Gulfport Energy Corporation — Q1 2020 Form 10-Q Summary
Business context and reporting period
Gulfport Energy is an independent, natural-gas-weighted exploration and production company operating primarily in the Utica Shale in Ohio and the SCOOP formations in Oklahoma. This filing covers the three months ended March 31, 2020, with comparative results for the three months ended March 31, 2019. The period was affected by sharply lower commodity prices and the emerging COVID-19 pandemic.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue, including derivatives | $246.9 million | $320.6 million | Down 23% |
| Oil, natural gas and NGL sales before derivatives | $148.6 million | $340.6 million | Down 56% |
| Net gain on derivatives | $98.3 million | $(20.0) million | Favorable $118.3 million |
| Loss from operations | $(480.1) million | $93.0 million | Material deterioration |
| Net loss | $(517.5) million | $62.2 million net income | Material deterioration |
| Basic and diluted loss per share | $(3.24) | $0.38 income per share | Material deterioration |
| Cash flow from operations | $130.8 million | $239.8 million | Down 45% |
| Capital expenditures for oil and gas properties | $113.7 million | $241.4 million | Down 53% |
| Cash and cash equivalents | $1.6 million | $6.1 million at Dec. 31, 2019 | Down $4.4 million |
| Principal debt | $1.9 billion | $2.0 billion at Dec. 31, 2019 | Down $79.6 million |
The company recorded a $553.3 million non-cash impairment of oil and natural gas properties under the full-cost accounting ceiling test. This charge was the primary driver of the quarterly loss. The filing states that future impairments were expected in the second quarter, depending on commodity prices, production, reserves and other assumptions.
Production averaged approximately 1,053.8 MMcfe per day, down 16% from 1,263.6 MMcfe per day in Q1 2019. Natural gas production averaged 945.7 MMcf per day, oil and condensate production averaged 5,844 barrels per day, and NGL production averaged 511,183 gallons per day.
Average realized sales prices, including settled derivatives, were $1.97 per Mcf for natural gas, $61.39 per barrel for oil and condensate, and $0.37 per gallon for NGLs. Without settled derivatives, the comparable prices were $1.26 per Mcf, $43.53 per barrel and $0.36 per gallon, respectively.
Balance sheet, debt and liquidity
- Working capital deficit was $146.2 million at March 31, 2020.
- The revolving credit facility had $65.0 million outstanding and $698.2 million of borrowing availability after $236.8 million of letters of credit. The facility’s borrowing base was $1.2 billion and elected commitment was $1.0 billion at quarter-end.
- The company repurchased approximately $25.9 million principal amount of senior notes for $10.2 million, recognizing a $15.3 million gain on debt extinguishment.
- On May 1, 2020, the borrowing base and elected commitment were reduced to $700.0 million. The amendment added a 2.00-to-1.00 net secured debt-to-EBITDAX covenant, deferred a net funded debt-to-EBITDAX covenant, and restricted further unsecured-note repurchases.
- Management stated that cash on hand, forecast operating cash flow and revolver availability were expected to fund planned expenditures, debt service and other obligations for the next 12 months, but also identified substantial sensitivity to commodity prices, capital-market access and COVID-19 effects.
Material changes versus the prior comparable period
- Commodity prices and production volumes declined substantially, reducing pre-derivative oil, gas and NGL revenue by $192.0 million.
- Derivative gains improved by $118.3 million, partially offsetting lower physical commodity revenue.
- Operating expenses declined with lower activity: lease operating expense decreased 19%, production taxes decreased 39%, midstream costs decreased 18%, and DD&A decreased 34%.
- General and administrative expense increased 61% to $16.2 million, primarily due to higher non-recurring legal and consulting costs.
- Equity-method results deteriorated from $4.3 million of income to $10.8 million of loss, including a $10.6 million loss related to Mammoth Energy.
- The company sold its SCOOP water infrastructure assets on January 2, 2020 for $50.0 million in cash, with potential additional incentive payments over 15 years. Proceeds were used to reduce revolver borrowings.
- Operating cash flow declined by $108.9 million, while investing cash outflows decreased by $175.8 million due primarily to lower capital spending.
Guidance, outlook, management commentary and risks
- Previously issued 2020 production guidance should no longer be relied upon because of COVID-19, commodity-price volatility and operational uncertainty.
- Management expected to shut in a minimal amount of production, including many vertical SCOOP wells, with an anticipated impact of less than 20 MMcfe per day. Non-operated production could also be affected.
- 2020 drilling and completion capital expenditures were estimated at $265 million to $285 million, with an additional $20 million to $25 million for non-drilling and completion expenditures. The midpoint represented a 51% reduction from 2019 capital spending.
- Management expected 2020 production, revenue, operating cash flow and EBITDA to be lower than in 2019 and anticipated production volumes to decline approximately 18% from 2019 levels.
- COVID-19 risks include lower demand and prices, service-provider and supply-chain disruptions, midstream outages or bankruptcies, delayed drilling and completions, reduced liquidity and difficulty refinancing or accessing capital.
- At March 31, 2020, open hedges included 432,000 MMBtu per day of 2020 natural gas swaps at $2.92 per MMBtu, 6,000 barrels per day of 2020 oil swaps at $59.83 per barrel and 500 barrels per day of NGL swaps at $21.63 per barrel. In April 2020, the company terminated the remaining oil swaps for approximately $40.5 million and entered into replacement hedges at lower prices.
- The company expected additional full-cost impairment in Q2 2020, although such impairments would be non-cash and would not directly affect future cash flows or liquidity.
- Disclosure controls were ineffective at March 31, 2020 because of a material weakness in internal control over financial reporting related to evaluating and transferring unevaluated costs to the amortizable full-cost pool. Management expected remediation by June 30, 2020.
- Pending matters include litigation involving legacy Louisiana properties, royalty claims, a Mammoth Energy derivative action, a securities class action, a contract counterclaim, employment litigation and EPA Clean Air Act findings. The filing states that outcomes and potential liabilities are uncertain.
- The SEC is investigating actions by former management, including alleged personal use of company assets and potential Sarbanes-Oxley violations. Management stated that it believes the matter will not materially affect the company, but the ultimate resolution and financial liability cannot be predicted.
Facts investors should verify
- Whether the May 2020 reduction of the borrowing base to $700 million creates additional liquidity or covenant pressure.
- The magnitude of Q2 2020 and subsequent full-cost impairment charges.
- Actual production, realized prices, operating cash flow and capital spending relative to the revised outlook.
- Compliance with the amended revolver covenants, including the 2.00-to-1.00 net secured debt-to-EBITDAX requirement.
- Progress in remediating the material weakness and whether disclosure controls were subsequently determined to be effective.
- Developments in the SEC investigation, securities litigation, environmental matters and other contingencies.
- The effect of terminated and replacement hedges on cash flow protection during the remainder of 2020 and 2021.