Gulfport Energy Corporation — Form 10-Q Summary
Business Context and Reporting Period
Gulfport Energy Corporation is an independent oil and natural gas exploration and production company focused primarily on the Utica Shale in Eastern Ohio, with additional properties along the Louisiana Gulf Coast, in Colorado and the Bakken, and equity investments in Diamondback Energy, Grizzly Oil Sands and other entities. This unaudited Form 10-Q covers the three and six months ended June 30, 2014, compared with the corresponding 2013 periods.
Financial and Operating Metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenues | $114.7 million, versus $70.4 million | $232.8 million, versus $125.4 million |
| Oil and gas revenues | $114.5 million, up 63% | $232.4 million, up 86% |
| Income from operations | $18.1 million, versus $22.5 million | $43.2 million, versus $37.4 million |
| Net income | $47.9 million, versus $43.8 million | $130.4 million, versus $88.4 million |
| Diluted earnings per share | $0.56, versus $0.56 | $1.52, versus $1.17 |
| Net production | 2.432 million BOE, up 198% | 4.870 million BOE, up 250% |
| Realized price per BOE | $47.08, versus $86.10 | $47.71, versus $89.92 |
| Operating margin | 15.8%, versus 31.9% | 18.6%, versus 29.8% |
| Net margin | 41.7%, versus 62.2% | 56.0%, versus 70.4% |
Net income benefited substantially from equity-method investment gains, including a $72.9 million Diamondback gain in the second quarter and $121.7 million for the six months. The six-month result also included an $84.8 million gain from Blackhawk's sale of interests in Ohio Gathering Company and Ohio Condensate Company. The filing does not present a clear consolidated EBITDA figure.
Six-month operating cash flow was $201.5 million, compared with $73.5 million in 2013. Investing cash outflow was $624.8 million, including $673.0 million of additions to oil and gas properties, $39.2 million of contributions to equity-method investments and $89.1 million of proceeds from selling Diamondback shares. Financing cash flow was $39.6 million, primarily from $40.0 million of revolving-credit borrowings. Cash declined to $75.3 million at June 30, 2014, from $459.0 million at December 31, 2013.
Total debt was approximately $339.3 million, consisting primarily of $300.0 million of 7.75% senior notes due 2020 and $40.0 million drawn on the revolving facility. The facility had $198.3 million of availability after letters of credit, and the company was in compliance with its debt covenants. Stockholders' equity was $2.188 billion and total assets were $3.032 billion at June 30, 2014.
Material Changes Versus the Prior Comparable Period
- Utica-driven production increased sharply, while the production mix shifted toward lower-priced natural gas and natural gas liquids.
- Oil and gas revenue increased, but realized BOE prices fell 45% in the second quarter and 47% for the six months.
- Lease operating expense, midstream processing and marketing expense, depreciation, depletion and amortization, and general and administrative expense increased materially with the scale-up of Utica operations.
- Operating income declined in the second quarter despite higher revenue, reflecting substantially higher operating and development-related costs; six-month operating income increased modestly.
- The company completed the $177.4 million net Rhino acquisition in March 2014, adding approximately 8,000 net Utica acres and producing interests.
- Gulfport sold 1.0 million Diamondback shares for approximately $89.1 million and owned approximately 4.7% of Diamondback at quarter-end.
- Cash declined by $383.7 million during the first six months as capital investment substantially exceeded operating cash flow and financing proceeds.
Guidance, Outlook, Risks and Unusual Items
Management expected 2014 Utica capital expenditures of $634 million to $676 million and planned to drill 85 to 95 gross wells. Additional 2014 estimates included $375 million to $425 million for Utica acreage acquisitions, $42 million to $45 million for WCBB drilling and recompletions, $24 million to $26 million for Hackberry activities, and $15 million to $20 million related to Grizzly. Total 2014 capital expenditures were estimated at $715 million to $767 million, with approximately 88% expected to be spent in the Utica.
Management stated that cash on hand, operating cash flow, Diamondback share sales and revolver borrowings should fund normal operating needs and capital requirements for the next twelve months. Additional financing could be required if drilling is accelerated, acquisitions expand or Grizzly projects advance.
Open commodity swaps covered approximately 59% to 67% of estimated 2014 production. At June 30, 2014, derivative liabilities exceeded derivative assets by approximately $29.2 million. A 10% change in underlying commodity prices was estimated to change derivative fair value by approximately $43.8 million in the opposite direction. Current hedges were deemed ineffective at inception, so related fair-value changes were recognized in earnings.
Litigation settlement expense was $6.0 million in the second quarter and $24.0 million for the six months. The Louisiana Department of Revenue settlement was finalized for $6.0 million, with claims for 2005–2010 released. Gulfport accrued an additional $18.0 million proposed settlement in the Reeds environmental lawsuit, but the settlement was not finalized and the ultimate outcome remained uncertain. An adverse outcome could materially affect financial condition or results of operations.
Other risks include commodity-price volatility, potential full-cost ceiling-test impairments, drilling and production execution, regulatory and permitting delays, environmental liabilities, reliance on continued access to capital, and the substantial cash requirements of the Utica development program. No ceiling-test impairment was required for the quarter. The company early adopted the revised discontinued-operations guidance without material impact and was evaluating the new revenue-recognition standard.
Important Facts for Investors to Verify
- Whether Utica production growth and planned drilling translate into sustainable operating cash flow after midstream, operating and development costs.
- The portion of reported net income attributable to recurring operations versus Diamondback fair-value gains, the Blackhawk transaction and other equity-method items.
- Cash burn, remaining revolver availability and funding requirements for the $715 million to $767 million 2014 capital program and planned acreage acquisitions.
- The status, final cost and remediation obligations associated with the $18.0 million proposed Reeds settlement.
- Exposure to lower natural gas and NGL prices, including the economic effects and accounting volatility of ineffective hedges.
- Future full-cost ceiling-test results and the recoverability of approximately $1.188 billion of unamortized non-producing oil and gas properties.
- Execution and permitting progress for Grizzly's Algar Lake, May River and other oil-sands projects, as well as the proposed initial public offering of certain service-investment entities.