GULFPORT ENERGY CORP quarterly report, Q3 FY2014

Gulfport Energy Corporation — Form 10-Q Summary

Business context and reporting period

Gulfport Energy is an independent oil and natural gas exploration and production company focused primarily on the Utica Shale in Eastern Ohio, with additional operations along the Louisiana Gulf Coast, and interests in the Alberta oil sands, Diamondback Energy and other investments. This unaudited filing covers the three and nine months ended September 30, 2014, compared with the corresponding 2013 periods. The company had 85.5 million common shares outstanding as of November 1, 2014.

Financial performance and key metrics

Metric	Q3 2014	Q3 2013	9M 2014	9M 2013
Total revenue	$170.8 million	$69.3 million	$403.6 million	$194.7 million
Income from operations	$53.5 million	$15.1 million	$96.7 million	$52.5 million
Net income	$6.9 million	$40.5 million	$137.3 million	$128.9 million
Diluted EPS	$0.08	$0.52	$1.60	$1.69
Net cash from operations	Not separately provided	Not separately provided	$285.9 million	$141.0 million

Q3 operating margin was approximately 31.3% versus 21.9% in the prior-year quarter; nine-month operating margin was approximately 24.0% versus 27.0%.
Q3 net margin was approximately 4.1% versus 58.5%; nine-month net margin was approximately 34.0% versus 66.2%. The comparisons were materially affected by equity-investment gains and losses and litigation charges.
Q3 oil and condensate sales were $58.2 million, gas sales were $85.2 million and NGL sales were $27.0 million. Nine-month amounts were $199.7 million, $139.0 million and $64.1 million, respectively.
Q3 production increased 226% to 3.895 million BOE from 1.194 million BOE. Nine-month production increased 239% to 8.764 million BOE from 2.585 million BOE, primarily from Utica development.
Q3 realized BOE price declined 24% to $43.75 from $57.65; the nine-month realized BOE price declined 39% to $45.95 from $75.02 because of the shift toward natural gas and NGL production.
Q3 DD&A increased to $72.4 million from $30.7 million; nine-month DD&A increased to $185.3 million from $81.8 million. Midstream processing and marketing expense increased to $18.7 million in Q3 and $37.3 million for nine months.

Liquidity, capital spending and debt

Cash and cash equivalents were $152.9 million at September 30, 2014, down from $459.0 million at December 31, 2013.
Cash used in investing activities was $904.0 million for the first nine months, including $1.041 billion of additions to oil and gas properties, $61.8 million of contributions to equity-method investments and $197.6 million of proceeds from selling Diamondback shares.
Cash provided by financing activities was $312.1 million, including $318.0 million of gross proceeds from the August 2014 issuance of additional 7.75% senior unsecured notes due 2020. Total principal amount of the notes was $600.0 million.
Long-term debt, including current maturities, was approximately $617.0 million at September 30, 2014, compared with $299.2 million at year-end 2013. The notes had a carrying value of $615.2 million and an estimated fair value of approximately $627.0 million.
The $1.5 billion revolving credit facility had no borrowings outstanding and $233.3 million of availability after $41.7 million of letters of credit. A proposed increase in borrowing-base availability from $275 million to $450 million remained subject to lender approval.
Management stated that cash on hand, operating cash flow, Diamondback share-sale proceeds and available borrowings were expected to fund normal operating needs and capital requirements for the next twelve months. Additional funding could be required for accelerated drilling, acquisitions or faster development of Grizzly’s oil sands projects.

Material changes versus the prior comparable period

Revenue growth reflected substantially higher production, but lower realized BOE pricing and a less oil-weighted production mix pressured profitability.
Q3 net income fell 83% because of a $32.4 million loss on the Diamondback investment, compared with a $52.9 million gain in Q3 2013, plus higher operating, midstream and administrative costs.
Nine-month net income rose 7%, supported by an $84.8 million gain from the Blackhawk asset sale, an $89.3 million Diamondback gain and higher production. These benefits were partly offset by $25.5 million of litigation settlements and increased operating costs.
The company completed the approximately $177.4 million net Rhino acquisition in March 2014, adding approximately 8,000 net Utica acres and producing-well interests. The remaining portion of the transaction was pending.
Oil and gas property, plant and equipment, net increased to $2.633 billion from $1.704 billion at year-end 2013, while non-producing properties excluded from amortization increased to $1.453 billion from $950.6 million.
Gulfport sold 2.4375 million Diamondback shares in June and September 2014 for approximately $197.6 million in aggregate net proceeds, leaving 942,000 shares, or approximately 1.7% of Diamondback outstanding.

Guidance, outlook, risks and unusual items

Management expected to spud 85 to 95 gross Utica wells in 2014 and estimated Utica capital expenditures of $634 million to $676 million, plus $375 million to $425 million for additional Utica acreage acquisitions.
Total 2014 capital expenditures were estimated at $715 million to $767 million, including approximately $42 million to $45 million for WCBB, $24 million to $26 million for Hackberry, and $15 million to $20 million related to Grizzly. Approximately 88% of estimated capital expenditures was expected to be spent in the Utica.
As of November 1, 2014, eight rigs were under contract in the Utica. Management cited production growth, completion backlog and well performance as support for its liquidity outlook, while noting that commodity prices and future capital decisions remained uncertain.
At September 30, 2014, oil and gas swaps covered approximately 59% to 67% of estimated 2014 production. The contracts included oil swaps at $101.50 per barrel and natural gas swaps generally between $4.01 and $4.08 per MMBtu through 2016. All current swaps were deemed ineffective as cash flow hedges at inception; Q3 and nine-month hedge ineffectiveness gains were $29.5 million and $23.0 million, respectively.
The company settled a Louisiana surface-contamination lawsuit for $18.0 million, including $16.0 million paid and an additional $2.0 million due on the first anniversary, plus remediation costs. It also accrued $1.5 million for a Clean Water Act plea agreement involving a $1.125 million fine and $0.375 million of community service.
No ceiling-test impairment was required for the quarter. However, lower oil, natural gas or NGL prices could reduce cash flow and trigger impairment of full-cost oil and gas properties.
Key risks include commodity-price volatility, production and reserve estimates, high development spending, access to financing, drilling and completion execution, regulatory and environmental matters, litigation, oil sands development and the ability to monetize or develop equity investments.
Subsequent to quarter-end, Gulfport entered into additional natural gas swaps covering periods from January 2015 through June 2017 at a weighted average price of $3.96 per MMBtu.

Most important facts for investors to verify

Whether Utica production growth and planned drilling can generate sufficient cash flow at materially lower realized BOE prices.
The funding requirement for the $715 million to $767 million 2014 capital program and additional Utica acreage spending.
Availability and covenant headroom under the revolving credit facility, including approval of the proposed $450 million borrowing base.
The effect of the 7.75% notes and increased debt on interest expense, leverage and future liquidity.
The sustainability of earnings excluding Diamondback mark-to-market gains or losses, the Blackhawk sale gain and hedge ineffectiveness gains.
Final terms and timing of the remaining Rhino acquisition consideration and any further acquisitions.
Future remediation, environmental, litigation and Clean Water Act costs beyond amounts accrued.
Commodity-price exposure created by fixed-price swaps, including potential losses if production is below contracted volumes or market prices rise above the fixed prices.