Gulfport Energy Corporation — FY2013 Form 10-K Summary
Business context and reporting period
Gulfport is an independent U.S. oil and natural gas exploration and production company. Its principal assets are in the Utica Shale in Eastern Ohio and the WCBB and Hackberry fields in Louisiana, with additional interests in the Niobrara, Bakken, Canadian oil sands, Thailand and oilfield services businesses. The filing covers the fiscal year ended December 31, 2013; fourth-quarter data is included where disclosed.
- Utica acreage totaled approximately 152,000 gross and 143,000 net acres at year-end. Gulfport had spud 66 Utica wells, with 38 completed and producing.
- Year-end proved reserves were 38.4 MMBOE, including approximately 35.2% proved undeveloped reserves. PV-10 was $696.9 million and standardized measure was $578.5 million.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $262.8 million | $248.9 million | 6% increase |
| Oil and gas revenue | $262.2 million | $248.6 million | 5% increase |
| Income from operations | $55.5 million | $97.3 million | 43% decrease |
| Net income | $153.2 million | $68.4 million | 124% increase |
| Diluted EPS | $1.97 | $1.21 | Increase |
| Operating margin | Approximately 21% | Approximately 39% | Decline |
| Net margin | Approximately 58% | Approximately 27% | Increase |
| Net cash from operating activities | $191.1 million | $199.2 million | 4% decrease |
| Capital additions to oil and gas properties | $808.2 million | $757.2 million | Increase |
| Cash and equivalents | $459.0 million | $167.1 million | Increase |
| Total debt | $299.2 million | $299.0 million | Essentially unchanged |
- Production increased 60% to approximately 4.12 million BOE, driven primarily by Utica development. Gas production increased substantially to 8,891 MMcf from 1,108 MMcf, while oil production was broadly stable at 2.317 million barrels.
- Realized price per BOE fell 34% to $63.68, reflecting the shift toward lower-priced natural gas and the effect of hedging. Excluding fixed-price swaps, 2013 realized pricing would have been approximately $70.99 per BOE.
- Total production, midstream and production-tax costs declined to $15.70 per BOE from $20.88 per BOE, although total DD&A increased to $118.9 million and midstream costs increased to $11.0 million.
- Net income included approximately $220.1 million of unrealized income from the Diamondback investment, compared with $12.8 million in 2012. This substantially increased reported earnings but was not operating cash flow.
Fourth-quarter 2013
| Metric | Q4 2013 |
|---|---|
| Revenue | $68.1 million |
| Income from operations | $2.9 million |
| Net income | $24.3 million |
| Diluted EPS | $0.30 |
Fourth-quarter operating income and margin were pressured by lower realized commodity pricing, higher depletion and development-related costs, and the company’s rapidly expanding Utica program.
Liquidity, debt and capital resources
- Cash increased to $459.0 million at year-end, supported primarily by approximately $765.1 million of net financing cash flow from 2013 equity offerings.
- The company issued approximately 17.3 million common shares in 2013 and received approximately $733.8 million from equity offerings. It also received $192.7 million from sales of Diamondback shares.
- Debt consisted primarily of $300.0 million of 7.75% senior unsecured notes due 2020. The revolving credit facility had a $150.0 million borrowing base, $143.6 million of availability after a letter of credit, and no borrowings outstanding at year-end.
- Contractual obligations totaled approximately $1.59 billion, including $1.10 billion of firm transportation commitments and $461.8 million of scheduled senior-note payments, including interest.
- Management stated that cash on hand, operating cash flow, recent financing proceeds, Diamondback and Blackhawk distributions, and available revolver capacity should fund normal operations and planned capital requirements for the next twelve months.
Material changes, outlook and unusual items
- Gulfport expects 2014 capital expenditures of $675 million to $725 million, plus $225 million to $275 million for additional Utica acreage. Approximately 88% of capital expenditures were expected to be directed to the Utica.
- Management forecast 2014 production of approximately 18.25 million to 21.90 million BOE and planned to drill 85 to 95 gross Utica wells, 22 to 24 WCBB wells and 10 to 12 Hackberry wells.
- On February 26, 2014, Gulfport agreed to acquire approximately 8,200 net Utica acres and approximately 1,000 BOEPD of production for $185.0 million, funded from cash. Closing remained subject to due diligence and other conditions.
- Grizzly’s Algar Lake project began reservoir steam injection in January 2014, with first production expected by the end of the first quarter. Gulfport’s net investment in Grizzly was approximately $191.5 million at year-end.
- Blackhawk completed a January 2014 sale of interests in Ohio Gathering and Ohio Condensate for $190.0 million; Gulfport received $84.8 million in net proceeds.
- Gulfport hedged approximately 48% of 2013 production and expected to hedge approximately 41% to 49% of 2014 production. Year-end derivative liabilities totaled approximately $23.6 million.
- Material risks include commodity-price volatility, Utica drilling and completion uncertainty, infrastructure and takeaway constraints, significant capital requirements, transportation minimum-volume commitments, reserve-estimation uncertainty, environmental regulation and uninsured operating losses.
Legal, environmental and governance matters
- Gulfport entered into an Ohio compliance agreement concerning brine contamination at seven drilling sites. It agreed to remediate the sites and pay $250,000; failure to comply could result in suspension of Ohio drilling or production operations.
- The company is cooperating with a government investigation regarding an alleged produced-water discharge at WCBB. Potential claims remained unresolved.
- Louisiana authorities disputed severance-tax payments, asserting potential claims of nearly $12 million for 2007–2010, an additional $4.4 million and possible penalties, in addition to an earlier lawsuit seeking $2.3 million plus interest and costs.
- Gulfport was also a defendant in the Reeds environmental contamination litigation in Louisiana. The trial was scheduled for July 2014, and management could not estimate any potential loss.
- James D. Palm resigned as CEO and director in February 2014. Michael G. Moore became interim CEO while retaining his president and CFO roles.
- Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting; management reported no material weaknesses.
Important facts for investors to verify
- Reconcile reported 2013 net income with the approximately $220.1 million Diamondback valuation gain and assess recurring operating profitability.
- Review 2014 funding needs against the $675 million–$725 million capital budget, the planned $225 million–$275 million acreage spending and the proposed $185 million acquisition.
- Evaluate Utica well productivity, completion timing, takeaway capacity, firm transportation obligations and minimum-volume payment exposure.
- Assess commodity-price sensitivity, hedge volumes and the approximately $23.6 million derivative liability.
- Monitor the Ohio compliance agreement, WCBB produced-water investigation, Louisiana severance-tax litigation and Reeds environmental litigation.
- Review reserve quality, the 35.2% proved undeveloped reserve proportion, future PUD development costs and the potential for full-cost ceiling-test impairment if prices decline.
- Consider concentration risk: approximately 99% of oil sales were to Shell, 100% of NGL sales were to MarkWest Utica, and major gas sales were concentrated among three purchasers.