Gastar Utica Update (1)
Transcript of Gastar Utica Update (1)
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GASTAR EXPLORATIONWhat is the Utica worth?
Union Square Research Group
[email protected] 3/13/14
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Disclaimer
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As of the publication date of this report, the author, employees of Union Square Research
Group, LLC (USRG)and their families hold long positions and may own option interest in
Gastar Exploration. Clients of USRG may also hold long or short positions in the securitiesmentioned and may buy or sell such securities at any time and without the knowledge of
USRG. This report represent the opinions of USRG. The Author has obtained all information
herein from sources we believe to be accurate and reliable. However, such information is
presented asis,without warranty of any kind whether express or implied. All expressions of
opinion are subject to change without notice, and the Author does not undertake to update or
supplement this presentation or any information contained herein. This document is forinformational purposes only. The Authors opinions and estimates constitute a best efforts
judgment and should be regarded as indicative, preliminary and for illustrative purposes only.
Any investment involves substantial risks. This reports estimated fundamental value only
represents a best efforts estimate of the potential fundamental valuation of a specific security,
and is not expressed as, or implied as, assessments of the quality of a security, a summary of
past performance, or an actionable investment strategy for an investor. This document does not
in any way constitute an offer or solicitation of an offer to buy or sell any investment or security.
To the best of the Authorsabilities and beliefs, all information contained herein is accurate
and reliable. Investors should conduct independent due diligence on all securities and
companies discussed in this document and develop a stand-alone judgment of the relevant
markets prior to making any investment decision.
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Investment OpportunityRapid run-up in share price overshadows a dramatic
increase in NAV during 2013.
We believe the current share price is below the private
market value of the two major producing assets.
The sell side hasnt yet given the company credit for Uticashale upside potentially worth an incremental $5/share
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Operations
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West Virginia
Contiguous blocked up land
position across roughly 16,000net acres in the super rich
Marcellus shale (Utica rights
across 13,000+ net acres)
Oklahoma
120,000+ net acre position in the
high-return emerging Hunton
Limestone oil play
Two high-IRR development areas
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West Virginia High-return Marcellus shale
development project
~35 MMcfe/day production (1/3 liquids)
~16,000 net acres in the liquids rich
fairway
40% IRRs, 57+ net undrilled locations
Utica shale upside potential Potential 100% IRRs, 80+ net locations
Significant near term upside from
exploration largely funded by others
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Oklahoma Non-shale oil reservoir
~18 MMcfe/day production (2/3 liquids)
120,000+ net acres (200+ future locations)
Horizontal wells access natural fractures in
oil impregnated limestone reservoir
Lower cost & lower risk
High IRR play (60%+ IRR) is less variable
than Miss Lime
No large wastewater disposal costs
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Valuation Methodology
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Union Square Research Group has been at the forefront ofunconventional oil and gas resource valuation. For more
information see: Getting Ahead by Drilling Down.
Evaluation of geological aspects of a petroleum
system and reservoir predict ultimate recoveries,
consistency of results, and geographic sweet spots.
Evaluation of both the legal and geographic details of a
companys leasehold position is a crucial step, without
which it is impossible to build an accurate development
model.
Building conservative type-curves based on all relevant
producing wells as well as analogous historic results (whereappropriate) and state production data allows the creation of a
realistic development model.
If accurate information is gathered in the first three steps, it is
possible using conservative assumptions to build a discounted
cash flow model of field development. This is the methodology
used by sophisticated acquirers of assets of this type.
DCF
MODEL
TYPE-CURVE
GEOLOGY
LEASEHOLD
https://sumzero.com/sp/shaleassetshttps://sumzero.com/sp/shaleassets -
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Valuation
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What is the Utica exposure worth? Two major data points:
American Energy Partners (Aubrey McClendon)recent acquisition from Hess
McClendon paid $924 million to purchase 74,000 net acres in thedry gas Utica shale from Hess (January 29th, 2014)
$12,486 per net acre deal metric (no significant production)
Two December 2013 dry gas wells brought online at ~18MMcf/day
Recent Operator Results
Gulfport (GPOR) reported its first dry gas Utica well came online at30.3 MMcf/day (November 5th, 2013)
Magnum Hunter (MHR) reported its first dry gas Utica well came
online at 32.5MMcf/day (February 14th, 2014)
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Valuation
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Dry gas Utica well results improve to the South and areexpected to improve to the West (deeper/higher pressure)
HessCross Creek A 2H-20
17.7 MMcf/day
HessSmithfield A 1H-2718.1 MMcf/day
Gulfport
Irons 1-4H30.3 MMcf/day
Magnum HunterStadler #3UH32.5 MMcf/day
AEP/Hess
acquisition area
shown in yellow
($12,486/acre)
Indicated dry
gas Utica sweet
spot shown ingreen
Gastar acreage
shown in blue
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Valuation
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Marcellus + Hunton Liabilities + Utica Upside
We value the Marcellus and Hunton Limestone assetson a risked development basis
Utica upside potentially adds $2.645.28 per share
At AEP/Hess metric, GastarsUtica is worth an incremental $162.3million or $2.64 per share ($9.61 per share total60% upside)
Well results and geology suggest Gastarsacreage may be twice asvaluable as the acreage Hess sold, which would add $325 million or
$5.28 per share ($12.25 per share total104% upside)
Value ($MMs) Per Share
Marcellus $455.5 $7.39
Hunton Limestone $451.0 $7.32
Long Term Debt ($325.0) ($5.28)
Perpetual Preffered Shares ($152.0) ($2.47)
Total equity value: $429.5 $6.97
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