Company Overview

Gastar Exploration Inc. (GST) is an independent oil company that is involved wi th explorat ion, development, and production of Oil & Condensate, Natural Gas Liquids, and Natural Gas. In 2014, Gastar had 102,063 Mboe of total proved reserves, up 88% from 2013 total proved reserves of 54,234 Mboe. Currently, 64% of the total proved reserves are proved undeveloped reserves, which creates a large supply that has yet been drilled into. Gesture currently operates in two main areas, Mid-continent and Appalachian Basin. In 2014, The Appalachian Basin has 68,066 Mboe, where Mid-continent only has 33,997, although Mid-continent has significantly more acreage than the Appalachian Basin.

Gastar Exploration Inc. (GST) Price Target: $3.92 Rating: BUY

Group 6 3/30/15

Zach Amrein (913)530-5515 Z_amrein@yahoo.com

Madison Myers (785)217-3152 Madison.myers@ku.edu

Sam Plank (314)775-9232 Samplank@ku.edu

Endong Wang (785)979-2608 E526W404@ku.edu

Investment Thesis• In the next 12 months, we see oil prices

beginning to rise a bit to $55. With this rise in oil prices, we expect to see an increase in GST’s stock price. This increase in stock price can be associated with a few factors. A few factors we see as positives are the stock price of GST’s high correlation to Oil prices of 0.12, and GST has and will continue efforts in increasing efficiencies.

• We believe that GST’s management team is very realistic and transparent. The management team has the firm moving in the right direction, they have figured out what their core competencies are and have been sticking to them.

• They have been cutting capital expenditures by 40% and are still expecting to grow by 20% over the next 12 months.

Gastar Exploration Inc. (GST) Price Target: $3.92 Rating: BUY

Effective Crude Oil Supply and DemandThe trend in future price of oil is a direct product of supply and demand. On the supply side, world oil production was just over 94.04 million bpd in February. The crude oil production speed is expected to keep constant for at least the next six months, since the United States increased to 8.7 million bbl/d in 2014. This caused a shortage of storage space in the U.S., while there was no significant decline in OECD production. In February oil prices approached their January low of $44 per barrel but the recent conflict in Yemen led to a heightened price back of $48 a barrel. Additionally, recent U.S. innovations in drilling technologies could cause a catastrophic increase in the worlds current supply of petroleum. The supply could potentially grow by as much as six times it’s current level in the coming year to 10.2 Trillion Barrels. This new technology could lead the U.S. to become the world’s largest producer of oil and natural gas. Although this could put downward pressure on the price of crude oil moving forward, the increased efficiencies associated with the new drilling technology’s mitigates the risk to major losses that the U.S. would have been exposed to in the face of falling oil prices. However, when looking at the demand side; the consumption of petroleum is expected to fall in some countries as a result of the slowing economy in China, India, and various other emerging countries. However, in 2015 the growth of oil consumption worldwide is still expected to grow by 0.2 million Boe/d and stay relatively flat into 2016. If this trend continues the crude oil price should gradually increase.

We use the Crude Oil WTI December 2015(CLZ15) and Natural Gas December 2015(NGZ15) as the yearly average of crude oil and natural gas prices and excluded the commodity derivatives, which are $55 and $3, respectively. Under these assumptions, our target price for 2015 is $3.90 per share. However, if we were to use the average price of oil and gas from 2014, the target price would see a drastic increase to around $15. This increase is astronomical relative to the current stock price $2.65. Referring to the graph on the right: natural gas and oil have historically had correlations to the stock price of .16 and .12 respectively in the past. Additionally, GST plans to reduce their CapEx by 40% in 2015 but still grow by 22%. This is a direct result of their transition to liquids. We believe that this correlation between the stock price and natural gas will continue, but these efficiencies will allow for huge gains if the price of crude oil decreases and will minimize the risk of huge losses if the price falls.

Capital Structure and Bond PriceCompare the capital structure of Gastar Exploration Inc. (GST) to Comstock Resources (CRK), GST is less leverage over the years. Also, 93.78% of total assets is property and equipment for CRK and 89.20% of total assets is property and equipment for GST at 12/31/2014. This indicates that for both companies, the enterprise value most emphasizes on the long-term assets. Since last July when the crude oil price was decreasing, GST and CRK increase their leverage ratio by 6.25% and 12.59%. The change may result from the decreasing value of their oil and natural gas properties. The shrinking value of proved and unproved properties leads the loss of assets. Under the certain number of liabilities, the total equity has some damaged at certain level. Therefore, in light of failing oil prices and gas prices, the leverage ratio for both companies increase. CRK and GST sell their bonds for $41.9 for 7.75 coupon rate and $42.1 for 9.5% coupon rate. However, GST’s bond trading is not active so we cannot find the trading price. The bond prices has certain relationship with stock price which reveals the company’s future revenue and expanding situation. Under the poor circumstances of both companies’ stock price, the bond price has shown the weak performance.

Strategic PositioningThere are two regions in which Gastar Exploration operates: Appalachia and Mid-Continent. Appalachia accounts for two-thirds of their proved reserves and drills for both crude oil and natural gas whereas Mid-Continent accounts for one-third of their proved reserves and only drills for crude oil. Management seems to be very content with this mix and has decided to focus on growing organically rather than heading down other possible risky avenues for growth. In 2013 their proved reserves increased by 87% and year-over-year production was up 300%. Rather than buy more land to start drilling on, they have put the 77% of their capital expenditures into drilling and 17% of their CapEx into renewing their current leases. GST currently has one well functional in Utica, which drills for Natural Gas Liquids, and they plan to have their second one functioning in May of this year. Drilling for NGL’s is a much more efficient way of drilling and they expect to produce 58% NGL’s. This is up from 0% in 2010 and has allowed them to decrease their capital expenditure while still growing very sustainably.

Sources1. Gastar Exploration 2014 10K 2. Gastar Exploration Investor Presentation 3.Gastar Exploration 4Q14 Conference Call 4. Reuters Financial 5. Morningstar Financial

Run Off Model & NAV Intrinsic ValueThe Run Off Model was used to forecast how long the current total proved reserves will last. Through this method, the Revenue for each factor of revenue could be forecasted forward until the reserves were depleted completely. Using a Best, Base, and Worst case scenario, the Base Case was utilized for the forward predictions of where oil, natural gas liquids, and natural gas prices would go. The base case priced oil at a $55/bbl, which is base on the WTI Crude Oil December 2014 Future. Natural gas liquids is kept at it 2014 price of $26.71/bbl. Lastly, natural gas is priced at its 2014 price of $4.11/mcfe. Through these prices, the total weighted average price/boe is $40.96 for 2014. This creates a large profit margin, as in 2014 Gastar has production costs of $8.02/boe. Although the forecast for 2015 average price is set at $34.98, a wide profit margin is still obtained. The Run-off model showed Oil & Condensate to last until 2025, using a production of 7.18 mboe/d. NGLs are projected to last until 2026, using a production of 5.67 mboe/d. Natural Gas reserves are forecasted to last the longest, 2028, with a production of 54 mcfe/d, which is roughly equivalent to 9 mboe/d using a conversion of 6 cfe to 1 boe. Through this, the revenue for each commodity was forecasted each year until their reserves have been depleted. The structure of revenue will stay fairly constant through 2020, where Oil and Condensate is the leading revenue, making up 50.9% of revenue. Natural gas is second at 28.8%, and NGL is last at 20.9%.

The Net Asset Value helps determine a price target based on total proved reserves. A $3.92 price target way established through the intrinsic value determined by the Present Value of the NAV. We used a 10% discount rate because of the PV-10’s already established 10% discount rate. Although the PV-10 value of $998,686 was established in the 10K, Capital Expenditure needed to be added to get an accurate value of the total enterprise value, and eventually the NAV Intrinsic Value.

Gastar Exploration Inc. (GST) Price Target: $3.92 Rating: BUY

Relative ValuationGST operates in a very competitive industry. Each company is constantly clawing and fighting to gain or find new locations that could yield a profitable oil reserve. Therefore, in many cases capital resources can provide a competitive advantage for a firm in this industry. Most firms use this capital to gain new reserves, which in turn provides these firms with increased revenues. GST for instance, is not the industry leader in any categories that one may consider significant. For instance, EBITDAX is a widely known and used financial metric for the Oil and Gas Industry. We decided to use the TEV/EBITDAX multiple to provide a valuation metric for GST. Although, GST may not be the industry leader, they do not lag when it comes to producing revenue efficiently. For this reason we decided to evaluate GST using benchmark TEV/EBITDAX multiples of 6.5 and 8.5. Using the 2015 estimated EBITDAX of $78.63 million, we received target prices of $2.04 and 4.04 for 6.5 and 8.5 respectively. With the current price trading at $2.64, the 6.5 multiple provides an overvalued stock by 23%, while the 8.5 multiple provides an undervalued stock 53%.