PostRock Reports 2013 Results

PostRock Reports 2013 Results

OKLAHOMA CITY, March 26, 2014 (GLOBE NEWSWIRE) -- PostRock Energy Corporation
(Nasdaq:PSTR) today announced its results for the year ended December 31,

Key Operating Results

  *Based on a 27:1 oil-to-gas conversion (the Company's 2013 realized price
    differential), production increased 4% from the prior year.

    *Oil sales doubled to an average of 527 net barrels a day.
    *Gas sales averaged 39.8 net MMcf a day, an 11% decline.

  *Based on a 6:1 oil-to-gas conversion, production declined 8%.
  *Oil reserves increased 63% to 4.4 million barrels. Based on the 27:1
    conversion noted above, oil now represents 58% of proved reserves.
  *Gas reserves increased 24% to 86.6 Bcf. Based on the 27:1 conversion, gas
    now represents 42% of proved reserves.

Key Financial Results

  *Revenue totaled $72.3 million, up 32% from the prior year.
  *Oil contributed 25+% of revenues, versus 16% in 2012.
  *Production costs, excluding one-time items discussed below, decreased 4%.
  *General and administrative expenses, excluding one-time items and non-cash
    compensation discussed below, decreased 20%.

Development and Leasing Activities

Central Oklahoma. In May 2013, the Company acquired approximately 4,300 net
acres located in Lincoln and Payne Counties of Oklahoma. In November, slightly
over 22,000 net acres of leasehold in Seminole, Pottawatomie, Cleveland and
McClain Counties were purchased along with associated production. Subsequent
to these acquisitions, total leasehold in Central Oklahoma currently
approximates 35,000 net acres, of which 11,000 net acres are held by

During the year, nine wells were recompleted and two vertical wells were
drilled in Oklahoma targeting multiple oil pays, including the Hunton and
Woodford formations. In addition, an initial, horizontal Hunton well was
drilled and put on production. These 12 projects had a total cost of $7.7
million. Two water disposal wells were drilled and four tank batteries were
built at a total cost of $1.9 million.

Cherokee Basin. During 2013, 62 wells were recompleted, 143 wells were drilled
and brought on line and nine wells previously drilled were brought on line at
a total cost of $18.9 million. Nine water disposal wells were drilled and 22
tank batteries were built at a total cost of $2.4 million. Since August,
development work in the Cherokee Basin has been deferred as the Company has
shifted its focus to Central Oklahoma to realize higher returns.

One of the Company's most significant projects has been to reconfigure its
Cherokee Basin compression system. This project improves energy efficiency and
reduces gathering and operating costs. The program was piloted in 2012 and
began to be implemented in 2013. At present, only the Company's largest
compressor station remains to be converted. The Company expects the project to
be complete in May at a total cost of $8.2 million. Roughly $5.5 million of
the project cost will fall in 2014. In aggregate, the project is expected to
reduce costs by approximately $3.2 million a year while reducing fuel usage by
2.5 MMcf per day.

2013 Results

Revenue increased 32% from the prior year to $72.3 million. Despite lower
sales volumes, gas revenue increased 17% to $51.5 million. The increase was
driven by a 32% increase in realized prices to $3.55 per Mcf. Oil revenue
increased 111% to $18.2 million as production doubled and the realized price
of $94.56 per barrel was slightly above the prior year. Gas gathering revenue
increased 7% to $2.6 million as higher gas pricing offset lower volumes.

Production costs, including lease operating expenses, gathering costs and
production taxes, decreased 5% to $40.1 million. Production costs in 2012 had
included $368,000 related to a field reorganization. Excluding this cost,
production costs fell $1.8 million, or 4%. The largest contributors to the
cost reduction were a $1.1 million reduction in compressor rentals, lower
repair and maintenance costs of $635,000, lower workover costs of $486,000,
and lower ad valorem taxes of $271,000. These reductions were partially offset
by a $614,000 increase in production taxes and increased electricity costs of
$263,000. Production costs were $2.56 per Mcfe, up from an adjusted $2.47 per
Mcfe in the prior year, primarily due to lower production volumes.

General and administrative expenses increased 8% from the prior year to $16.0
million. Excluding non-cash compensation of $1.3 million and $4.3 million from
2012 and 2013, respectively, a $503,000 charge related to a headquarters
reorganization in 2012, $1.6 million of legal fees related to the
Constellation Energy Partners ("CEP") and Sanchez Energy Partners I
("Sanchez") litigation in 2013, and a $454,000 workman's compensation charge
related to a 2010-2011 audit settlement, general and administrative expenses
totaled $9.7 million, a 20% decrease from the prior year adjusted total. The
decrease was due primarily to reduced wages, benefits and bonuses of $601,000,
higher capitalized general and administrative expenses of $434,000, and lower
contract labor and other services of $299,000.

The Company had a realized hedging loss of $2.3 million in 2013. This compared
to a gain of $73.2 million in 2012 when the Company exited above-market
natural gas swap contracts.

Each quarter, PostRock is required to assess the recoverability of the
carrying value of its oil and gas properties against their present value
utilizing a first-of-the-month twelve-month average price for oil and natural
gas. An impairment of $5.9 million was recognized in 2012 due to depressed gas
prices. With the recovery in gas prices during the year, no impairment was
recognized in 2013.

Due to appreciation of the market price of CEP units in 2013, a mark-to-market
gain of $6.8 million was recorded.

Fourth Quarter Results

Revenue increased 14% from the prior-year period to $18.0 million. Despite a
6% increase in realized pricing to $3.46 per Mcf, natural gas revenue
decreased 5% from the prior-year period to $12.2 million due to a 10% decrease
in average daily sales volumes to 38.3 MMcf per day. Oil revenue increased
120% from the prior-year period to $5.2 million as production nearly doubled
to an average of 607 barrels per day and the $93.90 a barrel realized price
was 11% higher. Gas gathering revenue decreased 3% to $605,000 as lower volume
offset higher gas prices.

Production costs decreased 5% from the prior-year period to $9.6 million.
Compressor rental costs decreased $637,000 and vehicle and equipment costs
decreased $163,000. These reductions were partly offset by a decrease in
capitalized lease operating expenses of $357,000 and an increase in
electricity costs of $199,000. In total, production costs were $2.49 an Mcfe,
compared to $2.46 an Mcfe from the prior-year period, primarily due to lower
production volumes.

General and administrative expenses increased 36% from the prior-year period
to $4.7 million. Excluding non-cash compensation of $622,000 and $2.2 million
from 2012 and 2013, respectively, and $1.5 million of legal fees related to
the litigation with CEP and Sanchez in 2013, ongoing general and
administrative expenses totaled $2.0 million, a 32% decrease from the
prior-year period's adjusted total. The decrease was due primarily to reduced
wages, benefits and bonuses of $458,000 and lower franchise taxes of $164,000.

The Company had a $77,000 realized hedging gain in the quarter compared to a
gain of $39.8 million in the prior-year period.

Due to appreciation of the market price of CEP units in the fourth quarter, a
mark-to-market gain of $1.6 million was recorded.


The Company's natural gas and crude oil swaps for 2014 cover an average of
28.3 MMcf and 318 Bbls per day at a weighted average price of $4.01 and
$95.19, respectively. This represents roughly 79% and 50%, respectively, of
the Company's 2014 production forecast in its December 31, 2013 reserve
report. The following table summarizes the Company's derivative positions at
December 31, 2013. The Company has no Southern Star basis swaps outstanding.

                                2014        2015       2016
NYMEX Gas Swaps                                       
Volume (MMBtu)                   10,327,572 8,983,560 7,814,028
Weighted Average Price ($/MMBtu) $ 4.01      $ 4.01     $ 4.01
NYMEX Oil Swaps                                       
Volume (Bbls)                    116,076    71,568    65,568
Weighted Average Price ($/Bbl)   $ 95.19     $ 92.73    $ 90.33


At December 31, 2013, $92.0 million was drawn under the Company's revolving
credit facility, an increase of $34.5 million from the prior year and a $5.5
million increase from September 30, 2013. At March 25, 2014, $94.5 million was
drawn under the revolving credit facility, an increase of $2.5 million from
year end. The increase was driven by an acquisition of additional well
interests in Central Oklahoma and legal costs related to the litigation with
CEP and Sanchez, both of which are discussed in more detail below. The
facility requires that a leverage ratio (ratio of consolidated funded debt to
consolidated EBITDAX for the four fiscal quarters ending on the applicable
fiscal quarter-end) be maintained at less than 3.5 to 1.0 as of each
quarter-end. The leverage ratio at December 31, 2013 was very slightly above
this limit. However, the banks granted a waiver. PostRock expects to be in
full compliance with its covenants at March 31, 2014. The Company was in
compliance with all other financial covenant ratios as of December 31, 2013.

On December 13, 2013, 1,123,981 shares of common stock were issued to White
Deer in exchange for 22,241,333 warrants with the associated voting preferred.
As a result, the Company removed the carrying value of the affected Series A
Preferred Stock out of temporary and permanent equity and added $64.5 million,
the fair value of the affected Series A Preferred Stock, to long-term
liabilities, pursuant to applicable accounting guidance.

At December 31, 2013, PostRock elected to again pay in-kind its quarterly
dividend on the preferred, increasing the liquidation value of the preferred
by $3.0 million to $102.8 million. White Deer also received 2.5 million
additional warrants with a weighted average strike price of $1.22 a share. At
year end, White Deer held a total of 20.2 million warrants exercisable at an
average price of $1.54 a share and 11.0 million common shares.

                                      December 31,
                                      2012       2013
Capitalization                         (in thousands)        
Long-term debt                         $ 57,500  $ 92,000
Mandatorily redeemable preferred stock —         64,523
Redeemable preferred stock             73,152    23,828
Stockholders' deficit                  (21,008)  (30,034)
Total capitalization                   $ 109,644 $ 150,317

CEP Litigation

On August 30, 2013, a wholly owned subsidiary of the Company filed suit
against CEP and Sanchez, et al. The lawsuit arose from a transaction that was
closed between CEP and Sanchez on August 9^th that diluted PostRock's
ownership interest in CEP and removed certain rights of PostRock.

The trial has been postponed pending an anticipated settlement. While nothing
has been finalized, the proposed settlement contemplates PostRock recovering a
target of $21.6 million via the sale of its A Units to CEP and Sanchez,
followed by the orderly disposition of its B Units in various market and block
transactions in the course of 2014. The settlement, as currently proposed,
would eliminate all disputes between the parties.

Capital Expenditures

During the fourth quarter, capital expenditures totaled $16.7 million. This
included $11.5 million spent on land, primarily the two November acquisitions.
A total of $3.4 million was spent on oil directed drilling and recompletions
and the remaining $1.8 million was spent on maintenance projects, largely on
the ongoing Cherokee Basin compressor optimization project.

Capital expenditures totaled $60.7 million in 2013. This included $40.0
million spent on exploration and development. Land expenditures totaled $16.6
million including leasing and the three Central Oklahoma acquisitions
completed in 2013. Maintenance expenditures, including the compressor
optimization project, totaled $4.1 million.


Based on a 6:1 oil-to-gas conversion, proved reserves increased 32% to 112.9
Bcfe at year end 2013. Gas reserves increased 16.9 Bcf, or 24%. Of this
amount, 91.6 MMcf was gained from acquisitions, 23.5 Bcf was gained as the
result of a 33% increase in pricing, 6.1 Bcf was gained due to decreasing
operating costs, and 1.8 Bcf was gained as a result of additions to the
reserve base and positive revisions to previous estimates. These increases
were partially offset by production of 14.5 Bcf. Oil reserves increased 1.7
million barrels, or 63%. Of this amount, 449,500 barrels were gained from
acquisitions, 23,700 barrels were gained as the result of a 2% increase in
pricing, 108,000 barrels were gained due to lower operating costs, and 1.3
million barrels were gained as a result of additions to the reserve base and
positive revisions to previous estimates. These increases were partially
offset by production of 192,500 barrels. At year-end 2013, approximately 90%
of the Company's reserves were classified as proved developed.

Proved reserves at a 6:1 oil-to-gas     Gas (Mcf)     Oil (Bbls) Total Mcfe
Balance December 31, 2012               69,661,273   2,691,568 85,810,681
2013 production                         (14,521,385) (192,474) (15,676,229)
Acquisitions                            91,581       449,463   2,788,359
Changes in commodity price              23,533,695   23,677    23,675,757
Changes to operating costs              6,074,639    108,010   6,722,699
Development and revisions to previous   1,767,424     1,300,359  9,569,578
Balance December 31, 2013               86,607,227   4,380,603 112,890,845

Subsequent Event

In January 2014, the Company acquired additional interests, associated with
the larger acquisition made in November 2013, for $1.8 million. The interests
were purchased with $900,000 of cash and 725,806 shares of common stock.

Management Comment

Terry W. Carter, PostRock's President and Chief Executive Officer, said, "In
2013 PostRock made meaningful progress on increasing oil production and oil
reserves. In particular, I believe the development success, small
acquisitions, and land additions in Central Oklahoma along with our continued
focus on reducing operating costs will prove to be the foundation for future
growth and at long last provide us the ability to create shareholder value."

Webcast and Conference Call

PostRock will host its quarterly webcast and conference call tomorrow,
Thursday, March 27, 2013, at 10:00 a.m. Central Time. The live webcast will be
accessible on the 'Investors' page at, where it will also be
available for replay. The conference call number for participation is (866)

PostRock Energy Corporation is engaged in the acquisition, exploration,
development, production and gathering of crude oil and natural gas. Its
primary production activity is focused in the Cherokee Basin, a 15-county
region in southeastern Kansas and northeastern Oklahoma, and Central Oklahoma.
The Company owns and operates over 3,000 wells and maintains nearly 2,200
miles of gas gathering lines in the Basin. It also owns and operates minor oil
and gas producing properties in the Appalachian Basin.

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 the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance such expectations will prove correct. Actual results may differ
materially due to a variety of factors, some of which may not be foreseen.
These risks and other risks are detailed in the Company's filings with the
Securities and Exchange Commission, including risk factors listed in the
Annual Report on Form 10-K and other filings. The Company's SEC filings may be
found at or By making these forward-looking
statements, the Company undertakes no obligation to update these statements
for revisions or changes.

Reconciliation of Non-GAAP Financial Measures

The following table represents a reconciliation of net income (loss) to EBITDA
and adjusted EBITDA, as defined, for the periods presented.

                             Three Months Ended December Twelve Months Ended
                              31,                         December 31,
                             2012           2013         2012       2013
Net income (loss) from        $ (11,386)     $ (7,377)    $ (44,717) $ (9,036)
continuing operations
Adjusted for:                                                     
Interest expense, net         2,617         1,446       10,452    3,739
Income taxes                  —             180         —         180
Depreciation, depletion and   7,246         7,291       27,669    27,369
EBITDA                        $ (1,523)      $ 1,540      $ (6,596)  $ 22,252
Other income, net             (31)          9           (111)     (12)
(Gain) loss from equity       596           (1,583)     5,174     (6,768)
Unrealized (gain) loss from
derivative financial          41,348        3,529       66,708    (1,672)
Impairment of oil and gas     1,610         —           5,919     —
Gain on forgiveness of debt   —             —           (255)     —
(Gain) loss on disposal of    69            (25)        295       (194)
Non-cash compensation         622           1,292       2,224     4,268
Acquisition costs             —             286         —         348
CEPM legal fees               —             1,488       —         1,618
Adjusted EBITDA               $ 42,691       $ 6,536      $ 73,358   $ 19,840

Although adjusted EBITDA is not a measure of performance calculated in
accordance with generally accepted accounting principles, or GAAP, management
considers it an important measure of performance. Adjusted EBITDA is not a
substitute for the GAAP measures of earnings or cash flow and is not
necessarily a measure of the Company's ability to fund its 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 business to the
extent that an entity incurs debt, (b) depreciation, depletion and
amortization, which are necessary elements of any business that uses capital
assets, (c) impairments of oil and gas properties, which may at times be a
material element of an independent oil company's business, and (d) income
taxes, which may become a material element of the Company's operations in the
future. Because of its limitations, adjusted EBITDA should not be considered a
measure of discretionary cash available to invest in the growth of PostRock's


                          Three Months Ended        Year Ended December 31,
                           December 31,
                          2012         2013         2012         2013
                          (in thousands, except per (in thousands, except per
                           share data)               share data)
Natural gas sales          $ 12,842     $ 12,187     $ 43,911     $ 51,489
Crude oil sales            2,386       5,247       8,640       18,200
Gathering                  625         605         2,444       2,611
Total                      15,853      18,039      54,995      72,300
Costs and expenses                                             
Production expense         10,096      9,625       42,213      40,085
General and administrative 3,481       4,735       14,810      15,990
Depreciation, depletion    7,246       7,291       27,669      27,369
and amortization
Impairment of oil and gas  1,610       —           5,919       —
(Gain) loss on disposal of 69          (25)        295         (194)
Acquisition costs          —           286         —           348
Total                      22,502      21,912      90,906      83,598
Operating loss             (6,649)     (3,873)     (35,911)    (11,298)
Other income (expense)                                         
Realized gains (losses)
from derivative financial  39,793      77          73,162      (2,271)
Unrealized gains (losses)
from derivative financial  (41,348)    (3,529)     (66,708)    1,672
Gain (loss) from equity    (596)       1,583       (5,174)     6,768
Gain on forgiveness of     —           —           255         —
Other income (expense),    31          (9)         111         12
Interest expense           (2,617)     (1,446)     (10,454)    (3,740)
Interest income            —           —           2           1
Total                      (4,737)     (3,324)     (8,806)     2,442
Income (loss) from
continuing operations      (11,386)    (7,197)     (44,717)    (8,856)
before income taxes
Income taxes               —           180         —           180
Income (loss) from         (11,386)    (7,377)     (44,717)    (9,036)
continuing operations
Income (loss)from          149         —           (2,855)     —
discontinued operations
Net income (loss)          (11,237)    (7,377)     (47,572)    (9,036)
Preferred stock dividends  (2,494)     (2,577)     (9,083)     (11,047)
Accretion of redeemable    (698)       (802)       (2,238)     (3,283)
preferred stock
Net income (loss)
available to common        $ (14,429)   $ (10,756)   $ (58,893)   $ (23,366)
Net income (loss) per                                          
common share
Basic income (loss) per
share—continuing           $ (0.90)     $ (0.38)     $ (4.12)     $ (0.93)
Basic income (loss) per
share—discontinued         0.01        —           (0.21)      —
Basic income (loss) per    $ (0.89)     $ (0.38)     $ (4.33)     $ (0.93)
Diluted income (loss) per
share—continuing           $ (0.90)     $ (0.38)     $ (4.12)     $ (0.93)
Diluted income (loss) per
share—discontinued         0.01        —           (0.21)      —
Diluted income (loss) per  $ (0.89)     $ (0.38)     $ (4.33)     $ (0.93)
Weighted average common                                        
shares outstanding
Basic                      16,258      28,039      13,596      25,069
Diluted                    16,258      28,039      13,596      25,069


                                          December 31,
                                          2012              2013
                                          (in thousands, exceptshare and per
                                           share data)
Current assets                                              
Cash and equivalents                       $ 525             $ 37
Restricted cash                            1,500            —
Accounts receivable—trade, net             7,207            7,722
Other receivables                          180              194
Inventory                                  990              886
Other                                      2,100            820
Derivative financial instruments           1,771            54
Total                                      14,273           9,713
Oil and natural gas properties, full cost  107,531          141,911
method of accounting, net
Other property and equipment, net          14,244           14,180
Equity investment                          7,820            14,588
Derivative financial instruments           615              652
Other, net                                 2,180            2,038
Total assets                               $ 146,663         $ 183,082
Current liabilities                                         
Accounts payable                           $ 9,373           $ 7,406
Revenue payable                            4,447            4,397
Accrued expenses and other                 4,928            4,055
Derivative financial instruments           4,449            1,937
Total                                      23,197           17,795
Derivative financial instruments           2,638            1,796
Long-term debt                             57,500           92,000
Mandatorily redeemable preferred           —                64,523
stock—6,000 shares at December 31, 2013
Asset retirement obligations               10,868           13,099
Other                                      316              75
Total liabilities                          94,519           189,288
Commitments and contingencies                               
Series A Cumulative Redeemable Preferred
Stock, $0.01 par value; 7,250 and 1,250    73,152           23,828
shares issued and outstanding,
Stockholders' equity                                        
Preferred stock, $0.01 par value;
5,000,000 authorized shares; 265,095 and
113,521 shares of Series B Voting          3                1
Preferred Stock issued and outstanding,
Common stock, $0.01 par value; 100,000,000
authorized shares; issued—21,309,159 and   213              299
29,915,951; outstanding—21,309,159 and
29,556,263, respectively
Additional paid-in capital                 396,732          397,170
Treasury stock, at cost                    —                (512)
Accumulated deficit                        (417,956)        (426,992)
Total stockholders' deficit                (21,008)         (30,034)
Total liabilities and stockholders'        $ 146,663         $ 183,082


                                                      Year Ended December 31,
                                                      2012         2013
                                                      (in thousands)
Cash flows from operating activities                               
Net income (loss)                                      $(47,572)   $(9,036)
Adjustments to reconcile net income (loss) to net cash             
flows from operating activities
Depreciation, depletion and amortization               30,206      27,369
Impairment of oil and gas properties                   5,919       —
Share-based and other compensation                     2,224       4,268
Amortization of deferred loan costs                    2,820       461
Change in fair value of derivative financial           67,186      (1,672)
Litigation reserve                                     —           —
Loss (gain) on disposal of assets                      5,735       (194)
Gain on forgiveness of debt                            (255)       —
Loss (gain) from equity investment                     5,174       (6,768)
Other non-cash changes to items affecting net loss     409         497
Changes in operating assets and liabilities                        
Accounts receivable                                    1,519       (529)
Other current assets                                   5,020       578
Other assets                                           33          16
Accounts payable                                       2,453       (3,094)
Accrued expenses                                       (11,701)    (512)
Other                                                  (51)        (141)
Net cash flows from operating activities               69,119      11,243
Cash flows from investing activities                               
Restricted cash                                        (1,500)     1,500
Proceeds from sale of equity securities                —           —
Equity investment                                      —           —
Expenditures for equipment, development, leasehold and (16,759)    (52,283)
Proceeds from sale of discontinued pipeline            53,397      —
Proceeds from sale of assets                           496         1,111
Net cash flows from (used in) investing activities     35,634      (49,672)
Cash flows from financing activities                               
Proceeds from debt                                     57,500      98,500
Repayments of debt                                     (193,000)   (64,000)
Proceeds from stock option exercises                   —           —
Debt and equity financing costs                        (2,301)     (635)
Proceeds from issuance of common stock                 20,724      4,076
Proceeds from issuance of preferred stock and warrants 12,500      —
Net cash flows from (used in) financing activities     (104,577)   37,941
Net increase (decrease) in cash and cash equivalents   176         (488)
Cash and equivalents beginning of period               349         525
Cash and equivalents end of period                     $525        $37

CONTACT: Company Contact:
         Stephen L. DeGiusti
         EVP, General Counsel & Secretary
         (405) 702-7420

PostRock Energy Corporation Logo
Press spacebar to pause and continue. Press esc to stop.