Nov. 5, 2009 (PR Newswire) --

HOUSTON, Nov. 5 /PRNewswire-FirstCall/ -- Gastar Exploration Ltd. (NYSE Amex: GST) today reported financial and operational results for the three months and nine months ended September 30, 2009. Please note that all common share and per share amounts reported in this earnings release reflect the 1-for-5 common share reverse split, which occurred on August 3, 2009.

Financial Results

Net income for the third quarter of 2009 was $112.3 million, or $2.29 per diluted share, and contained several special items, including a $127.6 million gain on the sale of the Company's Australian assets, a foreign transaction gain of $7.6 million related to the sale of the Australian assets, early debt extinguishment expense of $15.9 million, a $3.3 million unrealized natural gas hedging loss and a $495,000 non-cash warrant derivative loss. For the third quarter of 2008, net income was $3.0 million, or $0.07 per diluted share, including a $3.4 million unrealized natural gas hedging gain. Excluding the special items, as described above for both periods, the Company would have recorded a net loss of $3.2 million, or $0.07 per share, for the third quarter of 2009, versus a net loss of $426,000, or $0.01 per share, for the third quarter of 2008.

Net cash flow from operations for the third quarter of 2009 was a deficit of $2.7 million, down from $16.8 million of positive cash flow for the third quarter of 2008. Our cash flow from operations before working capital changes for the third quarter of 2009 was a deficit of $1.1 million, compared to $7.0 million of positive cash flow in the third quarter of 2008.

Excluding the unrealized natural gas hedging loss, natural gas and oil revenues in the third quarter of 2009 decreased 39% to $7.6 million from revenues reported in the third quarter of 2008. This decrease was due to a 48% decline in realized natural gas prices, partially offset by a 16% increase in production volumes, primarily in East Texas. Average daily production for the third quarter of 2009 was 23.3 MMcfe, compared to 20.2 MMcfe for the third quarter of 2008 and 25.6 MMcfe for the second quarter of 2009. During the latest quarter, we elected to curtail our East Texas production by approximately 1.9 MMcf per day due to low natural gas prices. Due to recent improvements in natural gas prices, in late October, we discontinued production curtailments and returned our contracted rig to drilling in East Texas.

During the three months ended September 30, 2009, approximately 81% of our natural gas production was hedged. The realized effect of this hedging program was an increase of $2.2 million in revenues, reflecting an increase in total price received from $2.46 per Mcf to $3.50 per Mcf. The realized effect of hedging in the third quarter of 2008 was a decrease of $569,000 in revenues, reflecting a decrease in total price received from $6.98 per Mcf to $6.67 per Mcf. The unrealized non-cash effect of our hedging program was a loss of $3.3 million for the third quarter of 2009 and a gain of $3.4 million for the third quarter of 2008.

Lease operating expense (LOE) was $1.8 million in the third quarter of 2009, compared to $1.9 million in the third quarter of 2008 and $1.4 million in the second quarter of 2009. LOE per Mcfe decreased 20% to $0.82 in the third quarter, compared to $1.03 per Mcfe during the third quarter of last year. Excluding workover expense and other non-recurring costs, our lease operating expenses were $0.66 per Mcfe for the third quarter of 2009 compared to $0.95 per Mcfe for the same period in 2008. The decrease in the rate per Mcfe was primarily due to higher current quarter production volumes and a decrease in property taxes of $0.06 per Mcfe, due to lower natural gas prices.

Operations Review and Update

As previously reported, we completed the sale of our Australian assets in July 2009 and, to date, have received approximately $231.0 million (AU$298.0 million), excluding taxes and transaction expenses, of the aggregate purchase price of $232.6 million (AU$300.0 million). We are scheduled to receive the remaining approximate $1.6 million (AU$2.0 million) upon receipt of certain government approvals. We may be paid, assuming current foreign exchange rates, an additional approximate $17.5 million (AU$20.0 million) pre-tax in early 2010 if certain gross reserve certification targets for the PEL 238 coalbed methane project are achieved. The sale agreement also acknowledges the retention of our right to future cash payments of up to $10.0 million pursuant to a pre-existing farm-in agreement in the event that certain production thresholds are reached on PEL 238. Neither the gross reserve certification target receivable nor the production threshold receivables were accrued as of September 30, 2009, as the probability of earning the receivables was not determinable.

In East Texas, net production for the third quarter of 2009 from the Hilltop area averaged 20.0 MMcfe per day, down from 22.0 MMcfe per day in the second quarter of 2009, but up from 14.5 MMcfe per day in the third quarter of 2008. The 38% year-over-year increase in volumes is due to the production from three wells completed, eight wells recompleted and limited workover operations over the 12-month period. The sequential decline is due to the curtailment of approximately 1.9 MMcf per day due to low natural gas prices and natural decline as a result of no new wells being drilled during the period.

Capital expenditures for the third quarter of 2009 in East Texas were $1.9 million, which was primarily related to recompletion activities. In late October, we resumed our drilling program in East Texas with the spudding of the Donelson #4 well, an approximate 19,000-foot lower Bossier test. We expect this well will take approximately three months to drill. For the remainder of 2009 and fiscal year 2010, we are planning three additional lower Bossier exploratory wells and up to 11 recompletions in East Texas.

In October 2009, we commenced drilling our first vertical Marcellus Shale well, the Yoho #1, in West Virginia. The well was drilled to a depth of 6,600 feet and is waiting on fracture simulation and flow testing, which is scheduled to be completed during the first half of November. We are currently seeking pipeline capacity for the well's anticipated production but do not expect any sales until at least mid-2010. For the remainder of 2009 and fiscal year 2010, we currently anticipate that we will drill at least five additional vertical Marcellus wells. We plan on generating a development plan utilizing horizontal drilling based on the results of our initial vertical wells.

In the third quarter, we drilled five shallow vertical wells in Appalachia and now have a total of 15 shallow wells in the area. Currently, eight are on production, and the remaining wells are scheduled to be on production in the next 75 days. This shallow well drilling program continues to be conducted to hold certain leases by production. We plan to drill up to 15 additional shallow wells by the end of 2010. For the three months ended September 30, 2009, net production from the Appalachia area averaged approximately 0.4 MMcfe per day.

Our current acreage position in the Marcellus Shale play in West Virginia and Pennsylvania is approximately 39,300 gross (35,800 net) acres, of which the majority is considered to be in the core, over-pressured area of the Marcellus play in close proximity to wells being drilled by other operators.

Liquidity and Capital Budget

On July 13, 2009, we used proceeds from the sale of our Australian assets to repay the $13.0 million outstanding under our secured revolving credit facility and $27.5 million to repay in full our term loan. On August 7, 2009, we repurchased all of our outstanding $100.0 million 12¾% senior secured notes at a price of 106.375% of par, plus accrued and unpaid interest, in accordance with the terms of the governing indenture by tendering payment of $108.7 million to the noteholders. During the third quarter, we also repaid, at par, $10.3 million of our convertible subordinated debentures and the remaining $300,000 of our subordinated unsecured note payable.

At September 30, 2009, the Company had cash and cash equivalents of $27.6 million and a net working capital deficit of approximately $18.2 million. The working capital deficit is primarily the result of $19.7 million of convertible subordinated debentures scheduled to mature on November 20, 2009 being classified as current portion of long-term debt. On October 28, 2009, we executed an amended and restated revolving credit facility with an available borrowing base of $47.5 million, of which only a $100,000 letter of credit is outstanding. The revolving credit agreement is scheduled to mature on January 2, 2013. The revolving credit facility has no monthly amortization and is subject to standard semi-annual redeterminations.