worldwide and regional economic conditions impacting the global supply and demand for oil and natural gas;

Transcription

1 RISK FACTORS You should carefully consider each of the risks described below, together with all of the other information contained in this offering memorandum, before deciding to invest in the units. The risks and uncertainties described below are not the only ones we may face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business. If any of the following risks develop into actual events, our business, financial condition or results of operations could be materially adversely affected and you may lose all or part of your investment. Risks Related to Our Business A substantial or extended decline in oil and, to a lesser extent, natural gas prices may adversely affect our business, financial condition or results of operations and our ability to meet our capital expenditure obligations and financial commitments. The price we receive for our oil and, to a lesser extent, natural gas, will heavily influence our revenue, profitability, access to capital and future rate of growth. Oil and natural gas are commodities and, therefore, their prices are subject to wide fluctuations in response to relatively minor changes in supply and demand. Historically, the markets for oil and natural gas have been volatile. These markets will likely continue to be volatile in the future. The prices we receive for our production and the levels of our production depend on numerous factors beyond our control. These factors include the following: worldwide and regional economic conditions impacting the global supply and demand for oil and natural gas; the price and quantity of imports of foreign oil and natural gas; the actions of the Organization of Petroleum Exporting Countries, or OPEC, and other state-controlled oil companies relating to oil and natural gas price and production control; political conditions in or affecting other oil-producing and natural gas-producing countries, including the current conflicts in the Middle East and conditions in South America and Russia; the level of global oil and natural gas inventories; localized supply and demand fundamentals and transportation availability; weather conditions and natural disasters; governmental regulations; speculation as to the future price of oil and the speculative trading of oil and natural gas futures contracts; price and availability of competitors supplies of oil and natural gas; technological advances affecting energy consumption; and the price and availability of alternative fuels. Further, oil prices and natural gas prices do not necessarily fluctuate in direct relationship to each other. Because approximately 65% of Gastar s estimated proved reserves as of April 5, 2013 were liquids, our financial results are more sensitive to fluctuations in oil prices. The price of oil has been extremely volatile, and we expect this volatility to continue. The slowdown in economic activity caused by the worldwide economic recession has reduced worldwide demand for energy and resulted in lower crude oil and natural gas prices. Crude oil prices declined from record high levels in early July 2008 of over $140 per Bbl to below $45 per Bbl in February 2009 before rebounding to over $105 per Bbl in April Natural gas prices declined from over $13 per MMBtu in mid-2008 to approximately $1,90 per MMBtu in April Declines in oil and natural gas prices may materially adversely affect our financial condition. Liquidity and ability to finance planned capital expenditures and results of operations and may reduce the amount of oil and natural gas that we can produce economically. Additionally, such declines may result in a reduction of the initial borrowing base.this could have a material adverse effect on our liquidity and financial condition.

2 Our development and production projects require significant capital expenditures. We may be unable to obtain necessary capital or financing on satisfactory terms, which could lead to a decline in our oil and natural gas reserves. The oil and natural gas industry is capital intensive. We make and expect to continue to make significant capital expenditures in our business for the development and production of oil and natural gas reserves. Improvement in commodity prices may result in an increase in our actual capital expenditures. Conversely, a significant decline in product prices could result in a decrease in our capital expenditures. We intend to finance our future capital expenditures primarily through cash flows from operations and through borrowings under the new senior revolving credit facility, however, our financing needs may require us to alter or increase our capitalization substantially. The issuance of additional debt may require that a portion of our cash flows from operations be used for the payment of interest and principal on our debt, thereby reducing our ability to use cash flows to fund working capital. Capital expenditures and acquisitions. Our cash flows from operations and access to capital are subject to a number of variables, including: our proved reserves; the level of oil and natural gas we are able to produce from existing wells; the prices at which our oil and natural gas are sold; our ability to acquire, locate and produce new reserves; and the ability of our banks to lend. If our revenues decrease as a result of lower oil or natural gas prices, operating difficulties, declines in reserves or for any other reason, we may have limited ability to obtain the capital necessary to sustain our operations at current levels. If additional capital is needed, we may not be able to obtain debt or equity financing. If cash generated by operations or cash available under the new senior revolving credit facility is not sufficient to meet our capital requirements, the failure to obtain additional financing could result in a curtailment of our operations relating to development of our prospects, which in turn could lead to a decline in our oil and natural gas reserves and could adversely affect our business, financial condition and results of operations. Drilling for oil and natural gas is a speculative activity and involves numerous risks and substantial and uncertain costs that could adversely affect us. Our future financial condition and results of operations will depend on the success of our exploitation, development and production activities. Our oil and natural gas exploration and production activities are subject to numerous risks beyond our control; including the risk that drilling will not result in commercially viable oil or natural gas production. Our decisions to explore, develop or otherwise exploit drilling locations or properties will depend in part on the evaluation of data obtained through geophysical and geological analyses, production data and engineering studies, the results of which are often inconclusive or subject to varying interpretations. For a discussion of the uncertainty involved in these processes, see Cautionary statements regarding forward-looking statements. The estimated oil and natural gas reserve quantities and future production rates set forth in this offering memorandum are based on many assumptions that may prove to be inaccurate. Any material inaccuracies in these reserve estimates or the underlying assumptions will materially affect the quantities and present value of our reserves. Our cost of drilling, completing and operating wells is often uncertain before drilling commences. Overruns in budgeted expenditures are common risks that can make a particular project uneconomical. Further, many factors may curtail, delay or cancel our scheduled drilling projects, including the following: shortages of or delays in obtaining equipment and qualified personnel; facility or equipment malfunctions; unexpected operational events; pressure or irregularities in geological formations; adverse weather conditions, such as flooding; reductions in oil and natural gas prices;

3 delays imposed by or resulting from compliance with regulatory requirements; proximity to and capacity of transportation facilities; title problems: and limitations in the market for oil and natural gas. Even if drilled, our completed wells may not produce reserves of oil or natural gas that are economically viable or that meet our earlier estimates of economically recoverable reserves. A productive well may become uneconomic if water or other deleterious substances are encountered, which impair or prevent the production of oil and/or natural gas from the well. Our overall drilling success rate or our drilling success rate for activity within a particular project area may decline. Unsuccessful drilling activities could result in a significant decline in our production and revenues and materially harm our operations and financial condition by reducing our available cash and resources. Because of the risks and uncertainties of our business, our future performance in exploration and drilling may not be comparable to the historical performance of the Chisholm Trail Properties. The estimated oil and natural gas reserve quantities and future production rates set forth in this offering memorandum are based on many assumptions that may prove to be inaccurate. Any material inaccuracies in these reserve estimates or the underlying assumptions will materially affect the quantities and present value of our reserves. Numerous uncertainties are inherent in estimating quantities of oil and natural gas reserves. This offering memorandum contains estimates of our pro forma net proved reserve quantities. These estimates are based upon the information Gastar publically has presented. The process of estimating oil and natural gas reserves is complex, requiring significant decisions and assumptions in the evaluation of available geological, engineering and economic data for each reservoir, and these reports rely upon various assumptions, including assumptions regarding future oil and natural gas prices, production levels, and operating and development costs. As a result, estimated quantities of proved reserves and projections of future production rates and the timing of development expenditures may prove to be inaccurate. Over time, we may make material changes to reserve estimates taking into account the results of actual drilling and production. Any significant variance from our assumptions by actual results could greatly affect our estimates of reserves, the economically recoverable quantities of oil and natural gas attributable to any particular group of properties, the classifications of reserves based on risk of recovery, and estimates of the future net cash flows. The standardized measure of discounted future net cash flows of our actual and pro forma estimated net proved reserves is not necessarily the same as the current market value of our estimated net proved reserves. We base the discounted future net cash flows from our estimated net proved reserves on prices and costs in effect on the day of the estimate. Actual prices received for production and actual costs of such production will be different than these assumptions, perhaps materially. Actual future net revenues from our oil and natural gas properties will be affected by factors such as: the actual prices we receive for oil and natural gas; our actual development and production expenditures; the amount and timing of actual production; and changes in governmental regulations or taxation. In addition, the 10% discount factor we use when calculating discounted future net cash flows may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with us or the oil and natural gas industry in general. Any material inaccuracy in our reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves which could adversely affect our business, results of operations and financial condition. Approximately 97% of our total estimated proved reserves were classified as possible reserves and may ultimately prove to be less than estimated. Recovery of proved undeveloped reserves requires significant capital expenditures and successful drilling operations. As of April 5, 2013, approximately 97% of our total estimated proved reserves were estimates of possible reserves. The future drilling of undeveloped probable and possible reserves is highly dependent upon our own ability as well as our partners in the AMI ability to fund estimated total capital development costs of approximately $250 million. We cannot be sure that these estimated costs are accurate. Further, our drilling efforts may be delayed or unsuccessful, and actual reserves may prove to be

4 less than current reserve estimates, which could have a material adverse effect on our financial condition, future cash flows and results of operations. If oil and natural gas prices decrease, we may be required to take write-downs of the carrying values of our oil and natural gas properties. We will review our proved oil and natural gas properties for impairment whenever events and circumstances indicate that a decline in the recoverability of their carrying value may have occurred. Based on specific market factors and circumstances at the time of prospective impairment reviews, and the continuing evaluation of development plans, production data, economics and other factors, we may be required to write down the carrying value of our oil and natural gas properties, which may result in a decrease in the amount available under our new senior revolving credit facility. A write-down constitutes a non-cash charge to earnings. We may incur impairment charges in the future, which could have a material adverse effect on our ability to borrow under our new senior revolving credit facility and our results of operations for the periods in which such charges are taken. Unless we replace oil and natural gas reserves our future reserves and production will decline. Our future oil and natural gas production will depend on our success in finding or acquiring additional reserves. If we are unable to replace reserves through drilling or acquisitions, our level of production and cash flows will be adversely affected. In general, production from oil and natural gas properties declines as reserves are depleted, with the rate of decline depending on reservoir characteristics. Our total proved reserves decline as reserves are produced unless we conduct other successful exploration and development activities or acquire properties containing proved reserves, or both. Our ability to make the necessary capital investment to maintain or expand our asset base of oil and natural gas reserves would be impaired to the extent cash flow from operations is reduced and external sources of capital become limited or unavailable. We may not be successful in exploring for, developing or acquiring additional reserves. We also may not be successful in raising funds to acquire additional reserves. Hedging transactions may limit our potential gains and involve other risks. In order to manage our exposure to price risks in the marketing of our oil and natural gas production, we may enter into oil and natural gas price hedging arrangements with respect to a significant portion of our anticipated production. While intended to reduce the effects of volatile oil and natural gas prices, such transactions may limit our potential gains and increase our potential losses if oil and natural gas prices were to rise substantially over the price established by the hedge. In addition, such transactions may expose us to the risk of loss in certain circumstances, including instances in which: our production is less than expected; the counterparties to our futures contracts fail to perform under the contracts; or an event materially affects oil or natural gas prices or the relationship between the hedged price index and the oil and natural gas sales price. We cannot assure you that any hedging transactions we may enter into will adequately protect us from declines in the prices of oil and natural gas. On the other hand, where we choose not to engage in hedging transactions in the future, we may be more adversely affected by changes in oil and natural gas prices than our competitors who engage in hedging transactions. All of the Chisholm Trail Properties are located in two adjacent counties in Oklahoma, making us vulnerable to risks associated with having our production concentrated in a single region. All of the Chisholm Trail Properties are geographically concentrated in two adjacent counties in Oklahoma. As a result of this concentration, we may be disproportionately exposed to the impact of delays or interruptions of production from these wells caused by significant governmental regulation, transportation capacity constraints, curtailment of production, natural disasters, interruption of transportation of natural gas produced from the wells in the Hunton formation, or other events which impact this area. Certain of our undeveloped leasehold acreage is subject to leases that will expire over the next several years unless production is established on units containing the acreage or the leases are extended. A large portion of our acreage is not currently held by production. Unless production in paying quantities is established on units containing these leases during their primary terms or we obtain extensions of the leases, these leases will expire. If our leases expire we will lose our right to develop the related properties.

5 Our drilling plans for these areas are subject to change based upon various factors, including factors that are beyond our control. Such factors include drilling results, oil and natural gas prices, the availability and cost of capital, drilling and production costs, availability of drilling services and equipment, gathering system and pipeline transportation constraints, and regulatory approvals. Prospects that we decide to drill may not yield oil or natural gas in commercially viable quantities. Prospects that we decide to drill that do not yield oil or natural gas in commercially viable quantities will adversely affect our financial condition and results of operations. Our prospects are in various stages of evaluation, and may range from a prospect which is ready to drill to a prospect that will require substantial additional seismic data processing and interpretation and other technical analysis. There is no way to predict in advance of drilling and testing whether any particular prospect will yield oil or natural gas in sufficient quantities to recover drilling or completion costs or to be economically viable. The use of seismic data and other technologies and the study of producing fields in the same area will not enable us to know conclusively prior to drilling whether oil or natural gas will be present or, if present, whether oil or natural gas will be present in commercial quantities. We cannot assure you that the analogies we draw from available data from other wells, more fully explored prospects or producing fields will be applicable to our drilling prospects. Market conditions or transportation impediments may hinder access to oil and natural gas markets or delay production. Market conditions, the unavailability of satisfactory oil and natural gas transportation or the remote location of our drilling operations may restrict our access to oil and natural gas markets or delay production. The availability of a ready market for oil and natural gas production depends on a number of factors, including the demand for and supply of oil and natural gas, the proximity of reserves to pipelines or trucking and terminal facilities and the availability of trucks and other transportation equipment. We may be required to shut-in wells or delay initial production for lack of a viable market or because of inadequacy or unavailability of pipeline or gathering system capacity. When that occurs, we will be unable to realize revenue from those wells until the production can be tied to a gathering system. This can result in considerable delays from the initial discovery of a reservoir to the actual production of the oil and natural gas and realization of revenues. Delays in obtaining permits by us for our operations could impair our business. Gastar and/or the Operator are required to obtain permits from one or more governmental agencies in order to perform drilling and completion activities, including hydraulic fracturing. Such permits are typically required by state agencies, but can also be required by federal and local governmental agencies. As with all governmental permitting processes, there is a degree of uncertainty as to whether a permit will be granted, the time it will take for a permit to be issued, and the conditions which may be imposed in connection with the granting of the permit. Hydraulic fracturing has been particularly scrutinized. New York, for example, has issued a moratorium on the issuance of permits for inland drilling and completion activities. Subject to an Executive Order issued by Governor Paterson on December 13, 2010, the New York Department of Environmental Conservation will not issue permits for drilling and completion activities until it completes a final environmental impact study following public comment. Oklahoma is not currently considering such a measure. Our operations are subject to hazards inherent in the oil and natural gas industry. We implement hydraulic fracturing in our operations, a process involving the injection of fluids usually consisting mostly of water but typically including small amounts of several chemical additives as well as sand in order to create fractures extending from the wellbore through the rock formation to enable oil or natural gas to move more easily through the rock pores to a production well. Risks inherent to our industry include the potential for significant losses associated with damage to the environment. Equipment design or operational failures, or vehicle operator error can result in explosions and discharges of toxic gases, chemicals and hazardous substances, and, in rare cases, uncontrollable flows of gas or well fluids into environmental media, as well as personal injury, loss of life, long-term suspension or cessation of operations and interruption of our business and! or the business or livelihood of third parties, damage to geologic formations, environmental media and natural resources, equipment and/or facilities and property. In addition, we use and generate hazardous substances and wastes in our operations and may become subject to claims relating to the release of such substances into the environment. In addition, some of our current properties are, or have been, used for industrial purposes which could contain currently unknown contamination that could expose us to governmental requirements or claims relating to environmental remediation, personal injury and/or property damage. These conditions could expose us to liability for personal injury, wrongful death, property damage, loss of oil and natural gas production pollution and other environmental damages and, in an extreme case, could materially impair our profitability, competitive position or viability. Depending on the frequency and severity of such liabilities or losses, it is possible that our operating costs, insurability and relationships with employees and regulators could be materially impaired. Our business and operations may be adversely affected by regulations affecting the oil and gas industry. Our business and operations are subject to and impacted by a wide array of federal, state, and local laws and regulations on the exploration for and development, production, and marketing of oil and natural gas, the operation of oil and natural gas

6 wells, taxation, and environmental and safety matters. Many laws and regulations require drilling permits and govern the spacing of wells, rates of productions prevention of waste and other matters. The technical requirements of these laws and regulations are becoming increasingly stringent, complex and costly to implement. The high cost of compliance with applicable regulations may cause us to limit or discontinue our operation and development activities. Changes in regulations and laws relating to the oil and natural gas industry could result in our operations being disrupted or curtailed by government authorities. For example, oil and natural gas exploration and production may become less cost effective and decline as a result of increasingly stringent environmental requirements (including land use policies responsive to environmental concerns and delays or difficulties in obtaining environmental permits). A decline in exploration and productions in turn could have a material adverse effect on our business, financial condition, results of operations and cash flows. The unavailability or high cost of drilling rigs, equipment, supplies, personnel and oilfield services could adversely affect our ability to execute exploration plans on a timely basis and within budget, and consequently could adversely affect our anticipated cash flow. We utilize third-party services to maximize the efficiency of our operations. The cost of oil field services typically fluctuates based on demand for those services. There is no assurance that we will be able to contract for such services on a timely basis or that the cost of such services will remain at a satisfactory or affordable level. Shortages or the high cost of drilling rigs, equipment, supplies or personnel could delay or adversely affect our exploration operations, which could have a material adverse effect on our business, financial condition or results of operations. Operating hazards, natural disasters or other interruptions of our operations could result in potential liabilities, which may not be fully covered by our insurance. The oil and natural gas business generally, and our operations, are subject to certain operating hazards such as: accidents resulting in serious bodily injury and the loss of life or property; liabilities from accidents or damage by our equipment; well blowouts; cratering (catastrophic failure); explosions; uncontrollable flows of oil, natural gas or well fluids; fires; reservoir damage; oil spills; pollution and other damage to the environment; and releases of toxic gas. In addition, our operations are susceptible to damage from natural disasters such as flooding or tornados, which involve increased risks of personal injury, property damage and marketing interruptions. The occurrence of one of these operating hazards may result in injury, loss of life, suspension of operations, environmental damage and remediation and/or governmental investigations and penalties. The payment of any of these liabilities could reduce, or even eliminate, the funds available for exploration and development, or could result in a loss of our properties. Our insurance might be inadequate to cover our liabilities. Insurance costs are expected to continue to increase over the next few years, and we may decrease coverage and retain more risk to mitigate future cost increases. If we incur substantial liability, and the damages are not covered by insurance or are in excess of policy limits, then our business, results of operations and financial condition may be materially adversely affected. An increase in interest rates would increase the cost of servicing our indebtedness and could reduce our profitability.

7 Indebtedness we may incur under the new senior revolving credit facility will bear interest at variable rates. See Description of Other Indebtedness. As a result, an increase in interest rates, whether because of an increase in market interest rates or an increase in our own cost of borrowing, would increase the cost of servicing our indebtedness, which could adversely affect our cash flow and financial condition. Furthermore, any such increase could materially reduce the availability of debt financing, which may result in increases in the interest rates and borrowing spreads at which lenders are willing to make future debt financing available to us. The increases could adversely affect our business and financial condition if we do not have access to additional borrowings on terms that we believe to be commercially reasonable. The impact of such an increase would be more significant than it would be for some other companies because of our substantial indebtedness, which could adversely affect our ability to compete. We may not be able to keep pace with technological developments in our industry. The oil and natural gas industry is characterized by rapid and significant technological advancements and introductions of new products and services using new technologies. As others use or develop new technologies, we may be placed at a competitive disadvantage or competitive pressures may force us to implement those new technologies at substantial costs. In addition, other oil and natural gas companies may have greater financial, technical and personnel resources that allow them to enjoy technological advantages and may in the future allow them to implement new technologies before we can. We may not be able to respond to these competitive pressures and implement new technologies on a timely basis or at an acceptable cost. If one or more of the technologies we use now or in the future were to become obsolete or if we are unable to use the most advanced commercially available technology, our business, financial condition and results of operations could be materially adversely affected. Market conditions or transportation impediments may hinder access to oil and natural gas markets or delay production. Market conditions, the unavailability of satisfactory oil and natural gas transportation or the remote location of our drilling operations may restrict our access to oil and natural gas markets or delay production. The availability of a ready market for oil and natural gas production depends on a number of factors, including the demand for and supply of oil and natural gas, the proximity of reserves to pipelines or trucking and terminal facilities and the availability of trucks and other transportation equipment. We may be required to shut-in wells or delay initial production for lack of a viable market or because of inadequacy or unavailability of pipeline or gathering system capacity. When that occurs, we will be unable to realize revenue from those wells until the production can be tied to a gathering system. This can result in considerable delays from the initial discovery of a reservoir to the actual production of the oil and natural gas and realization of revenues. Delays in obtaining permits by Gastar or the Operator for our operations could impair our business. Gastar and/or our Operator are required to obtain permits from one or more governmental agencies in order to perform drilling and completion activities, including hydraulic fracturing. Such permits are typically required by state agencies, but can also be required by federal and local governmental agencies. As with all governmental permitting processes, there is a degree of uncertainty as to whether a permit will be granted, the time it will take for a permit to be issued, and the conditions which may be imposed in connection with the granting of the permit. Hydraulic fracturing has been particularly scrutinized. New York, for example, has issued a moratorium on the issuance of permits for inland drilling and completion activities. Subject to an Executive Order issued by Governor Paterson on December 13, 2010, the New York Department of Environmental Conservation will not issue permits for drilling and completion activities until it completes a final environmental impact study following public comment. Oklahoma is not currently considering such a measure. Competition in the oil and natural gas industry is intense, and many of our competitors have resources that are greater than ours. We operate in a highly competitive environment for developing properties, marketing oil and natural gas and securing equipment and trained personnel. As a relatively small oil and natural gas company, many of our competitors, major and large independent oil and natural gas companies, possess and employ financial, technical and personnel resources substantially greater than ours. Those companies may be able to develop and acquire more prospects and productive properties than our financial or personnel resources permit. Our ability to acquire additional prospects and discover reserves in the future will depend on our ability to evaluate and select suitable properties and execute our exploration and development activities in a highly competitive environment. Also, there is substantial competition for capital available for investment in the oil and gas industry. Larger competitors may be better able to withstand sustained periods of unsuccessful drilling and absorb the burden of changes in laws and regulations more easily than we can, which would adversely affect our competitive position. We may not be able to compete successfully in the future in developing reserves, acquiring prospective reserves, marketing hydrocarbons, attracting and retaining quality personnel and raising additional capital.

8 We may incur significant costs and liabilities as a result of environmental, health and safety laws and regulations that govern our operations. Our operations are subject to U.S. federal, state and local laws and regulations that impose limitations on and liabilities for the discharge of pollutants into the environment and which establish standards for the handling, storage and disposal of hazardous materials, including toxic and hazardous wastes. Laws protecting the environment generally have become more stringent over time and are expected to continue to do so, which could lead to material increases in our costs for future environmental compliance and remediation. To comply with these laws and regulations, we must obtain and maintain numerous permits, approvals, consents and certificates from various governmental authorities. Future changes in relevant laws, regulations or enforcement policies could significantly increase our compliance costs or liabilities and/or limit our future business opportunities in presently unforeseen ways. In such an event, our business, financial condition and results of operation could be materially impaired. Oil and natural gas exploration and production operations in the United States are subject to extensive and stringent federal, state and local laws and regulations governing health and safety aspects of our operations, the release or disposal of materials into the environment or otherwise relating to environmental protection. We may be required to make significant capital and operating expenditures or perform corrective actions at our wells and properties to comply with the requirements of these laws and regulations or the terms or conditions of permits issued pursuant to such requirements. The adoption of more stringent future environmental laws or regulations or any adverse change in the interpretation or enforcement of such existing laws and regulations could increase these compliance costs. Regulatory limitations and restrictions could also delay or curtail our operations and could have a significant impact on our financial condition or results of operations. These environmental laws and regulations impose numerous obligations that are applicable to our operations including: requiring the acquisition of a permit before drilling or other regulated activity commences; restricting the types, quantities and concentration of materials that can be released into the environment in connection with regulated activities; limiting or prohibiting drilling activities on certain lands lying within wilderness, wetlands and other protected areas; imposing substantial liabilities for pollution resulting from operations; and decommissioning or plugging abandoned wells. These costs and liabilities could arise under a wide range of federal, state and local environmental and occupational safety laws and regulations, including, for example: the Clean Air Act ( CAA ) and comparable state laws and regulations that restrict the emission of air pollutants from many sources and impose various pre-construction, monitoring and reporting obligations; the Federal Water Pollution Control Act, also known as the Clean Water Act, and comparable state laws and regulations that impose obligations related to discharges of pollutants from facilities into regulated bodies of water; the federal Safe Drinking Water Act (the SDWA ) which ensures the quality of the nation s public drinking water through adoption of drinking water standards and controlling the injection of waste fluids into below ground formations that may adversely affect drinking water sources; the Resource Conservation and Recovery Act ( RCRA ) and comparable state laws that impose requirements for the handling and disposal of solid waste, including hazardous waste, from our facilities; the Comprehensive Environmental Response, Compensation, and Liability Act ( CERCLA ) and comparable state laws that regulate the cleanup of hazardous substances that may have been released at properties currently or previously owned or operated by us or at locations to which we have sent hazardous substances for disposal; the Environmental Protection Agency (the EPA ) community right to know regulations under the Title III of CERCLA and similar state statutes that require us to organize and/or disclose information about hazardous materials used or produced in our operations; and the federal Occupational Safety and Health Act ( OSHA ) and comparable state laws that establish workplace standards for the protection of the health and safety of employees.

9 Failure to comply with these laws and regulations or the terms or conditions of required environmental permits may result in the assessment of administrative, civil and/or criminal penalties, the imposition of investigatory or remedial obligations as well as corrective actions, and the issuance of injunctions limiting or prohibiting some or all of our operations. Changes in environmental, health or safety laws, regulations or enforcement policies occur frequently, and any changes that result in more stringent or costly waste handling, storage, transport, disposal or cleanup requirements or other unforeseen liabilities could require us to make significant expenditures to attain and maintain compliance and may otherwise have a material adverse effect on our industry in general and on our own financial condition, competitive position or results of operations. The costs of complying with applicable environmental laws and regulations are likely to increase over time and we cannot provide any assurance that we will be able to remain in compliance with respect to existing or new laws and regulations or that such compliance will not have a material adverse effect on our business, financial condition and results of operations. For example, the April 2010 explosion and fire aboard the Deepwater Horizon drilling platform operated by BP in ultra deep water in the Gulf of Mexico resulted in a catastrophic oil spill that produced widespread economic, environmental and natural resource damage in the U.S. Gulf Coast region. As a consequence, there have been many proposals by governmental and private constituencies to address the impacts of this disaster and to prevent similar disasters in the future. Although our operations are onshore, the entire oil and natural gas exploration and development industry is currently subject to elevated public scrutiny, which could result in changes to laws, regulatory guidance and policy that could significantly adversely affect our operations as well as the operations of our customers. There is inherent risk of incurring significant environmental costs and liabilities in the performance of our operations due to our handling of petroleum hydrocarbon and wastes, because of air emissions and wastewater discharges related to our operations, and as a result of historical operations and waste disposal practices. Under certain environmental laws and regulations that impose strict, joint and several liability, we may be required to remediate contamination on our properties regardless of whether such contamination resulted from the conduct of others or from consequences of our own actions that were or were not in compliance with all applicable laws and regulations at the time those actions were taken. In addition, claims for damages to persons, property or natural resources may result from environmental and other impacts of our operations. Moreover, future spills or releases of regulated substances or accidents or the discovery of currently unknown contamination could expose us to material losses, expenditures and environmental or health and safety liabilities, including liabilities resulting from lawsuits brought by private litigants or neighboring property owners or operators for personal injury or property damage related to our operations or the land on which our operations are conducted. Such claims, damages, penalties or sanctions and related costs could cause us to incur substantial costs or losses and could have a material adverse effect on our business, financial condition and results of operations. We may not be able to recover some or any of these costs from insurance. Federal and state legislation and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays. Legislation was proposed in the last Congress to amend the federal Safe Drinking Water Act to require the disclosure of chemicals used by the oil and natural gas industry in the hydraulic fracturing process. Hydraulic fracturing involves the injection of water, sand and chemicals under pressure into rock formations to stimulate oil and natural gas production. We expect that third parties will be engaged to provide hydraulic fracturing or other well stimulation services in connection with many of the wells for which Gastar or the Operator will be the operator. If similar legislation is ultimately adopted it could establish an additional level of regulation at the federal or state level that could lead to operational delays or increased operating costs and could result in additional regulatory burdens that could make it more difficult to perform hydraulic fracturing and increase our costs of compliance and doing business. In addition to possible future regulatory changes at the federal level, several states (including Arkansas, Colorado, New York and Pennsylvania), have considered, or are considering, legislation or regulations similar to the federal legislation described above. Recently, for example, the Wyoming Oil and Gas Conservation Commission passed a rule requiring disclosure of hydraulic fracturing fluid content. At this time, it is not possible to estimate the potential impact on our business of additional federal or state regulatory actions affecting hydraulic fracturing. In addition, a number of states in which we plan to conduct hydraulic fracturing operations are currently conducting, or may in the future conduct, regulatory reviews that potentially could restrict or limit our access to shale formations located in their states. In most states, we are required to obtain permits from one or more governmental agencies in order to perform drilling and completion activities, including hydraulic fracturing. Such permits are typically required by state agencies, but can also be required by federal and local governmental agencies. The requirements for such permits vary depending on the location where such drilling and completion activities will be conducted. As with all governmental permitting processes there is a degree of uncertainty as to whether a permit will be granted, the time it will take for a permit to be issued and the conditions which may be imposed in connection with the granting of the permit. Recently, moratoriums on the issuance of permits have been imposed upon inland drilling and completion activities. For example, subject to an Executive Order issued by Governor Paterson on December 13, 2010, the New York Department of Environmental Conservation will not issue permits for drilling and completion activities until it completes a final environmental impact study following public comment. Wyoming and Colorado have enacted additional regulations applicable to our business activities. Arkansas is presently considering similar regulations. Some of the drilling

10 and completion activities may take place on federal land, requiring leases from the federal government to conduct such drilling and completion activities. In some cases, federal agencies have cancelled oil and natural gas leases on federal lands. In March 2010, the United States Environmental Protection Agency announced that it would conduct a wide-ranging study on the effects of hydraulic fracturing on drinking water resources. Interim results of the study are written in 2012, with final results expected in The agency also announced that one of its enforcement initiatives for 2011 to 2013 would be to locus on environmental compliance by the energy extraction sector. This study and enforcement initiative could result in additional regulatory scrutiny that could make it difficult to perform hydraulic fracturing and increase our costs of compliance and doing business. Possible regulation related to global warming and climate change could have an adverse effect on our operations and demand for oil and natural gas. Studies over recent years have indicated that emissions of certain gases may be contributing to warming of the Earth s atmosphere. In response to these studies, governments have begun adopting domestic and international climate change regulations that requires reporting and reductions of the emission of greenhouse gases. Methane, a primary component of natural gas, and carbon dioxide, a byproduct of the burning of oil, natural gas and refined petroleum products, are considered greenhouse gases. Internationally, the United Nations Framework Convention on Climate Change, and the Kyoto Protocol address greenhouse gas emissions, and several counties including the European Union have established greenhouse gas regulatory systems. In the United States, at the state level, many states, either individually or through multi-state regional initiatives, have begun implementing legal measures to reduce emissions of greenhouse gases, primarily through the planned development of emission inventories or regional greenhouse gas cap and trade programs or have begun considering adopting greenhouse gas regulatory programs. Increasing concentrations of greenhouse gases in the Earth s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts, floods and other climatic events. If any such effects were to occur, they could have a material adverse effect on our financial condition and results of operations. Changes in climate due to global warming trends could adversely affect our operations by limiting or increasing the costs associated with equipment or product supplies. In addition, flooding and adverse weather conditions such as increased frequency and/or severity of hurricanes could impair our ability to operate in affected regions of the country. Repercussions of severe weather conditions may include: curtailment of services; weather-related damage to facilities and equipment, resulting in suspension of operations; inability to deliver equipment, personnel and products to job sites in accordance with contract schedules; and loss of productivity. These constraints could delay our operations and materially increase our operating and capital costs. Unusually warm winters may decrease the demand for our oil or natural gas. In the courts, several decisions have been issued that may increase the risk of claims being filed by governments and private parties against companies that have significant greenhouse gas emissions. Such cases may seek to challenge air emissions permits that greenhouse gas emitters apply for and seek to force emitters to reduce their emissions or seek damages for alleged climate change impacts to the environment, people, and property. Any laws or regulations that may be adopted to restrict or reduce emissions of greenhouse gases could require us to incur increased operating and compliance costs, and could have an adverse effect on demand for the oil and natural gas that we produce. Certain federal income tax deductions currently available with respect to oil and natural gas exploration and development may be eliminated as a result of future legislation. President Obama s proposed Fiscal Year 2013 Budget includes proposed legislation that would, if enacted into law, make significant changes to United States tax laws, including the elimination or postponement of certain key United States federal income tax incentives currently available to oil and natural gas exploration and production companies. These changes include, but are not limited to, (i) the repeal of the percentage depletion allowance for oil and natural gas properties, (ii) the elimination of the current deduction for intangible drilling and development costs, (iii) the elimination of the deduction for certain domestic production activities and (iv) an extension of the amortization period for certain geological and geophysical expenditures. It is unclear whether these or similar changes will be enacted and, if enacted, how soon any such changes could become effective. The passage of any legislation as a result of these proposals or any other similar changes in United States federal income tax laws could eliminate certain tax deductions that are currently available with respect to oil and natural gas exploration and development. Risks Inherent in an Investment in Us The forward-looking production and reserve estimates presented in this offering memorandum will differ from our actual results.

11 The forward-looking production estimates we have included in this offering memorandum are based upon a number of assumptions and on information that we believe are reliable as of today. However, these forward- looking production estimates and assumptions are inherently subject to significant business and economic uncertainties, such as industry conditions, prices of oil and natural gas, rates of drilling success, and the timing and amount of capital expenditures, many of which are beyond our control. These forward-looking production estimates are necessarily speculative in nature, and you should expect that some or all of the assumptions will not materialize. Actual results will vary from the forward-looking production estimates and the variations will likely be material and are likely to increase over time. Consequently, the inclusion of these forward-looking production estimates in this offering memorandum should not be regarded as a representation by us, the placement agents or any other person that the forward-looking production estimates will actually be achieved. Moreover, we do not intend to update or otherwise revise these forward-looking production estimates to reflect events or circumstances after the date of this offering memorandum to reflect the occurrence of unanticipated events. You, as a prospective purchaser of the units, are cautioned not to place undue reliance on the forward-looking production estimates. Our forward-looking production estimates were not prepared with a view toward compliance with published guidelines of the SEC, the American Institute of Certified Public Accountants, the Society of Petroleum Engineers, the World Petroleum Congress or any other regulatory or professional body or generally accepted accounting principles. No independent accountants or independent petroleum engineers compiled or examined the forward-looking production estimates, and accordingly no independent accountant or independent petroleum engineer has expressed an opinion or any other form of assurances with respect thereto or has assumed any responsibility for the forward-looking production estimates. Further, our independent petroleum engineers made different assumptions when calculating our respective proved reserve estimates. As a result, our forward-looking production estimates may not accurately portray our proved reserves following the Chisholm Trail Acquisition or in the future. The forward-looking financial projections included in this offering memorandum will differ from our actual results. The financial projections contained in this offering memorandum are based on certain assumptions and estimates and, although we believe there is a reasonable basis for the assumptions and estimates upon which the projections are based, there can be no assurance that the revenues stated therein will be attained or that expenses will not be higher than estimated. Much of the information contained in the projections is based on assumptions and estimates that are subject to variations that could be beyond our control and could have a substantially adverse effect our performance and profitability. Accordingly, no representation is or can be made as to the future operations or the amount of any future income or loss of the Company. In addition, the projections were prepared by management and have not been reviewed by any independent certified public accountant. Each investor should consult his own attorney, accountant or other advisors concerning an investment in our units Our business may suffer if we lose key personnel. We depend to a large extent on the services of our officers, including Peter Flensburg, Torsten Helgemo and Fredrik Prans. These individuals have relatively long experience and expertise in evaluating and analyzing producing oil and natural gas properties and drilling prospects, maximizing production from oil and natural gas properties, marketing oil and natural gas production and developing and executing financing and hedging strategies. The loss of any of these individuals could have a material adverse effect on our operations. We do not maintain key-man life insurance with respect to any management personnel. Our success will be dependent on our ability to continue to retain and utilize skilled technical personnel. Risks Related to the Chisholm Trail Acquisition Our operating history may not be sufficient for investors to evaluate our business and prospects. Our initial operations will depend heavily upon the oil and natural gas properties acquired pursuant to the purchase and sale agreement. Husky Ventures was founded less than 10 years ago and we were formed in December We are companies with limited operating histories, which may make it more difficult for investors to evaluate our business and prospects and to forecast our future operating results. Our initial operations will rely substantially upon the exploration and production of the Chisholm Trail Properties. Our business could be disrupted if those assets were either no longer available to us or did not perform as expected. We may not successfully achieve the benefits we are seeking from the Chisholm Trail Project. The Chisholm Trail Project is essential to our business strategy. We will have only limited or no recourse against the Operator for losses and liabilities arising or discovered after the closing of the Chisholm Trail Project. Under the terms of the letter agreement, we have limited indemnification rights in the event of a breach of a representation or warranty by the Operator, any environmental defect, a breach of a covenant by the Operator and certain third-party costs related to title

12 defects. Under the letter agreement, we have limited indemnification rights and limited rights to assert title defects or environmental defects, and any claims for title defects not timely asserted by us are deemed waived. We may not receive all of the assets and properties we are seeking in connection with the Chisholm Trail Acquisition. Under the purchase and sale agreement, the scope of the assets and properties to be acquired is limited, and, in certain instances, the universe of assets and properties to be acquired may be further limited to the extent such assets and properties are not transferable. Some leases, contracts and other interests may be subject to third-party or governmental consents, preferential purchase rights, or other third-party rights or restrictions, which may result in our inability to acquire at closing all of the Chisholm Trail Properties. In Oklahoma, oil and gas leases are typically considered to be real property interests (most often treated as determinable fee interests). Conveyance and transfer of such interests require proper legal descriptions, and the conveyance instruments are typically filed in the applicable real property records in the county where the properties are located (state or federal leases may also require the use of alternative forms of conveyance and recording with applicable government authorities). Failure to properly describe and record assets and properties like the Chisholm Trail Properties may result in our failure receive good title to the same. The exclusion of, or our failure to acquire, certain assets or interests, as described above, could adversely affect (a) the value of the remaining assets and properties we acquire, (b) the amount of reserves that we would have attributable to our interests in the Chisholm Trail Properties, (c) the costs we incur that are attributable to the ownership and operation of the Chisholm Trail Properties, and (d) our future revenues, profitability and cash flow. We may not successfully integrate the operations of the Chisholm Trail Properties or achieve the benefits we are seeking. The Chisholm Trail Project will provide us with substantially all of our oil and natural gas properties. Our success will partially depend upon the integration of the operations of the Sellers and our ability to retain and timely employ personnel necessary to augment our staff in a competitive environment. We may not be able to integrate these operations without loss of revenues, increases in operating or other costs, or other difficulties. In addition, we may not be able to realize the operating capabilities and other benefits sought from the Chisholm Trail Project. We may incur losses as a result of title deficiencies relating to the Chisholm Trail Properties. We are primarily purchasing third-party working and revenue interests and natural gas leasehold interests upon which we will perform our exploration activities. The existence of material title deficiencies can substantially impair the value of the leases and may adversely affect our results of operations and financial condition. Title insurance covering mineral leaseholds is not generally available and, in all instances, we forego the expense of retaining lawyers to examine the title to the mineral interest to be placed under lease or already placed under lease until the drilling block is assembled and ready to be drilled. We have relied primarily upon our independent landmen to perform the field work in examining records in the appropriate governmental offices and abstract facilities relevant to the Chisholm Trail Properties. Without examination of the mineral title interests, there could be operating agreements, rights of first refusal or other restrictive third party agreements customary in the oil and gas industry that could adversely affect our ability to acquire the affected properties. In the event that we identify any title deficiencies with respect to the Chisholm Trail Properties, there can be no assurance that we will be able to successfully assert those deficiencies under the terms of the purchase and sale agreement, or that the Sellers will be able to perform curative work to correct deficiencies of the title to those properties. If we cannot successfully assert title deficiencies in cases involving more serious title problems, the amount paid for affected oil and natural gas leases may be generally lost, and the target area may become undrillable.