Description

Gastar Exploration, Inc. (Amex: GST) – VIC Writeup

As a note: this is a summary of a much larger investment thesis. Please see the below link to access the whole write up. Further while this is focused on the equity we think the bonds are very attractive and should offer a 14% type total return in the next year.

Gastar Exploration, Inc. (“GST” or the “Company”) is an independent energy company engaged in the exploration, development and production of natural gas, condensate, oil and NGLs in the U.S.   The Company is currently pursuing the development of liquids-rich natural gas in the Marcellus Shale play in West Virginia/Ohio and oil in the Mid-Continent area of the U.S.  GST currently has 188,700 net acres in the Marcellus and Hunton regions of the US (see map on following page), ~300 Bcfe of proven reserves (~50mm boe), a pro forma PV-10 value of $575mm, and average daily production of +60mmcfe (~10mboe/d). 

Gastar currently trades sub $6.00 per share, implying an EV of ~$750mm.  Gastar offers significant value underpinning its existing stock price; we think the Company offers +50% upside, with the potential to gain +100% in 2014 based on the following: 

(i)                   The current stock price is entirely supported by the Company’s existing production and its stated drilling plan in the Marcellus (~$5.60 based on our NAV analysis). 

(ii)                 Counter to some sell side research, which essentially penalizes GST for taking its current EV/EBITDA valuation, GST is undervalued based a host of comparative metrics beyond just EV/EBITDA.  As noted above, this is due in large part to the 2013 transactions that enabled GST to acquire valuable (albeit risky) acreage at below fair value. 

(iii)                There are near term drilling catalysts, most notably its first operated well in the MidCon. In addition, the 7H well (inside the AMI) results have just come out; these were quite strong vs. the Company’s type curve.

(iv)                GST has been one of the only public players in the midcon play and on a relative basis the region doesn’t get nearly as much press as the other plays in the US.  This is starting to change with Newfield/Marathon, etc. getting into the action.  At the very least, this additional activity will likely give sell side analysts more comfort to move up their risked rates, leading to higher implied NAVs and likely higher price targets.

(v)                 The CEO has articulated specific steps to get the Company in a position to sell, merge, or otherwise create a liquidity event for shareholders in ’14 or ’15, as spelled out in our write up. 

Given all of this, we think the Company has the potential to move well north of 50% in the coming months as the market gets more comfortable with the OK play, and we can see a path to $10.00+ per share with a few of these catalysts coming to fruition.

Disclaimer:  The author of this idea presently has a long position in securities of this issuer and may trade in and out of these positions without notice.  The data contained herein are prepared by the author from publicly available sources and the author's independent research and estimates (except for the disclaimer which I took from someone else :) ).  No representation or warranty is made as to the accuracy of the data or opinions contained herein.

Catalyst

Catalysts

• Positive well results in the mid-con (including additional AMI well results), with results expected to come out in early 2014
• Positive drilling results in the Utica, likely 2H ‘14
• Progress with Williams
• Potential sale of the Marcellus
• Knock-on impact from proximal drilling by other E&Ps
• Additional coverage from sell side analysts (including new shops recently brought on in their preferred offering) and upgrades as sell-side feels comfortable ‘de-risking’ their NAV models

Risks

• Falling oil / gas prices would weigh on the entire sector (note: gst does operate a hedging program)
• Poor drilling results in the midcon, particularly in the GST-operated region
• Poor drilling results from competing firms in the area
• Poor results or a delay in the Utica test well (albeit we feel this option is received for free).