Gulfport Energy Corporation — Form 10-Q Summary
Reporting period: Quarterly and six-month periods ended June 30, 2012; filed August 9, 2012. Gulfport is an independent oil and natural gas exploration and production company with producing properties in Louisiana and the Permian Basin, and development positions in the Utica, Niobrara, Bakken and Alberta oil sands. The interim financial statements are unaudited.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Oil and gas revenue | $66.3 million | $55.5 million | $131.7 million | $102.0 million |
| Net income | $25.1 million | $27.3 million | $52.0 million | $48.4 million |
| Diluted EPS | $0.45 | $0.57 | $0.93 | $1.04 |
| Income from operations | $25.9 million | $28.2 million | $53.2 million | $50.3 million |
| Operating margin | 39.1% | 50.6% | 40.4% | 49.2% |
| Net margin | 37.9% | 49.0% | 39.4% | 47.4% |
| Net production | 664,000 BOE | 567,000 BOE | 1.309 million BOE | 1.081 million BOE |
| Cash flow from operations | Not separately provided | Not separately provided | $99.5 million | $65.4 million |
- Q2 production increased 17%, while realized BOE pricing increased 2% to $99.84. Six-month production increased 21%, and realized BOE pricing increased 7% to $100.62.
- Q2 oil and condensate sales were $65.0 million; gas sales were $0.5 million and natural gas liquids sales were $0.7 million.
- At June 30, 2012, total assets were $871.8 million, compared with $691.2 million at December 31, 2011. Stockholders’ equity was $692.7 million.
- Cash and cash equivalents declined to $6.6 million from $93.9 million at year-end 2011. Current assets were $69.9 million versus current liabilities of $95.9 million.
- Total debt was $70.2 million, including $68.0 million outstanding under the revolving credit facility and approximately $2.2 million of building loans. The revolver borrowing base was increased to $155.0 million in May 2012; Gulfport reported compliance with all covenants.
Material changes versus the prior comparable period
- Revenue increased 19% in Q2 and 29% for the six-month period, driven primarily by higher production and realized prices.
- Q2 net income decreased 8%, despite higher revenue, because lease operating expenses increased 21%, production taxes increased 12%, general and administrative expense increased 54%, and DD&A increased 72%.
- Six-month net income increased 7%, but DD&A increased to $45.0 million from $25.9 million, lease operating expenses increased 24%, production taxes increased 25%, and general and administrative expense increased 50%.
- Cash flow from operations increased $34.1 million, but investing cash use more than doubled to $254.3 million. Oil and gas property additions were $150.7 million, including drilling, recompletions and Utica lease acquisitions.
- Equity-method investments increased to $185.9 million from $86.8 million, principally due to $78.3 million of cash calls to Grizzly Oil Sands and investments in drilling, midstream and completion-service entities.
- Shares outstanding increased modestly to 55.7 million from 55.6 million; no equity offering occurred during the first six months of 2012.
Operations, outlook and unusual items
- Gulfport had acquired approximately 116,000 gross, or 58,000 net, Utica Shale acres at June 30, with potential commitments for approximately 125,000 gross, or 62,500 net, acres. Seven Utica wells had been spud since February 2012. The first well was brought online in August and tested at a reported gross peak rate equivalent to approximately 4,650 BOE per day.
- Management expected to drill approximately 20 gross Utica wells in 2012, with approximately ten expected to be completed by year-end. Estimated 2012 Utica lease costs were $70 million to $75 million, with additional drilling expenditures of $72 million to $76 million.
- Estimated 2012 capital expenditures for the described drilling activities were $212 million to $226 million, including approximately $40 million to $43 million for Grizzly. Approximately $81.5 million had been spent on drilling activities during the first six months.
- Management stated that cash on hand, operating cash flow and revolver borrowings should fund normal operating needs and capital requirements for the next twelve months. Additional funding could be required for accelerated drilling, acquisitions or expansion of the Canadian oil sands project.
- Gulfport agreed to contribute its Permian Basin interests to Diamondback Energy in exchange for shares representing 35% of Diamondback immediately before its IPO and a $63.6 million promissory note, subject to closing conditions and adjustments. Completion would convert the Permian interests into an equity-method investment and reduce Gulfport’s borrowing base and proved reserves.
- Oil hedges covered approximately 38% to 41% of estimated 2012 production. Fixed-price swaps outstanding at June 30 had a $9.7 million asset fair value. The filing states that a 10% commodity-price increase would reduce the instruments’ fair value by approximately $7.1 million.
- Subsequent to quarter-end, Gulfport entered into additional swaps covering 1,000 barrels per day for August through December 2012 at $99.98 per barrel and 3,000 barrels per day for 2013 at $100.04 per barrel.
- No ceiling-test impairment was required for the quarter. The company maintained a $12.3 million valuation allowance against deferred tax assets and reported a net operating loss carryforward of approximately $116.8 million.
- Material contingencies include Louisiana severance-tax litigation, a Cudd trade-secret lawsuit seeking, among other items, an $11.8 million reasonable royalty and at least $450,000 of attorney fees, and environmental litigation relating to the Hackberry field. Management assessed the possibility of loss as remote, but adverse outcomes could materially affect results.
Important facts for investors to verify
- Whether the Diamondback contribution and IPO were completed, the final consideration received, and the resulting impact on reserves, liquidity and borrowing-base availability.
- Utica well performance, completion costs, infrastructure availability and the sustainability of the reported initial well test.
- Whether planned 2012 capital expenditures were funded without materially increasing leverage or requiring additional equity or asset sales.
- Exposure to oil, gas and NGL price declines, including the volume and pricing of outstanding hedges and the risk of production shortfalls under fixed-price contracts.
- Progress and funding requirements for Grizzly’s Algar Lake project and other equity-method investments, many of which involve entities controlled by Wexford.
- Developments and potential exposure in the LDR, Cudd and Hackberry environmental litigation.
- Trends in DD&A, reserve volumes, full-cost ceiling-test headroom and operating costs, which materially affected Q2 margins.