Gastar Exploration Ltd. announced that it has entered into a definitive agreement to acquire proven reserves and undeveloped leasehold interests in Kingfisher and Canadian counties, Oklahoma from Chesapeake Energy Corporation, repurchase Chesapeake's common shares of the Company and settle all litigation for $85 million. The acquisition includes drilling rights omin approximately 157,000 net acres that adjoin Gastar's existing Mid-Continent acreage and approximately 2.8 million barrels of oil equivalent (MMBoe) of proven reserves. The transaction is expected to close on or before June 7, subject to customary closing adjustments, and with a property purchase effective date of Oct. 1, 2012.
"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 J. Russell Porter, Gastar's president and CEO. "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.
"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 ten days, with only a small percentage of the completion fluids recovered since production began in mid-February. 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."
"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," Porter said.
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 percent using NYMEX futures pricing as of March 8) of $32.4 million, which holds approximately 19 percent of the acreage by production. Current net daily production is approximately 177 barrels of crude oil, 54 barrels of NGLs and 3.5 million cubic feet of natural gas. Net proved reserves associated with the transaction include 494,269 barrels of oil, 270,508 barrels of natural gas liquids (NGL) and 12.5 Bcf of natural gas, for a total of 2.8 MMBoe. These reserves are all classified as proved developed producing.
In conjunction with the acquisition, Gastar agreed to repurchase from Chesapeake 6,781,768 shares of Gastar common stock (approximately 9.9 percent of Gastar's total outstanding common shares) at a price of $1.44 per share based on a twenty day moving average price as of Friday, March 22, which represents 100 percent of Chesapeake's holdings in Gastar. In addition, Gastar and Chesapeake have agreed to settle all current litigation between the two companies, conditioned upon the closing of the stock purchase. As previously disclosed, Chesapeake filed a lawsuit against Gastar in October 2012 in U.S. District Court for the Southern District of Texas seeking rescission of certain 2005 transactions with Gastar and reimbursement of additional well costs stated to have been expended by them.
The closing of the proposed property acquisition, stock repurchase and settlement for $85 million is subject to satisfaction of customary closing conditions and delivery of the total acquisition purchase of $75.2 million (subject to adjustment for an acquisition effective date of October 1, 2012) and stock repurchase price of $9.8 million on or before June 7. In the event that Gastar does not close the acquisition by such date, Chesapeake may terminate the property acquisition agreement, but Gastar may elect to pay for the stock repurchase and effect the lawsuit settlement assuming sufficient funding is available.
The transactions are expected to be funded from a combination of Gastar'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. Subsequent to closing, Gastar also intends to pursue a joint venture partner for the new acreage to reduce the company's debt and help fund the planned exploration and development program.
Update on Existing Mid-Continent Acreage
Gastar's previously acquired Mid-Continent oil play acreage consists of approximately 51,700 gross (21,700 net) acres in Major, Garfield and Kingfisher counties in Oklahoma acquired in a joint venture with a third party operator. The primary target of this acreage is also the Hunton Limestone formation. Gastar's second well in the play began producing Feb. 15 and has produced a daily average rate for the most recent ten days of 853 barrels of oil, 687 million cubic feet of natural gas and 411 barrels of completion fluids. Less than 7% of completion fluids have been recovered to date. The production rates to date from the second well have significantly exceeded those of the first well due to better placement of the lateral within the formation and improved completion techniques.
Completion operations are underway on a third horizontal well in Gastar's existing Mid-Continent acreage, with initial flow back operations expected to commence in mid-April. This well has a 4,300-foot horizontal lateral that is being completed using the same techniques employed on the second well. A fourth horizontal well was spud Feb. 16 and completion operations should commence early April.
Gastar's existing acreage is subject to a joint venture with a third party operator which includes an area of mutual interest (AMI) that includes approximately 20,000 net acres that are being acquired in these transactions. Our existing partner will have the right to participate in the acquisition of 50 percent of the proved reserves and leasehold within the existing AMI on the same terms as Gastar is acquiring these interests.
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