Gulfport Energy Corporation — Q1 2023 Form 10-Q Summary
Business context and reporting period
Gulfport Energy is a natural-gas-weighted U.S. exploration and production company focused on the Utica and Marcellus formations in eastern Ohio and the SCOOP Woodford and Springer formations in central Oklahoma. This unaudited Form 10-Q covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Natural gas, oil, condensate and NGL sales | $353.2 million | $480.7 million | (27%) |
| Derivative gain/(loss) | $378.1 million | $(788.6) million | Material improvement |
| Total revenues, including derivatives | $731.2 million | $(307.8) million | Improved |
| Operating income/(loss) | $522.6 million | $(492.8) million | Improved |
| Net income/(loss) | $523.1 million | $(492.0) million | Improved |
| Net income attributable to common stockholders | $435.5 million | $(493.4) million | Improved |
| Diluted EPS | $22.90 | $(23.23) | Improved |
| Cash flow from operations | $304.1 million | $253.7 million | 20% |
| Capital expenditures paid | $130.4 million | $80.3 million | 62% |
| Production | 1,057.4 MMcfe/day | 1,008.1 MMcfe/day | 5% |
The reported total-revenue and operating margins were heavily affected by noncash derivative fair-value movements. Reported operating margin was approximately 71% in Q1 2023, but this is not representative of commodity sales economics because derivative gains contributed $378.1 million to revenue.
- Natural gas, oil and NGL sales declined to $353.2 million, primarily because realized commodity prices fell. Production volumes increased 5%.
- Average realized prices, including settled derivatives, were $3.32/Mcf for natural gas, $71.12/barrel for oil and condensate, and $32.23/barrel for NGLs.
- Lease operating expenses increased 13% to $19.9 million; transportation, gathering, processing and compression costs increased 3% to $87.6 million.
- DD&A increased 27% to $79.1 million, reflecting prior drilling and development activity.
- Cash and cash equivalents were $3.5 million at March 31, 2023, compared with $7.3 million at December 31, 2022.
- Total long-term debt was $549.2 million, consisting primarily of $550 million of 8.0% senior notes due May 2026. There were no borrowings under the Credit Facility at quarter-end, although $74.4 million of letters of credit were outstanding.
- Stockholders’ equity increased to $1.32 billion from $828.8 million, primarily because of quarterly net income. Preferred stock classified as mezzanine equity totaled $52.3 million.
Material changes versus the prior comparable period
- Commodity sales decreased 27% despite higher production, reflecting lower natural gas, oil and NGL prices.
- Derivative results shifted from a $788.6 million loss in Q1 2022 to a $378.1 million gain in Q1 2023, primarily from changes in forward commodity prices and fair values.
- Operating cash flow increased $50.4 million, partly because lower commodity prices reduced cash payments on settled derivatives.
- Capital investment increased, including $105.2 million of cash drilling and completion expenditures and $20.1 million of leasehold acquisitions.
- Credit Facility borrowings were reduced by $145.0 million during the quarter through $313.0 million of repayments and $168.0 million of borrowings.
- The company repurchased 459,087 shares for approximately $32.9 million at a weighted-average price of $71.61 per share. Approximately $116.4 million remained available under the repurchase authorization at March 31, 2023.
- Lease operating costs per Mcfe increased to $0.21 from $0.19, while total transportation, gathering, processing and compression costs per Mcfe declined slightly to $0.92 from $0.93.
Guidance, outlook, management commentary, risks and unusual items
- Management estimated 2023 drilling and completion capital expenditures of $375 million to $400 million, plus approximately $50 million to $75 million of non-drilling and completion expenditures.
- The 2023 capital program was expected to support production of approximately 1,000 to 1,040 MMcfe per day.
- During Q1, Gulfport spudded six gross Utica wells and two gross SCOOP wells; no operated wells commenced sales during the quarter.
- On May 1, 2023, the Credit Facility amendment increased elected commitments from $700 million to $900 million and the borrowing base from $1.0 billion to $1.1 billion. It also increased the excess-cash threshold to $75 million and modified the maturity provisions.
- Gulfport changed its CEO in January 2023 and recognized $1.9 million of personnel-related restructuring costs, including $0.5 million of noncash accelerated stock vesting. Additional restructuring costs were expected in Q2 2023 in connection with the CFO transition and other organizational changes.
- The company received a $17.8 million interim distribution related to its assigned TC bankruptcy claim and paid a $1.0 million Rover administrative claim. The timing and amount of future TC-related distributions are uncertain.
- The company maintains significant commodity hedges, including swaps, collars, basis swaps and sold call options. These reduce downside price exposure but limit upside participation and can create losses if production is lower than forecast or commodity prices rise.
- Firm transportation and gathering commitments totaled approximately $1.53 billion as of March 31, 2023, including $169.6 million for the remainder of 2023. Additional 2023 and 2024 inventory commitments totaled approximately $83.9 million.
- Ohio litigation involving restrictive covenants could result in injunctive relief affecting operations and potentially require plugging and abandoning wells. Other lawsuits involve alleged production beyond leased Marcellus and Utica formations.
- No income tax expense was recorded because the company maintained a full valuation allowance against its net deferred tax assets. The allowance could change if sufficient positive evidence of future realization develops.
- Management stated that operating cash flow, borrowing capacity and cash on hand were expected to fund operations, capital expenditures, interest expense and share repurchases for the next 12 months, but warned that lower commodity prices or adverse operating results could reduce liquidity.
Important facts investors should verify
- Reconcile reported earnings and revenue with underlying commodity sales because the Q1 profit was substantially influenced by derivative fair-value gains.
- Monitor natural gas prices, hedge settlements, sold call exposure and the effect of hedges on future cash flow and upside participation.
- Verify the company’s ability to fund the planned $425 million to $475 million 2023 capital program while continuing share repurchases and preferred dividends.
- Review the 2026 Senior Notes maturity, Credit Facility covenants and the amended borrowing-base and maturity provisions.
- Assess liquidity beyond the reported $3.5 million quarter-end cash balance, including subsequent cash of $45.5 million reported as of April 26, 2023 and available Credit Facility capacity.
- Follow the Ohio restrictive-covenant litigation, post-bankruptcy claims and potential operational or plugging obligations.
- Evaluate the sustainability of production growth and whether the 2023 program achieves management’s 1,000–1,040 MMcfe/day production expectation.