Gulfport Energy Corporation — Q1 2022 Form 10-Q Summary
Business context and reporting period
Gulfport is a natural-gas-weighted exploration and production company operating primarily in Ohio’s Utica and Oklahoma’s SCOOP plays. The filing covers the three months ended March 31, 2022. Comparisons are between the post-bankruptcy “Successor” period and the “Predecessor” period ended March 31, 2021; results are not fully comparable because Gulfport emerged from Chapter 11 on May 17, 2021 and applied fresh-start accounting.
Financial and operating performance
- Production: Average production increased 3% to 1,008.1 MMcfe per day from 982.7 MMcfe per day, including 924.5 MMcf per day of natural gas, 3,632 Bbl per day of oil and condensate, and 10,294 Bbl per day of NGLs.
- Commodity sales: Natural gas, oil and NGL sales totaled $480.7 million, up 73% from $277.3 million. Reported revenue was negative $307.8 million after a $788.6 million net loss on commodity derivatives.
- Realized pricing: Before derivatives, average realized prices were $4.87/Mcf for natural gas, $92.51/Bbl for oil and condensate, and $48.88/Bbl for NGLs. Including settled derivatives, prices were $3.53/Mcf, $67.60/Bbl and $42.68/Bbl, respectively.
- Net loss: Net loss was $492.0 million, or $23.23 per diluted share, compared with net income of $8.8 million, or $0.05 per share. Net loss attributable to common stockholders was $493.4 million after $1.4 million of preferred dividends.
- Operating expenses: Total operating expenses were $185.0 million, versus $196.5 million. Lease operating expenses increased 39% to $17.6 million, while transportation, gathering, processing and compression expense declined 20% to $84.8 million. General and administrative expense declined 44% to $7.1 million.
- Cash flow and capital spending: Operating cash flow was $253.7 million, compared with $123.2 million. Cash capital expenditures were $80.3 million; incurred capital expenditures were approximately $100.4 million, including $94.3 million for drilling and completion.
- Liquidity: Cash and cash equivalents were $5.9 million at March 31, 2022. As of April 25, 2022, cash had increased to $59.1 million and the Credit Facility had no borrowings outstanding.
- Debt: Total principal funded debt was $575.0 million at March 31, consisting of $550.0 million of 8.0% senior notes due 2026 and $25.0 million drawn under the Credit Facility. Net debt decreased by approximately $139.0 million from December 31, 2021.
- Balance sheet: Total assets were $2.21 billion and stockholders’ equity was $50.5 million. Current liabilities included $820.3 million of derivative liabilities, and total derivative liabilities were approximately $1.10 billion on a gross basis.
Material changes versus the prior comparable period
- Commodity sales increased substantially because of higher market prices and modestly higher production. Average Henry Hub gas, WTI oil and Mont Belvieu NGL indices increased to $4.95/Mcf, $94.29/Bbl and $54.24/Bbl, respectively, from $2.69, $57.84 and $32.59.
- Higher commodity prices significantly increased derivative mark-to-market losses. Net derivative losses rose from $30.0 million to $788.6 million, largely offsetting the benefit of higher unhedged commodity sales.
- Transportation and midstream costs declined following rejection and renegotiation of certain contracts during the bankruptcy process.
- Depreciation, depletion and amortization increased 51% to $62.3 million, primarily because of higher depletion rates following fresh-start valuation adjustments.
- The prior-year quarter included $38.7 million of net Chapter 11 reorganization expense and a $14.6 million impairment charge; neither item was recorded in the current quarter.
- Interest expense increased to $14.0 million from $3.3 million because of the post-emergence debt structure, including the 2026 Senior Notes and Credit Facility.
- Gulfport repurchased 438,082 shares for approximately $35.5 million during the quarter. In April 2022, the authorized repurchase program was increased from $100 million to $200 million.
Guidance, outlook, risks and unusual items
- Capital outlook: 2022 drilling and completion expenditures were estimated at $355 million to $395 million, with approximately $25 million of additional non-drilling and completion expenditures.
- Development activity: Gulfport expected to reduce Utica operated rigs from two to one during the second half of 2022 and conclude its SCOOP drilling program by mid-year, averaging one operated SCOOP rig for the year.
- Credit facility amendment: On May 2, 2022, the borrowing base increased from $850 million to $1.0 billion, while elected lender commitments remained $700 million. The amendment also eased certain hedging and restricted-payment provisions and transitioned the interest-rate benchmark from LIBOR to SOFR.
- Hedging exposure: Gulfport generally hedges approximately 50% to 75% of forecast annual production. At March 31, 2022, its net derivative liability was $1.065 billion. A 10% increase in underlying commodity prices was estimated to increase the liability by approximately $262.2 million.
- Contractual commitments: Future firm transportation and gathering commitments totaled approximately $1.80 billion, including $180.8 million remaining in 2022 and $889.7 million thereafter. The company also had $113.2 million of letters of credit and $33.1 million of surety bonds outstanding.
- Litigation and contingencies: Gulfport believes the Rover contract rejection will ultimately be approved; otherwise, potential demand charges, legal fees and interest could exceed approximately $64 million. Certain post-emergence claims in the J&R Passmore litigation remain outstanding. Management stated that no pending matter is currently expected to materially affect financial position, results or cash flows, but actual outcomes could differ.
- Other unusual items: Gulfport recognized $11.5 million of income from an initial distribution related to assigned claims from its TC Energy settlement. Future distributions are uncertain. The company maintained a full valuation allowance against deferred tax assets and recorded no income tax expense.
- Market risks: Results remain highly sensitive to natural gas, oil and NGL prices, inflation, supply-chain conditions, the war in Ukraine, production performance, interest rates and derivative counterparties. The filing also cautions that hedges can limit upside when commodity prices rise.
Most important facts for investors to verify
- Reconcile the $480.7 million of commodity sales with the negative $307.8 million reported revenue and understand the timing and economic effects of derivative settlements and mark-to-market losses.
- Review the composition, maturities and strike prices of the company’s substantial natural gas, oil and NGL hedge portfolio.
- Assess liquidity after planned 2022 capital spending, share repurchases, preferred dividends, debt service and potential contingent payments.
- Verify the May 2022 borrowing-base redetermination, covenant amendments and availability under the Credit Facility.
- Evaluate the $1.80 billion of firm transportation and gathering commitments and the potential Rover liability exceeding $64 million.
- Consider the dilutive and cash obligations associated with preferred stock, including its approximately 4.1 million potential common shares and cumulative dividend provisions.
- Account for the limited comparability of Successor and Predecessor results because of the Chapter 11 emergence and fresh-start accounting.