Gulfport Energy Corporation — Form 10-Q Summary
Business context and reporting period
Gulfport is an independent U.S. oil and natural gas exploration and production company focused on oil, natural gas liquids and natural gas. Its principal operations are in the Utica Shale in Eastern Ohio, Louisiana Gulf Coast fields, Colorado and the Bakken. It also holds equity investments in Diamondback Energy, Grizzly Oil Sands and various oilfield-service and infrastructure entities.
This unaudited Form 10-Q covers the three and six months ended June 30, 2013, compared with the corresponding 2012 periods. Gulfport had 77.5 million common shares outstanding as of August 1, 2013.
Key financial metrics
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 |
|---|---|---|---|---|
| Total revenue | $70.4 million | $66.3 million | $125.4 million | $131.8 million |
| Income from operations | $22.5 million | $25.9 million | $37.4 million | $53.2 million |
| Operating margin | 31.9% | 39.1% | 29.8% | 40.4% |
| Net income | $43.8 million | $25.1 million | $88.4 million | $52.0 million |
| Diluted EPS | $0.56 | $0.45 | $1.17 | $0.93 |
| Net margin | 62.2% | 37.9% | 70.5% | 39.4% |
| Production | 815,300 BOE | 663,626 BOE | 1,390,842 BOE | 1,308,683 BOE |
| Realized price per BOE | $86.10 | $99.84 | $89.92 | $100.62 |
Second-quarter oil and natural gas revenue increased 6% despite a 14% decline in realized BOE pricing, because production increased 23%. Six-month oil and natural gas revenue declined 5% as the 6% production increase did not offset an 11% decline in realized BOE pricing.
- Second-quarter revenue included $61.0 million of oil and condensate sales, $6.8 million of gas sales and $2.4 million of NGL sales.
- Second-quarter net income included approximately $51.4 million of income from the Diamondback investment, including gains associated with the sale of 1.95 million Diamondback shares. Six-month income from that investment was approximately $112.5 million. These gains materially increased reported net income and margins.
- Second-quarter operating expenses were $48.0 million, including $28.5 million of DD&A, $8.3 million of production taxes, $5.9 million of lease operating expense and $4.9 million of general and administrative expense.
- For the six months, cash flow from operations was $73.5 million versus $99.5 million in 2012. Investing cash outflow was $384.5 million, primarily due to $428.2 million of oil and gas property additions. Financing cash inflow was $358.3 million, primarily from the February 2013 equity offering.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $214.4 million at June 30, 2013, compared with $167.1 million at December 31, 2012.
- Total assets were $2.10 billion and stockholders’ equity was $1.57 billion at June 30, 2013.
- Total debt was approximately $299.1 million, consisting primarily of $300 million of 7.75% senior unsecured notes due 2020 and approximately $2.1 million of building loans, net of discounts and current maturities.
- There were no borrowings under the revolving credit facility. The facility had a $50 million borrowing base, was extended to June 2018, and was subject to funded-debt-to-EBITDAX and EBITDAX-to-interest covenants. Gulfport reported compliance with all covenants.
- Cash increased by $47.3 million during the first six months despite $384.5 million of investing outflows, supported by equity proceeds and the $65.1 million sale of Diamondback shares during June. An additional $9.4 million was received from the Diamondback share sale in July.
Material changes versus the prior comparable period
- Utica-driven production growth shifted the production mix substantially toward natural gas and NGLs. Second-quarter gas production increased to 1,414,797 Mcf from 216,081 Mcf, while oil production declined to 535,182 barrels from 608,468 barrels.
- Gulfport’s Utica position increased to approximately 136,000 gross, or 128,000 net, acres. Property and equipment increased to $1.36 billion from $953.9 million at year-end 2012, and non-producing properties excluded from amortization increased to $872.1 million from $626.3 million.
- Gulfport completed a February 2013 acquisition of approximately 22,000 net Utica acres for approximately $220 million, increasing its working interest in the acquired leases to 93.8%.
- General and administrative expense increased 50% in the quarter and 48% for the six months, reflecting higher corporate, accounting, personnel and stock-compensation costs associated with Utica expansion.
- Interest expense increased to $3.3 million for the quarter and $6.8 million for the six months following issuance of the senior notes. The company also capitalized $5.5 million of interest during the first six months.
- Gulfport contributed its Permian Basin properties to Diamondback in October 2012. The resulting equity investment replaced direct Permian production and generated significant mark-to-market gains in 2013.
- A $25.5 million quarterly and $53.7 million six-month income tax expense was recognized in 2013; no income tax expense was recorded in the comparable 2012 periods.
Guidance, outlook, commentary and risks
- Management estimated 2013 capital expenditures of $570 million to $590 million, excluding Utica acreage acquisitions. Approximately 85% was expected to be spent in the Utica Shale.
- Estimated 2013 capital expenditures included $494 million to $504 million for Utica development, $42 million to $45 million for WCBB, $24 million to $26 million for Hackberry, approximately $20 million for Grizzly and $10 million to $15 million for other service and infrastructure investments.
- Gulfport intended to drill 55 to 60 gross Utica wells in 2013, with seven horizontal rigs under contract as of August 1, 2013. Management expected 25 to 30 additional Utica wells to be producing by the fourth quarter of 2013.
- Management expected first oil production from Grizzly’s Algar Lake project in the fourth quarter of 2013. The filing states that Grizzly’s Thickwood project was expected to receive approval in mid-2014 and begin production by mid-2017.
- Management stated that cash on hand, operating cash flow, recent debt and equity proceeds, Diamondback share-sale proceeds and available revolver capacity should fund normal operating needs and capital requirements for the next twelve months. Additional expansion, acquisitions or accelerated oil-sands development could require further financing.
- At June 30, 2013, oil swaps covered 5,000 barrels per day for July through December 2013 at a weighted average price of $99.86 per barrel. The company estimated that 2013 swaps covered approximately 33% to 40% of expected production. Subsequent July transactions added natural gas and oil hedges extending through March 2016.
- Commodity-price volatility, production performance, drilling and completion costs, access to capital, reserve estimates, lease expirations, regulatory approvals, environmental liabilities and severe weather were identified as material risks. Lower commodity prices could reduce cash flow and cause full-cost ceiling-test impairments.
- Gulfport was defending Louisiana severance-tax litigation involving a stated $2.3 million claim plus interest and costs, as well as environmental contamination litigation in Cameron Parish. Management considered the possibility of loss remote but acknowledged that adverse decisions could materially affect results.
- No ceiling-test impairment was required for the quarter ended June 30, 2013. The filing reports no off-balance-sheet arrangements and effective disclosure controls.
Most important facts for investors to verify
- How much of reported earnings and equity growth is attributable to unrealized or transaction-related Diamondback gains rather than recurring oil and gas operations.
- Whether Utica drilling results, production growth and well economics support the planned $494 million to $504 million Utica capital program.
- Whether operating cash flow and liquidity remain sufficient as capital spending materially exceeds cash flow from operations.
- The sensitivity of cash flow, reserves and full-cost accounting to oil, gas and NGL prices, including the effects of fixed-price hedges.
- The company’s ability to meet the 2013 capital program without additional equity, debt or asset-sale financing.
- The status and potential exposure from Louisiana severance-tax claims, Cameron Parish environmental litigation and the $6.5 million remaining Grizzly commitment.
- The sustainability of the 2013 tax rate and the recoverability of deferred tax assets, including the reported $4.6 million valuation allowance.