Gastar Exploration Inc. (NYSE MKT: GST) announced that it has executed a definitive agreement with a large 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 Development Agreement.
Gastar is a pure play Mid-Continent independent energy company and holds a concentrated acreage position in what is believed to be the core of the STACK Play, with multiple oil and natural gas-rich reservoirs including the Meramec, Oswego, Osage, Woodford and Hunton formations.
For the 60-well program in Kingfisher County, Gastar’s private equity partner will finance 90% of the company’s drilling and completion cost obligations and earn 80% of its working interest for each new well drilled under the agreement, the company said.
The 60 wells will be split into three tranches of 20 wells each. Of the first 20 wells, 18 will target the Meramec and two will target the Osage. The investors will determine the locations of the next 20 wells, while the last 20 well locations will be determined by mutual consent, Gastar said.
For each 20-well tranche, once the investor has reached a 15% internal rate of return (IRR), its share of Gastar’s working interest will go from 80% to 40%, with the company’s share increasing from 20% to 40%. When 20% IRR has been achieved the investor’s share will further decrease to 10%.
Key highlights of the Development Agreement are:
- Enhances Gastar’s ability to hold acreage by production, reducing future lease renewal costs;
- Increased drilling activity allows for more rapid delineation of Gastar’s STACK acreage;
- Investor earns only an interest in the wellbores drilled under the Drilling Program, with Gastar retaining all operational control and right to keep offset formation locations at its full original working interest.
- Gastar may book offsetting proved undeveloped locations at full original working interest; and
- Gastar’s 10% carried working interest and projected future reversionary interests will increase production and cash flow while reducing capital requirements.
Gastar also announced a $71 million deal to sell noncore assets mainly located in northeast Canadian County, OK, to an undisclosed third party. The sale involves allocated value for 19,100 net acres and current production of 181 boe/d from 25 gross (11.2 net) wells 32% weighted to oil, the company said.
Gastar CEO J. Russell Porter said the noncore sale will improve liquidity and “allow us to focus on and accelerate our core STACK delineation program in northern Kingfisher and southern Garfield Counties” in Oklahoma.
Some proceeds from Gastar’s divestiture will be used to pay down the balance on its $100 million revolver line. The company said about 20%, or $14.2 million, of the sales price, will pay down corporate debt. The transaction is expected to close on or before Nov. 8, with an Aug. 1 effective date.
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