GULFPORT ENERGY CORP quarterly report, Q2 FY2021

Gulfport Energy Corporation — Form 10-Q Summary

Business context and reporting period

Gulfport is a natural-gas-weighted exploration and production company with assets primarily in the Appalachia and Anadarko basins, including the Utica and SCOOP formations. The filing covers the quarter and six months ended June 30, 2021, but results are split between the Successor period after emergence from Chapter 11 on May 17, 2021 and the Predecessor period before emergence. Because Gulfport applied fresh-start accounting, post-emergence financial statements are not directly comparable with historical periods.

Management presents combined Successor and Predecessor results for operational trend analysis. These combined figures are non-GAAP and have not been prepared as pro forma results.

Key financial metrics

Metric	Successor period May 18–June 30, 2021	Combined Q2 2021 non-GAAP	Prior Q2 2020
Natural gas, oil and NGL sales	$145.4 million	$278.3 million	$159.3 million
Total revenues, including derivatives	$5.7 million	Not clearly provided as a combined figure	$186.3 million
Net loss attributable to common stockholders	$210.6 million	Not directly comparable	$561.1 million
Operating cash flow	$38.4 million	Not clearly provided as a combined figure	$247.2 million for six months
Capital expenditures	$40.4 million	$142.8 million for six months	$274.9 million for six months
Net production	994 MMcfe/day	989 MMcfe/day	1,027 MMcfe/day
Combined realized price, including settled derivatives	$3.18/Mcfe	$2.98/Mcfe	$3.03/Mcfe

Successor-period operating expenses were $207.5 million, including $117.8 million of oil and gas property impairment and $32.4 million of DD&A. The Successor period produced an operating loss of $201.7 million and a net loss of $209.6 million, or $10.36 per common share; $1.0 million of preferred dividends resulted in a $210.6 million loss attributable to common stockholders.

For the combined six-month period, natural gas, oil and NGL sales were $555.7 million versus $360.4 million in the prior-year period, reflecting substantially higher commodity prices. However, derivative losses of $276.9 million reduced reported revenue and profitability. Combined production declined 5% to 985.9 MMcfe/day.

Balance sheet, debt and liquidity

June 30, 2021 cash and cash equivalents were $9.4 million, with an additional $29.1 million of restricted cash.
Total debt was $833.8 million, consisting primarily of $105.0 million drawn under the Exit Facility, a $180.0 million First-Out Term Loan and $550.0 million of 8.0% senior notes due 2026. Funded debt principal was approximately $835.0 million.
The Exit Facility had an initial borrowing base and elected commitment amount of up to $580 million, subject to a $40 million availability blocker until successful midstream resolution. Letters of credit outstanding were $114.8 million.
As of August 2, 2021, management reported available liquidity of $161.9 million. Liquidity consisted of cash, operating cash flow and borrowing capacity under the Exit Credit Facility.
Stockholders’ equity was $453.1 million at June 30, 2021, compared with a $300.5 million deficit at December 31, 2020, primarily reflecting the Chapter 11 restructuring and fresh-start accounting.
The Exit Facility matures May 17, 2024. The First-Out Term Loan requires quarterly principal installments of $15 million. The credit agreement requires compliance with net funded leverage, net senior secured leverage and current-ratio covenants.

Material changes versus prior comparable periods

Chapter 11 emergence: Gulfport emerged on May 17, 2021. Predecessor common stock was cancelled, approximately 20.6 million New Common Stock shares were outstanding at June 30, 2021, and $1.4 billion of debt was reduced through the restructuring.
Fresh-start accounting: Assets and liabilities were remeasured at fair value. Oil and gas properties were reduced materially, and the resulting accounting reset makes post-emergence results difficult to compare with prior periods.
Commodity pricing: Combined Q2 2021 realized prices before derivatives increased to $3.09/Mcfe from $1.70/Mcfe, while oil and NGL prices also increased substantially. These gains were partly offset by unfavorable derivative fair-value and settlement results.
Production: Combined Q2 production declined 4% to 989.1 MMcfe/day, and combined six-month production declined 5% to 985.9 MMcfe/day, reflecting reduced development activity.
Cost structure: Combined Q2 lease operating expense declined to $0.12/Mcfe from $0.14/Mcfe, while transportation, gathering, processing and compression declined to $1.07/Mcfe from $1.22/Mcfe, aided by midstream contract rejections and renegotiations.
Impairment: Gulfport recorded a $117.8 million oil and gas property impairment in the Successor period, compared with $532.9 million in Q2 2020. The prior-year six-month period included $1.1 billion of oil and gas impairments and $14.6 million of corporate headquarters impairment.

Guidance, outlook, risks and unusual items

2021 capital expenditure guidance was $270 million to $290 million for drilling and completion, plus approximately $20 million for non-drilling and completion expenditures.
Management expects to add one operated drilling rig in the Utica during the third quarter of 2021 and continue operating one SCOOP rig through the remainder of 2021.
Management stated that annual free cash flow, cash on hand and Exit Facility borrowing capacity are expected to fund operations, capital spending, interest, debt repayments and any declared preferred or other cash dividends over the next 12 months; actual liquidity remains sensitive to commodity prices, production and cash uses.
Derivative exposure was significant. The net derivative liability was $301.0 million at June 30, 2021. A 10% increase in underlying commodity prices would have reduced derivative fair value by approximately $160.3 million, while a 10% decrease would have increased it by approximately $145.1 million.
Open hedges included natural gas swaps, collars, basis swaps and sold call options, as well as oil and NGL swaps. Sold natural gas calls capped participation above $2.90/MMBtu for specified 2022 and 2023 volumes.
Pending motions to reject certain firm transportation agreements could expose Gulfport to demand charges, attorneys’ fees and interest exceeding $80 million if rejection is not permitted. Total future firm transportation and gathering commitments were approximately $1.9 billion, excluding contracts in the rejection process.
Off-balance-sheet financial assurance included $114.8 million of letters of credit and $90.7 million of surety bonds, primarily related to firm transportation agreements.
COVID-19, commodity-price volatility, midstream-provider disruption, litigation, environmental matters and the effects of the recent bankruptcy may materially affect operations, liquidity and counterparties.
The company has an estimated $1.1 billion federal net operating loss carryforward after the estimated reduction associated with approximately $708.8 million of cancellation-of-debt income. A full valuation allowance remains against deferred tax assets.

Investor verification points

Reconcile Successor, Predecessor and management’s combined non-GAAP results before assessing quarterly trends or margins.
Monitor the November 2021 borrowing-base redetermination, the $40 million availability blocker and compliance with Exit Facility covenants.
Evaluate whether commodity prices and production support the $270–$290 million drilling and completion budget and planned debt amortization.
Review the mark-to-market liability and future cash settlement exposure of the derivative portfolio, including sold natural gas calls.
Track the pending midstream contract rejection litigation and potential exposure exceeding $80 million, as well as the broader $1.9 billion firm transportation and gathering commitment profile.
Assess the sustainability of liquidity given only $9.4 million of unrestricted cash at quarter-end, $114.8 million of letters of credit and substantial secured and unsecured debt.