Gulfport Energy Corporation — FY2022 Form 10-K Summary
Business context and reporting period
Gulfport is a natural gas-weighted exploration and production company focused on the Utica and Marcellus formations in eastern Ohio and the SCOOP formations in central Oklahoma. The filing covers the year ended December 31, 2022. Gulfport emerged from Chapter 11 on May 17, 2021 and applied fresh start accounting; therefore, Successor-period results are not directly comparable with Predecessor-period results.
- 2022 production averaged 983.4 MMcfe per day, approximately 70% from Utica and 30% from SCOOP.
- Year-end proved reserves were 4.048 Tcfe, including 1.752 Tcfe of proved undeveloped reserves.
- Estimated standardized measure of proved reserves was $8.279 billion; PV-10 was $9.524 billion using SEC prices of $6.36 per MMBtu of gas and $94.14 per barrel of oil.
Financial performance and key metrics
| Metric | FY2022 | Prior Successor Period |
|---|---|---|
| Total revenues, including derivatives | $1.331 billion | $535.8 million |
| Oil, gas and NGL sales before derivatives | $2.331 billion | $1.093 billion |
| Net income | $494.7 million | $(112.8) million |
| Net income attributable to common stockholders | $412.9 million | $(117.4) million |
| Diluted EPS | $20.32 | $(5.71) |
| Cash flow from operations | $739.1 million | $293.0 million |
| Cash capital expenditures | $460.8 million | $207.1 million |
| Net cash flow after cash capital expenditures | Approximately $278.3 million | Approximately $85.9 million |
| Lease operating expense | $0.18/Mcfe | $0.14/Mcfe |
| Transportation, gathering, processing and compression | $1.00/Mcfe | $0.92/Mcfe |
| Total production costs including LOE, midstream costs and other taxes | $1.34/Mcfe | $1.19/Mcfe |
Unhedged realized price was $6.49/Mcfe, while realized price after settled derivatives was $3.55/Mcfe. Derivative losses totaled $999.7 million, including $1.054 billion of cash settlement losses, substantially offsetting higher market prices.
Operating income was $543.1 million. Depreciation, depletion and amortization was $267.8 million, or $0.74/Mcfe. No oil and gas impairment was recorded in 2022, compared with a $117.8 million impairment in the Prior Successor Period. The effective income tax rate was 0%; a valuation allowance of $803.3 million fully offset the net deferred tax asset.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $7.3 million at December 31, 2022, compared with $3.3 million at December 31, 2021.
- Funded principal debt was $695.0 million, consisting of $145.0 million under the Credit Facility and $550.0 million of 8.0% senior notes due May 2026.
- The Credit Facility had a $1.0 billion borrowing base and $700 million of elected commitments; it matures October 14, 2025. Borrowings carried a weighted-average interest rate of 7.39% at year-end.
- Letters of credit totaled $113.4 million. Gulfport stated that it was in compliance with its debt covenants at December 31, 2022.
- Net working capital was negative $391.1 million, although no funded debt was due within the next 12 months.
- Cash capital expenditures were $460.8 million, including $410.3 million for drilling and completion, $32.7 million for leasehold acquisitions and $17.8 million for other oil and gas property expenditures.
- Gulfport repurchased 2.9 million common shares for $250.8 million at an average price of $86.47, leaving $49.2 million under the then-current $300 million authorization.
- The Company paid $5.4 million of cash dividends on preferred stock. Preferred stock outstanding at year-end had a $52.3 million carrying value and could convert into approximately 3.7 million common shares.
At February 23, 2023, Gulfport reported $25.6 million of cash, $79.0 million of Credit Facility borrowings, $113.4 million of letters of credit and $550 million of senior notes outstanding.
Material changes versus the prior comparable period
- Reported net income improved from a $112.8 million Successor-period loss to $494.7 million of 2022 net income. The comparison is affected by the Prior Successor Period covering only May 18 through December 31, 2021.
- Production declined to 983 MMcfe per day from 1,016 MMcfe per day in the Prior Successor Period, primarily reflecting lower Utica volumes, while SCOOP production increased.
- Higher commodity prices increased unhedged sales and realized prices, but derivative settlement losses increased materially and reduced reported revenue.
- Cash flow from operations increased to $739.1 million, while cash capital expenditures increased to $460.8 million.
- Total debt declined by $19.0 million during 2022, and the Credit Facility borrowing base increased from $850 million to $1.0 billion.
- Common shares outstanding declined due to the $250.8 million repurchase program, partially offset by preferred-stock conversions and equity awards.
- Proved reserves increased from 3.898 Tcfe to 4.048 Tcfe, driven by 438.9 Bcfe of extensions and discoveries, partly offset by production of 359 Bcfe and development-plan revisions.
Guidance, outlook, risks and unusual items
- Management expects 2023 capital expenditures of approximately $425 million to $475 million, consisting of $375 million to $400 million for drilling and completion and $50 million to $75 million for non-drilling activities.
- The 2023 program is expected to generate production of approximately 1,000 to 1,040 MMcfe per day. Gulfport plans to fund the program with operating cash flow and Credit Facility borrowings.
- Management reported hedges covering approximately 58% of expected 2023 production, with an average floor price of $3.58/Mcf. Subsequent to year-end, Gulfport restructured portions of its 2023 call-option position and added 2024 and 2025 derivative positions.
- Key risks include natural gas, oil and NGL price volatility; substantial derivative liabilities and settlement exposure; rising floating-rate interest expense; negative working capital; minimum-volume and firm-transportation commitments; pipeline and gathering constraints; drilling and reserve-estimation risk; regulatory and environmental changes; induced seismicity and hydraulic-fracturing restrictions; and concentration of operations in Ohio and Oklahoma.
- Firm transportation and gathering commitments totaled approximately $1.618 billion at year-end, including $231.1 million due in 2023. Other operational commitments totaled $83.9 million.
- Gulfport had a net derivative liability of $347.9 million at December 31, 2022. A 10% increase in underlying commodity prices would have increased the liability by approximately $171.9 million.
- Pending litigation includes disputes involving restrictive covenants affecting certain Ohio properties and post-emergence claims related to production from Marcellus and Utica leases. Management believes no pending matter is likely to have a material adverse effect, but the ultimate outcomes are uncertain.
- On February 27, 2023, the Board increased the common-stock repurchase authorization from $300 million to $400 million, with the additional authorization expiring March 31, 2024.
- John Reinhart became President and Chief Executive Officer effective January 24, 2023, replacing Timothy Cutt, who became Executive Chairman.
Important facts for investors to verify
- Reconcile reported revenue and cash flow with the significant impact of derivative settlements and the company’s future hedge structure.
- Review debt maturities, Credit Facility borrowing-base redeterminations, covenant compliance and the 7.39% floating borrowing rate.
- Assess whether projected 2023 production and capital spending can be funded from operating cash flow without materially increasing debt.
- Evaluate the sustainability of the $739.1 million operating cash flow in a lower-price environment and after required midstream payments.
- Review the $1.618 billion firm transportation and gathering commitment, including minimum-volume obligations and contracts subject to rejection or litigation.
- Consider the sensitivity of reserves and PV-10 to commodity prices; a 10% price decline would have reduced PV-10 by approximately $1.4 billion under the filing’s sensitivity analysis.
- Account for approximately 43% of proved reserves being PUDs, which require substantial capital and timely development.
- Review potential dilution from preferred-stock conversion, equity awards and remaining claim-reserve shares.
- Verify the status and potential operational effects of the Ohio restrictive-covenant litigation and remaining bankruptcy-related claims.