Sticking to Our Guns on Gastar

 | May 11, 2017 | 1:00 PM EDT
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Someone decided they weren't going to like Gastar Exploration's (GST) earnings yesterday (they reported after the close) as the stock fell from a midday high down to $1.32 in a few minutes at the end of trading. It's down to $1.24 now after opening up a few pennies this morning then dropping again before the conference call. These moves have nothing to do with fundamentals and make my life extremely difficult. 

But you have to stick to your guns, and I bought more GST at these levels after this morning's call. Crude oil prices have risen again today and now sit above $48 a barrel for West Texas Intermediate. Today's move is a follow-up from yesterday's jump on lower-than-expected U.S. inventories. That's what is ultimately important for GST. 

Gastar's conference call was a pretty blah affair. I would describe GST's earnings as mixed. Revenues beat my expectations and adjusted EBITDA, at $10.6 million, was in line with the fourth quarter's level. 

The negatives would be somewhat higher well costs and uneven results from the company's most recently drilled wells. Service costs have risen from generational lows registered last year -- true across the industry not just for GST -- and it's clear Gastar has not yet "cracked the code" as far as optimizing well completions in its targeted Meramec and Osage formations in Oklahoma. 

On the positive side, CEO Russ Porter mentioned strong results from other operators in GST's target areas and that Gastar's wells are achieving a higher oil cut (mix of oil versus gas) than had been expected, which adds to profitability. 

So it's really early days for Gastar in these new plays, but the key factor in the first quarter was the company's multistage transaction with publicly traded BDC Ares Management. The final stage of the Ares deal was approved by GST shareholders last week. Gastar's balance sheet is now in fine shape, and first-quarter results confirmed liquidity is no longer an issue. 

As the company keeps drilling more wells in Oklahoma (on its own and with its "DrillCo" partnership with a private equity company, a separate transaction from the Ares deal), I believe initial well production results will improve. I also believe we'll see crude oil prices back in the low $50s very soon, so I have been increasing my exposure to the energy sector in the past week. 

I'm still adding to GST positions with an eye toward flipping everything into Gastar's Series A preferreds (GST-A) . These shares are trading at about 78 cents on the dollar and yielding 11% based on its monthly coupon. Gastar suspended preferred dividends during the depths of the oil plunge last spring, but fully paid down all those cumulative dividends in the first quarter of 2017. Gastar's deal with Ares allows for preferred dividend payments and GST is now back to its monthly payment schedule on its series A and B preferreds. 

I would have loved for GST to jump today so I could move into GST-A in time for May's dividend (GST-A goes ex-dividend next Thursday, so we still have time for that trade), but the short-sellers and day-traders never make things easy. At their current level of $1.24, the shares are just below the level at which they traded when I submitted my Real Money column on GST last Thursday and well above that day's low of $1.06. The intraday roller-coaster rides are just part of the joy of microcap investing, as I detail in my newsletter, MicroCap Guru

My clients and I lived through such volatility with Navios Maritime (NM) , and I'll be absorbing it via Gastar for the near future. That's the life of the guru. Finding undervalued gems in this market requires patience.

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