Gulfport Energy Corporation — Q1 2019 Form 10-Q Summary
Business context and reporting period
Gulfport Energy Corporation is an independent U.S. oil and natural gas exploration and production company focused primarily on the Utica Shale in Ohio and the SCOOP Woodford and Springer plays in Oklahoma. It also holds interests in Louisiana properties, Grizzly Oil Sands ULC and Mammoth Energy Services, Inc. The filing covers the unaudited three months ended March 31, 2019, compared with the three months ended March 31, 2018.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue, net of derivative losses | $320.6 million | $325.4 million | Down 1% |
| Income from operations | $91.5 million | $110.3 million | Down 17% |
| Operating margin | 28.5% | 33.9% | Down 5.4 percentage points |
| Net income | $62.2 million | $90.1 million | Down 31% |
| Net margin | 19.4% | 27.7% | Down 8.3 percentage points |
| Diluted earnings per share | $0.38 | $0.50 | Down 24% |
| Cash flow from operations | $185.1 million | $226.3 million | Down 18% |
| Capital additions to oil and gas properties | $186.7 million | $302.8 million | Down 38% |
| Cash and cash equivalents at period end | $18.0 million | $118.6 million at March 31, 2018 | Down substantially |
Revenue before derivative effects was $340.6 million versus $341.9 million. Natural gas sales increased to $276.0 million from $249.4 million, while oil and condensate sales declined to $32.5 million from $45.7 million and NGL sales declined to $32.1 million from $46.8 million. Net derivative losses were $20.0 million versus $16.5 million.
Total net production was 113,726 MMcfe, down 2% from 115,977 MMcfe. Natural gas production was broadly flat at 102,079 MMcf, while oil and condensate volumes fell 19% and NGL volumes fell 15%. Average production costs, production taxes and midstream costs totaled $0.86 per Mcfe, compared with $0.77 per Mcfe in the prior-year quarter.
Total assets were $6.23 billion and stockholders’ equity was $3.37 billion at March 31, 2019. Long-term debt, including current maturities and excluding debt issuance costs, totaled approximately $2.11 billion. The debt consisted primarily of $2.05 billion of senior notes, $45.0 million outstanding under the revolving facility and a $23.0 million construction loan. Revolving-facility availability after $271.1 million of letters of credit was $683.9 million, and the company was in compliance with its financial covenants.
Material changes versus the prior comparable period
- Net income decreased $27.8 million, primarily due to lower oil and NGL revenue, lower equity-method investment income, higher midstream costs and higher DD&A expense.
- Income from equity-method investments declined to $4.3 million from $13.5 million, principally reflecting weaker results from Mammoth Energy.
- Midstream gathering and processing expense increased $6.1 million to $70.3 million, primarily due to contract escalations associated with Utica production.
- DD&A expense increased $7.4 million to $118.4 million, reflecting a larger full-cost pool and lower proved reserve volumes used in the depletion calculation.
- General and administrative expense decreased $1.5 million to $11.6 million.
- Operating cash flow declined $41.3 million, while investing cash use declined $116.0 million because of lower oil and gas property additions.
- Financing cash flow changed from $99.6 million provided in Q1 2018 to $28.5 million used in Q1 2019, primarily due to share repurchases and repayment of borrowings offset by a $150.0 million revolver draw.
- The company adopted ASC 842 lease accounting prospectively on January 1, 2019, recognizing approximately $110 million of right-of-use assets and corresponding lease liabilities without a cumulative-effect adjustment to retained earnings.
Guidance, outlook, risks and unusual items
Management reduced expected 2019 capital expenditures by approximately 29% from 2018 in response to lower forward natural gas prices and a focus on disciplined capital allocation and operating within cash flow. Planned 2019 drilling and completion expenditures were $525 million to $550 million, with $254.9 million spent through March 31. Non-drilling and completion expenditures were expected to be $40 million to $50 million, with $20.1 million spent through March 31.
- Utica guidance: 13 to 15 gross, or 10 to 11 net, horizontal wells to be spudded and 47 to 51 gross, or 40 to 45 net, wells to commence sales in 2019.
- SCOOP guidance: 9 to 10 gross, or 7 to 8 net, horizontal wells to be spudded and 15 to 17 gross, or 14 to 15 net, wells to commence sales.
- The company expects cash flow from operations, cash on hand and borrowing capacity to fund normal operating needs and capital requirements for the next twelve months, but cautions that lower commodity prices, higher costs, additional equity-investment funding or acquisitions could require additional financing.
- Approximately 94% to 96% of estimated 2019 production was hedged. Open positions included natural gas swaps, oil swaps and NGL swaps; the net derivative position was an $8.3 million liability at March 31, 2019.
- A 10% increase in underlying commodity prices would have reduced derivative fair value by approximately $129.5 million, while a 10% decrease would have increased it by approximately $129.1 million.
- The company authorized a new $400 million share-repurchase program in January 2019 and repurchased 3.6 million shares for approximately $28.3 million during the quarter. Through April 26, 2019, aggregate repurchases totaled approximately 3.8 million shares for $30.0 million, leaving $370.0 million authorized.
- No full-cost ceiling-test impairment was required at March 31, 2019, but a future decline in commodity prices could require a material non-cash write-down of oil and gas properties and could reduce the borrowing base.
- The company maintained a full valuation allowance against its net deferred tax assets, including a $200.4 million valuation allowance. Utilization of approximately $838.2 million of federal NOL carryforwards may be limited by Internal Revenue Code Section 382.
- Louisiana coastal-management litigation remains in an early procedural stage. The company cannot estimate any potential loss, and motions to remand remain pending.
- At March 31, 2019, material off-balance-sheet items included $271.1 million of letters of credit and $43.6 million of surety bonds supporting midstream transportation obligations.
Most important facts for investors to verify
- Whether lower natural gas, oil and NGL prices, hedging results and production declines affect 2019 cash flow and the planned capital program.
- Whether the company can fund the $565 million to $600 million of projected 2019 capital expenditures while continuing share repurchases.
- Revolver borrowing-base availability, covenant compliance, letters of credit and scheduled senior-note maturities.
- The sustainability of the 2019 drilling and production guidance for the Utica and SCOOP assets.
- Potential full-cost ceiling-test impairment if commodity prices or reserve estimates deteriorate.
- The outcome of the Section 382 analysis and any resulting limitation on NOL utilization or release of the valuation allowance.
- Developments in the Louisiana coastal litigation and any resulting financial exposure.