September 11, 2005
Mr. J. Russell Porter
Chief Executive Officer and President
Gastar Exploration Ltd.
1331 Lamar Street, Suite 1080
Houston, TX 77010
Re: Gastar Exploration Ltd.
Registration Statement on Form S-1
Filed August 12, 2005
File No. 333-127498
Dear Mr. Porter:
We have reviewed your filing and have the following
comments.
Where indicated, we think you should revise your document in
response
to these comments. If you disagree, we will consider your
explanation as to why our comment is inapplicable or a revision is
unnecessary. Please be as detailed as necessary in your
explanation.
In some of our comments, we may ask you to provide us with
information so we may better understand your disclosure. After
reviewing this information, we may raise additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
General
1. Ensure that your prospectus includes the latest and best
information available. In your next amendment, also file all
omitted
exhibits and supply the information you currently omit, including,
without limitation:
* Any aspect of your business that was impacted by Hurricane
Katrina,
such as the Henry Hub in Louisiana or your East Texas properties;
* the status of your indebtedness;
* the status of the production you expect to complete by mid-
September 2005 on page 22;
* your business environment section on page 26, including crude
oil
prices; and
* the opinion of counsel regarding legality.
Cover Page
2. We note your disclosure that you "may also trade in the United
States over-the-counter market under the symbol `GSREF.PK`" and
your
additional disclosure that the last reported sales price for your
common shares on the OTC Bulletin Board was $2.56. Please
clarify.
Prospectus Summary, page 1
3. Please define the term "LIBOR" on page 2.
4. In the last paragraph on page 2, you refer to "certain
financial
and other covenants." Please provide details in this section or a
cross reference to disclosure later in the document. Likewise
please
also provide a cross-reference to the "certain requirements" to
which
you refer in the first paragraph on page 3.
Geostar Acquisition, page 3
5. Please provide a cross-reference to the section regarding this
acquisition. Also, later in the prospectus, please provide
additional details and background regarding the acquisition,
including a discussion of the fairness opinion presented to the
board. We may have further comment.
Risk Factors, page 6
6. You are required to disclose the "most significant factors"
that
make this offering speculative or risky. Please revise the first
paragraph of this section to indicate clearly that you are
describing
the material risks associated with the offering of shares of your
common stock. In this regard, please remove the statement that
the
risk factors are "not all inclusive" as it could suggest that you
fail to describe all material risks. In addition, to the extent
that
you do not deem certain other risks material at this time, you
should
not refer to them in this section. In this regard, please delete
the
reference to "[a]dditional risks and uncertainties not currently
known to [you] or that [you] currently consider immaterial."
7. Revise your captions so that they are precise and concise.
Similarly, rather than stating that a risk would have a negative
effect on the company, discuss the specific risk to your
operations.
Among captions requiring revision are the first on page 6, the
third
on page 9 and the second on page 12. To the extent possible,
avoid
the generic conclusion you make throughout your risk factors
section
that you cannot provide assurances or certainty regarding the risk
discussed and its impact on your business. Instead, replace this
language with specific disclosure of how your business would be
affected. Delete phrases such as "there is no assurance" and "we
cannot predict."
8. Please remove the bold font in the body of the first risk
factor
on page 8.
We depend on our key personnel, page 14
9. Include the names of the limited number of senior management
individuals to whom you refer.
Some of our directors, page 15
10. Expand your risk factor to describe in greater detail the
difficulty for investors to affect service of process on, to bring
suit against, or to enforce in the United States judgments
obtained
with respect to the directors to whom you refer.
Selected Historical Financial and Operational Information, page 20
11. Please include total assets in your table of selected
financial
data. Refer to Item 301 of Regulation S-K.
Management`s Discussion and Analysis of Financial Condition, page
21
Year Ended December 31, 2004 compared to Year Ended December 31,
2003, page 23
Impairment of natural gas and oil properties, page 24
12. We note you have recorded impairments in each of the past
three
fiscal years and in the three months ended March 31, 2005. We
further note in your August 12, 2005 press release that you may
incur
an additional impairment charge in the three months ended June 30,
2005. Please enhance your MD&A to address the following:
* Identify the key assumptions used in your calculation of the
impairments; and
* Explain the extent that future impairments may impact your
earnings
and provide disclosure for investors to ascertain the likelihood
and
extent that impairment charges may be recorded in the future.
Liquidity and Capital Resources, page 27
13. We note your disclosure that "sufficient capital will be
available to execute [y]our business and operational plans."
Please
also disclose whether you will have sufficient cash to execute
your
business and operational plans for the next twelve months.
14. Please discuss and analyze any known trends in your cash used
from operations. Also identify and explain the impact of expected
changes in production volumes and in the timing of when those
volumes
will be produced on the amount and timing of future cash flows.
15. Please discuss and analyze the significant debt covenants
within
your debt arrangements and their impact on your ability to
undertake
additional debt or equity financing. Refer to FRC 501.13.c. for
further guidance.
16. Disclose whether you have been in compliance with all material
debt covenants.
Significant Accounting Policies, page 28
17. You indicate several accounting policies as being significant.
Please revise your disclosure to include only those policies you
consider to be critical. For those policies you deem to be
critical,
expand your disclosures to address the material implications of
the
uncertainties that are associated with the methods, assumptions
and
estimates underlying your critical accounting measurements.
Specifically, you should provide the following:
(a) An analysis of the uncertainties involved in applying the
principle and the variability that is reasonably likely to result
from its application.
(b) An analysis of how you arrived at the measure and how
accurate
the estimate or underlying assumptions have been in the past.
(c) An analysis of your specific sensitivity to change based on
outcomes that are reasonably likely to occur and have a material
effect.
Please refer to FRC Section 501.14 for further guidance.
Natural Gas and Oil Reserves, page 44
18. We note that you include within your filing a measure for
PV(10).
Please be advised that this disclosure is considered a non-GAAP
measure. As such, you must provide all disclosures required by
Item
10(e) of Regulation S-K. The disclosures should include a
reconciliation to the most direct comparable GAAP financial
measure,
which would be the standardized measure of discounted future net
cash
flows relating to proved oil and gas reserve quantities as set
forth
in paragraph 30 of SFAS 69.
Acreage and Productive Wells, page 46
19. Please disclose in a footnote to the tables presented on page
46
the reasons why you are unable to present exact acreage for your
Australian locations.
Selling Shareholders, page 71
20. Please disclose how your security holders acquired their
shares.
In addition, please identify any selling stockholders who are
registered broker-dealers (Fidelity, for example) or affiliates of
registered broker-dealers. If you determine that any selling
stockholder is a registered broker-dealer, please revise your
disclosure to indicate that such selling stockholder is an
underwriter, unless such selling stockholder received its
securities
as compensation for investment banking services. With respect to
any
affiliate of a registered broker-dealer, please disclose, if true,
that such selling stockholder acquired its shares in the ordinary
course of business and at the time of the acquisition did not have
any arrangements or understandings with any person to distribute
the
securities. If not, you must indicate that such stockholder is an
underwriter.
Plan of Distribution, page 75
21. Please disclose, and describe, more prominently your
relationship
with Westwind.
Certain Relationships, page 78
22. Please file the agreements referred to in this section as
exhibits.
Material Income Tax Consequences, page 80
23. In the first full paragraph on page 81, you state that the
following is a "general discussion of certain U.S. federal income
tax
consequences." Please revise to make clear that you have included
a
discussion of "all material" consequences.
Consolidated Financial Statements for the Fiscal Years Ended
December
31, 2004, 2003 and 2002, page F-1
Report of Independent Registered Public Accounting Firm, page F-2
24. We note that your audit report was signed by an audit firm
based
in Calgary, Alberta, Canada. Please tell us how you concluded
that
it is appropriate to have an audit report issued by an auditor
licensed outside of the United States, in light of the facts that
the
majority of your assets are located within, the majority of your
revenues are derived within, and your corporate offices are
located
in the United States. In accordance with Article 2 of Regulation
S-
X, we believe that the audit report of a registrant (that is not a
foreign private issuer) should ordinarily be rendered by an
auditor
licensed in the United States. Further guidance may be found in
Section 5.K of "International Reporting and Disclosure Issues in
the
Division of Corporation Finance" on the Commission`s website at:
http://www.sec.gov/divisions/corpfin/internatl/cfirdissues1104.htm
..
Please tell us whether your management and accounting records are
located in the United States or Canada as well as where the
majority
of the audit work is conducted.
Consolidated Balance Sheets, page F-3
25. Present separately any payables or accruals that are in excess
of
five percent of total current liabilities. Refer to Rule 5-02.20
of
Regulation S-X.
26. Please remove the sub-header for "Debt to be Settled by the
Issuance of Shares" and present the amounts due to related party
and
convertible notes as Long Term liabilities.
Consolidated Statements of Changes in Shareholders` Equity and
Comprehensive Loss, page F-5
27. Disclose the changes in shareholders` equity and comprehensive
loss for the year ended December 31, 2002.
28. Please revise your disclosure of Other Comprehensive Income as
follows:
* Include Net Income as a component of Other Comprehensive Income;
* Rename the caption on your balance sheet to be "Accumulated
Other
Comprehensive Income"; and
* Disclose whether the components of comprehensive income are
shown
net of related tax effects or before related tax effects with one
amount shown for the aggregate income tax expense or benefit
related
to the total of other comprehensive income items. Refer to
paragraph
24 of SFAS 130 for further guidance.
29. Please enhance your disclosure regarding the share
cancellation
costs by describing in your footnotes the nature of these costs
and
how you account for them in your footnotes. Additionally, please
tell us why the share cancellation costs decreased from $1,691
thousand in 2003 to $6 thousand in 2004.
30. Please tell us why you recorded the issuance of share purchase
warrants as an increase to Common Stock and not Additional Paid-in
Capital. Also, tell us how you will account for exercises of
share
purchase warrants.
31. Please tell us what Contributed Surplus is and how you account
for it.
32. Please tell us how you accounted for the cashless exercise of
stock options. In your response, please cite specific accounting
literature, including your consideration of FIN 44.
Consolidated Statements of Cash Flows, page F-7
33. Please tell us why you classified accounts payable from a
joint
venture partner as a financing activity and not an operating
activity.
Notes to Consolidated Financial Statements, page F-8
34. Please disclose your proceeds from the sale of the Cherokee
Basin
property and the related gain or loss recorded in your
consolidated
financial statements, to the extent material.
Note 2. Significant Accounting Policies, page F-8
35. Please disclose your accounting policy related to treasury
stock.
Note 2(c) Oil and gas properties, page F-9
36. Please enhance your policy footnote to describe when costs
relating to unevaluated properties are transferred into the
amortization base.
Note 2(d) Mineral resource properties, page F-9
37. Please tell us why it is appropriate to capitalize indirect
overhead expenditures. Cite specific accounting literature in
your
response. Additionally, explain to us the difference between oil
and
gas properties and mineral resource properties.
Note 2(f) Revenue recognition, page F 10
38. Please enhance your revenue recognition policy to disclose
what
the sales method is and describe when delivery occurs.
Note 2(m) Stock-based compensation, page F-11
39. You indicate that you account for stock options granted using
the
fair value method and indicate that the Black-Scholes model is
used
to determine the fair values. You also provide a table indicating
the pro forma impact of applying SFAS 123. Again you indicate
that
you use the Black-Scholes model for determining the fair values.
Please explain to us why the two fair value methods provide
different
results.
Note 2(v) New accounting policies, page F13
40. We call your attention to SEC Release No. 33-8568 that defers
the
effective date of SFAS 123(R) for non-small business public
registrants to the first interim or annual reporting period
beginning
after December 15, 2005. In light of this release, tell us
whether
you plan to adopt SFAS 123(R) at the beginning of your third
quarter
of 2005.
Note 8. Convertible Notes, page F-18
41. Please tell us how you determined whether a beneficial
conversion
feature was present in your issuances of convertible notes during
2002. If you determined that a beneficial conversion feature was
present, tell us how you recorded it in your consolidated
financial
statements. Refer to EITF 95-8 for further guidance.
Note 9. Drilling Advances Liability, page F-19
42. Please tell us how you accounted for the share purchase
warrants
that were issued to the subscribers of the $4.0 million in
financing.
Tell us what consideration you gave to EITF 96-18 in accounting
for
the share purchase warrants.
Note 15. Loss per share, page F-23
43. Please disclose the number of potentially dilutive securities
that were not included in the computation of diluted EPS because
to
do so would have been antidilutive for the periods presented.
Refer
to paragraph 40.c. of SFAS 128 for further guidance.
Note 18(m) Commitments and Contingencies, page F-28
44. Please tell us what consideration you gave to FIN 45 related
to
the indemnifications you provided pursuant to provisions of
purchase
and sale contracts, service agreements, joint venture agreements,
operating agreements and leasing agreements.
Note 22. Supplemental Oil and Gas Disclosures - Unaudited, page F-
31
Costs Incurred in Oil and Gas Property Acquisition, Exploration
and
Development Activities, page F-33
45. Please tell us why costs incurred in oil and gas-producing
activities were negative in Australia for 2004.
Part II
Recent Sales of Unregistered Securities, page II-2
46. Please ensure that an exemption is provided for each private
placement.
Exhibits and Financial Statement Schedules
47. Provide a currently dated consent from the independent
accountants in your amendment.
Engineering Comments
Risk Factors, page 6
48. Expand your disclosure to include risk factors that disclose
the
drilling and operating risks and costs associated with handling
gas
containing high levels of hydrogen sulfide and carbon dioxide and
other contaminants such as in the Bossier trend of East Texas.
Include how this affects your results and may affect them in the
future and the fact that if your gas processing plant is out of
commission or exceeding capacity you may have to shut-in
production
due to not meeting minimum pipeline specifications for your
natural
gas.
49. We do not understand the necessity of a risk factor for
reserve
estimates provided by outside engineers. You are responsible for
the
accuracy of the disclosure that appears in your filings. Please
remove this risk factor from your filing or explain to us why it
is
necessary.
50. Your disclosure about the Australian gas market suggests that
it
may not be well developed. If this is the case, provide a risk
factor addressing how this may affect your future operations in
terms
of volumes and timing of future gas sales, capital costs for
pipeline
construction, expected gas prices and their comparison to those in
the United States, etc. If you do not believe a risk factor is
appropriate, advise us why you feel that is the case.
51. Include a risk factor that discloses the percentage of your
reserves that are classified as proved developed non-producing and
proved undeveloped. Disclose the ramifications this may have on
your
operations and results such as the need for future development
costs,
the delay in monetizing the reserves, and other key impacts.
Management`s Discussion and Analysis of Financial Condition and
Results of Operations,
page 21
Results of Operations, page 23
52. Please include operating costs on a per equivalent unit
production basis in each of the tables for the reported periods.
Business, page 33
Our Business, page 33
53. You state that you utilize advanced geophysics and geologic
techniques. Please describe to us the techniques that you use
that
are not also used by others in the industry and why you consider
it
appropriate to describe these as advanced. Alternatively, remove
this claim.
Our Strategy, page 33
54. We do not understand how participating in conventional natural
gas exploration necessarily exposes you to potentially large
natural
gas reserves and significant shareholder value. Please explain
this
to us or, alternatively remove this disclosure or expand the
disclosure to better justify your claim.
Natural Gas and Oil Operations, page 34
Hilltop Area, East Texas, page 34
55. You state that your acreage is located where the Deep Bossier
sand is at greater depths and possibly thicker pay zones than the
typical Deep Bossier sand development experienced by other
industry
participants. Please provide the support for this statement or
remove it from the disclosure.
Gas Transportation, page 35
56. Please include in your disclosure the approximate cost to
connect
with the natural gas pipeline that was constructed three miles
from
your initial drilling site and the estimated timing of when this
connection will occur.
Activities, page 35
57. Expand your disclosure to include why a 20 MMcfd natural gas
processing plant was constructed, what the cost was and describe
the
processing that the plant performs and why it is necessary.
Disclose
when the maximum capacity of this plant is expected to be reached
and
how this may impact your future operations. Provide information
on
the need and estimated future costs and the timing to expand or
build
another plant when gas production capacity exceeds the throughput
capacity of the existing plant.
Appalachian Basin, West Virginia, page 36
58. Please remove the disclosure concerning recoverable reserves
per
well and the reported estimated absolute open flow rates. These
do
not represent proved reserves and the results of calculated,
short-
term tests are confusing and not representative.
Coal Bed Methane, page 37
59. Expand your disclosure to include the facts that coal bed
methane
wells typically produce at lower rates and have lower reserves per
well than conventional gas wells.
Gunnedah Basin, New South Wales, Australia, page 40
60. Provide us with the reservoir simulation modeling results
regarding the Maules Creek CBM properties. Tell us also who
conducted these "independent" studies.
Natural Gas and Oil Reserves, page 44
61. Please include the definition of proved reserves as found in
Rule
4-10(a) of Regulation S-X. As requested in our prior comment,
remove
the disclaimers concerning the uncertainty of your estimates.
Notes to Consolidated Financial Statements, page F-8
Supplemental Oil and Gas Disclosures - Unaudited, page F-31
62. Please provide a copy of the reserve report as of December 31,
2004. For reserves classified as proved producing, provide a
graph
of the production over time with the forecasted production decline
also on the graph.
63. We are confused about your disclosure of a Reserves Committee
of
the Board of Directors and senior management who reviews the
reserves
report for completion and accuracy and approves the final reserve
report. Reconcile this with your previous disclosure which
indicates
you have no in house reservoir engineering capability and,
therefore,
rely on the accuracy of the reserve reports provided by your
outside
reservoir engineers. Please provide us with the names of the
members
of the Reserves Committee and their qualifications to perform the
work that you report that they are performing in this capacity.
Standardized Measure of Discounted Future Net Cash Flows, page F-
36
64. We note that the future production costs calculate to $1.52
per
MCFe but your actual costs at year-end 2004 were reported as $1.78
per MCFe. Please reconcile this for us.
Closing Comments
As appropriate, please amend your registration statement in
response to these comments. You may wish to provide us with
marked
copies of the amendments to expedite our review. Please furnish a
cover letter with your amendment that keys your responses to our
comments and provides any requested information. Detailed cover
letters greatly facilitate our review. Please file your cover
letter
on EDGAR. Please understand that we may have additional comments
after reviewing your amendment(s) and responses to our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made. You are also reminded to consider applicable
requirements
regarding distribution of the preliminary prospectus.
Notwithstanding our comments, in the event the company
requests
acceleration of the effective date of the pending registration
statement, it should furnish a letter, at the time of such
request,
acknowledging that
* should the Commission or the staff, acting pursuant to delegated
authority, declare the filing effective, it does not foreclose the
Commission from taking any action with respect to the filing;
* the action of the Commission or the staff, acting pursuant to
delegated authority, in declaring the filing effective, does not
relieve the company from its full responsibility for the adequacy
and
accuracy of the disclosure in the filing; and
* the company may not assert this action as defense in any
proceeding
initiated by the Commission or any person under the federal
securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in connection with our review of
your
filing or in response to our comments on your filing.
We will consider a written request for acceleration of the
effective date of the registration statement as a confirmation of
the
fact that those requesting acceleration are aware of their
respective
responsibilities under the Securities Act of 1933 and the
Securities
Exchange Act of 1934 as they relate to the proposed public
offering
of the securities specified in the above registration statement.
We
will act on the request and, pursuant to delegated authority,
grant
acceleration of the effective date.
We direct your attention to Rules 460 and 461 regarding
requesting acceleration of a registration statement. Please allow
adequate time after the filing of any amendment for further review
before submitting a request for acceleration. Please provide this
request at least two business days in advance of the requested
effective date.
You may contact Ryan Milne, Staff Accountant, at (202) 551-
3688
or April Sifford, Accounting Branch Chief, at (202) 551-3684, if
you
have questions regarding financial the statements and related
disclosure. Please contact Carrie Darling, Staff Attorney, at
(202)
551-3724, or me at (202) 551-3685. Direct all correspondence to
us
at the following address: 100 F St., NE, Washington, DC 20549,
Mail
Stop 7010.
Sincerely,
Tangela Richter
Branch Chief
cc: T. Mark Kelly, Esq.
Tangela Richter
Carrie Darling
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Mr. J. Russell Porter
Gastar Exploration Ltd.
page 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
DIVISION OF
CORPORATION FINANCE
Mail stop 7010