Gulfport Energy Corporation 2019 Form 10-K Summary
Business context and reporting period
Gulfport Energy is a U.S. natural gas-weighted exploration and production company focused primarily on the Utica Shale in Eastern Ohio and the SCOOP in Oklahoma. The filing covers the fiscal year ended December 31, 2019, with quarterly data showing fourth-quarter results.
- Year-end proved reserves were 4.528 Tcfe, including 2.544 Tcfe of proved undeveloped reserves.
- Production increased 1% to 501,742 MMcfe, or approximately 1,375 MMcfe per day.
- Utica and SCOOP represented approximately 71% and 29%, respectively, of proved reserves by volume.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenues, including derivative gains | $1.346 billion | $1.355 billion | Down 1% |
| Oil, natural gas and NGL sales before derivatives | $1.138 billion | $1.479 billion | Down 23% |
| Operating income (loss) | $(1.704) billion | $398.959 million | Material deterioration |
| Net income (loss) | $(2.002) billion | $430.560 million | Material deterioration |
| Basic EPS | $(12.49) | $2.46 | Declined |
| Cash flow from operations | $723.993 million | $786.271 million | Down 8% |
| Capital expenditures | $720.057 million | $899.083 million | Down 20% |
| Total debt | $1.979 billion | $2.087 billion | Down 5% |
- The $2.040 billion oil and natural gas property impairment charge was the principal driver of the annual loss. Operating margin was approximately negative 126.6% and net margin approximately negative 148.8%, both heavily affected by this non-cash impairment.
- Commodity sales before derivatives declined primarily because natural gas, oil and NGL prices fell. Including settled derivatives, average realized equivalent pricing decreased to $2.51 per Mcfe from $2.86 per Mcfe.
- Derivative activity generated a net gain of $208.360 million in 2019, compared with a $123.479 million net loss in 2018.
- Production costs, including production taxes and midstream gathering and processing, decreased to $0.81 per Mcfe from $0.83 per Mcfe. Lease operating expense decreased 10% to $0.17 per Mcfe.
- Year-end cash was $6.060 million, compared with $52.297 million in 2018, and net working capital was negative $145.3 million.
- The revolving facility had $120.0 million drawn, $243.6 million of letters of credit outstanding and $636.4 million of stated borrowing availability. The company was in compliance with its debt covenants at year-end.
- Contractual obligations included approximately $2.002 billion of debt principal, $613.3 million of debt interest and $3.561 billion of firm transportation commitments.
Material changes versus the prior comparable period
- Natural gas, oil and NGL sales before derivatives fell 23%; natural gas sales decreased 18%, oil and condensate sales decreased 34%, and NGL sales decreased 43%.
- The company recorded no oil and gas property impairment in 2018 but recorded a $2.040 billion ceiling-test impairment in 2019, primarily due to lower commodity prices.
- Equity-method results deteriorated by $260.1 million, including impairment charges of $160.8 million for Mammoth Energy and $32.4 million for Grizzly Oil Sands.
- Proved reserves declined from 4.743 Tcfe to 4.528 Tcfe. Extensions and discoveries of approximately 1.1 Tcfe were offset by 733.8 Bcfe of downward revisions, 502 Bcfe of production and asset sales.
- The company repurchased approximately $190.1 million principal amount of senior notes for $138.8 million, recognizing a $48.6 million gain on debt extinguishment.
- The company repurchased approximately 3.8 million common shares for about $30.0 million. The stock repurchase program was suspended during the fourth quarter.
- General and administrative expense decreased 4% to $48.0 million, while a fourth-quarter workforce reduction of approximately 13% of employees generated $4.6 million of restructuring costs.
- The company adopted the new lease accounting standard, recognizing approximately $110 million of right-of-use assets and corresponding lease liabilities on adoption.
Guidance, outlook, commentary and risks
- Management expected 2020 capital expenditures of approximately $285 million to $310 million in one disclosure, while the MD&A provided a more detailed range of $265 million to $285 million for drilling and completion plus $20 million to $25 million for other expenditures.
- 2020 production was forecast at approximately 1,100 to 1,150 MMcfe per day, about 18% below 2019 levels, reflecting lower capital spending and asset divestitures.
- Management expected 2020 revenue, operating cash flow and EBITDA to be lower than 2019 and planned to fund capital spending primarily with operating cash flow and revolver borrowings.
- As of February 27, 2020, approximately 50% of forecast 2020 production revenue was hedged, including 52% of natural gas production at an average price of $2.86 per Mcf and 80% of oil production at $59.82 per barrel.
- Commodity prices remain the central risk. Lower prices could reduce reserves, borrowing-base availability, liquidity and cash flow and could trigger additional full-cost impairments.
- The company has substantial fixed transportation commitments and could owe deficiency payments if production is insufficient to meet minimum volumes.
- Legal and regulatory matters include royalty-owner litigation, Louisiana environmental and property-damage claims, a derivative action involving Mammoth Energy, and an ongoing SEC investigation concerning former management. A proposed $1.7 million EPA/Department of Justice settlement and required well-pad improvements were pending court approval at filing.
- Grant Thornton issued an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting. The material weakness involved controls over transfers of unevaluated oil and gas costs into the amortization base and had caused a prior-quarter restatement.
- Gulfport stated that it expects to fund operations and obligations for the next 12 months, but this outlook depends materially on commodity prices, operating cash flow, borrowing-base availability and access to financing.
Most important facts for an investor to verify
- Reconcile the $2.040 billion full-cost impairment to reserve revisions, commodity-price assumptions and the company’s future depletion profile.
- Review debt maturities, revolver borrowing-base redeterminations, covenant compliance and the ability to fund the $3.561 billion of firm transportation commitments.
- Assess whether projected 2020 capital spending and production reductions are consistent with expected operating cash flow and liquidity.
- Evaluate the sustainability of the 2019 $208.4 million derivative gain and the effect of hedges, sold calls and counterparty exposure on future cash flow.
- Track remediation of the material weakness and determine whether further restatements or control deficiencies arise.
- Monitor the SEC investigation, royalty litigation, environmental proceedings and potential liabilities not fully accrued.
- Confirm reserve sensitivity to lower gas, oil and NGL prices, including the risk that additional PUDs or proved reserves could be removed.