PostRock Energy Corp. (Nasdaq:PSTR) ("PostRock" or the "Company")
today announced the filing of its annual report on Form 10-K on
March 19, 2010, which includes consolidated financial statements
and operating results of PostRock's predecessor entities for the
fiscal year ended December 31, 2009.
2009 Operational and Financial Highlights
Maintained production at 59.5 million cubic feet of natural gas
equivalent per day despite a 96% reduction in capital
expenditures.
Reduced net debt by $65.9 million to $308.4 million at December
31, 2009.
Increased adjusted EBITDA by 22% to $100 million, despite a
large drop in natural gas prices, through operating cost reductions
and proceeds from its hedging strategy.
Reported proved reserves as of December 31, 2009, on a pro forma
basis giving effect to the recombination of PostRock's predecessor
entities, of 222.8 Bcfe under NYMEX pricing and 110.3 Bcfe under
SEC pricing (assuming termination of the midstream services and gas
gathering agreement), as compared with 74.8 Bcfe on an SEC,
non-recombined basis.
Management Comment
"In 2009 we made significant progress on our strategic
plan. We successfully reduced debt, maintained production,
lowered operating costs, and amended our credit facilities allowing
for our recombination, which occurred on March 5, 2010," said David
C. Lawler, President and Chief Executive Officer of PostRock
Energy. "We were also successful in our Marcellus Shale
development activity during the year as we completed one vertical
well and our first two horizontal wells. The performance of these
wells supports our positive view of our Marcellus Shale acreage
position."
"In 2010, we plan to drill and complete three vertical and six
horizontal wells on our Marcellus Shale acreage and complete and
connect 108 wells previously drilled in the Cherokee Basin. In
addition, we continue to pursue several initiatives to increase the
value of our interstate pipeline that include creating the ability
to deliver our Cherokee Basin production into our interstate
pipeline and building interconnects with other interstate and
intrastate pipelines to provide access to premium markets in the
upper Midwest and Northeast. We remain focused on cost
reductions and anticipate our recombination will allow us to
significantly lower our general and administrative expenses in
2010," said Mr. Lawler
2009 Financial Summary
PostRock's adjusted EBITDA increased to $100 million in 2009
from $82.2 million in 2008. The Company reported a net loss of
$292.3 million in 2009, which included a $268.6 million non-cash
impairment charge and a $50 million non-cash mark to market loss on
derivative financial instruments.
Revenues from oil and natural gas sales declined to $79.9
million in 2009 from $162.5 million in 2008. The change was the
result of the decline in average realized natural gas equivalent
sales prices to $3.68 per Mcfe in 2009 from $7.47 per Mcfe in 2008.
PostRock's total natural gas equivalent production was unchanged
from 2008 at approximately 21.7 billion cubic feet (Bcfe) despite a
reduction in oil and gas development capital expenditures to $5.1
million in 2009 from $58.1 million in 2008.
PostRock actively manages its exposure to natural gas and crude
oil prices using various hedging strategies. In 2009, the
Company received $98.1 million from its derivative settlements as
compared to paying out $6.4 million in 2008. Derivative
settlements in 2009 included approximately $26 million received as
a result of PostRock amending or exiting certain above-market
derivative financial instruments in June 2009.
As of December 31, 2009, PostRock had derivative positions that
provided price protection for approximately 16.1 Bcfe of its
Cherokee Basin natural gas production at an average realized price
of $6.11 per Mcfe in 2010 and positions that protect prices on the
majority of its proved developed producing Cherokee Basin reserves
from 2011 to 2013 at increasing prices. PostRock's natural gas
and crude oil derivative positions are shown in the following
table:
Natural Gas Derivative Contract Summary
2010
2011
2012
2013
Price
($/mcf)
Volume
(MMcf)
Price
($/mcf)
Volume
(MMcf)
Price
($/mcf)
Volume
(MMcf)
Price
($/mcf)
Volume
(MMcf)
Southern Star Swaps
$6.24
12,499
$6.43
5,000
$6.72
2,000
--
--
NYMEX Swaps
$6.31
3,630
$7.01
8,550
$7.22
9,000
$7.28
9,000
Southern Star Basis
Swaps
($0.63)
3,630
($0.67)
8,550
($0.70)
9,000
($0.71)
9,000
Avg. Realized Price &
Total Volume Hedged
$6.11
16,129
$6.37
13,550
$6.56
11,000
$6.57
9,000
Crude Oil Derivative Contract Summary
2010
Price
($/bbl)
Volume
(MBbls)
NYMEX Swap
$87.50
30,000
Oil and natural gas production costs decreased to $33.4 million
in 2009 from $44.1 million in 2008. The Company was able reduce
operating costs by effectively implementing process improvement
initiatives, including the use of the latest artificial lift
technology, which helped improve reliability and reduce well
maintenance costs.
PostRock's natural gas pipeline revenue from its interstate
pipeline and third party gathering operations decreased to $26.2
million in 2009 from $28.2 million in 2008. The decrease was
primarily driven by the loss of a significant customer on
PostRock's interstate pipeline, as well as the renegotiation of
certain other contracts. PostRock's pipeline operating costs
declined to $29.1 million in 2009 from $29.7 million in 2008.
PostRock is pursuing efforts to optimize its compression fleet in
order to decrease fuel consumption and improve horsepower
utilization.
PostRock's general and administrative expenses increased to
$41.7 million in 2009 from $28.3 million in 2008 due to the legal,
consulting and audit fees associated with re-audits and
restatements of historical financial statements as well as
increased legal, investment banker, and other professional fees in
connection with the Company's recombination.
Liquidity Update
PostRock's outstanding debt balance was $329.3 million and total
cash balance was $20.9 million at December 31, 2009. From December
31, 2009 to March 19, 2010, the Company borrowed an additional $1.4
million to fund its Marcellus Shale development activity and for
general corporate purposes while cash balances increased to
approximately $25.5 million.
Natural Gas and Oil Reserves as of December 31, 2009
Fluctuations in the prices and costs used in the estimation of
reserves can cause significant variations in the resulting reserve
calculation. PostRock believes it would be meaningful to consider
different price and cost sensitivities with respect to its reserve
calculation, particularly with respect to transportation costs
following consummation of the recombination. The following table
presents reserve volumes and the present value of future cash
flows, discounted at 10%, as of December 31, 2009 under three
different pricing and cost scenarios explained below. The reserves
presented under the SEC case and the alternative price and cost
assumptions have been prepared by independent petroleum
engineers.
Sensitivity of Reserves to Prices and Costs
as of December 31, 2009
SEC
Modernization
Methodology(1)
Recombined
Methodology(2)
Recombined
NYMEX
Methodology(3)
Gas
(Bcf)
Oil
(MMbbl)
Total
(Bcfe)
Gas
(Bcf)
Oil
(MMbbl)
Total
(Bcfe)
Gas
(Bcf)
Oil
(MMbbl)
Total
(Bcfe)
Proved reserves
Developed
62.1
0.78
66.8
96.5
0.78
101.2
158.9
0.87
164.1
Undeveloped
7.7
0.05
8.0
8.8
0.05
9.1
58.4
0.05
58.7
Total proved reserves
69.8
0.83
74.8
105.3
0.83
110.3
217.3
0.92
222.8
Total probable reserves
4.5
—
4.5
31.7
0.33
33.7
57.4
0.33
59.4
Total possible reserves
9.1
—
9.1
9.1
—
9.1
94.8
0.06
95.2
SEC
Modernization
Methodology(1)
Recombined
Methodology(2)
Recombined
NYMEX
Methodology(3)
(in thousands)
PV-10 value(4):
Proved reserves
$ 50,559
$ 99,901
$ 431,901
Probable reserves
435
2,120
63,437
Possible reserves
139
139
75,996
1) Amounts determined based on the recently adopted SEC
final rule "Modernization of Gas and Oil Accounting". The prices
used in this calculation equal the unweighted arithmetic average of
the first day of the month price for each month from January
through December 2009 of $61.18 per barrel of oil and $3.87 per
Mmbtu of gas. The transportation cost on PostRock's Cherokee Basin
production was $1.70 per Mcf, which is based on the gathering rate
to be charged under the midstream services and gas dedication
agreement between Bluestem Pipeline, LLC and Quest Cherokee,
LLC.
2) The prices used in this calculation are the same as those
described in footnote 1. The transportation charge used on
PostRock's Cherokee Basin production was $0.80 per Mcf due to the
fact that this scenario assumes that the midstream services and gas
dedication agreement (which after the recombination is an
intercompany agreement) would be no longer in effect and therefore
utilizes PostRock's current estimate of direct pipeline operating
expense for the natural gas gathering pipeline system.
3) Amounts determined based on the publicly traded NYMEX 2010 to
2015 natural gas and oil forward curve as of February 1, 2010. The
average five year forward price for natural gas was $6.38 per Mmbtu
and the average five year forward price for crude oil was $82.75
per barrel. The transportation charge used on PostRock's Cherokee
Basin production was $0.80 per Mcf due to the fact that this
scenario assumes that the midstream services and gas dedication
agreement (which after the recombination is an intercompany
agreement) would be no longer in effect and therefore utilizes
PostRock's current estimate of direct pipeline operating expense
for the natural gas gathering pipeline system.
4) The PV-10 value of PostRock's reserves is a non-GAAP
financial measure. PV-10 value is derived from the standardized
measure of discounted future net cash flows, which is the most
directly comparable financial measure under generally accepted
accounting principles. PV-10 value is a computation of the
standardized measure of discounted future net cash flows on a
pre-tax basis. PV-10 value is equal to the standardized measure of
discounted future net cash flows at a specified date before
deducting future income taxes, discounted at 10%. Discounted future
net cash flows are based on assumptions of future prices, future
production costs, and future development costs. However, as a
result of significant net operating loss carryforwards, PostRock
does not expect to incur future income tax liabilities for the
foreseeable future and therefore has an effective future income tax
rate of zero. As such, there is no difference between the
standardized measure and the PV-10 value of PostRock's reserves
under the different methodologies. PostRock believes that the
presentation of the PV-10 value is relevant and useful to investors
because it presents the discounted future net cash flows
attributable to its reserves, and it is a useful measure of
evaluating the relative monetary significance of its oil and
natural gas properties. Further, investors may utilize the measure
as a basis for comparison of the relative size and value of
PostRock's reserves to other companies. PostRock uses this measure
when assessing the potential return on investment related to
PostRock's oil and natural gas properties. However, PV-10 value is
not a substitute for the standardized measure of discounted future
net cash flows. PostRock's PV-10 value measure and the standardized
measure of discounted future net cash flows do not purport to
present the fair value of its oil and natural gas reserves as of
the specified dates.
About PostRock Energy Corporation
PostRock Energy Corporation is an integrated independent energy
company engaged in the acquisition, exploration, development,
production and transportation of oil and natural gas in the
Cherokee Basin, the Appalachian Basin, and Central
Oklahoma. PostRock has over 2,800 wells and nearly 2,200 miles
of natural gas gathering pipelines in the Cherokee Basin. The
Company also owns and operates nearly 400 natural gas and oil
producing wells and undeveloped acreage in the Appalachian Basin of
the northeastern United States and more than 1,100 miles of
interstate natural gas transmission pipelines in Oklahoma, Kansas,
and Missouri. For more information, visit PostRock's website
at www.pstr.com.
The PostRock Energy Corp. logo is available at
http://www.globenewswire.com/newsroom/prs/?pkgid=7221
Forward-Looking Statements
Opinions, forecasts, projections or statements, other than
statements of historical fact, are forward-looking statements that
involve risks and uncertainties. Forward-looking statements in this
announcement are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Although
PostRock believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance
that such expectations will prove to be correct. Actual
results may differ materially due to a variety of factors, some of
which may not be foreseen by PostRock. These risks and other
risks are detailed in PostRock's filings with the Securities and
Exchange Commission, including risk factors listed in PostRock's
Registration Statement on Form S-4 and Annual Report on Form 10-K
and other filings with the SEC. You can find PostRock's
filings with the SEC at www.pstr.com or www.sec.gov. By making
these forward-looking statements, PostRock undertakes no obligation
to update these statements for revisions or changes after the date
of this release.
SEC Reserve Reporting Rule Changes
For year-end 2009 reserve reporting, the Securities and Exchange
Commission (SEC) has implemented new rules requiring that proved
reserve calculations be based on the unweighted average
first-of-the-month prices for the twelve months in 2009, as
contrasted with the previous method which utilized period-end
prices. The prices under the new method were $3.87 per mcf and
$61.18 per bbl, before field differential adjustments, compared to
year-end 2009 spot prices of $5.79 per mcf and $79.36 per bbl,
before field differential adjustments. The modernized rules also
contain new reserve recognition definitions that allow for the
reporting of proved undeveloped (PUD) reserves that are more than
one direct development spacing area away from offsetting producing
wells if reasonable certainty can be shown using reliable
technology. PostRock met the criteria of reasonable certainty using
reliable technology by demonstrating the Company's consistency of
results, geologic understanding, and analogy to other areas. As
such, additional reserves were realized on the two Appalachia
horizontal wells drilled in 2009. At the present time, PUD reserve
bookings in all other asset areas have been restricted to directly
offsetting development spacing areas away from offsetting producing
wells.
The SEC's new pricing rule reflects the low average natural gas
prices experienced in 2009. This affects the volume of reportable
proved reserves and substantially lowers the estimated future net
cash flows from proved reserves. PostRock believes that using the
five-year annual NYMEX average as of February 1, 2010, which were
$6.38 per mcf and $82.75 per bbl, before field differential
adjustments, yields a better indication of the likely economic
production capability of its proved reserves than the 2009 12-month
average required by the new rules or spot prices at year end, which
were required prior to year-end 2009.
Reserves Categories
Proved reserves are those quantities of oil and natural gas,
which, by analysis of geosciences and engineering data, can be
estimated with reasonable certainty to be economically producible –
from a given date forward, from known reservoirs, and under
existing economic conditions, operating methods, and government
regulations – prior to the time at which contracts providing the
right to operate expire, unless evidence indicates that renewal is
reasonably certain, regardless of whether deterministic or
probabilistic methods are used for the estimation. Probable
reserves are those additional reserves that are less certain to be
recovered than proved reserves but which, together with proved
reserves, are as likely as not to be recovered. Possible
reserves are those additional reserves that are less certain to be
recovered than probable reserves. Although probable and
possible reserve locations are found by "stepping out" from proved
reserve locations, estimates of probable and possible reserves are
by their nature more speculative than estimates of proved reserves
and accordingly are subject to substantially greater risk of being
actually realized by the Company.
Reconciliation of Non-GAAP Financial Measures
PostRock defines adjusted EBITDA as net income (loss) before
interest expense, net; income taxes; depreciation, depletion and
amortization; gain (loss) on sale of assets; loss (recovery) from
misappropriation of funds; impairments; other income (expense) and
change in fair value of derivative instruments. The following table
represents a reconciliation of PostRock's net income (loss) to
EBITDA and adjusted EBITDA for the period presented:
Year ended
December 31,
2009
Net income (loss)
$ (292,320)
Add (deduct):
Interest expense, net
29,329
Income tax expense (benefit)
—
Depreciation, depletion and amortization
47,802
EBITDA
(215,189)
Loss (gain) on sales of assets
—
Loss (recovery) from misappropriation of funds
(3,412)
Impairments
268,630
Other expense (income)
(83)
Change in fair value of derivative financial instrument
50,026
Adjusted EBITDA
$ 99,972
Although adjusted EBITDA is not a measure of performance
calculated in accordance with generally accepted accounting
principles, or GAAP, PostRock management considers it an important
measure of PostRock's performance. Adjusted EBITDA is not a
substitute for the GAAP measures of earnings or cash flow and is
not necessarily a measure of PostRock's ability to fund PostRock's
cash needs. In addition, it should be noted that companies
calculate adjusted EBITDA differently, and therefore adjusted
EBITDA as presented herein may not be comparable to adjusted EBITDA
reported by other companies. Adjusted EBITDA has material
limitations as a performance measure because it excludes, among
other things, (a) interest expense, which is a necessary element of
PostRock's business to the extent that PostRock incurs debt, (b)
depreciation, depletion, amortization and accretion, which are
necessary elements of PostRock's business because PostRock uses
capital assets, (c) impairments of oil and gas properties, which
may at times be a material element of PostRock's business, and (d)
income taxes, which may become a material element of PostRock's
operations in the future. Because of its limitations, adjusted
EBITDA should not be considered a measure of discretionary cash
available to us to invest in the growth of PostRock's business.
CONTACT: PostRock Energy Corporation
Jack Collins, EVP Finance/Corporate Development
(405) 702-7460
www.pstr.com
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