Gulfport Energy Corporation — Q3 2022 Form 10-Q Summary
Business context and reporting period
Gulfport Energy is a natural-gas-weighted exploration and production company operating primarily in eastern Ohio’s Utica play and central Oklahoma’s SCOOP play. The filing covers the quarter and nine months ended September 30, 2022. Because Gulfport emerged from Chapter 11 on May 17, 2021 and applied fresh-start accounting, 2022 Successor results are not fully comparable with 2021 Predecessor and Successor periods.
Financial performance and key metrics
| Metric | Q3 2022 | Comparable Q3 2021 |
|---|---|---|
| Natural gas, oil and NGL sales | $666.0 million | $379.9 million |
| Net derivative loss | $(474.9) million | $(622.5) million |
| Total revenues | $191.1 million | $(242.5) million |
| Loss from operations | $(3.9) million | $(435.3) million |
| Net loss | $(18.5) million | $(461.3) million |
| Net loss attributable to common stockholders | $(19.8) million | $(463.4) million |
| Loss per common share | $(1.01) | $(22.50) |
| Operating cash flow | $167.9 million | Not clearly provided in the filing excerpt |
Q3 total revenue was reduced substantially by derivative losses. Based on reported total revenue, the operating margin was approximately negative 2% and the net margin approximately negative 10%; these margins are heavily affected by mark-to-market and settled hedge losses and are not representative of unhedged commodity sales margins.
For the nine months ended September 30, 2022, natural gas, oil and NGL sales were $1.785 billion, net derivative losses were $1.436 billion, total revenue was $348.6 million, operating loss was $221.6 million, net loss was $253.9 million and net loss attributable to common stockholders was $258.0 million, or $12.58 per share. Operating cash flow was $551.1 million, compared with $336.8 million for the prior combined 2021 period.
- Q3 production averaged 914.9 MMcfe per day, down 6% from 973.3 MMcfe per day in Q3 2021.
- Q3 average realized price before derivatives was $7.91/Mcfe, versus $4.24/Mcfe; after settled derivatives, it was $3.56/Mcfe versus $3.20/Mcfe.
- Q3 production costs for lease operations, taxes and transportation, gathering, processing and compression totaled $1.44/Mcfe, up from $1.22/Mcfe.
- Q3 general and administrative expense declined to $8.8 million from $16.7 million, primarily due to lower restructuring-related legal and professional costs.
- Q3 interest expense was $15.5 million, compared with $16.4 million. The company had $729.0 million of funded debt principal at September 30, 2022.
Cash flow, capital spending, debt and liquidity
- For the first nine months, operating cash flow of $551.1 million funded $332.0 million of oil and natural gas property additions, $225.8 million of share repurchases and $4.1 million of preferred-stock dividends.
- Cash and cash equivalents were $8.3 million at September 30, 2022. The company had $179.0 million drawn under its revolving Credit Facility, $113.2 million of letters of credit and $550.0 million of 8% Senior Notes due May 2026.
- The Credit Facility had a $1.0 billion borrowing base, $700 million of elected commitments and a maturity date of October 2025. The borrowing base was reconfirmed at $1.0 billion on October 31, 2022.
- The Credit Facility carried a weighted-average interest rate of 6.23% at quarter-end, up from 3.21% at March 31, 2022, increasing exposure to further rate increases.
- At October 27, 2022, cash was $10.1 million and Credit Facility borrowings were $57.0 million, while letters of credit remained $113.2 million.
- Capital expenditures incurred through September 30 were $346.7 million, including $322.5 million for drilling and completion and $24.2 million for leasehold and land investment.
Material changes versus the prior comparable period
- Commodity prices increased sharply, with Q3 Henry Hub averaging $8.20/Mcf versus $4.01/Mcf and WTI averaging $91.55/barrel versus $70.56/barrel. Higher prices increased unhedged sales but also produced substantial derivative losses.
- Q3 natural gas sales increased 94% to $585.6 million, while production declined 6%; oil and condensate sales increased 8% despite a 19% volume decline, and NGL sales decreased modestly.
- Derivative losses improved to $474.9 million from $622.5 million in Q3 2021, but the company still had a net derivative liability of $1.039 billion at quarter-end versus $402.0 million at December 31, 2021.
- Operating loss narrowed materially from $435.3 million to $3.9 million. The prior-year quarter included materially larger derivative losses and $2.8 million of restructuring charges.
- Year-to-date results benefited from higher commodity prices and increased operating cash flow, but were burdened by $1.436 billion of derivative losses. The 2021 comparison also included bankruptcy-related reorganization items and fresh-start accounting effects.
- Common-stock repurchases totaled 2.607 million shares for $227.6 million during the first nine months at a weighted-average price of $87.29. The remaining authorization at September 30 was approximately $72.4 million.
Guidance, outlook, commentary and risks
- Management estimated 2022 drilling and completion capital expenditures of approximately $415 million and non-drilling and completion expenditures of approximately $35 million.
- Management expected 2022 production of approximately 975 to 1,000 MMcfe per day and planned to add a top-hole drilling rig in the Utica during Q4 2022 to support a continuous 2023 completion program.
- Management stated that operating cash flow, borrowing capacity and cash on hand were expected to provide sufficient liquidity for the next 12 months, but cautioned that lower realized prices, weaker operating results or higher cash uses could adversely affect liquidity.
- Principal market risks include natural gas, oil and NGL price volatility, hedge settlement and mark-to-market exposure, inflation, rising interest rates, supply-chain constraints and the economic effects of the war in Ukraine.
- As of September 30, 2022, open firm transportation and gathering commitments totaled approximately $1.675 billion, excluding contracts in the process of being rejected.
- The company had $113.2 million of letters of credit and $33.5 million of surety bonds, primarily supporting firm transportation obligations.
- The Rover Pipeline contract rejection proceeding remained unresolved. If rejection is denied, Gulfport could face additional credit assurance, demand charges, attorneys’ fees and interest.
- Ohio restrictive-covenant litigation could result in injunctive relief affecting operations associated with the relevant leases. Other litigation outcomes may differ materially from accrued amounts.
- The company maintained a full valuation allowance against deferred tax assets, resulting in a nominal effective tax rate and no income tax expense for the nine-month 2022 period.
Most important facts for investors to verify
- Reconcile reported commodity sales with the substantial derivative losses and evaluate the company’s hedge volumes, prices, ceilings, floors and future settlement exposure.
- Assess liquidity after planned capital spending, share repurchases, preferred dividends, letters of credit and firm transportation commitments.
- Verify compliance with Credit Facility leverage and current-ratio covenants and monitor borrowing-base redeterminations.
- Evaluate sensitivity to floating-rate debt, including the 6.23% Credit Facility rate at quarter-end.
- Compare actual 2022 production and capital spending with management’s 975–1,000 MMcfe per day production expectation and approximately $450 million total capital-spending plan.
- Monitor the Rover rejection litigation, Ohio restrictive-covenant cases, environmental matters and potential bankruptcy-related claim distributions.
- Consider the comparability limitations created by the May 2021 emergence from Chapter 11 and fresh-start accounting.