Gastar Exploration Inc.
GASTAR EXPLORATION LTD (Form: 10-Q, Received: 11/07/2012 16:22:33)
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________
FORM 10-Q
____________________________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 2012
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                    TO                     .
Commission File Number: 001-32714
Commission File Number: 001-35211
____________________________________________________
GASTAR EXPLORATION LTD.
GASTAR EXPLORATION USA, INC.
(Exact name of registrant as specified in its charter)
____________________________________________________
Alberta, Canada
98-0570897
Delaware
38-3531640
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
1331 Lamar Street, Suite 650
 
Houston, Texas
77010
(Address of principal executive offices)
(ZIP Code)
(713) 739-1800
(Registrant’s telephone number, including area code)
____________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   
Gastar Exploration Ltd.
Yes
ý
No
o
Gastar Exploration USA, Inc.
Yes
ý
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
Gastar Exploration Ltd.
Yes
ý
No
o
Gastar Exploration USA, Inc.
Yes
ý
No
o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Gastar Exploration Ltd.
Large accelerated filer
o
Accelerated filer
ý
Non-accelerated filer
o   (Do not check if a smaller reporting company)
Smaller reporting company
o

Gastar Exploration USA, Inc.
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
ý   (Do not check if a smaller reporting company)
Smaller reporting company
o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
Gastar Exploration Ltd.
Yes
o
No
ý
Gastar Exploration USA, Inc.
Yes
o
No
ý

The total number of outstanding common shares, no par value per share, as of November 2, 2012 was
Gastar Exploration Ltd.
65,663,063

shares of common stock
Gastar Exploration USA, Inc.
750

shares of common stock


Table of Contents

GASTAR EXPLORATION LTD.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012
TABLE OF CONTENTS
 
 
 
Page
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

Unless otherwise indicated or required by the context, (i) “Gastar,” the “Company,” “we,” “us,” “our” and similar terms refer collectively to Gastar Exploration Ltd. and its subsidiaries, including Gastar Exploration USA, Inc., and predecessors, (ii) “Gastar USA” refers to Gastar Exploration USA, Inc., our first-tier subsidiary and primary operating company, (iii) “Parent” refers solely to Gastar Exploration Ltd., (iv) all dollar amounts appearing in this report on Form 10-Q are stated in U.S. dollars unless otherwise noted and (v) all financial data included in this report on Form 10-Q have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”).
General information about us can be found on our website at www.gastar.com . The information available on or through our website, or about us on any other website, is neither incorporated into, nor part of, this report. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other filings that we make with the U.S. Securities and Exchange Commission (“SEC”), as well as any amendments and exhibits to those reports, will be available free of charge through our website as soon as reasonably practicable after we file or furnish them to the SEC. Information is also available on the SEC website at www.sec.gov for our U.S. filings.



2

Table of Contents

Glossary of Terms

AMI
Area of Mutual Interest, an agreed designated geographic area where joint venturers or other industry partners have a right of participation in acquisitions and operations
 
 
Bbl
Barrel of oil, condensate or NGLs
 
 
Bbl/d
Barrels of oil, condensate or NGLs per day
 
 
Btu
British thermal unit, typically used in measuring natural gas energy content
 
 
CRP
Central receipt point
 
 
FASB
Financial Accounting Standards Board
 
 
MBbl
One thousand barrels of oil, condensate or NGLs
 
 
MBbl/d
One thousand barrels of oil, condensate or NGLs per day
 
 
Mcf
One thousand cubic feet of natural gas
 
 
Mcf/d
One thousand cubic feet of natural gas per day
 
 
MMBtu/d
One million British thermal units per day
 
 
MMcf
One million cubic feet of natural gas
 
 
MMcf/d
One million cubic feet of natural gas per day
 
 
Mcfe
One thousand cubic feet of natural gas equivalent
 
 
MMcfe
One million cubic feet of natural gas equivalent
 
 
MMcfe/d
One million cubic feet of natural gas equivalent per day
 
 
NGLs
Natural gas liquids
 
 
NYMEX
New York Mercantile Exchange
 
 
psi
Pounds per square inch


3

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
GASTAR EXPLORATION LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
September 30,
2012
 
December 31,
2011
 
(Unaudited)
 
 
 
(in thousands, except share data)
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
9,103

 
$
10,647

Accounts receivable, net of allowance for doubtful accounts of $546 and $551, respectively
8,277

 
10,706

Commodity derivative contracts
11,446

 
19,385

Prepaid expenses
799

 
1,243

Total current assets
29,625

 
41,981

PROPERTY, PLANT AND EQUIPMENT:
 
 
 
Natural gas and oil properties, full cost method of accounting:
 
 
 
Unproved properties, excluded from amortization
74,954

 
78,302

Proved properties
623,112

 
514,357

Total natural gas and oil properties
698,066

 
592,659

Furniture and equipment
1,864

 
1,629

Total property, plant and equipment
699,930

 
594,288

Accumulated depreciation, depletion and amortization
(479,079
)
 
(308,548
)
Total property, plant and equipment, net
220,851

 
285,740

OTHER ASSETS:
 
 
 
Restricted cash

 
50

Commodity derivative contracts
2,685

 
4,130

Deferred charges, net
709

 
535

Advances to operators and other assets
501

 
2,067

Total other assets
3,895

 
6,782

TOTAL ASSETS
$
254,371

 
$
334,503

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
11,720

 
$
17,693

Revenue payable
8,811

 
4,137

Accrued interest
136

 
144

Accrued drilling and operating costs
6,923

 
4,647

Advances from non-operators
18,438

 
19,523

Commodity derivative contracts
2,578

 
6,479

Commodity derivative premium payable
1,414

 
4,725

Accrued litigation settlement liability

 
800

Other accrued liabilities
2,407

 
1,723

Total current liabilities
52,427

 
59,871

LONG-TERM LIABILITIES:
 
 
 
Long-term debt
70,000

 
30,000

Commodity derivative contracts
2,452

 
1,163

Asset retirement obligation
6,689

 
8,275

Total long-term liabilities
79,141

 
39,438

Commitments and contingencies (Note 12)

 

SHAREHOLDERS' EQUITY:
 
 
 
Common stock, no par value; unlimited shares authorized; 65,663,063 and 64,706,750 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively
316,346

 
316,346

Additional paid-in capital
27,618

 
25,376

Accumulated deficit
(297,721
)
 
(133,919
)
Total shareholders' equity
46,243

 
207,803

Non-controlling interest:
 
 
 
Preferred stock of subsidiary, aggregate liquidation preference $98,674 and $34,114 at September 30, 2012 and December 31, 2011, respectively
76,560

 
27,391

Total equity
122,803

 
235,194

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
254,371

 
$
334,503


The accompanying notes are an integral part of these condensed consolidated financial statements.


4

Table of Contents

GASTAR EXPLORATION LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(in thousands, except share and per share data)
REVENUES:
 
 
 
 
 
 
 
Natural gas
$
8,906

 
$
8,613

 
$
22,499

 
$
25,184

Oil
3,457

 
736

 
7,748

 
2,707

NGLs
2,483

 
239

 
6,394

 
239

Total natural gas, oil and NGLs revenues
14,846

 
9,588

 
36,641

 
28,130

Unrealized hedge gain (loss)
(5,403
)
 
2,424

 
(4,123
)
 
1,027

Total revenues
9,443

 
12,012

 
32,518

 
29,157

EXPENSES:
 
 
 
 
 
 
 
Production taxes
560

 
157

 
1,494

 
384

Lease operating expenses
780

 
2,363

 
4,754

 
5,945

Transportation, treating and gathering
1,305

 
1,128

 
3,715

 
3,354

Depreciation, depletion and amortization
7,135

 
3,694

 
19,744

 
10,797

Impairment of natural gas and oil properties
78,054

 

 
150,787

 

Accretion of asset retirement obligation
101

 
138

 
284

 
392

General and administrative expense
2,951

 
3,100

 
9,263

 
8,576

Litigation settlement expense

 

 
1,250

 

Total expenses
90,886

 
10,580

 
191,291

 
29,448

INCOME (LOSS) FROM OPERATIONS
(81,443
)
 
1,432

 
(158,773
)
 
(291
)
OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
Interest expense
(30
)
 
(24
)
 
(86
)
 
(87
)
Investment income and other
2

 
2

 
6

 
7

Foreign transaction loss
(2
)
 
(8
)
 
(2
)
 
(5
)
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
(81,473
)
 
1,402

 
(158,855
)
 
(376
)
Provision for income taxes

 

 

 

NET INCOME (LOSS)
(81,473
)
 
1,402

 
(158,855
)
 
(376
)
Dividend on preferred stock attributable to non-controlling interest
1,984

 
388

 
4,947

 
419

NET INCOME (LOSS) ATTRIBUTABLE TO GASTAR EXPLORATION LTD.
$
(83,457
)
 
$
1,014

 
$
(163,802
)
 
$
(795
)
NET INCOME (LOSS) PER COMMON SHARE ATTRIBUTABLE TO GASTAR EXPLORATION LTD. COMMON SHAREHOLDERS:
 
 
 
 
 
 
 
Basic
$
(1.31
)
 
$
0.02

 
$
(2.58
)
 
$
(0.01
)
Diluted
$
(1.31
)
 
$
0.02

 
$
(2.58
)
 
$
(0.01
)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
 
 
 
 
 
 
 
Basic
63,601,645

 
63,238,069

 
63,494,224

 
62,901,860

Diluted
63,601,645

 
63,842,098

 
63,494,224

 
62,901,860


The accompanying notes are an integral part of these condensed consolidated financial statements.

5


GASTAR EXPLORATION LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
For the Nine Months Ended September 30,
 
2012
 
2011
 
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(158,855
)
 
$
(376
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
19,744

 
10,797

Impairment of natural gas and oil properties
150,787

 

Stock-based compensation
2,575

 
2,003

Unrealized hedge (gain) loss
4,123

 
(1,027
)
Realized gain on derivative contracts
(662
)
 
(1,303
)
Amortization of deferred financing costs
157

 
193

Accretion of asset retirement obligation
284

 
392

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
2,429

 
(4,199
)
Commodity derivative contracts

 
(54
)
Prepaid expenses
345

 
765

Accounts payable and accrued liabilities
129

 
774

Net cash provided by operating activities
21,056

 
7,965

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Development and purchase of natural gas and oil properties
(100,606
)
 
(58,672
)
Advances to operators
(4,282
)
 
(3,299
)
(Use of proceeds) proceeds from non-operators
(1,085
)
 
27,794

Purchase of furniture and equipment
(235
)
 
(346
)
Net cash used in investing activities
(106,208
)
 
(34,523
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from revolving credit facility
70,000

 
41,000

Repayment of revolving credit facility
(30,000
)
 
(31,000
)
Proceeds from issuance of preferred stock, net of issuance costs
49,169

 
16,855

Dividend on preferred stock attributable to non-controlling interest
(4,947
)
 
(419
)
Deferred financing charges
(332
)
 
(13
)
Other
(282
)
 
(336
)
Net cash provided by financing activities
83,608

 
26,087

NET DECREASE IN CASH AND CASH EQUIVALENTS
(1,544
)
 
(471
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
10,647

 
7,439

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
9,103

 
$
6,968


The accompanying notes are an integral part of these condensed consolidated financial statements.

6


GASTAR EXPLORATION USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
September 30,
2012
 
December 31,
2011
 
(Unaudited)
 
 
 
(in thousands, except share data)
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
9,009

 
$
10,595

Accounts receivable, net of allowance for doubtful accounts of $546 and $551, respectively
8,276

 
10,703

Commodity derivative contracts
11,446

 
19,385

Prepaid expenses
774

 
1,088

Total current assets
29,505

 
41,771

PROPERTY, PLANT AND EQUIPMENT:
 
 
 
Natural gas and oil properties, full cost method of accounting:
 
 
 
Unproved properties, excluded from amortization
74,954

 
78,302

Proved properties
623,104

 
514,349

Total natural gas and oil properties
698,058

 
592,651

Furniture and equipment
1,864

 
1,629

Total property, plant and equipment
699,922

 
594,280

Accumulated depreciation, depletion and amortization
(479,072
)
 
(308,541
)
Total property, plant and equipment, net
220,850

 
285,739

OTHER ASSETS:
 
 
 
Restricted cash

 
25

Commodity derivative contracts
2,685

 
4,130

Deferred charges, net
709

 
535

Advances to operators and other assets
501

 
2,067

Total other assets
3,895

 
6,757

TOTAL ASSETS
$
254,250

 
$
334,267

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
11,695

 
$
17,682

Revenue payable
8,811

 
4,137

Accrued interest
136

 
144

Accrued drilling and operating costs
6,923

 
4,647

Advances from non-operators
18,438

 
19,523

Commodity derivative contracts
2,578

 
6,479

Commodity derivative premium payable
1,414

 
4,725

Accrued litigation settlement liability

 
800

Other accrued liabilities
2,180

 
1,654

Total current liabilities
52,175

 
59,791

LONG-TERM LIABILITIES:
 
 
 
Long-term debt
70,000

 
30,000

Commodity derivative contracts
2,452

 
1,163

Asset retirement obligation
6,682

 
8,268

Due to parent
30,810

 
27,432

Total long-term liabilities
109,944

 
66,863

Commitments and contingencies (Note 12)


 


STOCKHOLDERS' EQUITY:
 
 
 
Preferred stock, $0.01 par value; 10,000,000 shares authorized; 3,946,950 and 1,364,543 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively, with liquidation preference of $25.00 per share
39

 
14

Common stock, no par value; 1,000 shares authorized; 750 shares issued and outstanding
237,431

 
239,431

Additional paid-in capital
76,521

 
27,377

Accumulated deficit
(221,860
)
 
(59,209
)
Total stockholders' equity
92,131

 
207,613

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
254,250

 
$
334,267

The accompanying notes are an integral part of these condensed consolidated financial statements.

7


GASTAR EXPLORATION USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(in thousands, except share and per share data)
REVENUES:
 
 
 
 
 
 
 
Natural gas
$
8,906

 
$
8,613

 
$
22,499

 
$
25,184

Oil
3,457

 
736

 
7,748

 
2,707

NGLs
2,483

 
239

 
6,394

 
239

Total natural gas, oil and NGLs revenues
14,846

 
9,588

 
36,641

 
28,130

Unrealized hedge gain (loss)
(5,403
)
 
2,424

 
(4,123
)
 
1,027

Total revenues
9,443

 
12,012

 
32,518

 
29,157

EXPENSES:
 
 
 
 
 
 
 
Production taxes
560

 
157

 
1,494

 
384

Lease operating expenses
780

 
2,363

 
4,754

 
5,944

Transportation, treating and gathering
1,305

 
1,128

 
3,715

 
3,354

Depreciation, depletion and amortization
7,135

 
3,694

 
19,744

 
10,797

Impairment of natural gas and oil properties
78,054

 

 
150,787

 

Accretion of asset retirement obligation
101

 
138

 
284

 
392

General and administrative expense
2,481

 
2,879

 
8,105

 
7,992

Litigation settlement expense

 

 
1,250

 

Total expenses
90,416

 
10,359

 
190,133

 
28,863

INOME (LOSS) FROM OPERATIONS
(80,973
)
 
1,653

 
(157,615
)
 
294

OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
Interest expense
(30
)
 
(24
)
 
(87
)
 
(86
)
Investment income and other
(5
)
 
(1
)
 
(4
)
 
96

Foreign transaction gain (loss)
1

 
(5
)
 
2

 
(2
)
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
(81,007
)
 
1,623

 
(157,704
)
 
302

Provision for income taxes

 

 

 

NET INCOME (LOSS)
(81,007
)
 
1,623

 
(157,704
)
 
302

Dividend on preferred stock
1,984

 
388

 
4,947

 
419

NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDER
$
(82,991
)
 
$
1,235

 
$
(162,651
)
 
$
(117
)

The accompanying notes are an integral part of these condensed consolidated financial statements.

8


GASTAR EXPLORATION USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
For the Nine Months Ended September 30,
 
2012
 
2011
 
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income (loss)
$
(157,704
)
 
$
302

Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
19,744

 
10,797

Impairment of natural gas and oil properties
150,787

 

Stock-based compensation
2,575

 
2,003

Unrealized hedge (gain) loss
4,123

 
(1,027
)
Realized gain on derivative contracts
(662
)
 
(1,303
)
Amortization of deferred financing costs
157

 
193

Accretion of asset retirement obligation
284

 
392

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
2,427

 
(4,193
)
Commodity derivative contracts

 
(54
)
Prepaid expenses
215

 
601

Accounts payable and accrued liabilities
(43
)
 
675

Net cash provided by operating activities
21,903

 
8,386

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Development and purchase of natural gas and oil properties
(100,606
)
 
(58,672
)
Advances to operators
(4,282
)
 
(3,299
)
(Use of proceeds) proceeds from non-operators
(1,085
)
 
27,794

Purchase of furniture and equipment
(235
)
 
(346
)
Net cash used in investing activities
(106,208
)
 
(34,523
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from revolving credit facility
70,000

 
41,000

Repayment of revolving credit facility
(30,000
)
 
(31,000
)
Proceeds from issuance of preferred stock, net of issuance costs
49,169

 
16,855

Dividend on preferred stock
(4,947
)
 
(419
)
Deferred financing charges
(332
)
 
(13
)
Dividend to parent, net
(1,196
)
 
(836
)
Other
25

 
100

Net cash provided by financing activities
82,719

 
25,687

NET DECREASE IN CASH AND CASH EQUIVALENTS
(1,586
)
 
(450
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
10,595

 
7,401

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
9,009

 
$
6,951


The accompanying notes are an integral part of these condensed consolidated financial statements.

9


GASTAR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.
Description of Business
Gastar Exploration Ltd. is an independent energy company engaged in the exploration, development and production of natural gas and oil in the United States (“U.S.”). Gastar Exploration Ltd.’s principal business activities include the identification, acquisition, and subsequent exploration and development of natural gas and oil properties with an emphasis on unconventional reserves, such as shale resource plays. Gastar Exploration Ltd. is currently pursuing the development of liquids-rich natural gas in the Marcellus Shale play in the Appalachia area of West Virginia and central and southwestern Pennsylvania. Gastar Exploration Ltd. also holds prospective acreage in the deep Bossier play in East Texas and in the Mid-Continent area of the U.S.
Gastar Exploration Ltd. is a holding company and substantially all of its operations are conducted through, and substantially all of its assets are held by, its primary operating subsidiary, Gastar Exploration USA, Inc. and its wholly-owned subsidiaries. Unless otherwise stated or the context requires otherwise, all references in these notes to “Gastar USA” refer collectively to Gastar Exploration USA, Inc. and its wholly-owned subsidiaries, all references to “Parent” refer solely to Gastar Exploration Ltd., and all references to “Gastar,” the “Company” and similar terms refer collectively to Gastar Exploration Ltd. and its wholly-owned subsidiaries, including Gastar Exploration USA, Inc.

2.
Summary of Significant Accounting Policies
The accounting policies followed by the Company are set forth in the notes to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2011 (“2011 Form 10-K”) filed with the SEC. Please refer to the notes to the financial statements included in the 2011 Form 10-K for additional details of the Company’s financial condition, results of operations and cash flows. All material items included in those notes have not changed except as a result of normal transactions in the interim or as disclosed within this report.
These financial statements are a combined presentation of the condensed consolidated financial statements of the Company and Gastar USA. Separate information is provided for the Company and Gastar USA as required. Except as otherwise noted, there are no material differences between the unaudited condensed consolidated information for the Company presented herein and the unaudited condensed consolidated information of Gastar USA.
The unaudited interim condensed consolidated financial statements of the Company and Gastar USA included herein are stated in U.S. dollars unless otherwise noted and were prepared from the records of the Company and Gastar USA by management in accordance with U.S. GAAP applicable to interim financial statements and reflect all normal and recurring adjustments, which are, in the opinion of management, necessary to provide a fair presentation of the results of operations and financial position for the interim periods. Such financial statements conform to the presentation reflected in the 2011 Form 10-K. The current interim period reported herein should be read in conjunction with the financial statements and accompanying notes, including Item 8. “Financial Statements and Supplementary Data, Note 2 – Summary of Significant Accounting Policies” included in the 2011 Form 10-K.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates with regard to these financial statements include the estimate of proved natural gas and oil reserve quantities and the related present value of estimated future net cash flows.
The unaudited condensed consolidated financial statements of the Company include the accounts of Parent and the consolidated accounts of all of its subsidiaries, including Gastar USA. All significant intercompany accounts and transactions have been eliminated in consolidation.
The unaudited condensed consolidated financial statements of Gastar USA include the accounts of Gastar USA and the consolidated accounts of all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Certain reclassifications of prior year balances have been made to conform to the current year presentation; these reclassifications have no impact on net income (loss).
The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 . In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued and has disclosed certain subsequent events in these condensed consolidated financial statements, as appropriate.

10


Recent Accounting Developments
The following recently issued accounting pronouncements have been adopted or may impact the Company in future periods:
Comprehensive Income. In June 2011, the FASB issued an amendment to previously issued guidance regarding the reporting and presentation of other comprehensive income. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income and the total of comprehensive income. Regardless of whether an entity chooses to present comprehensive income in a single continuous statement or in two separate but consecutive statements, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and should be applied retrospectively. Earlier application is permitted. The adoption of this guidance did not impact our operating results, financial position or cash flows.
Fair Value Measurement. In May 2011, the FASB issued an amendment to previously issued guidance regarding fair value measurement and disclosure requirements. The amendments explain how to measure fair value and do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendments result in common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards. This guidance is effective prospectively for interim and annual periods beginning after December 15, 2011. The adoption of this guidance did not impact our operating results, financial position or cash flows.

3.
Property, Plant and Equipment
The amount capitalized as natural gas and oil properties was incurred for the purchase and development of various properties in the U.S., specifically the states of Texas, Pennsylvania, West Virginia, Wyoming and Montana and the Mid-Continent area. The Company's working interest in its Wyoming and Montana properties in the Powder River Basin were assigned to the operator on May 3, 2012, effective January 1, 2012.
The following table summarizes the components of unproved properties excluded from amortization for the periods indicated:
 
 
September 30, 2012
 
December 31, 2011
 
(in thousands)
Unproved properties, excluded from amortization:
 
 
 
Drilling in progress costs
$
3,155

 
$
3,958

Acreage acquisition costs
67,590

 
68,217

Capitalized interest
4,209

 
6,127

Total unproved properties excluded from amortization
$
74,954

 
$
78,302


For the nine months ended September 30, 2012 , management's evaluation of unproved properties resulted in an impairment. Due to a decline in natural gas prices and the suspension of drilling activity in East Texas, the Company reclassified $19.1 million of unproved properties to proved properties at September 30, 2012 .

The full cost method of accounting for natural gas and oil properties requires a quarterly calculation of a limitation on capitalized costs, often referred to as a full cost ceiling calculation. The ceiling is the present value of estimated future cash flow from proved natural gas and oil reserves reduced by future operating expenses, development expenditures, abandonment costs (net of salvage) to the extent not included in natural gas and oil properties pursuant to authoritative guidance and estimated future income taxes thereon. To the extent that our capitalized costs (net of accumulated depletion and deferred taxes) exceed the ceiling, the excess must be written off to expense. Once incurred, this impairment of natural gas and oil properties is not reversible at a later date even if natural gas and oil prices increase. The ceiling calculation dictates that the 12-month unweighted arithmetic average of the first-day-of-the-month prices and costs in effect are held constant indefinitely.


11


Management’s ceiling test evaluation for the nine months ended September 30, 2012 resulted in an impairment of proved natural gas and oil properties of $150.8 million recorded at September 30, 2012 . Management's ceiling test evaluation for the nine months ended September 30, 2011 did not result in an impairment of proved natural gas and oil properties. The following table provides the 12-month unweighted arithmetic average of the equivalent realized price utilized in the ceiling test evaluations for the periods indicated:
 
For the Nine Months Ended September 30,
 
2012
 
2011
Average price per Mcfe
$
3.69

 
$
4.59


Given the current price environment, the Company expects that future declines in the 12-month average of natural gas, oil and NGLs prices will likely result in the recognition of future ceiling impairments in 2012.
Atinum Joint Venture
In September 2010, Gastar USA entered into a joint venture (the “Atinum Joint Venture”) pursuant to a purchase and sale agreement with an affiliate of Atinum Partners Co., Ltd. (“Atinum”), a Korean investment firm. Pursuant to the agreement, at the closing of the transactions on November 1, 2010 , Gastar USA assigned to Atinum an initial 21.43% interest in all of its existing Marcellus Shale assets in West Virginia and Pennsylvania, which consisted of approximately 37,600 gross ( 34,200 net) acres and a 50% working interest in 16 producing shallow conventional wells and one non-producing vertical Marcellus Shale well (the “Atinum Joint Venture Assets”). Atinum paid Gastar USA approximately $30.0 million in cash at the closing and paid additional $40.0 million of Gastar USA's share of drilling costs over time in the form of a “drilling carry.” Upon completion of the funding of the drilling carry, Gastar USA made additional assignments to Atinum in early 2012 as a result of which Atinum owns a 50% interest in the Atinum Joint Venture Assets. The terms of the drilling carry required Atinum to fund its ultimate 50% share of drilling, completion and infrastructure costs along with 75% of Gastar USA’s ultimate 50% share of those same costs until the $40.0 million drilling carry had been satisfied. As of December 31, 2011 , Atinum had completed the funding of the $40.0 million drilling carry. Subsequent to December 31, 2011 , Atinum funds only its 50% share of costs.
The Atinum Joint Venture is pursuing an initial three-year development program that calls for the partners to drill a minimum of 12 horizontal wells in 2011 and 24 operated horizontal wells in each of 2012 and 2013 , respectively. Due to recent natural gas price declines, Atinum and Gastar USA agreed to reduce the 2012 minimum wells to be drilled requirement from 24 wells to 20 wells. As of September 30, 2012 , 35 operated wells were drilled and cased under the Atinum Joint Venture. Subsequent to June 30, 2011 , an AMI was established for additional acreage acquisitions in Ohio, New York, Pennsylvania and West Virginia, excluding the counties of Pendleton, Pocahontas, Preston, Randolph and Tucker, West Virginia. Within this AMI, Gastar USA acts as operator and is obligated to offer any future lease acquisitions within the AMI to Atinum on a 50/50 basis, and Atinum will pay Gastar USA on an annual basis an amount equal to 10% of lease bonuses and third party leasing costs up to $20.0 million and 5% of such costs on activities above $20.0 million .

4.
Long-Term Debt
Amended and Restated Revolving Credit Facility
On October 28, 2009 , Gastar USA, together with the other parties thereto, entered into an amended and restated credit facility (as amended and restated, the “Revolving Credit Facility”). The Revolving Credit Facility provided an initial borrowing base of $47.5 million , with borrowings bearing interest, at Gastar USA’s election, at the prime rate or LIBO rate plus an applicable margin. The applicable interest rate margin varies from 1.0% to 2.0% in the case of borrowings based on the prime rate and from 2.5% to 3.5% in the case of borrowings based on LIBO rate, depending on the utilization percentage in relation to the borrowing base. An annual commitment fee of 0.5% is payable quarterly based on the unutilized balance of the borrowing base. The Revolving Credit Facility had a scheduled maturity date of January 2, 2013 .
The Revolving Credit Facility is guaranteed by Parent (as defined in the Revolving Credit Facility) and all of Gastar USA’s current domestic subsidiaries and all future domestic subsidiaries formed during the term of the Revolving Credit Facility. Borrowings and related guarantees are secured by a first priority lien on all domestic natural gas and oil properties currently owned by or later acquired by Gastar USA and its subsidiaries, excluding de minimus value properties as determined by the lender. The facility is secured by a first priority pledge of the stock of each domestic subsidiary, a first priority interest on all accounts receivable, notes receivable, inventory, contract rights, general intangibles and material property of the issuer and 65% of the stock of each foreign subsidiary of Gastar USA.
The Revolving Credit Facility contains various covenants, including among others:

12


Restrictions on liens, incurrence of other indebtedness without lenders' consent and dividends and other restricted payments;
Maintenance of a minimum consolidated current ratio as of the end of each quarter of not less than 1.0 to 1.0 , as adjusted;
Maintenance of a maximum ratio of indebtedness to EBITDA on a rolling four quarter basis, as adjusted, of not greater than 4.0 to 1.0 ; and
Maintenance of an interest coverage ratio on a rolling four quarters basis, as adjusted, of EBITDA to interest expense, as of the end of each quarter, to be less than 2.5 to 1.0 .
All outstanding amounts owed become due and payable upon the occurrence of certain usual and customary events of default, including among others:
Failure to make payments;
Non-performance of covenants and obligations continuing beyond any applicable grace period; and
The occurrence of a “Change in Control” (as defined in the Revolving Credit Facility) of the Parent.
Should there occur a Change in Control of Parent, then, five days after such occurrence, immediately and without notice, (i) all amounts outstanding under the Revolving Credit Facility shall automatically become immediately due and payable and (ii) the commitments shall immediately cease and terminate unless and until reinstated by the lender in writing. If amounts outstanding become immediately due and payable, the obligation of Gastar USA with respect to any commodity hedge exposure shall be to provide cash as collateral to be held and administered by the lender as collateral agent.
On June 24, 2010 , Gastar USA, together with the other parties thereto, entered into the Second Amendment to the Amended and Restated Credit Agreement (the “Second Amendment”) amending that certain Amended and Restated Credit Agreement dated October 28, 2009 (as amended by that certain Consent and First Amendment to Amended and Restated Credit Agreement dated November 20, 2009 , the Second Amendment, the Third Amendment (as defined below) and the Fourth Amendment (as defined below), the “Credit Agreement”) . The Second Amendment amended the Revolving Credit Facility, by, among other things, (i) allowing Gastar USA to hedge up to 80% of the proved developed producing (“PDP”) reserves reflected in its reserve report using hedging other than floors and protective spreads, (ii) allowing Gastar USA to present to the administrative agent a report showing any PDP additions resulting from new wells or the conversion of proved developed non-producing reserves to PDP reserves since the last reserve report in order to hedge the revised PDP reserves, and (iii) removing the limitations on hedging using floors and protective spreads.
On June 14, 2011 , Gastar USA, together with the parties thereto, entered into the Third Amendment to the Credit Agreement (the “Third Amendment”). The Third Amendment amended the Revolving Credit Facility by, among other things, allowing Gastar USA to issue Series A Preferred Stock (as defined below) described in Part I, Item 1. “Financial Statements, Note 7 – Capital Stock” of this report and pay cash dividends on the Series A Preferred Stock of no more than $10.0 million in the aggregate in each calendar year and as long as payment of such dividends does not exceed 10% of the current availability under the then existing borrowing base.
On December 2, 2011 , Gastar USA, together with the parties thereto, entered into the Fourth Amendment to the Credit Agreement, effective as of November 10, 2011 (the “Fourth Amendment”). The Fourth Amendment amended the Revolving Credit Facility, by, among other things, (i) extending the maturity date on borrowings under the Revolving Credit Facility to September 30, 2015 ; (ii) allowing Gastar USA to hedge up to 100% of the PDP reserves reflected in its reserve report using hedging other than floors and protective spreads; and (iii) allowing no more than ten separate LIBO Rate Loans to be outstanding at one time.
Borrowing base redeterminations are scheduled semi-annually in May and November of each calendar year. Gastar USA and its lenders may request one additional unscheduled redetermination annually. As of December 31, 2011 , the Revolving Credit Facility had a borrowing base of $50.0 million , with $30.0 million of borrowings outstanding and availability of $20.0 million . Gastar USA requested that the May 2012 redetermination be accelerated to March 2012. On March 5, 2012 , Gastar USA was notified by its lenders that, effective immediately, the borrowing base was increased from $50.0 million to $100.0 million . Gastar USA requested that the November 2012 redetermination be accelerated to September 2012. On October 19, 2012 , Gastar USA was notified by its lenders that, effective September 30, 2012 , the borrowing base was increased from $100.0 million to $110.0 million . At September 30, 2012 , the Revolving Credit Facility had a borrowing base of $110.0 million , with $70.0 million of borrowings outstanding and availability of $40.0 million . The next regularly scheduled redetermination is set for May 2013.
At September 30, 2012 , Gastar USA was in compliance with all financial covenants under the Revolving Credit Facility.
Other Debt

13


Credit support for the Company’s open derivatives at September 30, 2012 is provided under the Revolving Credit Facility through inter-creditor agreements or open accounts of up to $5.0 million .

5.
Fair Value Measurements
The Company’s financial assets and liabilities are measured at fair value on a recurring basis. The Company discloses its recognized non-financial assets and liabilities, such as asset retirement obligations, unproved properties and other property and equipment, at fair value on a non-recurring basis. For non-financial assets and liabilities, the Company is required to disclose information that enables users of its financial statements to assess the inputs used to develop these measurements. The Company assesses its unproved properties for impairment whenever events or circumstances indicate the carrying value of those properties may not be recoverable. The fair value of the unproved properties is measured using an income approach based upon internal estimates of future production levels, current and future prices, drilling and operating costs, discount rates, current drilling plans and favorable and unfavorable drilling activity on the properties being evaluated and/or adjacent properties, which are Level 3 inputs. For the nine months ended September 30, 2012 , management's evaluation of unproved properties resulted in an impairment. Due to a decline in natural gas prices and the suspension of drilling activity in East Texas, the Company reclassified $19.1 million of unproved properties to proved properties at September 30, 2012 . For the nine months ended September 30, 2011 , the Company did not recognize an impairment of unproved properties. As no other fair value measurements are required to be recognized on a non-recurring basis at September 30, 2012 , no additional disclosures are provided at September 30, 2012 .
As defined in the guidance, fair value is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). To estimate fair value, the Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (“Level 1”) and the lowest priority to unobservable inputs (“Level 3”). The three levels of the fair value hierarchy are as follows:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. The Company’s cash equivalents consist of short-term, highly liquid investments, which have maturities of 90 days or less, including sweep investments and money market funds.
Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
Level 3 inputs are measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources. These inputs may be used with internally developed methodologies or third party broker quotes that result in management’s best estimate of fair value. The Company’s valuation models consider various inputs including (a) quoted forward prices for commodities, (b) time value, (c) volatility factors and (d) current market and contractual prices for the underlying instruments. Significant increases or decreases in any of these inputs in isolation would result in a significantly higher or lower fair value measurement. Level 3 instruments are commodity costless collars, index swaps, basis and fixed price swaps and put and call options to hedge natural gas, oil and NGLs price risk. At each balance sheet date, the Company performs an analysis of all applicable instruments and includes in Level 3 all of those whose fair value is based on significant unobservable inputs. The fair values derived from counterparties and third-party brokers are verified using publicly available values for relevant NYMEX futures contracts and exchange traded contracts for each derivative settlement location. Although such counterparty and third-party broker quotes are used to assess the fair value of its commodity derivative instruments, the Company does not have access to the specific assumptions used in its counterparties valuation models. Consequently, additional disclosures regarding significant Level 3 unobservable inputs were not provided and the Company does not currently have sufficient corroborating market evidence to support classifying these contracts as Level 2 instruments.
As required, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. The determination of the fair values below incorporates various factors, including the impact of the counterparty’s non-performance risk with respect to the Company’s financial assets and the Company’s non-performance risk with respect to the Company’s financial liabilities. The Company has not elected to offset the fair value amounts recognized for multiple derivative instruments executed with the same counterparty, but reports them gross on its condensed consolidated balance sheets.

14


Transfers between levels are recognized at the end of the reporting period. There were no transfers between levels during the 2012 and 2011 periods.
The following tables set forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2012 and December 31, 2011 :
 
Fair value as of September 30, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
9,103

 
$

 
$

 
$
9,103

Commodity derivative contracts

 

 
14,131

 
14,131

Liabilities:
 
 
 
 
 
 
 
Commodity derivative contracts

 

 
(5,030
)
 
(5,030
)
Total
$
9,103

 
$

 
$
9,101

 
$
18,204

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair value as of December 31, 2011
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in thousands)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
10,647

 
$

 
$

 
$
10,647

Restricted cash
50

 

 

 
50

Commodity derivative contracts

 

 
23,515

 
23,515

Liabilities:
 
 
 
 
 
 
 
Commodity derivative contracts

 

 
(7,642
)
 
(7,642
)
Total
$
10,697

 
$

 
$
15,873

 
$
26,570


The table below presents a reconciliation of the assets and liabilities classified as Level 3 in the fair value hierarchy for the three and nine months ended September 30, 2012 and 2011 . Level 3 instruments presented in the table consist of net derivatives that, in management’s opinion, reflect the assumptions a marketplace participant would have used at September 30, 2012 and 2011 .
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(in thousands)
Balance at beginning of period
$
15,460

 
$
13,286

 
$
15,873

 
$
15,199

Total gains (losses) (realized or unrealized):
 
 
 
 
 
 
 
included in earnings
(2,045
)
 
4,813

 
4,594

 
7,596

included in other comprehensive income

 

 

 

Purchases

 

 

 

Issuances

 

 

 

Settlements (1)
(4,314
)
 
(2,853
)
 
(11,366
)
 
(7,549
)
Transfers in and (out) of Level 3

 

 

 

Balance at end of period
$
9,101

 
$
15,246

 
$
9,101

 
$
15,246

The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains or (losses) relating to assets still held at September 30, 2012 and 2011
$
(5,403
)
 
$
2,424

 
$
(4,123
)
 
$
1,027

 _________________________________
(1)
Included in total revenues on the statement of operations.

15


At September 30, 2012 , the estimated fair value of accounts receivable, prepaid expenses, accounts and revenue payables and accrued liabilities approximates their carrying value due to their short-term nature. The estimated fair value of the Company’s long-term debt at September 30, 2012 approximates the respective carrying value because the interest rate approximates the current market rate (Level 2).
The Company has consistently applied the valuation techniques discussed above in all periods presented.
The fair value guidance, as amended, establishes that every derivative instrument is to be recorded on the balance sheet as either an asset or liability measured at fair value. See Note 6, “Derivative Instruments and Hedging Activity.”

6.
Derivative Instruments and Hedging Activity
The Company maintains a commodity price risk management strategy that uses derivative instruments to minimize significant, unanticipated earnings fluctuations that may arise from volatility in commodity prices. The Company uses costless collars, index, basis and fixed price swaps and put and call options to hedge natural gas, oil and NGLs price risk.
All derivative contracts are carried at their fair value on the balance sheet and all unrealized gains and losses are recorded in the statement of operations in unrealized natural gas hedge gain (loss), while realized gains and losses related to contract settlements are recognized in natural gas, oil and NGLs revenues. For the three and nine months ended September 30, 2012 , the Company reported unrealized losses of $5.4 million and $4.1 million , respectively, in the condensed consolidated statement of operations related to the change in the fair value of its commodity derivative instruments. For the three and nine months ended September 30, 2011 , the Company reported unrealized gains of $2.4 million and $1.0 million , respectively, in the condensed consolidated statement of operations related to the change in the fair value of its commodity derivative instruments.
As of September 30, 2012 , the following natural gas derivative transactions were outstanding with the associated notional volumes and weighted average underlying hedge prices:
 
Settlement Period
 
Derivative Instrument
 
Average
Daily
Volume
 
Total of
Notional
Volume
 
Base
Fixed
Price
 
Floor
(Long)
 
Short
Put
 
Call
(Long)
 
Ceiling
(Short)
 
 
 
 
(in MMBtu's)
 
 
 
 
 
 
 
 
 
 
2012
 
Put spread
 
16,566

 
1,524,040

 
$

 
$
6.00

 
$
4.00

 
$

 
$

2012
 
Costless three-way collar
 
7,391

 
679,960

 

 
5.73

 
4.00

 

 
6.88

2012
 
Call spread
 
2,000

 
184,000

 

 

 

 
4.00

 
4.50

2012
 
Basis - HSC (1)
 
5,000

 
460,000

 
(0.08
)
 

 

 

 

2013
 
Call spread
 
2,500

 
912,500

 

 

 

 
4.75

 
5.25

2013
 
Costless three-way collar
 
2,500

 
912,500

 

 
5.00

 
4.00

 

 
6.45

2013
 
Protective spread
 
8,000

 
2,920,000

 
4.91

 

 
3.23

 

 

2013 (2)
 
Protective spread
 
4,025

 
853,200

 
3.70

 

 
3.00

 

 

2013
 
Basis - HSC (1)
 
4,000

 
1,460,000

 
(0.11
)
 

 

 

 

2014
 
Short calls
 
2,500

 
912,500

 

 

 

 

 
6.00

2014
 
Costless three-way collar
 
3,000

 
1,095,000

 

 
4.00

 
3.00

 

 
4.36

2014
 
Costless three-way collar
 
5,000

 
1,825,000

 

 
3.75

 
3.00

 

 
4.55

 _______________________________
(1)
East Houston-Katy - Houston Ship Channel
(2)
For the period January to July 2013


16


As of September 30, 2012 , the following crude derivative transactions were outstanding with the associated notional volumes and weighted average underlying hedge prices:
Settlement Period
 
Derivative Instrument
 
Average
Daily
Volume (1)
 
Total of
Notional
Volume
 
Base
Fixed
Price
 
Floor
(Long)
 
Short
Put
 
Call
(Long)
 
Ceiling
(Short)
 
 
 
 
(in Bbls)
 
 
 
 
 
 
 
 
 
 
2012
 
Fixed price swap
 
600

 
55,200

 
$
102.01

 
$

 
$

 
$

 
$

2013
 
Put spread
 
400

 
146,000

 

 
100.75

 
70.00

 

 

2014
 
Costless three-way collar
 
200

 
73,000

 

 
90.00

 
70.00

 

 
106.20

 _______________________________
(1)
Crude volumes hedged include oil, condensate and certain components of our NGLs production.

As of September 30, 2012 , the following NGLs derivative transactions were outstanding with the associated notional volumes and weighted average underlying hedge prices:
Settlement Period
 
Derivative Instrument
 
Average
Daily
Volume
 
Total of
Notional
Volume
 
Base
Fixed
Price
 
Floor
(Long)
 
Short
Put
 
Call
(Long)
 
Ceiling
(Short)
 
 
 
 
(in Bbls)
 
 
 
 
 
 
 
 
 
 
2012
 
Fixed price swap
 
250

 
23,000

 
$
49.59

 
$

 
$

 
$

 
$

2013
 
Fixed price swap
 
175

 
63,750

 
42.06

 

 

 

 

As of September 30, 2012 , all of the Company’s economic derivative hedge positions were with a multinational energy company or large financial institutions, which are not known to the Company to be in default on their derivative positions. Credit support for the Company’s open derivatives at September 30, 2012 is provided under the Revolving Credit Facility through inter-creditor agreements or open credit accounts of up to $5.0 million . The Company is exposed to credit risk to the extent of non-performance by the counterparties in the derivative contracts discussed above; however, the Company does not anticipate non-performance by such counterparties. None of the Company’s derivative instruments contains credit-risk related contingent features.
In conjunction with certain derivative hedging activity, the Company deferred the payment of certain put premiums for the production month period July 2010 through December 2012. The put premium liabilities become payable monthly as the hedge production month becomes the prompt production month. The Company began amortizing the deferred put premium liabilities during July 2010. At September 30, 2012 and December 31, 2011 , the Company had current commodity derivative premium payable liabilities of $1.4 million and $4.7 million , respectively.


17


Additional Disclosures about Derivative Instruments and Hedging Activities
The tables below provide information on the location and amounts of derivative fair values in the condensed consolidated statement of financial position and derivative gains and losses in the condensed consolidated statement of operations for derivative instruments that are not designated as hedging instruments:
 
 
Fair Values of Derivative Instruments
Derivative Assets (Liabilities)
 
 
 
Fair Value
 
Balance Sheet Location
 
September 30, 2012
 
December 31, 2011
 
 
 
(in thousands)
Derivatives not designated as hedging instruments
 
 
 
 
 
Commodity derivative contracts
Current assets
 
$
11,446

 
$
19,385

Commodity derivative contracts
Other assets
 
2,685

 
4,130

Commodity derivative contracts
Current liabilities
 
(2,578
)
 
(6,479
)
Commodity derivative contracts
Long-term liabilities
 
(2,452
)
 
(1,163
)
Total derivatives not designated as hedging instruments
 
 
$
9,101

 
$
15,873

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of Gain (Loss) Recognized in Income on Derivatives
 
 
 
Amount of Gain (Loss)
Recognized in Income on
Derivatives For the Three
Months Ended
 
Location of Gain (Loss) Recognized in
Income on Derivatives
 
September 30, 2012
 
September 30, 2011
 
 
 
(in thousands)
Derivatives not designated as hedging instruments
 
 
 
 
 
Commodity derivative contracts
Natural gas, oil and NGLs revenues
 
$
3,358

 
$
2,389

Commodity derivative contracts
Unrealized hedge gain (loss)
 
(5,403
)
 
2,424

Total
 
 
$
(2,045
)
 
$
4,813

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of Gain (Loss) Recognized in Income on Derivatives
 
 
 
Amount of Gain (Loss)
Recognized in Income on
Derivatives For the Nine
Months Ended
 
Location of Gain (Loss) Recognized in
Income on Derivatives
 
September 30, 2012
 
September 30, 2011
 
 
 
(in thousands)
Derivatives not designated as hedging instruments
 
 
 
 
 
Commodity derivative contracts
Natural gas, oil and NGLs revenues
 
$
8,717

 
$
6,569

Commodity derivative contracts
Unrealized hedge gain (loss)
 
(4,123
)
 
1,027

Total
 
 
$
4,594

 
$
7,596

 
 
 
 
 
 





18



7.
Capital Stock

Other Share Issuances
The following table provides information regarding the issuances and forfeitures of Parent’s common shares pursuant to Parent’s 2006 Long-Term Stock Incentive Plan for the periods indicated:
 
 
For the Three Months Ended September 30, 2012
 
For the Nine Months Ended September 30, 2012
Other share issuances:
 
 
 
Restricted common shares granted

 
1,116,935

Restricted common shares vested
127,250

 
496,299

Stock options exercised

 
3,000

Common shares forfeited (1)
34,111

 
139,101

Common shares canceled
26,195

 
26,871

 __________________
(1)
Represents common shares forfeited in connection with the payment of estimated withholding taxes on restricted common shares that vested and with the payment of the exercise price and estimated withholding taxes on option exercises during the period.

On June 7, 2012 , Parent's shareholders voted to approve the Second Amendment to Parent's 2006 Long-Term Stock Incentive Plan. This amendment, effective June 3, 2012 , increased the total number of shares available for issuance under the plan from 6,000,000 shares to 11,000,000 shares. There were 5,192,527 shares available for issuance under the Parent's 2006 Long-Term Stock Incentive Plan at September 30, 2012 .
Shares Reserved
At September 30, 2012 , Parent had 978,550 common shares reserved for the exercise of stock options.
Gastar USA Common Stock
Prior to its conversion, as described below, Gastar USA’s articles of incorporation allowed Gastar USA to issue 1,000 shares of common stock, without par value. There were 750 shares issued and outstanding at September 30, 2012 and December 31, 2011 , all of which were held by Parent.
On May 24, 2011 , Gastar USA converted from a Michigan corporation to a Delaware corporation (the “Conversion”). Following the Conversion, Gastar USA’s new Delaware certificate of incorporation allows Gastar USA to issue 1,000 shares of common stock, without par value. In connection with the Conversion, the Parent’s 750 shares of common stock in the Michigan corporation were converted to 750 shares of common stock in the new Gastar USA Delaware corporation.
Gastar USA Preferred Stock
Prior to the Conversion, Gastar USA’s articles of incorporation did not authorize issuance of preferred stock.
Following the Conversion, Gastar USA’s new Delaware certificate of incorporation allows Gastar USA to issue 10,000,000 shares of preferred stock, with $0.01 par value. The preferred stock may be issued from time to time in one or more series. Gastar USA’s Board of Directors (the “Gastar USA Board”) is authorized to fix the number of shares of any series of preferred stock and to determine the designation of any such series. The Gastar USA Board is also authorized to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of preferred stock and, within the limits and restrictions stated in any resolution or resolutions of the Gastar USA Board originally fixing the number of shares constituting any series, to increase or decrease (but not below the number of shares of any such series outstanding) the number of shares of any series subsequent to the issues shares of that series).
On June 23, 2011 , Gastar USA sold an aggregate of 646,295 shares of its 8.625% Series A Cumulative Preferred Stock, par value $0.01 per share and liquidation preference $25.00 per share (the “Series A Preferred Stock”) through a best efforts underwritten public offering. The net proceeds to Gastar USA were approximately $13.6 million after deducting underwriting discounts, commissions and estimated offering expenses.
On June 29, 2011 , Gastar USA entered into an at-the-market sales agreement (“ATM Agreement”) with McNicoll, Lewis & Vlak LLC (“MLV”). According to the provisions of the ATM agreement, Gastar USA may offer and sell from time to time up

19


to 3,400,000 shares of Series A Preferred Stock through MLV, as its sales agent. Sales of the units will be made by means of ordinary brokers’ transactions on the NYSE at market prices, in block transactions or as otherwise agreed between Gastar USA and MLV.
For the nine months ended September 30, 2012 , Gastar USA sold 2,582,407 shares of Series A Preferred Stock under the ATM Agreement for net proceeds of $49.2 million , resulting in 3,946,950 total shares of Series A Preferred Stock issued for net proceeds of $76.6 million at September 30, 2012 . From October 1, 2012 to November 5, 2012 , Gastar USA sold an additional 4,304 shares of Series A Preferred Stock under the ATM Agreement for net proceeds of $84,000 .
The Series A Preferred Stock is subordinated to all of Gastar USA’s existing and future debt and all future capital stock designated as senior to the Series A Preferred Stock. Parent has entered into a guarantee agreement, whereby it will fully and unconditionally guarantee the payment of dividends that have been declared by the board of directors of Gastar USA, amounts payable upon redemption or liquidation, dissolution or winding up, and any other amounts due with respect to the Series A Preferred Stock, to the extent described in the guarantee agreement. Parent’s obligations with respect to the guarantee will be effectively subordinated to all of its existing and future debt.
The Series A Preferred Stock cannot be converted into common stock of Gastar USA or the Company, but may be redeemed by Gastar USA, at Gastar USA’s option, on or after June 23, 2014 for $25.00 per share plus any accrued and unpaid dividends or in certain circumstances prior to such date as a result of a change in control. Following a change in control, Gastar USA will have the option to redeem the Series A Preferred Stock, in whole but not in part, within 90 days after the date on which the change in control occurs, for cash at the following prices per share, plus accrued and unpaid dividends (whether or not declared), up to the redemption date:
 
Redemption Date
Redemption
Price
On or after June 23, 2012 and prior to June 23, 2013
$
25.50

On or after June 23, 2013 and prior to June 23, 2014
$
25.25

On or after June 23, 2014
$
25.00


Gastar USA will pay cumulative dividends on the Series A Preferred Stock at a fixed rate of 8.625%  per annum of the $25.00 per share liquidation preference. For the three and nine months ended September 30, 2012 , Gastar USA paid dividends of $2.0 million and $4.9 million , respectively.

8.
Interest Expense
The following table summarizes the components of interest expense for the periods indicated:
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(in thousands)
Interest expense:
 
 
 
 
 
 
 
Cash and accrued
$
549

 
$
180

 
$
1,272

 
$
559

Amortization of deferred financing costs
60

 
65

 
157

 
193

Capitalized interest
(579
)
 
(221
)
 
(1,343
)
 
(665
)
Total interest expense
$
30

 
$
24

 
$
86

 
$
87


9. Related Party Transactions
Chesapeake Energy Corporation
Chesapeake Energy Corporation (“Chesapeake”) acquired 6,781,768 of Parent’s common shares during 2005 to 2007 in a series of private placement transactions. As a result of its share ownership, Chesapeake has the right to have an observer present at meetings of the Parent’s board of directors.
As of September 30, 2012 , Chesapeake owned 6,781,768 of Parent’s common shares, or 10.3% of the Parent’s outstanding common shares.


20


10.
Income Taxes
For the three and nine months ended September 30, 2012 and 2011 , respectively, the Company did not recognize a current income tax benefit or provision.

11.
Earnings per Share
In accordance with the provisions of current authoritative guidance, basic earnings or loss per share is computed on the basis of the weighted average number of common shares outstanding during the periods. Diluted earnings or loss per share is computed based upon the weighted average number of common shares outstanding plus the assumed issuance of common shares for all potentially dilutive securities. Diluted amounts are not included in the computation of diluted loss per share, as such would be anti-dilutive.
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(in thousands, except per share and share data)
Net income (loss) attributable to Gastar Exploration Ltd.
$
(83,457
)
 
$
1,014

 
$
(163,802
)
 
$
(795
)
Weighted average common shares outstanding - basic
63,601,645

 
63,238,069

 
63,494,224

 
62,901,860

Incremental shares from unvested restricted shares

 
551,687

 

 

Incremental shares from outstanding stock options

 
52,342

 

 

Weighted average common shares outstanding - diluted
63,601,645

 
63,842,098

 
63,494,224

 
62,901,860

Net income (loss) per common share attributable to Gastar Exploration Ltd. Common Shareholders:
 
 
 
 
 
 
 
Basic
$
(1.31
)
 
$
0.02

 
$
(2.58
)
 
$
(0.01
)
Diluted
$
(1.31
)
 
$
0.02

 
$
(2.58
)
 
$
(0.01
)
Common shares excluded from denominator as anti-dilutive:
 
 
 
 
 
 
 
Unvested restricted shares
1,878,355

 
500

 
1,654,439

 
149,960

Stock options
979,725

 
838,200

 
926,271

 
857,825

Warrants

 
2,000,000

 

 
2,000,000

Total
2,858,080

 
2,838,700

 
2,580,710

 
3,007,785



12.
Commitments and Contingencies
Litigation
Chesapeake Exploration L.L.C. (“Chesapeake Exploration”) and Chesapeake Energy Corp.  (“Chesapeake Energy”) v. Gastar Exploration Ltd., Gastar Exploration Texas, LP, and Gastar Exploration Texas, LLC (No. 4:12-cv-2922), United States District Court for the Southern District of Texas, Houston Division .  This lawsuit, filed on October 1, 2012, re-asserts the same claims for rescission of the November 2005 Agreements (as defined below) and for recovery of amounts paid under those agreements that Chesapeake Exploration and Chesapeake Energy (collectively, “Chesapeake”) previously asserted in the cross-action filed against the Company in the Navasota litigation described below, as previously disclosed in the Company's filings. In March 2011, Chesapeake dismissed its cross-claims against the Company in the Navasota litigation, without prejudice to their re-filing. In this new lawsuit, Chesapeake re-asserts those claims, seeking rescission of (a) a Purchase and Sale and Exploration and Development Agreement between the Company and Chesapeake Exploration Limited Partnership (the “Purchase and Sale Agreement”), relating to properties in the Hilltop Prospect in Texas, (b) an Exploration and Development Agreement between the Company and Chesapeake Exploration Limited Partnership, (c) a Common Share Purchase Agreement between the Company and Chesapeake Energy, and (d) a Registration Rights Agreement between the Company and Chesapeake Energy, all effective as of November 4, 2005 (collectively, “the November 2005 Agreements”), based on an alleged “mutual mistake” and alleged failure of consideration.  Chesapeake alleges that the parties to the November 2005 Agreements

21


believed that the Gastar defendants had the right to convey to Chesapeake Exploration the properties that were the subject of the Purchase and Sale Agreement, notwithstanding the exercise by Navasota Resources LP (“Navasota”) of a preferential right to purchase the interest in the Hilltop Prospect properties. The dispute over the validity of Navasota's exercise of its preferential right to purchase was the subject of litigation filed by Navasota prior to the execution of the November 2005 Agreements.  Chesapeake claims that the Texas Court of Appeals' subsequent ruling in that litigation upholding the validity of Navasota's exercise of the preferential right to purchase establishes that there was a mutual mistake of fact and a failure of consideration with regard to the November 2005 Agreements. In the alternative, Chesapeake claims that the Gastar defendants have been unjustly enriched at the expense of Chesapeake by the funds paid by Chesapeake to the Gastar defendants. In their complaint filed in the lawsuit, Chesapeake offers to return Parent's common shares purchased pursuant to the Common Stock Purchase Agreement, and seeks restitution from the Gastar defendants of the net amount of approximately $101.4 million , which includes the $76.0 million that Chesapeake Energy paid for Parent's common shares (now 5,430,329 shares after a 1 : 5 stock split) that Chesapeake Energy purchased in 2005 and now seeks to return.  In a motion to compel arbitration filed by Chesapeake on October 24, 2012, Chesapeake has asked the court to order arbitration of the claims asserted in the complaint pursuant to an arbitration clause in the Common Share Purchase Agreement.
The Gastar defendants contend that the claims fail as a matter of law and intend to vigorously defend the lawsuit.  Specifically, the Gastar defendants contend that all facts relating to the Navasota claim were fully known to the parties at the time of execution of the November 2005 Agreements, and the parties expressly agreed in the Purchase and Sale Agreement that Chesapeake Exploration would take title to the properties subject to Navasota's claim and would convey the properties to Navasota in the event Navasota prevailed in the litigation, precluding Chesapeake's claims for rescission of the November 2005 Agreements.  For the same reasons, the Gastar defendants also contend that Chesapeake received all of the consideration that the November 2005 Agreements called for and that there was no failure of consideration.  With regard to Chesapeake's alternative unjust enrichment claim, the Gastar defendants contend that it is barred by the two-year statute of limitations and that in any event, it fails for a variety of reasons, including the fact that the parties' agreements address the subject matter of the dispute (precluding a claim for unjust enrichment) and the fact that the Gastar defendants were not unjustly enriched by Chesapeake Exploration's payment of the share of costs attributable to an interest in the properties that was not owned by the Gastar defendants.   The Gastar defendants also contend that Chesapeake's claims are not subject to arbitration and that the claims should be resolved on the merits by the federal court in which Chesapeake filed the lawsuit.
No specific loss or range of loss can be estimated as at least reasonably possible within the amounts claimed by Chesapeake. As of September 30, 2012, no accrual has been recorded as management believes a future adverse outcome is not probable.
Navasota Resources L.P. vs. First Source Texas, Inc., First Source Gas L.P. (now Gastar Exploration Texas, LP) and Gastar Exploration Ltd. (Cause No. 0-05-451) District Court of Leon County, Texas12th Judicial District. This lawsuit, dated October 31, 2005 , contended that the Company breached Navasota’s preferential right to purchase 33.33% of the Company’s interest in certain natural gas and oil leases located in Leon and Robertson Counties, which were sold to Chesapeake on November 4, 2005 (the “2005 Transaction”). The preferential right claimed that was the subject of the lawsuit is under an operating agreement dated July 7, 2000. The Company contended, among other things, that Navasota neither properly nor timely exercised any preferential right election it may have had with respect to the 2005 Transaction. In July 2006, the District Court of Leon County, Texas issued a summary judgment in favor of the Company and Chesapeake. Navasota filed a Notice of Appeal to the Tenth Court of Appeals in Waco. Oral argument was heard on September 26, 2007 and the Court of Appeals issued its opinion on January 9, 2008 reversing the trial court’s rulings, rendering judgment in favor of Navasota on its claims for breach of contract and specific performance, and remanding the case for further proceedings on Navasota’s other counts, which included claims for suit to quiet title, trespass to try title, tortuous interference with contract, conversion, money had and received, breach of contract and declaratory relief. The Company and Chesapeake filed a motion for rehearing on February 6, 2008, which was denied on March18, 2008. The Company and Chesapeake filed a joint Petition for Review in the Texas Supreme Court on May 13, 2008. On August 28, 2008, the Texas Supreme Court requested briefing on the merits. On January 9, 2009, the Texas Supreme Court denied the Petition for Review. On January 26, 2009, the Company and Chesapeake jointly filed a motion for rehearing in the Texas Supreme Court on its denial of the Petition for Review. On April 24, 2009, the Texas Supreme Court denied the Petition for Review.
Pursuant to a provision in the Purchase and Sale Agreement, between the Company and Chesapeake, Chesapeake acknowledged the existence of the Navasota lawsuit and claims and further agreed that if Navasota were to prevail on its claims, that Chesapeake would convey the affected interests it purchased from the Company to Navasota upon receipt of the purchase price and/or other consideration paid by Navasota. Therefore, the Company believes that Navasota’s exercise of its rights of specific performance should impact only Chesapeake’s assigned leasehold interests. However, in December 2008, Chesapeake stated to the Company that if the Texas Supreme Court were not to reverse the decision of the Tenth Court of Appeals, Chesapeake would seek rescission of the 2005 Transaction and restitution of consideration paid, indicating that Chesapeake might assert such rescission and restitution as to the Purchase and Sale Agreement and the Common Share Purchase Agreement. Chesapeake did not identify particular sums as to which it might seek restitution, but amounts paid to the

22


Company in connection with the 2005 Transaction could be asserted to include the $76.0 million paid by Chesapeake for the purchase of 5.5 million common shares as part of the 2005 Transaction and/or other amounts. Chesapeake amended its answer to include cross-claims and counterclaims, including a claim for rescission.
On or about June 9, 2009, Navasota filed and served its Fourth Amended Petition, essentially re-pleading its previously-asserted claims against the Company and Chesapeake. Navasota exercised its rights of specific performance, and Chesapeake assigned leases to Navasota in July 2009. In March 2011, Chesapeake dismissed the cross-claims against the Company, including the claim for rescission, without prejudice to the subsequent refiling of those claims. On April 12, 2011, Navasota filed its Fifth Amended Petition. The Fifth Amended Petition added a new claim that the Company allegedly refused to offer Navasota interests in oil and gas leases located within an area of mutual interest, failed to assign Navasota overriding royalty interests, and failed to recognize back-in-after-payout interests. On September 2, 2011 , Navasota filed its Sixth Amended Petition. The Sixth Amended Petition added a new claim that the Company allegedly further violated Navasota’s preferential right under the July 7, 2000 operating agreement to the extent the Company sold any other interests in oil and gas leases located in an area of mutual interest without offering them to Navasota. The Sixth Amended Petition also added a claim that the Company violated the Texas Natural Resource Code sections 402 and 403 by failing to pay production proceeds to Navasota.
The claims for monetary damages that Navasota asserted against the Company are as follows:
1. A claim for recovery of the gross proceeds of production for the period that Chesapeake owned record title to the properties, in the approximate amount of $52.0 million .
2. A claim for alleged lost hedging profits that Navasota claims that would have been realized if it had title to the properties during the period that Chesapeake owned record title to the properties, in the approximate amount of $32.0 million .
The Company believed that these claims against the Company were invalid and that Navasota was not entitled to any recovery on its claims for monetary damages. In particular, the Company believed that by virtue of the costs incurred in connection with the properties during the time period that Chesapeake owned record title to the properties compared to amount reimbursed by Navasota to Chesapeake to date, Navasota was in a better position economically than it would have been in had the assignments to Navasota been made in November 2005. The Company also believed that the claim that Navasota would have earned hedging profits if it had received the assignments in November 2005 was both legally invalid and factually wrong based on the undisputed evidence.
The case was set for trial in Leon County, Texas on April 24, 2012. The Company attended court-mandated mediation on April 5, 2012 , and at the mediation, the Company entered into a settlement agreement with Navasota. Under the terms of the settlement, Gastar Exploration Texas, LP agreed to pay the sum of $1.3 million to Navasota, Navasota gave a full release of claims to the Company, and Gastar Exploration Texas, LP agreed to offer Navasota the opportunity to acquire one-third (1/3) of Gastar Exploration Texas, LP's current working interest in each oil and gas lease that meets both of the following criteria: (a) Gastar Exploration Texas, LP acquired the lease or an interest in the lease after October 30, 2005 in the AMI that is the subject of the Joint Operating Agreement dated July 7, 2000 covering the Hilltop Prospect to which Navasota and Gastar Exploration Texas, LP are currently parties, and (b) none of the Gastar Defendants (or any of their affiliates) and none of the Chesapeake Defendants (or any of their affiliates) have conveyed a working interest therein to Navasota as of the date of this settlement agreement. The settlement agreement provides for the payment by Navasota of its share of lease acquisition costs for any leases in which it elects to acquire an interest and for an accounting of revenues and costs for any wells drilled on leases in which Navasota elects to acquire an interest. Pursuant to the settlement, Gastar Exploration Texas, LP made the offer for acquisition of certain leasehold interests to Navasota in early May 2012, and in early June 2012, Navasota exercised its election to acquire interests in all of the leases offered pursuant to the settlement agreement. Navasota has paid Gastar Exploration Texas, LP approximately $1.5 million in leasehold reimbursement and received an assignment of approximately 3,200 net acres. Gastar Exploration Texas, LP has paid the $1.3 million of settlement funds to Navasota, and Navasota has dismissed its claims against the Company with prejudice.
The settlement of the Navasota lawsuit did not materially impact the Company's operating results, financial position or cash flows.
The Company has been expensing legal defense costs on these proceedings as they are incurred.
The Company is party to various legal proceedings arising in the normal course of business. The ultimate outcome of each of these matters cannot be absolutely determined, and the liability the Company may ultimately incur with respect to any one of these matters in the event of a negative outcome may be in excess of amounts currently accrued for with respect to such matters. Net of available insurance and performance of contractual defense and indemnity obligations, where applicable, management does not believe any such matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows.


23


13.
Statement of Cash Flows – Supplemental Information
The following is a summary of the supplemental cash paid and non-cash transactions for the periods indicated:

 
For the Nine Months Ended September 30,
 
2012
 
2011
 
(in thousands)
Cash paid for interest
$
1,280

 
$
556

Non-cash transactions:
 
 
 
Capital expenditures excluded from accounts payable and accrued drilling costs
724

 
(99
)
Capital expenditures excluded from prepaid expenses
99

 

Asset retirement obligation included in natural gas and oil properties
229

 
486

Asset retirement obligation assigned to operator
(2,099
)
 

Application of advances to operators
5,848

 
2,770



24


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking information that is intended to be covered by the “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact included or incorporated by reference in this report are forward-looking statements, including without limitation all statements regarding future plans, business objectives, strategies, expected future financial position or performance, expected future operational position or performance, budgets and projected costs, future competitive position or goals and/or projections of management for future operations. In some cases, you can identify a forward-looking statement by terminology such as “may,” “will,” “could,” “should,” “expect,” “plan,” “project,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “pursue,” “target” or “continue,” the negative of such terms or variations thereon, or other comparable terminology.
The forward-looking statements contained in this report are largely based on our expectations and beliefs concerning future developments and their potential effect on us, which reflect certain estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions, operating trends, and other factors. Forward-looking statements may include statements that relate to, among other things, our:
financial position;
business strategy and budgets;
anticipated capital expenditures;
drilling of wells, including the anticipated scheduling and results of such operations;
natural gas and oil reserves;
timing and amount of future production of natural gas, NGLs, oil and condensate;
operating costs and other expenses;
cash flow and anticipated liquidity;
prospect development; and
property acquisitions and sales.
Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. As such, management’s assumptions about future events may prove to be inaccurate. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf. Management cautions all readers that the forward-looking statements contained in this report are not guar