Gulfport Energy Corporation — 2014 Q1 Form 10-Q Summary
Business Context and Reporting Period
Gulfport Energy Corporation is an independent oil and natural gas exploration and production company focused primarily on the Utica Shale in Eastern Ohio, with additional properties in Louisiana, Colorado and the Bakken, plus equity investments in Diamondback Energy, Grizzly Oil Sands and other energy-service businesses. This unaudited Form 10-Q covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013.
- Utica Shale leasehold position was approximately 180,000 gross acres and 179,000 net acres as of May 1, 2014.
- In March 2014, Gulfport acquired approximately 8,200 net Utica acres and related producing-well interests from Rhino Exploration for a gross purchase price of approximately $184.0 million; approximately $177.4 million had closed at quarter-end.
- Quarter-end common shares outstanding were approximately 85.4 million.
Financial and Operating Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Oil and gas revenues | $117.9 million | $54.9 million | Up 115% |
| Total revenues, including other income | $118.0 million | $55.0 million | Up 115% |
| Income from operations | $25.1 million | $14.9 million | Up 68% |
| Net income | $82.6 million | $44.6 million | Up 85% |
| Diluted EPS | $0.96 | $0.61 | Up 57% |
| Net cash from operating activities | $156.2 million | $35.0 million | Up $121.1 million |
| Net cash used in investing activities | $445.1 million | $333.2 million | Up $111.9 million |
- Production increased 324% to approximately 2.44 million BOE from 575,543 BOE, averaging approximately 27,087 BOE per day versus 6,395 BOE per day.
- Production consisted of approximately 726,720 barrels of oil, 7.66 Bcf of natural gas and 18.23 million gallons of NGLs.
- Realized price per BOE declined 49% to $48.35 from $95.34, reflecting the shift toward natural gas and NGL production. Average gas price declined to $2.39 per Mcf from $4.59; average oil price was $100.97 per barrel versus $102.68.
- Approximate operating margin was 21.3% versus 27.2% in the prior-year quarter. Approximate net margin was 70.0% versus 81.0%, with both periods materially affected by equity-investment gains.
- Lease operating expense increased to $11.6 million from $5.2 million; midstream transportation, processing and marketing expense increased to $7.8 million from $0.4 million; DD&A increased to $56.9 million from $22.6 million; and general and administrative expense increased to $9.5 million from $4.4 million.
- Income from equity-method investments was $128.5 million, including an $84.8 million gain from Blackhawk’s sale of interests in Ohio Gathering Company and Ohio Condensate Company and a $48.8 million fair-value gain on the Diamondback investment.
- Cash and cash equivalents declined to $170.4 million from $459.0 million at December 31, 2013, primarily because of $420.4 million of oil and gas property additions and $23.7 million of equity-investment contributions.
Debt and Liquidity
- Total debt was approximately $299.2 million, consisting primarily of $300.0 million of 7.75% senior unsecured notes due 2020 and approximately $2.0 million of building loans, net of discounts and current maturities.
- No borrowings were outstanding under the revolving credit facility. Availability was $143.6 million at March 31, 2014, after a $6.4 million letter of credit.
- On April 23, 2014, the credit facility amendment increased borrowing-base availability from $150.0 million to $275.0 million and increased the letter-of-credit sublimit from $20.0 million to $70.0 million.
- Management stated that cash on hand, operating cash flow, potential Diamondback share sales and credit-facility borrowings should be sufficient for normal operating needs and capital requirements over the next twelve months, subject to commodity prices and execution of the development program.
- The company was in compliance with its credit-facility covenants at March 31, 2014, including a maximum funded-debt-to-EBITDAX ratio of 2.00 to 1.00 and a minimum EBITDAX-to-interest ratio of 3.00 to 1.00.
Material Changes, Outlook and Unusual Items
- Management expects 2014 capital expenditures of approximately $715 million to $767 million, excluding additional Utica acreage acquisitions. Planned 2014 Utica drilling capital was $634 million to $676 million for 85 to 95 gross wells, with expected additional Utica acreage acquisitions of $375 million to $425 million.
- Management expected approximately $42 million to $45 million of 2014 drilling and recompletion expenditures at WCBB and approximately $24 million to $26 million in the Hackberry fields. Expected 2014 Grizzly capital requirements were approximately $15 million to $20 million.
- Approximately 88% of estimated 2014 capital expenditures were expected to be spent in the Utica Shale. Management may adjust spending based on commodity prices and costs.
- The company drilled 20 gross wells and participated in 26 additional gross wells during the quarter, and recompleted 38 wells. Seven rigs were under contract in the Utica as of May 1, 2014.
- The company recognized an $18.0 million accrued proposed settlement related to the Reeds environmental litigation. The proposed settlement was not finalized, included remediation costs to be approved by regulators and the court, and the case was scheduled for trial in July 2014 if no settlement was reached.
- Louisiana Department of Revenue litigation involves disputed severance taxes and asserted claims of nearly $12 million for 2007–2010, plus an additional $4.4 million and possible penalties. Management denied liability and assessed the loss possibility as remote, but stated that litigation outcomes remain uncertain.
- Commodity hedges covered approximately 59% to 67% of estimated 2014 production. All current swaps and swaptions were considered ineffective at inception; the company recognized an $8.7 million hedge-ineffectiveness loss in the quarter and reported a net derivative liability of approximately $31.5 million.
- No ceiling-test impairment was required for the quarter. A significant decline in oil, natural gas or NGL prices could nevertheless result in future property write-downs and reduced cash flow.
- Former CEO James Palm retired effective February 15, 2014. Michael Moore was appointed CEO on April 22, 2014 and entered into an amended employment agreement.
Most Important Facts for Investors to Verify
- Whether the rapid Utica production growth can be sustained as completion activity, infrastructure availability and realized gas and NGL prices evolve.
- Whether the planned $715 million–$767 million development program and $375 million–$425 million of additional Utica acquisitions can be funded without substantial additional debt or equity issuance.
- The final outcome and total cost of the Reeds environmental matter, including remediation obligations beyond the accrued $18.0 million.
- The status and potential exposure from the Louisiana severance-tax litigation.
- The sensitivity of cash flow, hedge values and full-cost ceiling-test results to commodity prices, particularly natural gas and NGL prices.
- The extent to which reported earnings depend on non-operating and potentially volatile equity-investment gains, including the Diamondback fair-value gain and Blackhawk disposition gain.