GULFPORT ENERGY CORP annual report, FY2014

Gulfport Energy Corporation — FY2014 Form 10-K

Reporting period: Fiscal year ended December 31, 2014, with fourth-quarter results disclosed. Gulfport is an independent U.S. oil and natural gas producer focused primarily on the Utica Shale in Eastern Ohio, with additional Louisiana, Niobrara, Bakken, Canadian oil sands and Southeast Asian investments.

Financial performance and liquidity

Metric	FY2014	FY2013	Change
Revenue	$671.3 million	$262.8 million	+156%
Income from operations	$226.1 million	$55.5 million	+308%
Net income	$247.4 million	$153.2 million	+61%
Diluted EPS	$2.88	$1.97	+46%
Operating cash flow	$409.9 million	$191.1 million	+114%
Capital additions to oil and gas properties	$1.329 billion	$808.2 million	+64%
Cash and equivalents at year-end	$142.3 million	$459.0 million	−69%
Total debt	$716.5 million	$299.2 million	+139%

Fourth-quarter revenue was $267.7 million, operating income was $129.5 million and net income was $110.1 million, compared with fourth-quarter 2013 revenue of $68.1 million, operating income of $2.9 million and net income of $24.3 million. FY2014 operating margin was approximately 33.7% and net margin approximately 36.9%; both were materially affected by investment gains and other unusual items.

Production increased 255% to 87,719 MMcfe from 24,709 MMcfe, primarily from Utica development.
Realized gas-equivalent pricing declined 28% to $7.65 per Mcfe, reflecting the shift toward natural gas and NGLs. Excluding fixed-price swaps, FY2014 realized pricing would have been $6.40 per Mcfe.
Total production, midstream and production-tax costs declined to $1.60 per Mcfe from $2.62 per Mcfe.
Year-end proved reserves were 933.6 Bcfe, including 479.8 Bcfe of proved undeveloped reserves. PV-10 was $1.841 billion and standardized measure was $1.427 billion.
Year-end cash was $142.3 million, with $306.4 million of borrowing availability after $43.6 million of letters of credit under the revolving facility.
Debt consisted primarily of $600.0 million of 7.75% senior notes due 2020 and $100.0 million outstanding under the revolving credit facility. The company was in compliance with debt covenants at year-end.

Material changes versus the prior comparable period

Utica production drove the substantial increase in revenue and cash flow. Gulfport spud 85 gross Utica wells, completed 36 as producing wells and commenced sales from 63 gross wells during 2014.
Gulfport acquired approximately 8,200 net Utica acres from Rhino for $179.5 million net of purchase-price adjustments.
Capital spending increased substantially, including $503.8 million for 2014 drilling and recompletion programs and $257.8 million for lease-related costs.
Gulfport issued $300.0 million of additional 7.75% senior notes, used partly to repay revolving borrowings and otherwise to fund capital development.
Gulfport sold its remaining Diamondback shares for approximately $60.8 million in November 2014. The company received $258.4 million of net proceeds from Diamondback share sales during the year and recognized approximately $79.7 million of Diamondback investment gains.
Gulfport contributed investments in several oilfield-service businesses to Mammoth Energy Partners LP for a 30.5% limited partnership interest and recognized an $84.5 million gain.
Income from equity-method investments was $139.4 million, including gains associated with Diamondback and Blackhawk. These non-operating items significantly influenced reported earnings.
Gulfport fully impaired its Tatex Thailand III investment by $12.1 million and planned to allow the related concession to expire in 2015.

Guidance, outlook, risks and unusual items

Management estimated 2015 production of 157,680 to 175,200 MMcfe.
2015 capital expenditures were estimated at $545 million to $595 million, plus $85 million to $95 million for additional Utica acreage. Approximately 96% of planned capital expenditures were expected to be directed to the Utica Shale.
Utica drilling plans called for 46 to 52 gross company-operated horizontal wells and sales from 49 to 53 gross wells. Southern Louisiana maintenance capital was estimated at $20 million to $25 million.
Management expected operational efficiencies and lower service costs to reduce overall well costs by approximately 15% in 2015.
Management stated that cash on hand, operating cash flow, the January 2015 Blackhawk escrow distribution and revolver borrowings should fund normal operating needs and planned capital requirements for the next twelve months, but additional funding could be needed for accelerated drilling, acquisitions or further Grizzly investment.
At December 31, 2014, approximately 47% to 52% of estimated 2015 production was hedged. Subsequent hedges included 1,000 barrels of oil per day at a weighted average price of $62.25 per barrel and additional natural gas swaps.
Commodity prices had declined sharply after year-end; on January 20, 2015, WTI was $46.47 per barrel and Henry Hub gas was $2.82 per MMBtu. Sustained low prices could reduce production economics, reserves, liquidity and the borrowing base and could trigger a full-cost ceiling-test impairment.
Material obligations included $2.404 billion of firm transportation commitments, $196.7 million of minimum sand and pressure-pumping commitments, senior-note obligations and asset-retirement obligations.
Gulfport disclosed an Ohio compliance agreement related to brine contamination at seven drilling sites. Failure to meet the agreement’s conditions could result in additional costs, penalties or suspension of Ohio operations.
Hydraulic-fracturing, environmental, air-emissions, water-disposal, climate-change and seismicity regulations could increase costs or restrict operations. The company also faces concentration among customers, transportation constraints, operational hazards and limited insurance coverage.
Gulfport reported no material pending litigation, no off-balance-sheet arrangements and effective internal control over financial reporting. Grant Thornton issued unqualified audit opinions.

Investor verification points

Reconcile reported net income to recurring operating performance, particularly the $79.7 million Diamondback gain, $84.5 million Mammoth contribution gain and Blackhawk-related investment income.
Assess whether Utica production growth and expected 2015 production can be achieved while commodity prices remain depressed.
Review liquidity after the $1.329 billion of 2014 property additions, the $716.5 million debt balance and the company’s large firm transportation commitments.
Verify the final outcome of the proposed increase in the revolver borrowing base from $450 million to $575 million and ongoing covenant compliance.
Evaluate the sensitivity of reserves, PV-10, full-cost accounting and borrowing capacity to lower oil, gas and NGL prices.
Monitor Ohio remediation and compliance obligations, hydraulic-fracturing regulation, permitting, takeaway capacity and lease-expiration requirements.
Review the economics, financing needs and execution risk of Grizzly’s Algar Lake, May River and Thickwood oil-sands projects.