Gastar Exploration reported financial results for the three months ended March 31, 2010.
Net income for the first quarter of 2010 was $27,000, or $0.00 per basic and diluted share, including an $849,000 cash tax benefit related to a 2010 amended assessment of taxes owed on the 2009 sale of the Company's Australian assets. This compares to a net loss of $1.5 million, or $0.04 per share in the first quarter of 2009, excluding the effect of a $68.7 million non-cash impairment of natural gas and oil properties.
Net cash flow from operations for the first quarter of 2010 was $7.4 million, compared to $13.3 million in the same period last year.
Natural gas and oil revenues were $6.8 million in the first quarter, down from $13.5 million a year ago. The decrease in revenues was the result of a 35% decrease in sales volumes and a 23% decrease in commodity prices. Average daily production was 19.6 million cubic feet of natural gas equivalent (MMcfe) for the first quarter of 2010 compared to 30.0 MMcfe per day for the same period in 2009. Of the decrease in volumes, 80% was due to lower East Texas production and 20% was due to production declines in Wyoming.
During the three months ended March 31, 2010, approximately 70% of our natural gas production was hedged. The realized effect of hedging on natural gas sales was a decrease of $1.0 million in revenues and resulted in a decrease in total price received from $4.35 per Mcf to $3.78 per Mcf. The realized hedge impact includes $1.0 million of amortization of prepaid put purchase premiums. Excluding the non-cash put premium amortization, the realized effect of hedging would have been a gain of $41,000, composed of $739,000 of NYMEX hedge gains offset by $698,000 of regional basis losses. We also sold weighted average $6.92 calls on approximately 3.3 MMBtu per day for the period April 2010 through December 2012, yielding an additional $1.1 million in hedging cash for the quarter. For the remainder of 2010, we have approximately 55% of our estimated future natural gas production hedged at an average NYMEX floor price of $5.83.
Lease operating expense (LOE) was $1.7 million in the first quarter of 2010, down from $1.9 million a year ago. LOE per Mcfe increased to $0.99 in the first quarter of 2010 compared to $0.70 per Mcfe during the first quarter of 2009. The increase per Mcfe was primarily due to lower production volumes.
Operations Review and Update
In East Texas, first quarter net production from the Hilltop area averaged 17.0 MMcfe per day, down from 20.1 MMcfe per day in the fourth quarter of 2009. The lower production was due to natural declines in field production and the periodic shutting in of the Belin #1 well to perform four recompletion operations that commenced January 2010. Gastar's average net daily production in the Belin #1 well during the fourth quarter of 2009 was 2.8 MMcfe per day compared to 0.3 MMcfe per day in the first quarter of 2010. In March, while testing production from the fourth re-completion in the Belin #1, the well began producing significant amounts of formation sand due to a suspected casing failure. We have successfully milled through the damaged portion of the casing and are now evaluating options to repair the casing and return the well to production. The Belin #1 is not expected to contribute to second quarter production and there continues to be a risk that we may not be successful in returning the lower zones to production in the well. Gastar has a 50% before payout working interest in the Belin #1 and a related 36.7% net revenue interest.
We are continuing to drill a sidetrack operation on the Donelson #4 well to a revised total depth of 18,800 feet targeting the lower Bossier formation, as previously announced. Based on previous log information obtained before the current sidetrack operation, we expect the well to be completed by mid-June in the lower Bossier target sands. The current estimate to drill and complete the Donelson #4 well, net of estimated reimbursements under existing well control insurance policies, is approximately $15.3 million gross ($10.2 million net). Gastar has a 67% before payout working interest and an approximate 50% before payout net revenue interest in the well.
Also in March, we successfully performed a workover of the Parker #1 well, which was previously not producing, for a gross expense of approximately $700,000 (net $350,000). At the end of the first quarter, the well was producing 1.3 MMcf per day. Gastar has a 50% before payout working interest and an approximate 39.5% before payout net revenue interest in the well.
Capital expenditures for the first quarter in East Texas were $6.1 million.
Currently, we have one drilling rig operating in East Texas. Once the sidetrack operations have been completed on the Donelson #4, the rig is expected to commence drilling the Streater #1 well, targeting the middle Bossier sands at a total depth of 18,000 feet. The Streater well is designed as a step-out well which is intended to expand the proven extent of the middle Bossier formation and add new proven reserves. Also in the second quarter, we intend to drill the Wildman #6-H, a horizontal well designed to test the Glen Rose Limestone. We previously drill stem tested the Glen Rose in the Lone Oak Ranch #4 well at approximately 220 barrels of oil per day. We plan to secure a second rig and commence drilling of the horizontal test well by mid-May. The Wildman #6-H will be drilled vertically to approximately 8,500 feet and horizontally to a total depth of 13,399 feet for a gross cost of $2.5 million. Subject to joint interest partner election, Gastar's working interest in the well will range from 67% to 100%.
In Appalachia, during the first quarter, we drilled one additional shallow vertical well targeting the Devonian formation as a part of our program to hold by production certain acreage in the Marcellus Shale play. As of the end of the first quarter, we had drilled 16 gross (14.8 net) Devonian wells in the area since inception of the program, with 12 on production and the remaining four wells scheduled to be on production in the next 30 days. In the first quarter of 2010, net production from the Appalachian area averaged approximately 0.4 MMcfe per day.
In June, we plan to commence drilling our first horizontal well targeting the Marcellus Shale, the Wengert #1 well in Marshall County, West Virginia. The horizontal lateral section in the well should be in excess of 4,000 feet. We hold a 100% working interest in the well, and due to its proximity to infrastructure, if successful, it could be brought on production by year-end.
In order to accelerate and extend the development of our Marcellus Shale acreage, we are attempting to finalize an agreement with an offset operator to pool acreage in Butler County, Pennsylvania near that company's existing infrastructure. If finalized, we expect to hold an approximate 38% interest in seven proposed horizontal wells that will be drilled from one pad at a gross cost of approximately $3.5 million each. We expect drilling to begin in July 2010, with the operator planning to drill all seven wells before commencing completion operations. If successful, we would expect first production from these wells in early 2011. However, there is no assurance at this time that we will be able to finalize the agreement and participate in the drilling of the seven wells.
J. Russell Porter, Gastar's President and CEO, stated, "During the quarter, we experienced a series of operational challenges in East Texas that materially affected our production, however we believe that we will be able to resolve these issues and restore higher production levels by the third quarter. For the balance of 2010, we expect to drill at least three wells in East Texas, including one horizontal well to test the oil potential of the Glen Rose formation.
"We are also planning to drill our first Marcellus Shale horizontal well in the second quarter, and we are looking forward to establishing a joint venture with an offset operator to expedite the exploration and development of a portion of our acreage in Pennsylvania. We believe that pooling acreage and participating in joint ventures is an excellent way to accelerate activities and de-risk portions of our leasehold in the Marcellus Shale play."
Liquidity and Capital Budget
At March 31, 2010, the Company had cash and cash equivalents of $11.7 million. Planned capital expenditures for our properties for the remainder of 2010 total $45.0 million, consisting of $27.7 million in East Texas, $14.3 million in Appalachia, $1.1 million in the Powder River Basin and an additional $1.9 million for capitalized interest and other costs. We plan on funding this capital activity through our existing cash balances, internally generated cash flows from operating activities and from our revolving credit facility.
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