August 8, 2012

PostRock Reports Second Quarter Results

OKLAHOMA CITY, Aug. 8, 2012 (GLOBE NEWSWIRE) -- PostRock Energy Corporation (Nasdaq:PSTR) today announced its second quarter 2012 results. Oil and gas revenues fell 50% from the prior-year period to $10.7 million. The decline paralleled a 51% drop in the Company's realized gas price which averaged $2.06 per Mcf in the period. This price does not reflect the benefits of hedging which are included in Other Income. As substantially all gas development was suspended in September 2011 due to falling prices, gas production fell 11.1% from the prior-year period to an average of 45.2 MMcf a day. Oil production, which remains modest but is benefiting from current development efforts, increased 22.5% to an average of 265 Bbls a day. Gathering revenue fell by almost 70% to $474,000. More than two-thirds of the decline resulted from the royalty settlement. A further $125,000 can be tracked to the Company's production decline and $175,000 related to a 26% reduction in third party volumes. Pipeline revenue rose 14.1% to $2.8 million as growing associated gas volumes from Osage County, OK increased throughput.

Realized hedging gains, including gains on settling June, July and August 2012 gas swaps, totaled $18.6 million for the quarter. Unfortunately, as the settlement was structured as a re-pricing, a portion of these gains were subsequently lost. Due to the declining unit price of Constellation Energy Partners ("CEP") in the quarter, the Company recorded a mark-to-market loss of $6.6 million. In June 2012, a $5.7 million escrow related to a 2011 property sale was released. Of this amount, $1.3 million was retained by the Company and $4.4 million was paid to the Royal Bank of Canada. At June 30, 2012, a $564,000 escrow balance remained and is scheduled for release in December 2012. Only $164,000 of this will remain with PostRock.

Production costs, consisting of lease operating expenses, gathering costs and production taxes, totaled $10.7 million, a 6.2% decrease from the prior-year period. The decrease was in part due to field optimization projects. Labor, vehicle and equipment costs decreased $691,000 and gathering costs fell $470,000. A $702,000 reduction in production taxes also contributed. These reductions were offset by the absence of capitalized costs, increased workover expenses of $319,000 and increased maintenance expenses of $241,000 driven by April weather issues. Production costs totaled $2.51 an Mcfe, a 4.1% increase from the prior-year quarter. Pipeline operating expense totaled $765,000, a 43.7% decrease. The decrease was due to the timing of integrity tests and the elimination of a contractual payment to another pipeline that had been reduced in January 2011 and eliminated in October. General and administrative expenses totaled $3.9 million, a 24.7% decrease from the prior-year period. The decrease was primarily due to a $900,000 reduction in compensation costs and a $185,000 drop in legal fees.

In April, PostRock re-priced its June, July and August NYMEX gas swap contracts, raising $10.8 million. This was effected by selling hedges to help reduce its bank debt and simultaneously entering into new contracts. Since the transaction, the new contracts have experienced $1.6 million in losses. Of this amount, $476,000 rolled into 2016 hedges, $514,000 was paid in July and $617,000 in August. PostRock holds gas hedges covering 30 MMcf a day for the remainder of 2012 at an average price of $5.12 per Mcf and 25 MMcf a day in 2013 at an average price of $6.58 per Mcf. The fair value of these hedges at June 30, 2012 totaled $43.2 million. This value changes daily based on price fluctuations and monthly due to roll off of hedges. The following table summarizes the hedges at June 30, 2012.

 July - Dec.        
 20122013201420152016
Gas Hedges        
Southern Star Gas Swaps      
Volume (Mmbtu) 1,000,002 -- -- -- --
Weighted Average Price (Mmbtu) $6.63 -- -- -- --
NYMEX Gas Swaps        
Volume (Mmbtu) 4,524,590 9,000,003 -- -- 1,047,000
Weighted Average Price (Mmbtu) $5.51 $7.28 -- -- $4.00
Southern Star Basis Swaps      
Volume (Mmbtu) 4,524,590 9,000,003 -- -- --
Weighted Average Price (Mmbtu) ($0.72) ($0.71) -- -- --
           
Oil Hedges        
NYMEX Oil Swaps        
Volume (Bbls) 33,342 65,892 61,680 58,164 53,892
Weighted Average Price (Bbl) $93.86 $101.70 $97.00 $93.40 $91.10

Debt

At June 30, 2012, PostRock's only debt was $167.4 million drawn on its bank facility. Debt decreased $11.7 million during the quarter. The reduction was largely funded with proceeds from settling June, July and August gas swaps. At August 8th, debt totaled $161.8 million.

On June 1, 2012, the borrowing base was redetermined based on December 31, 2011 reserves. Values for the KPC pipeline and the 26.5% ownership in CEP were also included. Primarily as a result of lower gas prices and the roll off of hedges, the borrowing base was reduced $24 million to $176 million. Through the October 2012 redetermination, the borrowing base will decline $1 million a month. Additional interest at the rate of 1.5% is payable on borrowings above $120 million. The $120 million figure appears to be the lenders' consensus on the value of a conforming borrowing base on proved reserves. With White Deer's equity investment on August 1, 2012, the borrowing base was permanently reduced to $166.5 million. Given current gas prices, the Company does not anticipate having meaningful liquidity for some time without a refinancing. Working capital needs and capital expenditures are expected to be funded with cash flow from operations.

On August 1, 2012, White Deer invested a further $12 million in Company equity, comprised of 50% common and 50% preferred stock. Simultaneously, it extended the period during which PostRock may pay-in-kind the dividends on all preferred stock held by White Deer by 18 months to December 2014. Proceeds from the investment were used to reduce debt and provide working capital.

At June 30, 2012, PostRock elected to pay-in-kind the quarterly dividend to White Deer which increased the liquidation value of Series A Preferred Stock outstanding by $2.2 million to $74.0 million. White Deer also received 1.4 million additional warrants with a strike price of $1.56 a share. Following the investment and the June 30th dividend, White Deer holds $80 million at liquidation preference of Series A Preferred, 26.7 million warrants exercisable at an average price of $3.00 a share and 5.3 million common shares.

     
 December 31, 2011June 30, 2011
 (in thousands)
     
Cash and equivalents   $ 349  $ 105
     
Long-term debt (including current maturities)    
Borrowing base facility  $ 190,000  $ 167,355
Secured pipeline loan  3,000  --
Total  $ 193,000  $ 167,355
     
Redeemable preferred stock  $ 56,736  $ 60,463
Stockholders' equity  7,810  1,451
Total capitalization  $ 257,546  $ 229,269

Capital Expenditures

During the first half of 2012, capital expenditures totaled $9.2 million. This included $4.1 million spent on oil directed drilling and recompletions, $1.6 million to complete vehicle and equipment efficiency projects, $1.2 million to connect two sections of the gathering system, $1.8 million to complete facility and IT projects, $377,000 on KPC and $100,000 to extend leases.  

Management Comment

Terry W. Carter, PostRock's President and Chief Executive Officer, said, "Gas prices remain depressed and, despite the recent rebound, they remain at unprofitable levels. As a result, we are focused on retiring debt and reducing our cost structure. White Deer's recent $12 million investment and extension of the PIK period on our Preferred was an important step in giving us time to return to profitability."

"All drilling and development capital is currently being directed to oil projects. Since March, we have performed 30 Cherokee Basin recompletions. The projects are low cost and should not add significant operating costs. It appears the projects have a 50% success rate and, in aggregate including those that prove unsuccessful, a rate of return greater than 75% at current prices. During the quarter, we also drilled three oil wells in southeast Kansas at a combined cost of only $316,000. Production from the three averaged 20 net barrels a day for the first 30 days. We expect to pursue additional such opportunities shortly. Oil production has increased over 20% since last year. We plan ten to twelve workovers a month for the remainder of the year."

"In June, our borrowing base was redetermined, dropping from $200 million to $176 million. At June 30, 2012, the outstanding balance became current as the facility expires on June 30, 2013. Recently, we have had discussions with a number of lenders and firms about a refinancing. We hope to have something to report on that front shortly."

"KPC is continuing to slightly exceed expectations due to transportation contracts related to the development of the oil-rich Mississippian play. Volumes and revenues have increased while we have been successful at continuing to lower operating costs. Meanwhile, the strategic discussion about the pipeline continues."

Webcast and Conference Call

PostRock will host its quarterly webcast and conference call tomorrow, Thursday, August 9, 2012, at 10:00 a.m. Central Time. The live webcast will be accessible on the 'Investors' page at www.pstr.com, where it will also be available for replay. The conference call number for participation is (866) 516-1003.

PostRock Energy Corporation is engaged in the acquisition, exploration, development, production and transportation of oil and natural gas, primarily in the Cherokee Basin of Kansas and Oklahoma. The Company owns and operates over 3,000 wells and nearly 2,200 miles of gas gathering lines in the Basin. It also owns and operates minor oil producing properties in Oklahoma, oil and gas producing properties in the Appalachian Basin and a 1,120 mile interstate natural gas pipeline, which transports natural gas from northern Oklahoma and western Kansas to Wichita and Kansas City.

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 the Company 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 the Company's filings with the Securities and Exchange Commission, including risk factors listed in the Company's Annual Report on Form 10-K and other filings with the SEC. The Company's filings with the SEC may be found at www.pstr.com or www.sec.gov. By making these forward-looking statements, the Company undertakes no obligation to update these statements for revisions or changes after the date of this release.

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 June 30,
 20112012
 (in thousands)  
     
Net income (loss)  $ 7,531  $ (18,508)
Adjusted for:    
Interest expense, net   2,633  2,524
Depreciation, depletion, accretion and amortization   6,836  7,781
EBITDA  $ 17,000  $ (8,203)
Other income (expense), net   164  (7)
Loss on equity investment  --  6,636
Unrealized loss from derivative financial
 instruments 
 1,103  18,777
Gain on forgiveness of debt  (1,647)  (255)
(Gain) loss on disposal of assets  (2,435)  266
Litigation reserve  100  --
Stock based compensation  1,042  649
Adjusted EBITDA  $ 15,327  $ 17,863
     

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 us to invest in the growth of PostRock's business.

POSTROCK ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
     
 Three Months Ended June 30,
 20112012
Revenue    
Oil and gas sales   $ 21,525  $ 10,650
Gathering   1,533  474
Pipeline   2,466  2,814
Total   25,524  13,938
Costs and expenses    
Production expense   11,406  10,699
Pipeline expense  1,356  765
General and administrative  5,148  3,878
Litigation reserve  100  --
Depreciation, depletion and amortization   6,836  7,781
(Gain) loss on disposal of assets  (2,435)  266
Total   22,411  23,389
     
Operating income (loss)  3,113  (9,451)
     
Other income (expense)    
Realized gain from derivative financial instruments   6,671  18,618
Unrealized loss from derivative financial instruments   (1,103)  (18,777)
Loss on equity investment   --  (6,636)
Gain on forgiveness of debt  1,647  255
Other income (expense), net  (164)  7
Interest expense, net   (2,633)  (2,524)
Total   4,418  (9,057)
Income (loss) before income taxes   7,531  (18,508)
Income taxes  --  --
Net income (loss)  7,531  (18,508)
Preferred stock dividends  (1,915)  (2,155)
Accretion of redeemable preferred stock  (380)  (501)
Net income (loss) available to common stock  $ 5,236  $ (21,164)
Net income (loss) per common share    
Basic   $ 0.63  $ (1.71)
Diluted   $ 0.28  $ (1.71)
Weighted average common shares outstanding    
Basic   8,311  12,403
Diluted   18,792  12,403
POSTROCK ENERGY CORPOATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
 December 31,June 30
 20112012
ASSETS
Current assets    
Cash and equivalents   $ 349  $ 105
Accounts receivable - trade, net   9,123  6,151
Other receivables   1,267  200
Inventory   1,788  1,568
Other  7,492  3,884
Derivative financial instruments   42,803  34,234
Total   62,822  46,142
Oil and gas properties, full cost, net   124,068  118,897
Pipeline assets, net   59,088  58,069
Other property and equipment, net   14,726  15,673
Equity investment  12,994  10,471
Other, net  3,497  1,051
Derivative financial instruments   29,516  17,360
Total assets   $ 306,711  $ 267,663
     
LIABILITIES AND EQUITY
Current liabilities    
Accounts payable   $ 6,286  $ 3,978
Revenue payable   4,972  3,529
Accrued expenses and other  8,700  5,571
Litigation reserve  3,081  4,415
Current portion of long-term debt  3,000  167,355
Derivative financial instruments   5,223  5,424
Total   31,262  190,272
Derivative financial instruments   4,611  2,999
Long-term debt  190,000  --
Asset retirement obligations  11,733  12,130
Other  4,559  348
Total liabilities  242,165  205,749
     
Commitments and contingencies    
Series A cumulative redeemable preferred stock  56,736  60,463
     
Stockholders' equity    
Preferred stock  2  2
Common stock  99  124
Additional paid-in capital   378,093  382,870
Accumulated deficit   (370,384)  (381,545)
Total equity  7,810  1,451
Total liabilities and equity   $ 306,711  $ 267,663
POSTROCK ENERGY CORPOATION
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
   
     
 Six Months Ended June 30, 
 20112012
 Cash flows from operating activities     
 Net income (loss)   $ 3,670  $ (11,161)
 Adjustments to reconcile net income (loss) to net cash from operations     
 Depreciation, depletion and amortization   13,727  14,794
 Stock-based compensation   1,341  1,091
 Amortization of deferred loan costs   848  797
 Change in fair value of derivative financial
 instruments 
 11,160  19,314
 Litigation reserve   9,600  --
 (Gain) loss on disposal of assets   (12,357)  157
 Loss from equity investment   --  2,467
 Gain on forgiveness of debt   (1,647)  (255)
 Other non-cash changes to net income (loss)   (100)  259
 Change in assets and liabilities     
 Receivables   (426)  4,039
 Payables   (2,859)  (6,591)
 Other   (1,486)  1,757
 Net cash flows from operating activities   21,471  26,668
     
 Cash flows from investing activities     
 Restricted cash   28  --
 Proceeds from sale of assets   10,682  293
 Equipment, development, leasehold and pipeline   (15,287)  (8,998)
 Net cash flows from investing activities   (4,577)  (8,705)
     
 Cash flows from financing activities     
 Repayments of debt   (16,319)  (25,645)
 Proceeds from issuance of common stock   --  7,514
 Equity issuance costs     (76)
 Net cash flows from financing activities   (16,319)  (18,207)
 Net increase (decrease) in cash   575  (244)
 Cash and equivalents - beginning of period   730  349
 Cash and equivalents - end of period   $ 1,305  $ 105
CONTACT: Company Contact:

         North Whipple

         Director, Finance & Investor Relations

         nwhipple@pstr.com

         (405) 702-7423


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