes has changed except as a result of normal transactions in the interim or as disclosed within this report.

The unaudited interim condensed consolidated financial statements of the Company included herein are stated in U.S. dollars and were prepared from the records of the Company by management in accordance with U.S. GAAP applicable to interim financial statements and reflect all normal and recurring adjustments, which are, in the opinion of management, necessary to provide a fair presentation of the results of operations and financial position for the interim periods. Such financial statements conform to the presentation reflected in the 2017 Form 10-K except for revenue which, for the three and nine months ended September 30, 2018, is presented net of treating, transportation and gathering costs pursuant to current authoritative accounting guidance. The current interim period reported herein should be read in conjunction with the financial statements and accompanying notes, including Item 8. “Financial Statements and Supplementary Data, Note 3 – Summary of Significant Accounting Policies,” included in the 2017 Form 10-K.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates with regard to these financial statements include the valuation of convertible debt, estimate of proved oil and natural gas reserve quantities and the related present value of estimated future net cash flows.

The unaudited interim condensed consolidated financial statements of the Company include the consolidated accounts of all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

Subsequent Events

In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued and has disclosed certain subsequent events in these condensed consolidated financial statements, as appropriate.

Restricted Cash

Cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements are recorded in restricted cash in the current assets section of our consolidated balance sheet.  At September 30, 2018 and December 31, 2017, the Company had restricted cash of $25,000 and $370,000, respectively.

 

Accounts Receivable

Accounts receivable are reported net of the allowance for doubtful accounts.  The allowance for doubtful accounts is determined based on a review of the Company’s receivables.  Receivable accounts are charged off when collection efforts have failed or the account is deemed uncollectible.  During 2016, the Company determined that a receivable account from a third-party natural gas and NGLs purchaser would no longer be collectible as a result of the third-party purchaser filing for bankruptcy.  A summary of the activity related to the allowance for doubtful accounts is as follows:

 

 

12


 

 

September 30,

2018

 

 

December 31,

2017

 

 

 

(in thousands)

 

Allowance for doubtful accounts, beginning of period

 

$

1,953

 

 

$

1,953

 

Expense

 

 

 

 

 

 

Reductions/write-offs

 

 

 

 

 

 

Allowance for doubtful accounts, end of period

 

$

1,953

 

 

$

1,953

 

Recent Accounting Developments

Leases.  In February 2016, the FASB issued updated guidance to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and enhance disclosures regarding key information about leasing arrangements.  Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases. The new lease guidance also simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Additionally, in January 2018, the FASB issued an amendment to the updated guidance to permit an entity to elect an optional transition practical expedient to not evaluate under the new guidance land easements that exist or expire before the adoption of the updated guidance and that were not previously accounted for as leases under previous guidance.  In July 2018, the FASB issued an additional amendment that permits an entity to elect an additional transition method to the existing modified retrospective transition requirements.  Under the new transition method, an entity could adopt the provisions of this update by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without adjustment to the financial statements for periods prior to adoption.  Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard may continue to be in accordance with the previous lease guidance.  This amendment also allows a practical expedient that permits lessors to not separate non-lease components from the associated lease component if certain conditions are present. The amendments in this update are effective beginning on January 1, 2019 and should be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.  Early adoption is permitted.  The Company has commenced analyzing its lease contracts but has not yet determined what the effects of adopting this updated guidance will be on its consolidated financial statements.  The Company will adopt this updated guidance in the first quarter 2019 and anticipates that it will recognize a right of use asset and lease liability on the adoption date. The Company plans to apply practical expedients provided in the standards update that allow, among other things, not to reassess contracts that commenced prior to the adoption. The Company also anticipates electing a policy not to recognize right of use assets and lease liabilities related to short-term and immaterial leases.

Revenue Recognition.  On January 1, 2018, the Company adopted Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“ASC 606”) using the modified retrospective method of transition.  Under the modified retrospective approach, the standard has been applied to all existing contracts as of the date of initial application with the cumulative effect of applying the standard, if any, recognized in retained earnings.  

The impact of adoption on our current period results is as follows:

 

Three Months Ended

September 30, 2018

 

 

Nine Months Ended

September 30, 2018

 

 

Under ASC 606

 

 

Under ASC 605

 

 

Increase (Decrease)

 

 

Under ASC 606

 

 

Under ASC 605

 

 

Increase (Decrease)

 

 

(in thousands)

 

 

(in thousands)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and condensate

$

17,436

 

 

$

17,448

 

 

$

(12

)

 

$

54,497

 

 

$

54,530

 

 

$

(33

)

Natural gas

 

1,986

 

 

 

2,752

 

 

 

(766

)

 

 

5,618

 

 

 

7,708

 

 

 

(2,090

)

NGLs

 

2,092

 

 

 

2,593

 

 

 

(501

)

 

 

7,315

 

 

 

8,629

 

 

 

(1,314

)

Total oil and condensate, natural gas and NGLs revenues

$

21,514

 

 

$

22,793

 

 

$

(1,279

)

 

$

67,430

 

 

$

70,867

 

 

$

(3,437

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transportation, treating and gathering

$

 

 

$

1,279

 

 

$

(1,279

)

 

$

 

 

$

3,437

 

 

$

(3,437

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

21,514

 

 

$

21,514

 

 

$

 

 

$

67,430

 

 

$

67,430

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

$

21,514

 

 

$

21,514

 

 

$

 

 

$

67,430

 

 

$

67,430

 

 

$

 

The primary impact to our revenues as a result of the adoption of ASC 606 is the recording of transportation, treating, gathering and compression expenses (“Post-Production Expenses”) as a direct reduction to revenues instead of our historical practice

 

13


of presenting such expenses gross in transportation, treating and gathering.  These changes are due to the conclusion that the Company represents the agent in the sale of natural gas and NGLs under its gas processing and marketing agreements with midstream entities in accordance with the control model in ASC 606.  As a result, the Company is required to record revenue on a net basis for amounts expected to be received from third-party customers through the marketing process, with Post-Production Expenses incurred subsequent to control of the product(s) transferring to the midstream entity at the wellhead being netted against revenue.

 

 

4.

Property, Plant and Equipment

The amount capitalized as oil and natural gas properties was incurred for the purchase and development of various properties in the U.S., specifically in the State of Oklahoma.  

The following table summarizes the components of unproved properties excluded from amortization at the dates indicated:

 

 

 

September 30,

2018

 

 

December 31, 2017

 

 

 

(in thousands)

 

Unproved properties, excluded from amortization:

 

 

 

 

 

 

 

 

Drilling in progress costs

 

$

800

 

 

$

4,772

 

Acreage acquisition costs

 

 

122,455

 

 

 

113,191

 

Capitalized interest

 

 

21,131

 

 

 

13,992

 

Total unproved properties excluded from amortization

 

$

144,386

 

 

$

131,955

 

 

The full cost method of accounting for oil and natural gas properties requires a quarterly calculation of a limitation on capitalized costs, often referred to as a full cost ceiling calculation. The ceiling is the present value (discounted at 10% per annum) of estimated future cash flow from proved oil, condensate, natural gas and NGLs reserves reduced by future operating expenses, development expenditures, abandonment costs (net of salvage) to the extent not included in oil and natural gas properties pursuant to authoritative guidance and estimated future income taxes thereon. To the extent that the Company's capitalized costs (net of accumulated depletion and deferred taxes) exceed the ceiling at the end of each reporting period, the excess must be written off to expense for such period. Once incurred, this impairment of oil and natural gas properties is not reversible at a later date even if oil and natural gas prices increase. The ceiling calculation is determined using a mandatory trailing 12-month unweighted arithmetic average of the first-day-of-the-month commodities pricing and costs in effect at the end of the period, each of which are held constant indefinitely (absent specific contracts with respect to future prices and costs) with respect to valuing future net cash flows from proved reserves for this purpose.  The 12-month unweighted arithmetic average of the first-day-of-the-month commodities prices are adjusted for basis and quality differentials in determining the present value of the proved reserves.  The table below sets forth relevant pricing assumptions utilized in the quarterly ceiling test computations for the respective periods noted before adjustment for basis and quality differentials:

 

 

 

2018

 

 

 

Total Year to Date

Impairment

 

 

September 30

 

 

June 30

 

 

March 31

 

Henry Hub natural gas price (per MMBtu)(1)

 

 

 

 

 

$

2.91

 

 

$

2.92

 

 

$

3.00

 

WTI oil price (per Bbl)(1)

 

 

 

 

 

$

63.43

 

 

$

57.67

 

 

$

53.49

 

Impairment recorded (pre-tax) (in thousands)

 

$

17,993

 

 

$

 

 

$

17,993

 

 

$

 

 

 

 

2017

 

 

 

Total Year to Date

Impairment

 

 

September 30

 

 

June 30

 

 

March 31

 

Henry Hub natural gas price (per MMBtu)(1)

 

 

 

 

 

$

3.00

 

 

$

3.01

 

 

$

2.73

 

WTI oil price (per Bbl)(1)

 

 

 

 

 

$

49.81

 

 

$

48.95

 

 

$

47.61

 

Impairment recorded (pre-tax) (in thousands)

 

$

 

 

$

 

 

$

 

 

$

 

 

(1)

For the respective periods, oil and natural gas prices are calculated using the trailing 12-month unweighted arithmetic average of the first-day-of-the-month prices based on Henry Hub spot natural gas prices and WTI spot oil prices.

The Company could potentially incur additional ceiling test impairments in the future should commodities prices decline or the value of its estimates of proved reserves declines. However, it is difficult to project future impairment charges in light of numerous variables involved.

 

14


The Company’s proved reserves estimates and their estimated discounted value and standardized measure will also be impacted by changes in lease operating costs, future development costs, production, exploration and development activities and estimated future income taxes.  The ceiling limitation calculation is not intended to be indicative of the fair market value of the Company’s proved reserves or future results.

The Company’s undeveloped reserves previously classified as proved, other than the PUD reserves associated with certain wells developed prior to June 30, 2018 or in the process of drilling and completion at June 30, 2018, were reclassified as unproved at June 30, 2018 due to the inability to meet the reasonable certainty criteria for proved reserves, as prescribed under the SEC rules, primarily due to the uncertainties regarding the availability and timing of funds required to develop these reserves.  As of September 30, 2018, the Company has no PUD reserves since all prior PUD reserves recognized at June 30, 2018 have been converted to proved developed.  

WEHLU Sale

On January 23, 2018, the Company entered into a definitive agreement of sale and purchase (the “Sale Agreement”) to divest its interest in the West Edmund Hunton Lime Unit (“WEHLU”) and adjacent undeveloped acreage to Revolution Resources, LLC, for $107.5 million, subject to, among other customary adjustments, adjustments for a property sale effective date of October 1, 2017 (the “WEHLU Sale”).  Pursuant to the Sale Agreement, the WEHLU Sale closed on February 28, 2018.  After effective date and other adjustments of approximately $9.9 million primarily related to revenues and direct operating expenses, net cash proceeds from the WEHLU Sale were approximately $97.6 million.  The WEHLU Sale was reflected as a reduction to the full cost pool and no gain or loss was recorded related to the divestiture as such divestiture did not result in a significant change to the depletion rate.

The following unaudited pro forma results for the three months ended September 30, 2017 and the nine months ended September 30, 2018 and 2017 show the effect on the Company's consolidated results of operations as if the WEHLU Sale had occurred at the beginning of the periods presented.  The pro forma results are the result of excluding from the statement of operations of the Company the revenues and direct operating expenses for the properties divested adjusted for (1) the reduction in asset retirement obligation liabilities and accretion expense for the properties divested and (2) the reduction in depreciation, depletion and amortization expense as a result of the divestiture.  As a result, certain estimates and judgments were made in preparing the pro forma adjustments.

 

For the Three Months Ended September 30, 2017

 

 

(in thousands, except  per share data)

 

 

(Unaudited)

 

Revenues

$

6,749

 

Net loss

$

(19,133

)

Loss per share:

 

 

 

Basic

$

(0.09

)

Diluted

$

(0.09

)

 

 

For the Nine Months Ended

September 30

 

 

2018

 

 

2017

 

 

(in thousands, except  per share data)

 

 

(Unaudited)

 

Revenues

$

42,983

 

 

$

28,796

 

Net loss

$

(81,973

)

 

$

(55,356

)

Loss per share:

 

 

 

 

 

 

 

Basic

$

(0.39

)

 

$

(0.26

)

Diluted

$

(0.39

)

 

$

(0.26

)

STACK Leasehold Acquisition

On March 22, 2017, the Company completed the acquisition of additional working and net revenue interests in approximately 66 gross (9.5 net) producing wells and 5,670 net acres of additional undeveloped STACK Play leasehold in Kingfisher County, Oklahoma, effective March 1, 2017, for $51.4 million (the “STACK Leasehold Acquisition”).  Prior to the completion of the STACK Leasehold Acquisition, the Company held an interest in the majority of acquired producing wells and acreage.  The Company accounted for the STACK Leasehold Acquisition as an asset acquisition.  

 

15


Development Agreement

On October 14, 2016, the Company executed an agreement with STACK Exploration LLC (the “Investor”) (the “Development Agreement”) to jointly develop up to 60 Gastar operated wells in the STACK Play in Kingfisher County, Oklahoma (the “Drilling Program”).  The Drilling Program targeted the Meramec and Osage formations within the Mississippi Lime in a contract area within three townships covering approximately 32,900 gross (21,200 net) undeveloped mineral acres under leases held by the Company. The Company serves as the operator of all Drilling Program wells.      

Under the Development Agreement, the Investor funded 90% of the Company’s working interest portion of drilling and completion costs to initially earn 80% of the Company’s working interest in each new well (in each case, proportionately reduced by other participating working interests in the well).  As a result, the Company paid 10% of its working interest portion of such costs for 20% of its original working interest.  

The proposed Drilling Program wells were to be mutually developed in three tranches of 20 wells each.  The locations of the first 20 wells, comprised of 18 Meramec formation wells and two Osage formation wells, were mutually agreed upon by the Company and the Investor.   Participation in the second tranche of 20 Drilling Program wells was to be at the election of the Investor and the third tranche of 20 wells would require mutual consent.  On July 31, 2017, the Investor elected not to participate in the second tranche of wells.  With respect to each 20-well tranche, when the Investor has achieved an aggregate 15% internal rate of return for its investment in the tranche, Investor’s interest will be reduced from 80% to 40% of the Company’s original working interest and the Company’s working interest increases from 20% to 60% of the original working interest.  When a tranche internal rate of return of 20% is achieved by the Investor, Investor’s working interest decreases to 10% and the Company’s working interest increases to 90% of the working interest originally owned by the Company.  

If and when the final reversion of working interest in the completed 20 well tranche should occur, the Investor has the right, but not the obligation, for a period of six months to cause the Company to purchase the Investor’s remaining interest in