Gulfport Energy Corporation — 2011 Form 10-K Summary
Business context and reporting period
Gulfport Energy Corporation is an independent oil and natural gas exploration, development and production company. Its principal producing assets are in the Louisiana Gulf Coast, including West Cote Blanche Bay and Hackberry, and the Permian Basin in West Texas. The company also holds acreage in the Niobrara Formation, the Utica Shale, Alberta oil sands interests through Grizzly Oil Sands ULC, and interests in Thailand.
The filing covers the fiscal year ended December 31, 2011. Fourth-quarter 2011 production totaled approximately 561,522 BOE across the principal producing areas, based on the field-level amounts disclosed in the filing.
Financial performance and key metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue | $229.3 million | $127.9 million | +79% |
| Income from operations | $111.0 million | $50.8 million | +119% |
| Net income | $108.4 million | $47.4 million | +129% |
| Basic EPS | $2.22 | $1.08 | +106% |
| Diluted EPS | $2.20 | $1.07 | +106% |
| Production | 2.333 million BOE | 1.976 million BOE | +18% |
| Realized price per BOE | $98.13 | $64.61 | +52% |
| Production costs and taxes per BOE | $20.25 | $15.99 | +27% |
| Cash flow from operations | $158.1 million | $85.8 million | +84% |
| Capital additions to oil and gas properties | $287.3 million | $101.6 million | +183% |
| Cash and cash equivalents | $93.9 million | $2.5 million | Significant increase |
| Total debt | $2.3 million | $51.9 million | Substantial reduction |
Operating margin was approximately 48.4% in 2011 versus 39.7% in 2010, and net margin was approximately 47.3% versus 37.0%. The margin improvement primarily reflected higher oil prices and increased production, partially offset by higher production taxes, lease operating costs and depletion.
Oil and condensate sales were $222.0 million, gas sales were $3.8 million and natural gas liquids sales were $3.1 million. Oil represented the majority of production and revenue. The average realized oil price, including hedging effects, was $104.33 per barrel; excluding fixed-price swaps, management reported $107.13 per barrel.
Liquidity, capital structure and cash flow
- Operating cash flow of $158.1 million funded a substantial portion of the company’s $323.2 million of investing cash outflows.
- Investing activity included $287.3 million of additions to oil and gas properties, including $124.7 million of lease-related costs, primarily for Utica Shale acquisitions.
- Financing activities provided $256.5 million, principally from approximately $307.2 million of common-stock issuance and option proceeds, partly offset by debt repayments.
- The company repaid all borrowings under its revolving credit facility in December 2011. The facility had a $350 million maximum commitment and a $125 million borrowing base at year-end, subject to customary covenants.
- Approximately $2.3 million of building-related debt remained outstanding at year-end. The company was in compliance with its credit agreement covenants.
- Management stated that cash on hand, operating cash flow and available revolver capacity should fund normal operating needs and planned capital requirements for the next twelve months, although additional funding could be required for accelerated drilling, acquisitions or the Canadian oil sands project.
Material changes versus the prior comparable period
- Revenue, production, operating income, net income and operating cash flow all increased materially, driven by an 18% production increase and a 52% increase in realized BOE prices.
- Production taxes increased 89% to $26.3 million, and lease operating expenses increased 19% to $20.9 million.
- DD&A increased 60% to $62.3 million because of a larger full-cost pool, increased production and lower proved reserve volumes used in depletion calculations.
- The company raised approximately $307.1 million through three public equity offerings, issuing 10.81 million shares. Year-end shares outstanding increased to 55.6 million from 44.6 million.
- Oil and gas property, plant and equipment increased to $468.6 million net from $242.1 million, while equity increased to $632.4 million from $211.1 million.
- Proved reserves declined to 19.367 million BOE from 22.397 million BOE. Downward revisions were attributed primarily to drilling results, Permian Basin ethane takeaway issues and other reserve-estimation changes.
- PV-10 increased to $490.5 million from $392.6 million, while standardized measure increased to $376.7 million from $315.5 million. These non-GAAP and reserve-based measures are sensitive to commodity prices, costs and reserve assumptions.
Guidance, outlook, commentary and unusual items
- Management estimated 2012 production of approximately 3.0 million to 3.2 million BOE.
- Expected 2012 capital expenditures were approximately $215 million to $225 million, excluding Utica acreage acquisitions, the proposed Grizzly acquisition and other potential acquisitions.
- Planned 2012 activity included drilling and recompletion programs in WCBB, East Hackberry, the Permian Basin and Niobrara, plus approximately 20 gross Utica wells.
- The company expected to spend up to $30 million to $35 million on additional Utica acreage and $72 million to $76 million on Utica drilling.
- Gulfport’s share of Grizzly’s planned acquisition of approximately 46,700 additional Canadian oil sands acres was approximately $56.3 million, due at closing. Grizzly’s Algar Lake project remained under development and financing was not secured.
- At December 31, 2011, 56% of proved reserves were classified as proved undeveloped. Projected PUD development costs were approximately $52.6 million in 2012, $49.9 million in 2013, $55.4 million in 2014, $51.4 million in 2015 and $58.3 million in 2016.
- The company had fixed-price swaps covering 2,000 barrels per day in 2012 at $108.00 per barrel. Subsequent to year-end, it entered into additional swaps covering 1,000 barrels per day at $113.20 per barrel for March 2012 through June 2013. Hedging limits exposure to lower prices but also limits upside and creates volume and counterparty risk.
- No ceiling-test impairment was recorded for 2011. The company uses the full-cost method, and a decline in oil, gas or NGL prices could result in a material noncash impairment.
- Material contingencies include Louisiana severance-tax litigation, a Cudd Pressure Control lawsuit seeking $26.5 million plus additional amounts and a Hackberry environmental contamination lawsuit. Management could not determine the amount of any potential loss.
Principal risks
- Commodity-price volatility and possible impairment of oil and gas properties.
- Reserve-estimation uncertainty, including the significant proportion of undeveloped reserves.
- Execution, cost and financing risks related to Utica development and the Grizzly oil sands project.
- Dependence on third-party operators, transportation, gathering, compression and purchasers, including concentration of sales among a small number of customers.
- Exposure to hurricanes, offshore operating hazards, environmental liabilities and incomplete insurance coverage in the Louisiana Gulf Coast.
- Potential changes to hydraulic-fracturing, environmental, greenhouse-gas, tax and derivatives regulations.
- Related-party transactions and operational dependence involving entities controlled by Wexford, including the Permian Basin operator and certain service providers.
Investor verification checklist
- Verify that 2012 production and capital-spending targets were achieved and reconcile actual results with the $3.0 million to $3.2 million BOE production estimate.
- Review subsequent reserve reports, particularly Permian Basin reserve revisions and the conversion of PUD reserves into producing reserves.
- Confirm the status, final cost and funding of Utica acreage acquisitions and drilling results.
- Assess Grizzly’s financing, regulatory approvals, construction progress and Gulfport’s contribution obligations.
- Review current borrowing-base availability, revolver usage, covenant compliance and funding needs after planned acquisitions and development spending.
- Monitor oil-price hedges, derivative fair values and the percentage of forecast production committed under fixed-price contracts.
- Track the resolution and potential financial exposure from the Louisiana severance-tax, Cudd and Hackberry environmental proceedings.
- Reconcile related-party balances and service costs with entities controlled by Wexford.