Gulfport Energy Corporation — Q2 2022 Form 10-Q Summary
Business context and reporting period
Gulfport is a natural-gas-weighted exploration and production company with principal assets in the Utica Shale in eastern Ohio and the SCOOP formations in central Oklahoma. The report covers the quarter and six months ended June 30, 2022. Comparisons with 2021 are affected by Gulfport’s emergence from Chapter 11 on May 17, 2021, fresh-start accounting, and separate Successor and Predecessor reporting periods.
Financial and operating metrics
| Metric | Q2 2022 | Six months 2022 |
|---|---|---|
| Commodity sales before derivatives | $638.2 million | $1.119 billion |
| Net derivative loss | $(172.9) million | $(961.4) million |
| Total revenues | $465.3 million | $157.5 million |
| Income (loss) from operations | $275.1 million | $(217.7) million |
| Net income (loss) | $256.6 million | $(235.4) million |
| Net income (loss) attributable to common stockholders | $215.6 million | $(238.2) million |
| Basic EPS | $10.42 | $(11.36) |
| Net cash provided by operating activities | $129.5 million | $383.2 million |
| Capital expenditures | Not separately provided | $205.6 million incurred; $181.8 million cash expenditures |
| Production | 959.1 MMcfe per day | 983.4 MMcfe per day |
Q2 operating and net margins were approximately 59% and 55%, respectively, based on reported total revenues. These margins are not representative of the six-month period, which was adversely affected by significant derivative losses and reported an operating loss.
- Q2 commodity sales increased substantially from the prior combined quarter’s $278.3 million, primarily because realized natural gas, oil and NGL prices rose sharply. Production declined 3% to 959.1 MMcfe per day.
- Q2 realized prices, including settled derivatives, were $3.78/Mcfe for total production, $3.20/Mcf for natural gas, $72.17/barrel for oil and condensate, and $44.44/barrel for NGLs.
- Production costs in Q2 totaled $1.36/Mcfe, comprising lease operating expense of $0.16/Mcfe, taxes other than income of $0.19/Mcfe, and transportation, gathering, processing and compression of $1.01/Mcfe.
- Cash and cash equivalents were $6.6 million at June 30, 2022, compared with $3.3 million at December 31, 2021. Accounts receivable from oil and natural gas sales increased to $316.9 million from $232.9 million.
- Total principal funded debt was approximately $674.0 million, consisting of $550.0 million of 8% senior notes due 2026 and $124.0 million drawn under the revolving Credit Facility. The Credit Facility had a $1.0 billion borrowing base, $113.2 million of outstanding letters of credit, and a 4.61% weighted-average interest rate at quarter-end.
- Stockholders’ equity was $184.7 million at June 30, 2022, down from $549.5 million at year-end, primarily reflecting the six-month net loss and $163.0 million of common-stock repurchases.
Material changes versus the prior comparable period
- Commodity sales increased approximately 129% in Q2 versus the prior combined quarter, while total reported revenues rose to $465.3 million from approximately $31.4 million after derivative losses.
- Derivative losses increased to $172.9 million in Q2 and $961.4 million year to date, compared with approximately $246.9 million for the prior combined quarter and $276.9 million for the prior combined year-to-date period. The losses reflected higher forward commodity prices and hedge settlements.
- Transportation, gathering, processing and compression expense declined to $1.01/Mcfe from $1.07/Mcfe in the prior combined quarter, primarily due to rejected or renegotiated midstream contracts following the bankruptcy process.
- General and administrative expense declined to $8.3 million in Q2 from $12.9 million in the prior combined quarter, primarily due to lower restructuring-related legal and professional fees and workforce changes.
- Gulfport repurchased 1.854 million shares for $163.0 million during the first half, including 1.416 million shares for $127.5 million in Q2. The remaining authorization at June 30 was approximately $37 million under the then-current $200 million program.
- The borrowing base was increased from $850 million to $1.0 billion in May 2022, while elected commitments remained $700 million. The amendment also eased certain hedging and restricted-payment provisions and transitioned the benchmark from LIBOR to SOFR.
Guidance, outlook, risks and unusual items
- 2022 drilling and completion capital expenditures were estimated at $375 million to $405 million, with approximately $35 million of additional non-drilling and completion expenditures.
- Management expected the 2022 drilling program to produce approximately 975 to 1,000 MMcfe per day. Gulfport had two operated Utica rigs as of July 28, 2022, expected to reduce to one in Q3, and had concluded its 2022 SCOOP drilling program.
- Management stated that operating cash flow, Credit Facility capacity and cash on hand were expected to fund operations, capital expenditures, interest expense and shareholder returns for the next 12 months, subject to commodity prices, operating results and cash uses.
- Commodity prices, inflation, higher drilling and completion costs, interest rates, supply-chain constraints, the war in Ukraine and market volatility could adversely affect cash flow, liquidity and development plans.
- Derivative liabilities totaled $929.9 million at June 30, 2022, compared with $402.0 million at December 31, 2021. A 10% increase in underlying commodity prices was estimated to increase the liability by approximately $253.1 million, although realized hedge losses would generally be offset by higher unhedged production revenue.
- Future firm transportation and gathering commitments totaled $1.733 billion, excluding contracts in the process of being rejected. The company also had $113.2 million of letters of credit and $33.1 million of surety bonds outstanding.
- The company continued to litigate the rejection of a Rover firm transportation contract and Ohio restrictive-covenant matters. An adverse outcome in the Rover matter could result in demand charges, attorneys’ fees and interest; the Ohio matters could affect operations on certain leases.
- Gulfport received an $11.5 million distribution in February 2022 related to assigned bankruptcy claims, but the timing and amount of additional distributions are uncertain.
- The company maintained a full valuation allowance against deferred tax assets and reported a 0% effective tax rate for the quarter and six months.
- On July 29, 2022, the board increased the stock-repurchase authorization from $200 million to $300 million, with the additional authorization expiring June 30, 2023.
Important facts for investors to verify
- Reconcile Successor, Predecessor and non-GAAP combined periods before comparing 2022 results with 2021.
- Evaluate the effect of the large derivative liability, hedge settlement losses, hedge volumes and future hedge prices on realized cash margins.
- Verify liquidity after planned capital expenditures, preferred-stock dividends, share repurchases, letters of credit and firm transportation commitments.
- Assess whether the $375 million–$405 million drilling and completion budget and 975–1,000 MMcfe per day production outlook remain achievable amid inflation and service-cost pressure.
- Review debt covenants, borrowing-base availability, floating-rate exposure and the May 2026 maturity of the 8% senior notes.
- Monitor the Rover contract rejection proceedings, Ohio restrictive-covenant litigation, bankruptcy-claim distributions and the potential conversion or redemption of preferred stock.