Gastar Exploration, Ltd. (GST)
Gastar Exploration 8.625% Serie (GST-PA)
EXCO Resources Inc. (NYSE: XCO)
goo.gl
Hi Jurgis
I upped my GSTpA position by 25% after I read their recent earnings call transcript. This is a pretty big bet for me as I wanted to search out a "pure" undervalued natural gas play where the risk reward was favorable if/when NG prices revert to their historical normal price. I have looked at GSTpA and EXCO Resources Inc. (NYSE: XCO) as two companies that may provide this opportunity. Each are not w/o risk but for my purposes I believe both will show a beter than average return when NG prices move higher.
I own the preferrred stock as it is a safer bet for me than owning the common shares. I am satified that their cash flow is secure for at least another year and maybe longer based on (1) NG prices stay at current levels and/or move higher and (2) wells in process come in as expected and on budget. Cash flow from current and future production is balanced between cap x and funding their debt. Current projections seem to do both. The ace-in-the-whole is a potential land sale that will be used to strengthen cash position and/or increase their revolving credit facility and/or finance their 2013 and beyound Cap X.
The recent Gastar Exploration's CEO Discusses Q3 2012 Results - Earnings Call Transcript is quite good IF all is true and their projections come in as discussed.
Now looking at net results. On a reported basis, our net loss for the third quarter of 2012 was $83.5 million or $1.31 per diluted share. If you exclude the impairment and the impact of unrealized hedging activity, we broke even in third quarter of 2012; that compares to an adjusted net loss of $1.4 million or $0.02 per diluted share in the third quarter of last year and $4.1 million or $0.06 per diluted share for the second quarter of 2012.Cash flow from operations before working capital changes was $0.15 per diluted share compared to a nickel diluted share last year and $0.09 per diluted share in the previous quarter. Combined average daily production increased by 9% from the prior quarter, which exceeded our guidance of 35 million cubic feet to 37 cubic feet equivalent per day, due to production from nine new gross wells in the Marcellus since the end of the second quarter and Q3 one-time adjustments partially offset by gathering system downtime. There are a few wild cards in play too. First the stock and the preferred shares were sold off significantly due to a law suit filed by Chesapeake Energy Corporation (CHK). Second, the company has taken significant impairment write downs due to the way they must account for lower average NG prices. If NG prices rise, their proved reserves become more valuable so to me it's just a question of weather they have sufficient cash flows in their current production to sustain and pay their debt obligatiions (including the preferreds). Therefore, their assets remain the same with or w/o the impariment charges EXCEPT that there is some opportunity loss due to selling part of their NG reserves at historically low prices.
Third, if the company ever is taken out through a merger and/or a buy out, the preferred shares must be paid off at PAR value (ie. $25/share) w/ a preminum paid to PAR if done before 2014. This is the reward part of the deal especially when the preferred is selling at a 32% discount to PAR.
EXCO Resources Inc. (NYSE: XCO) is my other play on my undervalued NG theme. It's more of a long term buy and hold. The stock is selling at it's 200 day MA and my recent buys have been in the $6.50/share range.
The other NG play I gave up on was GMX Resources Inc. (GMXR). I do own a few GMX Resources, Inc. 9.25% Seri (GMXR-P) but thought that GST had better land assets w/ sustainable cash flows to make a bet on than GMXR. However, if you bought GMXR near it's recent lows, it has had a good recovery. So maybe GMXR is a good predictor of how GST may perform in the future.
My NG theme for the stocks mentioned above represents a 5.6% portfolio position. The GSTpA monthly distributions are deemed a return of capital. Therefore, I will be adding shares over time and selling off my high priced shares after holding one year and one day when there is a gain or booking losses after any 31 day hold or longer if/when I can buy below my cost basis. My strategy is to build a low cost position sell any high priced shares for a capital gain and be in a position to sell at or above par on any merger and/or buy out.
If cash flows decrease to the extent that they do not cover debt and/or cap x is reduced significantly, the exit strategy is to peel off 50% of the preferred shares and perhaps selling short some common shares to hedge the rest of the preferred position. I will have to re-evaluate my options if this occurs.
For me a value play w/ a good risk reward profile but does present some company specific risk if cash flows get reduced and/or the cost of defending their CHK lawsuit increases substantially.
EKS |
