Gastar Exploration settles dispute with Chesapeake

Houston-based Gastar Exploration Ltd. [NYSE: GST] said April 1 that it will acquire about 157,000 net acres in Oklahoma, repurchase nearly 6.8 million shares of common stock, and settle litigation with Oklahoma City-based Chesapeake Energy Corp. [NYSE: CHK] in an $85 million deal.

The deal is expected to close on or before June 7. The property purchase has an effective date of Oct. 1, 2012.

The acreage in Oklahoma’s Kingfisher and Canadian counties includes 176 producing wells with $32.4 million in estimated proved reserves. According to J. Russell Porter, Gastar’s president and CEO, the acquisition gives Gastar more than 250 net potential drilling locations in its mid-continent play. He added that the company intends to seek a joint venture partner for the new acreage.

“This acquisition of undeveloped acreage and producing properties in our Mid-Continent area will provide us a tremendous opportunity to secure a much larger position in what we believe has the potential to be a highly prolific new oil play,” said Porter. “Based on existing data, nearly half of the acquired acreage lies within what we expect to be the most prospective area for horizontal drilling of the Hunton Limestone formation. Found at depths of 8,000 to 9,000 feet, this formation is the horizontal target of our previously undisclosed Mid-Continent Oil Play.”

The deal also settles a lawsuit Chesapeake brought against Gastar in 2010 with respect to the Hilltop Prospect in Texas, said a Gastar spokesman.

“We are currently seeing compelling results from the second well in our Mid-Continent joint venture, the Mid-Con 2H well, which has averaged production of more than 968 barrels (87% oil) of crude oil equivalent per day for the last 10 days, with only a small percentage of the completion fluids recovered since production began in mid-February,” said Porter. “Based on internal projections, we believe that Hunton formation wells have the potential for average gross recoverable reserves of approximately 430,000 barrels of oil equivalent. With an estimated $5.2 million drilling and completion cost per well, we are anticipating very attractive rates of return.”

Porter added, “Our current plan is to drill approximately 12 gross (6.0 net) wells in 2013, of which eight are within the existing area of mutual interest (AMI) previously established in our Mid-Continent joint venture. Our first well outside of our existing Mid-Continent joint venture AMI, which will be operated by Gastar, is expected to spud late in the third quarter.  In 2014, we plan to drill eight wells (4.0 net) within the existing AMI and 16 operated wells (8.0 net) outside the AMI.  These wells will target the Hunton Limestone with lateral lengths of approximately 4,000 to 4,500 feet.  With this acquisition, we now have over 250 net potential drilling locations in our Mid-Continent play.”

Included in the transaction are 176 producing wells (half to be operated by Gastar) with an estimated present value of proved reserves (discounted at 10% using NYMEX futures pricing as of March 8) of $32.4 million, which holds around 19% of the acreage by production, according to a statement from Gastar. Current net daily production is about 177 Bbls of crude oil, 54 Bbls of NGLs and 3.5 MMcf of natural gas. Net proved reserves associated with the transaction include 494,269 barrels of oil, 270,508 barrels of natural gas liquids (NGLs) and 12.5 Bcf of natural gas, for a total of 2.8 MMBoe. These reserves are all classified as proved developed producing.

Gastar says it will fund the transactions from combination of the company’s available borrowings under its revolving credit facility, proceeds from the possible sale of East Texas assets, and the issuance of debt or preferred stock.

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