Gastar Exploration, Ltd.

Q4 2010 Earnings Call

Gastar Exploration, Ltd. (AMEX:GST)

Earnings Call Transcript
Friday, March 11, 2011 10:00 AM ET

Call Participants
Executives Analysts
Lisa Elliott Joshua Young
Vice President

J. Porter Ronald Mills

Chief Executive Officer, President, Chief Operating Officer Johnson Rice & Company, L.L.C.
and Non-Independent Director

Michael Gerlich Stephen Berman

Chief Financial Officer, Principal Accounting Officer and Pritchard Capital Partners, LLC
Vice President

Jeffrey Hayden
Rodman & Renshaw, LLC

Derrick Whitfield
Canaccord Genuity

Neal Dingmann
SunTrust Robinson Humphrey, Inc.

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Gastar Exploration, Ltd. Q4 2010 Earnings Call

Presentation

Operator
Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Gastar Exploration's Fourth
Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Lisa Elliott with
DRG&L. Please go ahead.

Lisa Elliott
Thank you, Alicia. And good morning, everyone. Before I turn the call over to management, I do have the usual items to
go over. If you'd like to receive alerts to future news releases, please go to the Investor Relations page of Gastar's
website, that's www.gastar.com. Please sign up for those automatically. A replay will be available shortly by webcast
where it'll be archived on the company's IR website, and a telephone replay will be available for one week. The phone
number and access codes are in yesterday's press release.

Today, this call may contain forward-looking statements. And so management believes these statements are based on
reasonable expectations, they can give no assurance that they will prove to be correct. These statements are subject to
certain risks and uncertainties and assumptions including, among other things, market conditions, oil and natural gas
price volatility, uncertainties inherent in oil and gas drilling, production in operations and estimating reserves,
unexpected future capital expenditures and access to capital, competition, litigation, government regulation and other
factors. Those factors are described in the company's Form 10-K, which was filed on Thursday, March 10, 2011, and
can be found in the Investor Relations section of its website.

Should one or more of these risks materialize, recent underlying assumptions prove to be incorrect, actual results may
vary materially from those expected. And today's call may also include a discussion of probable or possible reserves and
use terms like reserve potential and upside or other descriptions of non-proved reserves, which are more speculative
than the estimates of proved reserves and accordingly are subject to greater risks. Information related on this call
speaks only as of today, March 11, 2011, so any time-sensitive information may no longer be accurate as of the time of
any replay.

Now I'd like to turn the call over to Russ Porter, Gastar's President and Chief Executive Officer. Russ?

J. Porter
Thanks, Lisa. And good morning, everyone. And as usual, Mike Gerlich, our CFO, is here with me this morning. In 2010,
we laid the groundwork to diversify our portfolio of opportunities from almost 100% reliance on dry gas with the potential
to produce substantial volumes of oil from our East Texas acreage and condensate and natural liquids from our
Marcellus acreage. We can't do anything about the poor natural gas pricing environment that I believe could be with us
for quite some time.

But our folks seen on the prospectivity of the Glen Rose and Eagle Ford/Woodbine formations or Eaglebine, as we refer
to it, that underlie our existing East Texas acreage and by acquiring additional acreage in West Virginia, Pennsylvania
with high-value condensate and natural gas liquids, we have positioned Gastar to benefit going forward from the
historically high oil and natural gas liquids prices. This will continue to be our strategy for 2011 and until gas prices
improve. In fact, about 59% of our drilling CapEx budget for 2011 will test these higher value liquids prospects.

Also in 2010, we established a joint venture with a strong financial partner, Atinum from South Korea, that will provide us
with the resources to dramatically increase our drilling program in the Marcellus. As 2011 got underway, we had cash in
the bank, no debt and tremendous opportunity. We'll go into more detail in a moment about our capital plans. I'd like to
begin with a look at our year-end reserve position plus highlights of the fourth quarter. Mike will then cover the financial
details and I'll come back with a look ahead at the year and then our operational plans.

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Gastar Exploration, Ltd. Q4 2010 Earnings Call
Looking first our reserve position. Despite the poor natural gas pricing environment, we replaced more than 100% of our
reserves in 2010. At year-end 2010, total proved reserves were approximately 50.3 Bcf equivalent composed of 49.9 Bcf
natural gas, 51,000 barrels of oil. That's an increase of about 3% from 2009 reserve level. Of the 50.3 Bcfe, 83% are
proved developed reserves. Roughly 90% or 45 Bcfe of our reserves are in East Texas, and about 5.5% in Appalachia,
and 4.5% in Wyoming. Our extensions and discoveries were 6 Bcfe plus an additional 2.6 Bcfe primarily related to
upwards performance revisions. The PV10 value of our reserves at year end was $67.3 million using the 12-month
average first day of the month pricing method the SEC adopted at the end of 2009. That compares with the PV10 value
of $45.6 million at the end of 2009.

Quickly looking at financial results for the fourth quarter. Excluding the impact of an unrealized hedging loss and a small
litigation expense accrual, fourth quarter earnings totaled $325,000 or $0.01 per share compared to the adjusted net
loss of $748,000 or $0.02 per share a year ago. Please refer to the table at the back of yesterday's news release for a
complete list of special items in both years. On a reported basis, we had a net loss of $2.9 million or $0.06 per share for
the fourth quarter of 2010 versus reported net income of $12.9 million or $0.26 per share in the fourth quarter of last
year. Keep in mind that in the fourth quarter of 2009, we recognized an additional gain of $13.2 million net of income
taxes related to the sale of our Australian assets.

For the full year 2010, adjusted net results were roughly flat versus 2009. Excluding special items in both years, 2010
net loss was $3.3 million versus $3.2 million in 2009. On a reported basis, the net loss in 2010 was $12.5 million versus
earnings of $48.8 million in 2009. Again, that 2009 include $140.8 million after-tax gain from the Australian sale, partly
offset by $68.7 million ceiling impairment. Again, those adjustments are detailed in the earnings release.

From an operational standpoint, by mid-year of 2010, we had resolved the problems with the Belin #1 and Donelson #4
wells that disrupted our trend of growing production and total company production was up 14% from the third quarter.
We expect to see more meaningful production growth throughout the year with first production from the Marcellus
expected around the third quarter of 2011. Mike will come back to this in a moment with some more detail as well as a
look at pricing.

Looking now at our operating activity in East Texas. In late November, we began drilling the Belin #2 well, which is a
lower Bossier task a down turn default lock adjacent to the Belin #1 well. We reached a total depth of 19,650 feet at the
end of February, and we logged approximately 130 net feet of pay at the lower Bossier within five separate sand
intervals.

Because of the continuing tightness in frac services, we're hopeful we can frac and complete the well and get it on
production by late April. We hold a 66.7% working interest before payout in the Belin #2 well. As I mentioned in the last
call, we plan to drill the Belin #3 well with spudding for that well planned in mid-March. The drilling of these two
additional wells exposes us to meaningful potential reserve additions that will allow us to hold a sizable lease position in
the Hilltop area that would otherwise expire. These leases have Bossier and Knowles gas potential as well as Eaglebine
oil potential. Again, we have 66.7% working interest in the Belin #3 well.

We also continue to drill and test oil potential in the Glen Rose and the Eagle Ford/Woodbine formations in East Texas.
In late February, we frac-ed two Glen Rose tests that were drilled in the fourth quarter. The first was the Williams #2,
which is an 8500-foot vertical well. The second was the Wildman 8H, which is a 4400-foot horizontal well, which was
completed with an 11-stage frac. In early March, we commenced initial flow back operations. The Williams #2 was
initially flowing up 4.5 inch casing with almost an immediate show of oil. As we anticipated, we will be placing the well on
ride lift pump and we'll continue to monitor production. We also consider doing a dual completion in the Eaglebine in the
Williams #2 well later this year.

Regarding the 8H, the Wildman 8H, we're encouraged by the early daily fluid and oil rates. The initial seven-day flowing
production averaged over 250 barrels of oil per day in excess of 1300 barrels of fracture stimulation fluids per day. We're
encouraged by these early flow rates, and we'll monitor the production longer term before determining whether to
proceed with drilling additional Glen Rose wells. As we learned in the completion of the Wildman 6H, which is a naturally
fractured limestone, the Glen Rose requires a slightly different completion technique.

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Gastar Exploration, Ltd. Q4 2010 Earnings Call
We're using a slip water frac instead of a large prop frac. Total drilling completion costs for the Williams #2 and Wildman
8H including frac-ing were approximately $1.5 million and $5.8 million, respectively. We have a 100% before payout
working interest in both these wells. Under a development scenario, a horizontal Glen Rose well is estimated to cost
approximately $4 million to drill it completely.

We continue to evaluate our first Eaglebine horizontal test, the Wildman 7H. As I mentioned last quarter, we had some
trouble with the lateral hole so we sidetracked it into the False Buda formation. After completing the full-end back
approximately 40% of the frac water of a 4.5-inch casing, we placed the well on a down hole ESP pump in late February.
The ESP pump has allowed us to expedite the flow rates, and current production is averaging about 120 barrels of oil
per day in excess of 1500 barrels of water per day. Since we didn't access a primary reservoir that we were originally
targeting, we're planning on drilling an additional horizontal Eaglebine test, the Wildman 9H, that I'll discuss in more
detail later. We're still on the learning curve for the Glen Rose and the Eaglebine objectives, but we're making progress
in optimizing drilling and completion techniques and further defining the oil potential from our existing East Texas
acreage. These formations have the potential to significantly change the composition, gas arch production profile and
materially increase our NAV per share.

Now looking at our 2010 Bossier drilling activity. The Streater #1 well, which is a middle Bossier well that went on
production in September 2010, is performing very well and was responsible for our overall production increase in the
fourth quarter. The Streater #1 came on production at a gross 7.6 million cubic feet per day and is currently producing
about 3.9 million cubic feet a day. It is producing from a single middle Bossier zone, but we plan to complete it in two
additional zones once the current reservoir pressure declines. And I should also mention that the Donelson #4 produced
an average of gross 10.8 million cubic feet a day in the fourth quarter and is still producing about 9 million cubic feet a
day this month. You will recall that we had some drilling problems with that well last year. And it's been a great producer
from the co-mingled B5 and B6 zones and has additional pace up the hole. After a casing class during recompletion
operations, the Belin #1 is continuing to perform well. It produced a gross 5.7 million cubic feet a day in the fourth
quarter after returning to production in late June of last year and is currently still over 5 million cubic feet a day.

Now moving on to Appalachian. The acreage we acquired earlier this year is contiguous to our other acreage in Marshall
County. It's located at PPG industries nature and chemical site along the Ohio River. We expect to begin drilling on the
PPG acreage during the second half of this year. And we've identified as many as 30 locations to be drilled over the next
several years. These leases are in Marshall County, West Virginia and have a very liquids-rich area of the Marcellus.

Developing the rich gas areas on the Western side of the Marcellus Shale play is a key part of our 2011 strategy given
the widening divide between natural gas prices and prices for oil condensate and natural gas liquids. The gas in this
area has a BTU content 1300 and higher with condensate yields from 20 barrels per million cubic feet to 80 barrels per
million cubic feet of natural gas, so the economics to drilling these rich areas are very good.

Atinum is partnering with us on this acreage under the joint venture agreement. Gastar will pay 45% of the lease
acquisition cost or 50% interest. Initial drilling on this acreage will be eligible for the same drilling carry terms that we
announced when we formed a joint venture with Atinum last year. Actually, this means that we can use a portion of the
$40 million carry for activity on these leases.

The approximately 62,000 net acres of leasehold we acquired in December is concentrated in Preston, Tucker and
Pendleton Counties of West Virginia. In addition to the acreage, we acquired a gathering system with 41 miles of 4-inch
and 6-inch steel pipeline, a salt water disposal well and five conventional wells producing about 500,000 cubic feet per
day. The purchase price was $28.9 million. Atinum chose not to partner with us on this acreage package. We think this
had more to do with the timing and the transaction and the limited operating results that we have from this area rather
than their view of the quality of these new assets.

We now have a total of approximately 81,200 net acres in the Marcellus. We've been trading acreage with other
producers in order to create more efficient contiguous blocks of leasehold. This will allow us to do drill more wells with
longer laterals on acreage we have under lease. During the fourth quarter, we completed the drilling of our first operated
horizontal joint venture, Marcellus Shale well, the Wengerd #1, in Marshall County West Virginia. Depending on the
availability of a frac crew, we hope to be able to frac the well in April and have it on production in May. Gastar and

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Gastar Exploration, Ltd. Q4 2010 Earnings Call
Atinum each have a 50% working interest in this well with Atinum paying 87.5% of the drilling and completion costs. We
will plan on drilling five or six additional wells from this path.

Also an update on our pooled acreage projects in Butler County that Rex [Rex Energy] is operating. Rex is in the
process of drilling the horizontal portions of the seven wells that were spudded in late 2010. They've informed us that
they plan to frac these wells in sequence and are targeting initial production in the fourth quarter of this year. Gastar and
Atinum in our joint venture have a [indiscernible] being drilled from a single path at a gross cost of approximately $1
million each. Our joint out-of-pocket share of this seven-well package is about $11.1 million, and we will have a 19.2%
interest in each well. Atinum will also have a 19.2% interest but they will pay 87.5% of our joint costs.

I should also mention that in December, the joint venture entered into a gas purchase agreement with SEI Energy for
future production from Marshall County, West Virginia. Initial term is five years with a five-year extension. This gas will
be processed at Cayman energy's midstream facilities and transported out of the area on the TETCO system. This is an
important factor in establishing the ability to invest significant capital dollars without continued delays in revenue
generation.

We've also been able to secure a commitment for frac services for Marcellus wells we plan to drill this year along with a
dependable water supply and rig commitment that is nearly finalized. These steps position Gastar for success that will
materially impact our financial results and our reserve position. These accomplishments are the results of the efforts of
our chiefs of staff, along with our staff in Clarksburg, West Virginia lead by Mike McCown, our VP of Northeast
operations.

I'll come back to our future plans in Texas and Appalachian in a moment. But now, I ask Mike to provide additional color
on the numbers.

Michael Gerlich
Thanks, Russ. And good morning, everyone. So that we can leave more time for your questions and for providing some
additional color around the things that are not explained in news release or the K, I'm going to skip going through the
details of the income statement, which Russ summarized upfront. As a reminder, there is a table at the back of the news
release that walks you through all the unusual items for the fourth quarter and full years 2010, 2009. If you have any
questions, we'll be glad to cover those in the Q&A.

I will make a quick comment on the smaller of the two items we've broken out for the fourth quarter of 2010, which was
roughly $600,000 litigation accrual. The majority of this relates to a 2004 debt financing and a dispute that arose
concerning the number of wells that the financing group was entitled to receive overriding royalty [ph]. This matter went
to arbitration in early January and was resolved through the payment of cash and a market repurchase of a portion of
the overrides originally granted. The accrual reflects the settlement of this matter in a small accrual for some other
litigation. We encourage significant litigation expense over the last couple of years, and we do not expect that trend to
continue into 2011. An additional benefit to the settlements will be a decline in legal G&A cost as we move forward.

Looking quickly at cash flow. On a normalized basis, excluding the special items in both years that are included in the
table at the back of the news release, cash flow from operating activities before working capital changes for the fourth
quarter was $4 million versus comparable cash flow of $2.2 million in the fourth quarter of 2009. For the full year,
normalized cash flow before working capital changes was $10.9 million in 2010 versus $16.2 million in 2009.

In regards to production. We exceeded our production volume guidance of the 23 million to 24 million cubic feet a day
for the fourth quarter with average daily production of 25.8 million cubic feet equivalents compared to 22.6 million a day
in the third quarter and 23 million a year ago. We exceeded our guidance primarily due to shallower declines in our
recently added East Texas Bossier wells. As Russ mentioned, we got a nice pump in production from the Streater #1
well in East Texas, which produced an average of gross 5.8, net 4.6 million cubic feet a day in the fourth quarter.
Average daily net production from Texas was 23.8 million a day, which was up 18% from both the third quarter and
fourth quarter of 2009.

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Gastar Exploration, Ltd. Q4 2010 Earnings Call
Growth from East Texas more than offset the ongoing declines in Wyoming, where depressed Rockies natural gas
pricing has dissuaded our operating partner from drilling any new wells, coupled with steps to reduce operating
compression costs, which further reduced production. Our net share production from Wyoming last quarter was 1.6
million cubic feet today versus 2 million a day in the third quarter and 2.5 million a day a year ago. We produced 400 Mcf
equivalent a day from our shallow conventional wells in Appalachia, which has held fairly steady over the last year.

Our production forecast for the first quarter of 2011 is about 20 million cubic feet a day to 22 million cubic feet a day. We
do see this production significantly ramping up in the second half of 2011 as we bring on our Marcellus shale production
coupled with our continuing East Texas drilling efforts.

For the full year, we see production averaging between 27 million cubic feet a day equivalent and 30 million cubic feet a
day equivalent with 6% to 8% attributable to oil and condensate production. The growth in projected oil and condensate
production is significant considering we're currently almost 100% natural gas. Plus the oil production estimate assumes
no further drilling in East Texas beyond the additional Wildman 9H Eaglebine test well that Russ mentioned previously.

Natural gas prices remain soft in the fourth quarter. They were higher in January but they have declined again in
February and March. We had a $2.7 million of unrealized hedging loss and a $2.1 million realized hedging gain in the
fourth quarter. As a result of our hedging programs, our fourth quarter realized natural gas pricing increase from $3.01
per Mcf to $3.90 per Mcf. That's compared with a realized price of $3.60 per Mcf a year ago and $4.09 per Mcf for the
third quarter of 2010.

The realized hedge impact includes a non-cash amortization benefit for prepaid foot purchases and call sale premiums
of $169,000. If you exclude the non-cash amortization, the realized effect of hedging would have been $1.9 million,
which is composed of $2.9 million of Nymex hedge benefit, offset by 331,000 of regional basis losses related to the
contractual differentials that Houston ship Channel in Colorado interstate gathering and payment of deferred put
premiums of $659,000.

Excluding non-cash amortizations, the actual net cash benefit of our hedging for the fourth quarter was $0.82 per Mcf,
which includes a reduction of $0.28 per Mcf for deferred put premium costs plus $0.14 of basis losses. Approximately
74% of our natural gas production was hedged to provide downside protection during the fourth quarter.

For 2011, a significant portion of our estimated natural gas production was hedged either through producer three-way
collars for approximately 15,300 MMBtu per day with a weighted average floor of $6.12, short floor of $4.19 and a ceiling
of $7.65 plus protective put spreads for approximately 2700 MMBtu per day with an average floor of $6 and a short put
at $4 and fixed price swaps covering 2000 MMBtu per day with a based fixed price $6.11. In addition for Q1 2011, we
have short calls covering 2500 MMBtu with a ceiling of $9.15.

For 2011, we continue to carry basis hedges of approximately 10,000 MMBtu per day at a negative $0.23 per usage
ship channel and 800 MMBtu per day of Colorado interstate gathering basis at a negative $1.21. The HST basis hedges
are for the period January to June 2011. Due to current low Henry Hub natural gas prices, these basis differentials are
currently projected to be negative only $0.07 and $0.39, respectively, for 2011.

For 2012, our hedges are currently composed of protective foot spreads for approximately 13,000 MMBtu per day with a
weighted average floor of $6 and a short put of $4, producer three-way collars for approximately 5400 MMBtu per day
with a weighted average floor of $6, short put of $4 and a ceiling of $7.39 and a recently added fixed price swap of 2000
MMBtu per day at a base fixed price of $5.05. We have no basis hedges for 2012.

We will continue to watch the market for opportunities to add additional natural gas hedges and prices that support our
capital program and possibly all volume hedges as oil production increases. One thing I'd like to point out about the
accounting treatment of our hedging program for purposes of modeling that I think may not be very well understood. In
December 2009, we added significant put spreads to hedge volumes for the period July 2010 through December 2012.
We elected deferred payment of the put premiums until the hedge production month becomes the prop production
month.

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Gastar Exploration, Ltd. Q4 2010 Earnings Call
The remaining deferred put premium liability is approximately $3.5 million for 2011 and approximately $4.7 million in
2012. These put premiums are currently netted by the counter party against the benefit derived from our hedging
program. The deferred put premiums reduced our realized cash benefit from [ph].

Looking at some of the key expense items in the fourth quarter and our guide in 2011. We continue to see improving at
least operating expense. Total LOE was flat versus the prior quarter and the year-earlier quarter at $1.5 million. On an
Mcfe basis, LOE declined to $0.62, which was $0.12 lower than the third quarter and $0.08 lower than a year ago. The
per unit decrease between the third and fourth quarter of this year was mainly due to higher production volumes and
lower work over costs.

We expect first quarter LOE to be in the $1.7 million to $1.9 million range as we anticipate an increase that for loan
taxes and work over costs. Estimate expected to work over costs anticipated growth in production, we are hopeful we'll
see continued improvement in LOE per Mcfe as 2011 progresses.

Our DD&A rate was $1.37 per Mcfe versus $1.03 a year ago and $1.28 in the third quarter. The increase over prior year
is mainly the result of crediting of the East Texas gathering system sale proceeds to the full cost pool in the fourth
quarter of 2009 and additional capitalized costs. Transportation expenses were $1.1 million in fourth quarter versus
$557,000 a year ago. This reflects the gathering charge that we began paying in early November 2009 following the sale
of our East Texas gathering system, partially offset by lower costs at Wyoming.

We expect transportation costs to continue to be in the $1.1 million to $1.2 million range for the first quarter. G&A
expense was $3 million for the quarter versus $3.8 million in the third quarter and $4 million a year ago. Excluding non-
cash stock compensation expense of $413,000 in the current fourth quarter and $780,000 last year's fourth quarter,
cash G&A expense was $2.6 million versus $3.1 million in the third quarter and $3.3 million a year ago.

The main reason for the decrease in G&A was primarily related to lower legal costs, partially offset by higher personnel
costs in the current quarter versus the prior periods. Our legal expense for just under $1 million lower than in the third
quarter, following the settlement of the ClassicStar litigation. First quarter cash G&A expense should be in the
neighborhood of $2.4 million to $2.6 million with non-cash G&A in the $800,000 range for the quarter.

Looking at the balance sheet, at year end, we had cash and cash equivalents of $7.4 million, and we had nothing
outstanding on our revolving credit facility. The revolver has a borrowing base of $47.5 million and is scheduled for its
semi-annual borrowing base redetermination in May. We currently have $17 million outstanding under the facility.

You'll recall that in December, we raised a net $52.5 million during an underwritten public offering of common shares,
which we used to fund the $29 million Marcellus acquisition and the initial $18 million payment for the ClassicStar
litigation settlement we announced in December, as well as for general corporate purposes. We believe that between
internally generated cash flow from operations, contributions from Atinum from the Marcellus drilling projects and
availability under our revolving credit facility, we'll have sufficient liquidity to support our 2011 planned exploration
development program in both of our core areas. If additionally, liquidity is needed, our focus will not be a common equity
offering but possibly preferred share issuance, joint venture or debt.

Looking at CapEx, total net oil and natural gas capital expenditures totaled $17.7 million in the fourth quarter, which
included $13.4 million in Texas and $4.3 million in Appalachia and other. For the full year, net CapEx was $62.6 million,
of which $39.7 million was in East Texas and the balance to Appalachia.

As Russ will detail, we're planning for higher level activity in the Marcellus than originally projected so our total CapEx
budget for 2011 is $83.6 million. We plan to spend $30.5 million to pursue both oil and natural gas drilling opportunities
in East Texas. $23.7 million is budgeted for the Marcellus Shale for drilling, completion of infrastructure costs and is net
of the contribution Atinum will make in our joint venture projects.

Keep in mind that the drilling carry into our joint venture with Atinum will fund additional portion of share by total CapEx
for Appalachia next year. Gross capital expenses for the Marcellus program this year including Atinum's contribution is
about $141 million and if we estimate that we will have full year and the remaining carry balance by early 2012. We have

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Gastar Exploration, Ltd. Q4 2010 Earnings Call
budgeted an additional $22.5 in lease acquisition costs, $3.5 million for seismic and $3.4 million for capitalized interest
and other costs.

Now I'll turn it back to Russ to go over operational plans for the rest of the year.

J. Porter
Thanks, Mike. In East Texas, as previously discussed, we plan on drilling an additional Eaglebine well, the Wildman 9H,
which will be a 4200-foot horizontal test. We expect to spud that well later this month. The Wildman 9H will target the
portion of the Eaglebine formation that we've missed in the Wildman 7H. We'll have a 100% working interest in the well
and drilling and completion cost is estimated to be $6.3 million, including $4.3 million of fracture stimulation and
completion costs. We'll again use an easy swell completion and anticipate performing 17 fracs during the completion.

Though drilling is only estimated to take 25 days, we're estimating that the well will not be in production until late second
quarter or early third quarter due to anticipated delays and scheduling the frac services. We'll evaluate the longer term
results of our two Eaglebine tests before deciding to proceed further with the program in 2011.

In March, we expect to spud the Belin #3, which will again be a lower Bossier test offsetting the Belin #2. We are also
anticipating in the late year lower Bossier exploration test on the northeastern portion of our acreage. This area will
initially be explored jointly with EnCana with our participation in this well to be in the range of 30% to 50%.

Our 3D seismic appears to show a similar deep structure to our Hilltop area in the Northeast portion of our acreage.
Drilling on that northeast portion could de-risk an additional portion of our exploratory Bossier position. Of the $30.5
million in drilling, dedicated to East Texas, $14.9 million or nearly 50% is dedicated to exploring our oil objectives in the
area as opposed to natural gas. However, if results for our oil efforts are positive, we would not hesitate to buy additional
capital to our East Texas program in 2011.

The success we've had in the Bossier from the Donelson #4 and Streater, confirms our belief that we have many years
of drilling opportunities in East Texas. But if natural gas prices remain below $5 per Mcf, we'll continue to curb our
Bossier activity in favor of other higher value opportunities.

In Appalachia, we're looking at accelerating our Marcellus drilling program beyond what we have previously discussed
with a focus of the liquids-rich area of our joint venture acreage. With the drilling portion of the Wengerd 1H now
complete on our original Marcellus acreage, we expect to spud the next horizontal well from the same pad in partnership
with Atinum as soon as the drilling rig is available.

We anticipated drilling the first horizontal well on the new PPG acreage during the third quarter and we'll likely
commence drilling on four wells there in partnership with Atinum. As a part of the joint venture, we plan to commence
drilling operations on a total of 27 operated horizontal wells, of which 10 will be top-holes only, 17 will be drilled encased.
Of those 17 wells, 10 will be frac-ed and 10 turned to sales by year-end 2011. This acceleration programs should allow
us to ramp up our liquids-rich production late in the year with that activity momentum carried into 2012. In addition, we
and Atinum will be participating in the previously discussed Rex operated wells during 2011.

Outside the joint venture, we plan to drill one horizontal this year on the Marcellus acreage on the large package risk
acquired in December. This test well will likely spud sometime in the second quarter.

I'm extremely pleased with the position we've been able to carve out in the Marcellus shale and with the economics of
our future projects. We got in early at attractive prices per acre, and then teamed up with a strong financial partner who’s
going to allow us to dramatically increase our drilling pace by shouldering the majority of the drilling costs.

Further, we were able to expand our footprint through the acquisition we made in December at only $410 per acre. And
in February, we acquired acreage in an ultra liquids-rich portion of the shale play where the economics are outstanding.
We estimate that we currently have approximately 9,800 net acres in the liquids-rich sweet spot, or assuming 100 acre
spacing room for about 93 wells that should produce high BTU gas and meaningful NGL and condensate volumes.

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These activities alone will significantly change and enhance Gastar's revenue, cash flow and production profile, both in
terms of oil versus gas and in terms of longer RP ratios. As Mike said a moment ago, we plan to spend about $23.7
million net for our share of drilling completion and infrastructure costs in the Marcellus. In addition, $30.9 million is year-
marked for acreage acquisitions within our Atinum joint venture as we focus on further blocking up our acreage position
to accommodate longer laterals.

$4.1 million is dedicated to lease acquisitions in the area of our December acquisition, and $4.5 million is dedicated to
East Texas lease renewals and additions, bringing our total 2011 land budget to $22.5 million. A portion of these lease
acquisition funds may not have to be spent if we continue to have success trading acreage with other operators.

We are very anxious to continue testing the oil potential in our East Texas acreage. I think it is worth reminding everyone
that we do not have to invest capital dollars in acquiring additional acreage with oil potential. We are drilling the same
acreage that we originally acquired for its deep Bossier potential. The Wildman 7H well didn't test the Eaglebine but it's
producing oil from the False Buda and probably from some of the porous reservoir rock in the Eaglebine section.

This confirms that the entire Eaglebine section is oil saturated, naturally fractured and over pressured. All key
ingredients for successful oil resource play. As is the case with these type resource plays, the early wells are
experimental and necessary in order to crack the code on drilling and completion techniques.

That sums up our prepared remarks. And at this point, we'll open up for questions and answers.

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Gastar Exploration, Ltd. Q4 2010 Earnings Call

Question and Answer

Operator
[Operator Instructions] Our first question comes from the line of Neal Dingmann with SunTrust.

Neal Dingmann
A couple questions. First, Russ, in East Texas, the 7H I guess versus like the 9H, you mentioned sound like the fracs
you would say 17 stages on this one. And would you go for the same formations in the Eaglebine in the False Buda?
And if so, then we just co-mingle? I guess what I'm not getting at is how do you -- based on what you learn on the 7H?
How is this 9H going to be different?

J. Porter
The 9H is different, Neil. The 7H, the lateral's portion of the well was drilled actually down in the very bottom of the
Eaglebine section, in on what we call the False Buda. The 9H is going to be drilled up at about 400 feet shallower than
that in what we consider the heart of the best shows within that Eaglebine section. The 7H originally was targeted for
that. But we had hole stability problems so we dropped the well down into the False Buda because we knew we could
get a completion down there. We had some evidence from completion companies of 400 foot to 600 foot frac growth in
similar zones. We run microseismic on that well and we only saw about a 200, 250 feet of frac growth. So we've
basically didn’t test the reservoir that the 7H was originally designed to test before we drilled it. The 9H well is going to
test what we consider the heart of the Eaglebine oil potential, which is also the same zone that some of the surrounding
operators are having some pretty material success in. So it's another Eaglebine well that's going to be drilled within a
different section of the Eaglebine. And if we get a couple of hundred feet of frac growth again there, then we should be
really testing all the best potential with the 9H.

Neal Dingmann
And it sounds like there or over in the Appalachian like with around the Wengerd the fracs still seem extremely tight. I
mean you've been debating about completing these long-term frac deals that some of the peers are doing or what's your
thoughts on kind of both these areas around fracs or other services, remainder of this year into next year?

J. Porter
Well, we are very pleased that we've got a deal that we are papering right now with BJ to assure that we've got all the
frac services we need for our accelerated Marcellus program for this year. So that’s really not going to be an issue in the
Marcellus. In East Texas, because we don't have a lot of future activity planned, we're not going out and signing any sort
of long-term deal. But we do have frac dates scheduled with several providers. And there'll be some delays but there
won't be anything that we can't plan around and work around in East Texas.

Neal Dingmann
And then over -- if you get that Wengerd #1H frac-ed, I was wondering how fluid I guess your plans are? I mean, how
many wells you kind of laid out and mentioned what you think you can drill? Is it based on results kind of you’ll move
around is there still some signs here, or you're pretty convinced on...

J. Porter
Everything we're drilling in the Marcellus. There's so much activity around us that we don't need a lot of science, of really
not a lot questions what results are going to be. And so we're going to execute the program and I think you'll see a big
impact on the company by the end of the year from that Marcellus program alone.

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Gastar Exploration, Ltd. Q4 2010 Earnings Call
Neal Dingmann
Last question. Just over back to East Texas on the -- after Belin #2 well, I'm just wondering as far as thickness of
formation and if you'll co-mingle on that? And what are the plans remainder of the year sort of the net or are you given
obviously the attractive potential you have over with the Marcellus and then in the Eagle Ford?

J. Porter
The Belin #2, we're going to complete it initially in probably two zones and then we'll produce those for a while then we'll
add some of the other zones probably a year down the line. Belin #3 is our only other planned closure activity for this
year. With the possible exception of a potential joint well with EnCana up in the northeast portion of our acreage late in
the year.

Operator
Our next question comes from the line of Ron Mills with Johnson Rice & Company.

Ronald Mills
Question on the Glen Rose. Can you provide a little bit more color on that Glen Rose horizontal? It seems like really
strong rates based on where you are in the fluid recovery. Are you still seeing an increasing oil cut and relative to
expectations, what do you think about at least early performance of that well and then further on you had, I think 24, 25
potential locations identified in the Glen Rose. As you evaluate more of your acreage, do you think that more of your
acreage could have additional Glen Rose opportunities?

J. Porter
Yes, Ron. I guess, first starting with the Glen Rose well that we've got now, we are seeing increasing oil cut. It's still
producing a significant amount of frac fluid back. And hopefully what we'll see is that as water production goes down as
we recover those frac fluids and we'll continue to increase the oil cut. We're really encouraged by the 250 barrels a day
we're seeing right now because it is so early in the life of it. If you look at where we are now, probably an educated
guess on EUR would be in the 150,000 to 175,000 barrel range. If these wells are 150,000 barrels and 250 barrels a day
at the type costs we're looking at, we're looking at in the 40% IRR range. So very economic. We are looking at additional
Glen Rose potential over our acreage. And we're about 30 offset locations now. I think that's going to expand as our
geologists and geophysicists take a harder look at this now that we've got some initial success. And I wouldn't be
surprised if we come up with another 15 or 20 potential locations.

Ronald Mills
Okay. And you mentioned up in the Marcellus, you obviously were talking with BJ on the frac. You have a marketing
agreement for the production and you're in discussions on the rig. Is the plan from an operating standpoint to have a one
rig or would you need two rigs to execute that 20-plus operated, 25-plus operated well program?

J. Porter
We are going to have a top-hole rig that we'll be working throughout the year, really just the drilling the vertical section of
these wells. We're going to have at various times during the year, two rigs drilling horizontal wells. We've got one of
those rigs lined up for a portion of the year, and we're working on getting one of these hopefully one of these super
single-type rigs that move in a small number of loads and are sort of purposely built for the Marcellus and we probably
wouldn't hesitate to enter into one or two year contract or one of those because you know we're going to have a
substantial amount of activity even if we just limited it to this liquids-rich sweet spot, we've got more than three years
worth of drilling to do.

Ronald Mills
Okay. And then in terms of the timing. I know you're waiting on Cayman for the gathering lines and everything for your
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Gastar Exploration, Ltd. Q4 2010 Earnings Call
Wengerd well. Looking forward in terms of the way the development plan is laid out other than the timing of fracs, how's
the infrastructure situation laid out relative to your drilling plans, i.e., are there going to be any potential bottlenecks or
are those being [ph]?

J. Porter
Well, we don't anticipate any bottlenecks on that with the Wengerd well. Was a little bit of delay in frac-ing means that
Cayman will be ready to pick up gas when that well is frac-ed and we've built our drilling program around as a key factor
ability to get gas out of there. So we built it around Cayman's capacity to get the gas out. And we've -- in setting out
them, there know where all our locations are. We're planning where the central receiving points will be. So we really
don't expect any delays as a result of pipelines. The other thing there that some people may not realize is critical is that
we're just about to finalize all the terms on source of water for us that would allow us almost 20,000 barrels a day of
water capacity, which means that we can move a lot of water around and we can put water on location quickly so we
can run the zipper fracs and we can get these wells completed without a delay, waiting to find or fire pump water.

Ronald Mills
And then from a timing standpoint, you're going to drill this Wildman 9H. You're going to continue to monitor the Glen
Rose well and then I guess at current plans you just have plans to drill that one more Eaglebine well. What would drive
the potential for deciding to drill more liquids wells in East Texas this year? And from a timing standpoint, would that be
more about third quarter or fourth quarter type decision because you want to have significant production history? Is that
the right way to look at it?

J. Porter
Yes, Ron. That is the right way to look at it. We're going to drill this 9H well and we'll get it frac-ed and put online and
evaluate it. And by the time we get all that done, then if we decide to accelerate the program, it would be probably late
third quarter, fourth quarter type of activity, which of course, is also going to be impacted by what the results have been
everywhere else in the company and what our capital availability looks like and all those other issues that go into that
type decision.

Operator
Our next question comes from the line of Steve Berman with Pritchard Capital Partners.

Stephen Berman
Just one housekeeping item here. Russ, can you repeat the cost on the Wildman 8H. I didn't hear that. Thought I heard
$5.8 million that's...

J. Porter
The Wildman 8H was $5.8 million. And as we said, future wells going forward, for that we're looking at -- what's the
number Mike? Approximately $4 million.

Stephen Berman
[ph] EnCana costs, who's going to operate that?

J. Porter
It depends on which track the well gets drilled on. I wouldn't be surprised if it's [ph] EnCana has a little bit more interest
than we do. So they would probably operate the initial well.

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Gastar Exploration, Ltd. Q4 2010 Earnings Call
Stephen Berman
And at this point, no plans to do any Bossier recompletions at any of the existing wells?

Michael Gerlich
This is Mike. There's actually two recompletions planned in some of our existing wells for the year. They're basically
going to be focused really on the Donelson ford and the Streater.

Stephen Berman
And in terms of current liquidity, the press release had $7 million of cash at year end and $17 million drawn currently on
the revolvers. What's the current cash position, if you could say that?

J. Porter
Well, obviously, our cash position at this point isn't excessive. Otherwise, we wouldn't be pulling down the line. One
thing I did fail to mention is we have not been reimbursed yet by Atinum for their share of the PPG acquisition and so
their share of that is just north of $5.5 million. So we should be getting that in here fairly soon. And obviously that will
present us an opportunity to pay down our revolver at that time.

Operator
Our next question comes the line of Jeff Hayden with Rodman & Renshaw.

Jeffrey Hayden
I'm just wondering if you can talk a little more detail about what you saw in the 7H and what are we going to do
differently in the 9H in terms of trying to help with those stability issues?

J. Porter
As far as the 7H, we drilled the original hole 5000-foot lateral in the zone that we wanted to target but we were not able
to keep the well open in order to run the easy swell system. Going back over and looking what we were doing and
looking what some all-set operators were doing, the biggest difference was the mud systems. We're actually going to run
a mud system that’s oversaturated with chlorides in the 9H well, which should resolve that sort of heaving shale
problem. So we'll put the 9H where the 7H was originally targeted within the formation. On the 7H, we did run
Microseismic and that allowed us to see what type of frac growth we did or didn't achieve. We got on average about 200
feet of frac growth from the Microseismic data that we gathered, which was really a pretty good investment for us
because without that, we never really know exactly where this oil we’re producing is coming from. So what we learned is
that this oil we're producing is coming from probably the False Buda, maybe a little bit from the Buda, which we frac-ed
down into and then from just the very lowest extent of the Eaglebine reservoir quality rock. So what we're going to
different is put the well about 400 feet shallower in the section, drill a horizontal and then put the similar type frac job on
it and hopefully just get the same type frac connected to better reservoir than what we've got right now.

Jeffrey Hayden
And some of your neighbors who've been having good results out of the formation, have you kind of a seen any
examples from them with maybe before they started tweaking up their completion design. They had kind of a similar
issue with the formation integrity in the hole?

J. Porter
No. We've seen a very similar from some of the Australian operators but we can't discuss anything we've seen in detail
because most of that we're under confidentiality agreement on.

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Gastar Exploration, Ltd. Q4 2010 Earnings Call

Jeffrey Hayden
Okay. Fair enough. Just one last one. I'm giving kind of the ramp-up implied by kind of the Q1 guidance and the full year
guidance, where do you guys kind of think you're 2011 exit rate is going to be?

Michael Gerlich
2011 exit rate?

Jeffrey Hayden
Yes.

Michael Gerlich
I would tell you at this point it's going to be probably somewhere in the $40 million to $42-ish million range.

Jeffrey Hayden
Okay. And what do you think the liquids percent is going to be out of that number?

Michael Gerlich
Yes, it'll be about 8% to 9%, by that time.

Operator
Our next question comes from the line of Derrick Whitfield with Canaccord Genuity.

Derrick Whitfield
The –- getting back to Glen Rose. Could you guys comment on what you're expecting as you move up this from the
trend? I'm specifically interested in locations you identified in your latest PowerPoint away from the 6, 8. I think it's the
six in the Wildman 8?

J. Porter
Basically, what we're doing there is we're moving a long trend along the flexures where we think the natural fracs have
been created. We've got a good test now on one area. We've got an earlier well mono fracs #4 that we DST-ed over 200
barrels a day from which is up to the north of this and we see a number of locations around it. And we're starting to
push that examination into some other portions of our acreage of kind of staying along that structural nose that we see
there. So like I said, I think you'll eventually see us talking about a number of new locations or additional future locations
for the Glen Rose as we spend more time on it now that we know there's some real potential there.

Derrick Whitfield
And then understanding it's still early days in the appraisal portion of your Eagle Ford or Eaglebine trend, could you help
us frame up the potential based on the Microseismic analysis you've conducted and the data you analyzed from the
industry? I guess I'm specifically interested in maybe how the geology in your area compares with that to the South in
Brazos and Burleson counties?

J. Porter
I don't know about the specifics of those two counties. But then again, I know that in general, the southern part of the
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Gastar Exploration, Ltd. Q4 2010 Earnings Call
play, one of the things that's made it work is that there is a high percentage of limestone within that Eagle Ford section.
We're seeing similar percentages of limestone up here where we are and what we call our Eaglebine, which is it’s Eagle
Ford in some parts of the world, it's Woodbine in others and we're right on the transition of where you call it one thing or
the other, so we made up our nomenclature. But we're seeing high percentages of lime, which has very positive
implications for how these reservoirs can be completed and whether they'll take a frac and the frac can be effective in
them. They're brittle. They're not ductile, which is I think one of the keys that's going to make it work. As a far as overall
potential, we haven't changed our outlook at all. We still we got about 125 potential locations if we can prove that it's
economic.

Derrick Whitfield
And then maybe what type of porosity readings are you guys seeing and then what's your pressure gradient in this
area?

J. Porter
It's slightly over pressured. I don't have exact gradient at my fingertips here. But we've had shows in the Eaglebine that
have taken at roughly 6,500 feet have taken nine to 11 pound mud weights to kill, so it's definitely over pressured. And
the fact that this 7H well produced naturally up 5-inch casing for so long shows that it's slightly over pressured. What
was the second part of your question?

Derrick Whitfield
It was the porosity reading. If you guys have any measurements on that?

J. Porter
I'd say we're seeing north of 8% porosity is all I want to say about that right now.

Derrick Whitfield
Moving over to the Appalachian basin, if you guys had a chance to evaluate the Uinta shale at any capacity to date?

J. Porter
We have not. There has been Uinta shale test just offsetting our position up in Butler County. A test was actually in
Beaver County, but our acreage is in Butler. We heard that there is some tests upcoming that is going to have an impact
on Western acreage in West Virginia. And we've seen the maps that probably you've seen that some of the other
operators are publishing and that some of the academics are publishing. At this point, all I can say is that it's likely we're
going to have Uinta potential on a portion of our acreage but we cannot quantify that right now.

Derrick Whitfield
And then on the Marcellus, could you help us quantify how much of your acreage is now located in strategic and efficient
blocks following the recent land work you've done?

J. Porter
O

I can't give you a percentage, but I can tell you that we're blocking up for our 2011 program, we've got -- we've been
able to, through trading with other operators really assure ourselves that almost every well we drill is going to be at least
4,400-, 4,500- or 5,000-foot laterals at minimum. Whereas if we hadn't done these trades, we'd be looking at some wells
with maybe a couple of thousand feet of horizontal and other wells filled from the same path with 4,000 or 5,000 feet. So
it's going to make our overall program more efficient. It's an ongoing process. We're continuing to talk to other operators
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Gastar Exploration, Ltd. Q4 2010 Earnings Call
about trading acreage and we're going to buy some additional acreage to fill in some of those gaps, but I can't tell you
what percentage of our acreage is within one of those or what isn’t right now, but I can tell you that essentially
everything that we're going to drill in 2011, 2012 over there in Marshall or Wetzel county area will probably be in an area
where we [ph] up like that.

Derrick Whitfield
Russ, it sounds like you got at least two years in runway with a one-rig program.

J. Porter
We probably have two years of run rate with a two-rig program.

Derrick Whitfield
And one more question if I could. This is on the Eagleford. Could you break down that $4 million AFE that you'd
mentioned earlier? Interested in dry hole costs, completion costs, et cetera.

J. Porter
Well, for the Eagle Ford, we're looking at a total AFE of about $6 million. Yes. For the Eagle Ford, Eaglebine, it's $6
million to drill and complete, probably $2 million of that is the dry hole costs and the rest is frac services.

Operator
And our final question comes from the line of Josh Young with Young Capital Management.

Joshua Young
Quick question for you on this Glen Rose, the Wildman 8H. It's currently producing 250 barrels of oil a day and I think
you said about 1,300 barrels or so of production fluids a day or completion fluid. It sounds like you're sort of guiding to a
completion rate or a final production rate of around that 250 barrels a day even though in many other wells and in many
other oil wells when there's that amount of completion fluid coming back and that amount of oil, the ultimate initial
production rate is announced and that ends up working out tends to be higher maybe 500- or 600-something barrels a
day. Can you give us some idea of where you might expect it to level out in sort of what the rate of oil production has
been in finding by and sort of where you could see it leveling out?

J. Porter
Josh, I mean anything we would tell you beyond what well is producing right now would really be speculation because
this is our first well in this area. We have seen the oil cut continue to improve and we're as anxious to know the number
is as you are. Yes, it's possible the well could continue to go up on a daily oil rate. It could flatten. We don't know what to
expect because this is really the first Glen Rose, horizontal Glen Rose completion that's anywhere near in the area. So
next quarter's call we'll be in a position to update everyone further. And certainly if you hear us talking about additional
activity there, drilling activity then you're going to know that we think that the economics are pretty strong. But the basis
of your question is correct. There are similar plays where you do continue to see your oil take to go up as you clean up
the well, and get those frac fluids back, but I really don't want to sit here and speculate on what that number could be.

Derrick Whitfield
And then that of the EUR of a 150,000 barrels would be if the well sort of flattened out at this 250 barrels of oil a day and
then started to climb?

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Gastar Exploration, Ltd. Q4 2010 Earnings Call
J. Porter
That would be, that's assuming you had a peak rate of 250 barrels of oil a day and then you started climbing from there.

Derrick Whitfield
Okay. So it sounds like there's potential upside in both from the oil rate again, from the EUR perspective and it just you
guys are trying to be conservative and not say anything beyond what you're actually seeing right now in the well?

J. Porter
Yes. That's a fair assessment.

Derrick Whitfield
And then can you talk a little bit about some of your thoughts on financing? I know Mike talked a little bit about the
possibility of debt financing or preferred or some of the other sort of options that you have other than raising equity and I
guess just some of your thoughts around that?

J. Porter
As Mike mentioned, if we needed additional capital, which is not a definite. But if we needed additional capital, we are
very focused on not selling common stock. I mean the scabs haven't healed yet from our last experience with that, and
we're looking at what some of the other EMP companies have done as far as some perpetual preferred issuances,
which we think are fairly attractive both to the investment community and as a vehicle for financing. And we're looking,
we're examining that. And we'll look at whether or not it's too early to sort of sway in a permanent portion of debt capital.
But we're evaluating all those opportunities. Again, with a goal of not selling common stock.

Derrick Whitfield
And then final question regarding the exploration activity on the northeast portion of your acreage in Texas with EnCana,
did you guys look at just going a non-consent on that one well letting them sort of explore it, see what they find and then
you'll have acreage around the area without having to deploy capital dollars into EnCana's exploration budget?

J. Porter
Well, the well has not been proposed. So I’m not going to sit here and tell you whether we're going to consent it or not
consent it, but the tracks that we're looking at. We have leasehold interest in those tracks as does EnCana. And to be
honest I'm not sure if EnCana would drill the well if we'd not consented so we're going to examine that as it gets closer
and as it gets more definite.

Derrick Whitfield
It sounded like it was a little bit nearer-term than what you're saying right now.

J. Porter
It's fourth quarter type activity.

Operator
Thank you. Mr. Porter, there are no further questions at this time. Please continue.

J. Porter

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Gastar Exploration, Ltd. Q4 2010 Earnings Call
Okay. Thank you, everyone. We appreciate you taking the time to be with us on the call. And as always, we usually
mention, if you have any other questions that we can answer, feel free to contact Mike or myself in our Houston office.

Operator
Ladies and gentlemen, this concludes the Gastar Exploration's fourth quarter earnings conference call. If you'd like to
listen to a replay of today's conference, please dial (303) 509-3030 and enter the access code of 4406342. We would
like to thank you for your participation. You may now disconnect.

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 Gastar Exploration, Ltd. Q4 2010 Earnings Call

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