OKLAHOMA CITY, Nov. 10, 2010 (GLOBE NEWSWIRE) -- PostRock Energy Corporation (Nasdaq:PSTR) today announced its results for the third quarter of 2010. Revenues increased $1.4 million, or 5.7%, to $25.3 million during the quarter. The increase was primarily due to higher realized gas prices offset by lower production volume and a decline in pipeline revenue. Production volumes fell to 53.9 Mcfe a day, a 10% decline from the prior year period primarily due to a lack of drilling in late 2008 and 2009. With increasing capital expenditures starting in the second quarter of 2010, production has stabilized at approximately 54 Mcfe a day. Average prices for the period, excluding realized hedging gains, increased to $4.33 per Mcfe. Realized hedging gains in the quarter decreased to $6.8 million from $19.6 million a year earlier. Pipeline revenue decreased $1.8 million, or 31.8%, to $3.8 million primarily due to the loss of a significant interstate pipeline customer in late 2009.

Production costs, including lease operating expenses ("LOE"), severance and ad valorem taxes, decreased $3.1 million, or 35.4%, to $5.6 million. The decline was primarily due to $2.7 million lower ad valorem taxes and $0.6 million lower LOE offset by $0.2 million higher severance taxes. The reduction in ad valorem taxes reflects reduced tax assessments. LOE decreased primarily as a result of improved labor utilization. Total production costs were $1.14 per Mcfe for the three months ended September 30, 2010, a sharp drop from the $1.59 per Mcfe reported in the prior year. Pipeline operating expense decreased $1.5 million, or 18.8%, to $6.7 million during the three months ended September 30, 2010. Contributing to the decrease in operating expense were lower ad valorem taxes. General and administrative expenses fell 58.9% in the quarter to $4.7 million. The decline reflected the absence of the reaudit and the cost of recombining our predecessor entities along with the related fees to financial advisors. 

At September 30, 2010, the Company had natural gas hedges in places covering 44.5 Mmcf a day for the remainder of 2010 at an average price of $6.14 per Mcf. It also held hedges covering the majority of its proved developed producing reserves through 2013. After the end of the quarter, new crude oil hedges were entered into covering 48,000 barrels of 2011 production at an average price of $85.90 a barrel and 42,000 barrels of 2012 production at an average price of $87.90. Hedging positions as of September 30, 2010, are shown below.

Hedging Position
                 
  Q4-2010 2011 2012 2013
  Price Volume Price Volume Price Volume Price Volume
Gas  ($/Mmbtu) (Mmbtu) ($/Mmbtu) (Mmbtu) ($/Mmbtu) (Mmbtu) ($/Mmbtu) (Mmbtu)
Southern Star Swaps  $ 6.18  3,150,448  $ 6.43  5,000,304  $ 6.72  2,000,004  $ --   -- 
                 
NYMEX Swaps  $ 6.71  948,141  $ 7.02  8,549,998  $ 7.22  9,000,000  $ 7.28  9,000,003
                 
Southern Star Basis Swaps  $ (0.69)  948,141  $ (0.67)  8,549,998  $ (0.70)  9,000,000  $ (0.71)  9,000,003
                 
Oil  $/bbl Bbls $/bbl Bbls $/bbl Bbls $/bbl (Bbls)
NYMEX Swaps  $ 87.50  7,500  $ --   --   $ --   --   $ --   -- 

At September 30, 2010, PostRock had $248.8 million of outstanding debt and $34.8 million of available liquidity. In the recent refinancing, the current portion of long-term debt was reduced from $305.2 million at June 30 th to $9.0 million at September 30 th. The current portion represents the next twelve months of amortization on the Pipeline Loan. The first monthly payment on the Loan was made in October. At September 30, 2010, the Company was in compliance with all financial covenants. 
Summary Capitalization Table
    (Predecessor)
  September 30, 2010 December 31, 2009
  (in thousands)
     
Cash and cash equivalents   $ 1,262  $ 20,884
     
Long-term debt (including current maturities)    
Current Credit Agreements    
Borrowing Base Facility  $ 190,000  $ -- 
Pipeline Loan  15,000  -- 
QER Loan  43,760  -- 
     
Former Credit Agreements    
Quest Cherokee Loan  --   145,000
Second Lien Loan  --   29,821
Midstream Loan  --   118,728
 PESC Loan  --   35,658
     
     
Other Notes Payable  35  103
Total  $ 248,795  $ 329,310
     
Equity    
 Preferred Stock  $ 49,217  $ -- 
Total stockholders' deficit  (21,824)  (148,377)
Non-controlling interests   --   57,990
Total (deficit) equity   $ 27,393  $ (90,387)
     
Total capitalization  $ 276,188  $ 238,923

In the first nine months of 2010, capital expenditures totaled $22.9 million, a sharp increase from the $6.4 million spent in the prior year period. Expenditures in 2010 included $17.2 million spent in the Cherokee Basin, $3.4 million in Appalachia and $2.3 million on our interstate pipeline and miscellaneous other items.

Commenting, David C. Lawler, President and Chief Executive Officer of the Company, said, "During the third quarter we successfully recapitalized the Company. With $60 million of new capital from White Deer Energy, we reduced debt by $72.7 million over the quarter, restructured our remaining indebtedness and initiated an effort to sell most of our Appalachian assets. The restructuring eliminated our liquidity issues, greatly reduced our borrowing costs and freed us to pursue a more aggressive capital expenditure program.

"Also during the quarter, we drilled and completed 27 new wells and returned 42 wells to production in the Cherokee Basin, bringing our year to date totals to 141 and 232, respectively. Although the majority of our project work was delivered on schedule and under budget, a fair number of wells completed in Q1 and Q2 did not achieve peak production rate as expected. We have conducted a series of detailed engineering studies to determine the cause of the underperformance, and learned that our historical approach to zonal fracture treatments is too standardized, and not as transferrable across the basin as we once believed. On future development projects, custom fracture treatments tailored to zone and region will be employed to maximize the effectiveness of each completion stage. We will keep you posted on our progress as we continue to develop and refine our fracture treatment program.

"At long last, we are positioned to create meaningful value for our stockholders and are optimistic about the Company's potential. As we develop our 2011 budget, our focus will be on efficiently growing reserves and production, lowering costs and further reducing debt. We look forward to keeping you abreast of our progress in the year ahead."

Webcast and Conference Call

PostRock will host its quarterly webcast and conference call tomorrow, Thursday, November 11, 2010 at 9:00 a.m. (Central Time). The webcast will be accessible on the 'Investors' page at www.pstr.com . Conference call numbers for participation are 866-516-1003 in the U.S. and 760-536-8545 internationally.  The webcast will be available for replay on the Company's website following the conference call.

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 2,800 wells and nearly 2,200 miles of gas gathering lines in the Basin. It also owns a 1,100 mile of interstate gas pipeline systems serving parts of Oklahoma, Kansas and Missouri.

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. You can find the Company's filings with the SEC at www.pstr.com or www.sec.gov. By making these forward-looking statements, the Company's undertakes no obligation to update these statements for revisions or changes after the date of this release.

Reconciliation of Non-GAAP Financial Measures

PostRock defines adjusted EBITDA as net income (loss) before income taxes; interest expense, net; depreciation, depletion and amortization; other (income) expense; change in fair value of derivative instruments; loss (recovery) from misappropriation of funds; stock based compensation and impairments. The following table represents a reconciliation of net income (loss) to EBITDA and adjusted EBITDA for the period presented:
           
    (Predecessor)   (Predecessor) (Predecessor)
  Three Months Ended September 30, 2010 Three Months Ended September 30, 2009 March 6, 2010 to September 30, 2010 January 1, 2010 to March 5, 2010 Nine Months Ended September 30, 2009
      (in thousands)    
           
Net income (loss) attributable to controlling interest   $ 28,189  $ (11,527)  $ 35,612  $ 11,778  $ (80,932)
Adjusted for:          
Net income (loss) attributable to non-controlling interest   --   (5,197)  --   9,958  (45,362)
Income tax expense   --   --   --   --   -- 
Interest expense, net   8,602  6,920  17,025  5,336  20,666
Depreciation, depletion, accretion and amortization   4,874  14,068  10,882  4,164  39,274
EBITDA  $ 41,665  $ 4,264  $ 63,519  $ 31,236  $ (66,354)
Other (income) expense, net   (67)  140  163  4  1
Unrealized (gain) loss from derivative financial instruments   (25,445)  10,864  (32,804)  (21,573)  52,018
Recovery of misappropriated funds, net of liabilities assumed   (997)  (9)  (997)  --   (3,406)
Stock based compensation  353  324  987  808  1,143
Impairment of oil and gas properties   --   --   --   --   102,902
Adjusted EBITDA  $ 15,509  $ 15,583  $ 30,868  $ 10,475  $ 86,304

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, amortization and accretion, 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 AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (Unaudited)
           
    (Predecessor)   (Predecessor) (Predecessor)
  Three Months Ended September 30, 2010 Three Months Ended September 30, 2009 March 6, 2010 to September 30, 2010 January 1, 2010 to March 5, 2010 Nine Months Ended September 30, 2009
   
Revenue          
Oil and gas sales   $ 21,484  $ 18,329  $ 50,075  $ 18,659  $ 56,711
Gas pipeline revenue   3,839  5,633  8,902  2,825  21,022
Total revenues   25,323  23,962  58,977  21,484  77,733
Costs and expenses          
Oil and gas production   5,644  8,739  15,173  5,266  23,699
Pipeline operating   6,691  8,243  15,586  4,489  22,264
General and administrative   4,658  11,337  15,772  5,735  29,705
Depreciation, depletion and amortization   4,874  14,068  10,882  4,164  39,274
Impairment of oil and gas properties   --   --   --   --   102,902
Recovery of misappropriated funds, net of liabilities assumed   (997)  (9)  (997)  --   (3,406)
Total costs and expenses   20,870  42,378  56,416  19,654  214,438
           
Operating income (loss)   4,453  (18,416)  2,561  1,830  (136,705)
           
Other income (expense)          
Gain (loss) from derivative financial instruments   32,271  8,752  50,239  25,246  31,078
Other income (expense), net   67  (140)  (163)  (4)  (1)
Interest expense, net   (8,602)  (6,920)  (17,025)  (5,336)  (20,666)
Total other income (expense)   23,736  1,692  33,051  19,906  10,411
Income (loss) before income taxes and non-controlling interests   28,189  (16,724)  35,612  21,736  (126,294)
Income tax expense   --   --   --   --   -- 
Net income (loss)   28,189  (16,724)  35,612  21,736  (126,294)
Net (income) loss attributable to non-controlling interest   --   5,197  --   (9,958)  45,362
Net income (loss) attributable to controlling interest   $ 28,189  $ (11,527)  $ 35,612  $ 11,778  $ (80,932)
 Preferred stock dividends  209  --   209  --   -- 
Net income (loss) attributable to common stockholders  $ 27,980  $ (11,527)  $ 35,403  $ 11,778  $ (80,932)
Net income (loss) per common share          
Basic   $ 3.47  $ (0.36)  $ 4.40  $ 0.37  $ (2.54)
Diluted   $ 3.21  $ (0.36)  $ 4.22  $ 0.36  $ (2.54)
Weighted average shares outstanding          
Basic   8,063  31,885  8,053  32,137  31,828
Diluted   8,719  31,885  8,381  32,614  31,828
 
POSTROCK ENERGY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
    (Predecessor)
  September 30, 2010 December 31, 2009
  (unaudited)  
ASSETS    
Current assets    
Cash and cash equivalents   $ 1,262  $ 20,884
Restricted cash   388  718
Accounts receivable — trade, net   9,320  13,707
Other receivables   858  2,269
Other current assets   2,193  8,141
Inventory   6,799  9,702
Current derivative financial instrument assets   36,103  10,624
Total current assets   56,923  66,045
Oil and gas properties under full cost method of accounting, net   49,233  40,478
Pipeline assets, net   141,503  136,017
Other property and equipment, net   17,859  19,433
Other assets, net   6,543  2,727
Long-term derivative financial instrument assets   47,255  18,955
Total assets   $ 319,316  $ 283,655
     
LIABILITIES AND EQUITY    
Current liabilities    
Accounts payable   $ 8,675  $ 10,852
Revenue payable   5,959  5,895
Accrued expenses   12,087  11,417
Current portion of notes payable   9,032  310,015
Current derivative financial instrument liabilities   2,525  1,447
Total current liabilities   38,278  339,626
Long-term derivative financial instrument liabilities   6,893  8,569
Other liabilities   6,989  6,552
Notes payable   239,763  19,295
Total liabilities  291,923  374,042
     
Commitments and contingencies    
Series A Preferred Stock  49,217  --
     
Equity    
Preferred stock  2  --
Common stock  82  33
Additional paid-in capital   378,115  299,010
Treasury stock, at cost   --  (7)
Accumulated deficit   (400,023)  (447,413)
Total stockholders' deficit before non-controlling interests   (21,824)  (148,377)
Non-controlling interests   --  57,990
Total equity   (21,824)  (90,387)
Total liabilities and equity   $ 319,316  $ 283,655
 
POSTROCK ENERGY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
    (Predecessor) (Predecessor)
  March 6, 2010 to September 30, 2010 January 1, 2010 to March 5, 2010 Nine Months Ended September 30, 2009
   
 Cash flows from operating activities       
 Net income (loss)   $ 35,612  $ 21,736  $ (126,294)
 Adjustments to reconcile net income (loss) to cash provided by operations       
 Depreciation, depletion and amortization   10,882  4,164  39,274
 Stock-based compensation   987  808  1,143
 Impairment of oil and gas properties   --   --   102,902
 Amortization of deferred loan costs   5,339  2,094  4,109
 Change in fair value of derivative financial instruments   (32,804)  (21,573)  52,018
 Loss (gain) on disposal of property and equipment   131  --   83
 Other non-cash changes to items affecting net income   111  --   (977)
 Change in assets and liabilities       
 Accounts receivable   4,624  (237)  6,154
 Other receivables   397  1,014  5,960
 Other current assets   (501)  466  1,215
 Other assets   (6)  2  153
 Accounts payable   (2,942)  (83)  (20,221)
 Revenue payable   221  (157)  (4,140)
 Accrued expenses   4,033  983  3,211
 Other long-term liabilities   1  --   -- 
 Other   --   --   (2)
 Cash flows from operating activities   26,085  9,217  64,588
       
 Cash flows from investing activities       
 Restricted cash   331  (1)  (143)
 Proceeds from sale of oil and gas properties   110  --   8,846
 Equipment, development, leasehold and pipeline   (20,588)  (2,282)  (6,363)
 Cash flows from investing activities   (20,147)  (2,283)  2,340
       
 Cash flows from financing activities       
 Proceeds from issuance of preferred stock and warrants   60,000  --   -- 
 Proceeds from bank borrowings   2,100  900  2,930
 Repayments of bank borrowings   (88,976)  (41)  (49,126)
 Refinancing and equity offering costs   (6,477)  --   (569)
 Cash flows from financing activities   (33,353)  859  (46,765)
 Net increase (decrease) in cash   (27,415)  7,793  20,163
 Cash and cash equivalents beginning of period   28,677  20,884  13,785
 Cash and cash equivalents end of period   $ 1,262  $ 28,677  $ 33,948
CONTACT:  PostRock Energy Corporation          Jack Collins, Chief Financial Officer            (405) 702-7460          North Whipple, Manager, Corporate Development &            Investor Relations            (405) 702-7423

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