Gulfport Energy Corporation — Q1 2017 Form 10-Q Summary
Business context and reporting period
Gulfport is an independent U.S. oil and natural gas exploration and production company focused primarily on the Utica Shale in Ohio and the SCOOP Woodford and Springer plays in Oklahoma, with additional Louisiana, Canadian oil sands, Niobrara, Bakken and oil-field-services investments. This unaudited filing covers the three months ended March 31, 2017, compared with the same period of 2016.
On February 17, 2017, Gulfport completed the approximately $1.85 billion Vitruvian acquisition, adding approximately 46,400 net SCOOP acres. Consideration included $1.35 billion of cash and approximately 23.9 million common shares. The acquired assets contributed $26.2 million of revenue from the closing date through March 31, 2017.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue, including derivative gains | $333.0 million | $157.0 million | Up 112% |
| Oil, gas and NGL sales before derivatives | $233.4 million | $99.2 million | Up 135% |
| Income from operations | $181.7 million | $(195.8) million | Improved |
| Net income | $154.5 million | $(242.3) million | Improved by $396.7 million |
| Diluted earnings per share | $0.91 | $(2.17) | Improved |
| Net cash provided by operating activities | $142.6 million | $83.8 million | Up $58.9 million |
| Production | 76,461 MMcfe | 62,993 MMcfe | Up 21% |
Approximate reported revenue-based operating margin was 54.6% in Q1 2017, versus negative 124.7% in Q1 2016. Approximate net margin was 46.4% in Q1 2017, versus negative 154.3% in Q1 2016. These comparisons were substantially affected by derivative valuation changes and the absence of a prior-year impairment charge.
- Natural gas sales were $177.8 million, oil and condensate sales were $24.4 million, NGL sales were $31.2 million, and net derivative gains were $99.6 million.
- Lease operating expense increased to $19.3 million, while unit lease operating expense declined 5% to $0.25 per Mcfe. General and administrative expense increased to $12.6 million, but unit G&A expense declined 2% to $0.16 per Mcfe.
- Midstream gathering and processing expense increased to $47.9 million, and interest expense increased to $23.5 million, primarily due to additional debt issued in connection with the acquisition.
- No oil and gas property impairment was recorded in Q1 2017, compared with a $219.0 million impairment in Q1 2016. The March 31, 2017 ceiling test did not require an impairment.
- Cash and cash equivalents were $102.5 million at March 31, 2017, compared with $1.276 billion at December 31, 2016, primarily reflecting the acquisition and related investment spending.
- Total assets were $4.954 billion and total stockholders’ equity was $2.802 billion at March 31, 2017.
Debt and liquidity
- Long-term debt, net of current maturities, was $1.632 billion; total debt included $350 million of 2023 notes, $650 million of 2024 notes, $600 million of 2025 notes, $40 million drawn on the revolving facility and approximately $23.7 million under the construction loan, net of debt issuance costs and current maturities.
- The revolving credit facility had a $700 million borrowing base, $40 million outstanding and $421.3 million of availability after $238.7 million of letters of credit. The facility was amended on May 4, 2017 to increase the borrowing base to $1.0 billion.
- Gulfport reported compliance with its credit facility covenants at March 31, 2017. The facility requires net funded debt to EBITDAX of no more than 4.00 to 1.00 and EBITDAX to interest expense of at least 3.00 to 1.00.
- Net cash used in investing activities was $1.348 billion, including $1.339 billion for the acquisition, $181.8 million for oil and gas property additions and $10.0 million in Strike Force contributions. Financing activities provided $31.6 million.
Material changes versus the prior comparable period
- Production increased 21% to 76,461 MMcfe, driven by continued Utica development and the newly acquired SCOOP assets.
- Higher commodity prices, increased production and derivative gains drove revenue growth. Natural gas market prices increased 93%, oil and condensate prices increased 81%, and NGL prices increased 187%, before considering derivative effects.
- The company moved from a $242.3 million net loss to $154.5 million of net income, aided by the absence of the $219.0 million prior-year impairment and a $25.8 million reduction in equity-method investment losses.
- Equity-method investment losses declined to $4.9 million from $30.7 million, including the absence of the $23.1 million Grizzly impairment recorded in Q1 2016.
- Common shares outstanding increased to 182.8 million at March 31, 2017 from 158.8 million at December 31, 2016, primarily due to shares issued for the Vitruvian acquisition.
Guidance, outlook, risks and unusual items
Management expected 2017 capital expenditures of approximately $845 million to $915 million for drilling, completion, acreage and Strike Force contributions. The plan included $645 million to $690 million for Utica activity, $170 million to $190 million for SCOOP activity, $110 million to $120 million for acreage expenses and $50 million to $60 million for Strike Force contributions. Management stated that cash flow from operations, cash on hand and borrowing capacity were expected to fund normal operating needs and capital requirements for the next twelve months, subject to market conditions.
- For 2017, management expected to spud 87 to 97 gross Utica wells and 19 to 21 gross SCOOP wells, and to commence sales from 72 to 80 gross Utica wells and 17 to 19 gross SCOOP wells.
- Approximately 55% to 57% of estimated 2017 production was hedged. At March 31, 2017, the derivative portfolio had a net liability position of approximately $30.0 million. A 10% commodity-price increase was estimated to reduce derivative fair value by approximately $126.3 million.
- Commodity prices, production levels, pipeline capacity, drilling and completion costs, reserve estimates and the full-cost ceiling test remain significant risks. Lower prices could reduce liquidity, borrowing capacity and reserves and could require future non-cash impairments.
- Gulfport had approximately $3.8 billion of firm transportation commitments with third parties and additional sand and pressure-pumping commitments totaling $78.7 million through 2018.
- Two Louisiana coastal-management lawsuits seek damages and restoration-related relief. The matters were in early stages, and management could not estimate any potential loss.
- Mammoth Energy expected to close acquisitions of Gulfport-related service entities in Q2 2017; Gulfport expected to receive approximately 2.0 million Mammoth shares and own approximately 25.1% of Mammoth after closing.
- The company reported effective disclosure controls and no off-balance-sheet arrangements. A $595.7 million valuation allowance was maintained against most deferred tax assets, with a $4.7 million amount expected to be usable through tax planning and carrybacks.
Important facts for investors to verify
- Verify the post-acquisition production, reserves, costs and integration progress of the Vitruvian/SCOOP assets.
- Assess whether commodity prices and derivative gains can support the planned $845 million to $915 million capital program.
- Review debt maturities, interest expense, covenant compliance and the May 2017 increase in the revolving facility borrowing base.
- Evaluate the effect of hedges, short call options and potential production shortfalls on realized pricing and cash flow.
- Monitor future full-cost ceiling tests and the potential for oil and gas property impairments if prices or reserve estimates decline.
- Track the Louisiana coastal litigation, firm transportation obligations and other contractual commitments.