Gulfport Energy Corporation — Form 10-Q Summary
Business Context and Reporting Period
Gulfport is an independent, natural-gas-weighted exploration and production company operating primarily in the Utica Shale in eastern Ohio and the SCOOP formations in Oklahoma. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared with the same periods in 2019.
Operations were affected by COVID-19, depressed commodity prices, reduced drilling activity and production shut-ins. Management stated that business continuity measures prevented significant operational disruptions during the first nine months of 2020.
Financial Performance and Key Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Total revenue | $136.2 million, down 60% from $341.7 million | $621.8 million, down 49% from $1.23 billion |
| Product sales, excluding derivatives | $190.0 million, down 40% | $550.4 million, down 48% |
| Net loss | $381.0 million, compared with $484.8 million loss | $1.46 billion, compared with $187.6 million loss |
| Loss per diluted share | $2.37, compared with $3.04 | $9.12, compared with $1.17 |
| Loss from operations | $346.4 million | $1.38 billion |
| Operating margin | Approximately negative 254% | Approximately negative 222% |
| Net margin | Approximately negative 280% | Approximately negative 235% |
| Operating cash flow | Not separately reported for the quarter | $200.0 million, down from $617.4 million |
| Capital expenditures | Not separately reported for the quarter | $338.0 million, down from $646.5 million |
The nine-month loss included $1.36 billion of oil and natural gas property impairments, compared with $571.4 million in the prior-year period. Third-quarter impairment was $270.9 million, compared with $571.4 million in the third quarter of 2019. The company also recorded $9.6 million of restructuring and liability-management costs year to date.
Production averaged 992.0 MMcfe per day in the third quarter, down 35% from 1,527.0 MMcfe per day, and 1,024.2 MMcfe per day for the nine-month period, down 26% from 1,384.2 MMcfe per day. Third-quarter average natural gas, oil and NGL sales price, including settled derivatives, was $2.41 per Mcfe, compared with $2.82 per Mcfe.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $51.0 million at September 30, 2020, compared with $6.1 million at December 31, 2019.
- Net working capital remained negative at approximately $105.6 million, although this improved from a $145.3 million deficit at year-end 2019.
- Total principal debt was approximately $2.1 billion at September 30, 2020, compared with approximately $2.0 billion at December 31, 2019. Long-term debt reported on the balance sheet was $2.07 billion.
- Debt included $279.9 million outstanding under the revolving credit facility, $1.79 billion of senior notes, and a $22.0 million construction loan. Revolver borrowings carried a weighted-average interest rate of 2.90%.
- At September 30, borrowing capacity under the revolver was $100.1 million after $320.0 million of outstanding letters of credit.
- As of November 5, 2020, revolver borrowings had increased to $355.5 million, availability was zero after $243.7 million of letters of credit, and cash on hand was $61.7 million.
- The company repurchased $73.3 million principal amount of senior notes for $22.8 million during the nine months, recognizing a $49.6 million gain on debt extinguishment.
Material Changes Versus the Prior Comparable Period
- Revenue and production declined substantially because of lower commodity prices, reduced development activity and production shut-ins.
- Product sales decreased 40% in the third quarter and 48% for the nine-month period. Natural gas sales fell 42% and 48%, respectively.
- Midstream gathering and processing expense declined in total but increased per unit to $1.21 per Mcfe in the third quarter and $1.19 per Mcfe for the nine-month period, primarily because production fell below minimum volume commitments and triggered deficiency payments.
- General and administrative expense increased 56% in the third quarter and 33% year to date, reflecting legal and consulting costs and cash retention incentives.
- The company reduced its workforce by approximately 10% in the third quarter and continued salary reductions, furloughs and other cost-reduction measures.
- Stockholders’ equity declined from $1.31 billion at year-end 2019 to negative $144.8 million at September 30, 2020, primarily because of the year-to-date net loss.
- The company’s commodity derivative position changed from a $71.9 million net asset at December 31, 2019 to an $80.6 million net liability at September 30, 2020.
Cash Flow, Guidance and Outlook
Management reduced 2020 capital spending by more than 50% from 2019. Current 2020 guidance called for $260 million to $270 million of drilling and completion expenditures and $20 million to $25 million of non-drilling and completion expenditures. Management expected full-year 2020 production to be approximately 22% to 27% below 2019 levels, with revenue, operating cash flow and EBITDA significantly lower than in 2019.
As of November 2, 2020, Gulfport had no operated drilling rigs running in the Utica and expected its one operated SCOOP rig to cease operations later in the fourth quarter. Management stated that further activity reductions could occur if commodity prices weakened.
Firm transportation commitments were approximately 1.38 million MMBtu per day for the remainder of 2020 and 1.399 million MMBtu per day for 2021. Management expected production to fall short of these commitments, creating potentially significant deficiency fees. Total firm transportation commitments were estimated at $3.41 billion through the stated commitment periods.
Going Concern, Contingencies and Other Unusual Items
- Management concluded that substantial doubt exists about the company’s ability to continue as a going concern over the twelve months following issuance of the financial statements.
- The revolving credit facility’s borrowing base was reduced from $700 million to $580 million on October 8, 2020. The facility matures in December 2021 and is expected to become a current liability at year-end 2020 unless refinanced.
- Gulfport deferred a $17.4 million interest payment due October 15, 2020 on its 2024 Notes and a $10.8 million payment due November 2, 2020 on its 2023 Notes. Failure to pay within the applicable 30-day grace periods could result in defaults and potential acceleration.
- First and Second Forbearance Agreements temporarily waived or deferred certain lender remedies, with the second agreement extending the forbearance period to the earlier of November 13, 2020 or a triggering event.
- Gulfport engaged financial and legal advisors to evaluate liability-management and potential restructuring alternatives, but provided no assurance that a transaction would be completed.
- Failure to refinance, satisfy debt obligations or maintain covenant compliance could lead to acceleration, cross-defaults, foreclosure on collateral and potentially bankruptcy protection. Common equity could receive little or no value in such a scenario.
- In late October and early November 2020, the company terminated 475,000 MMBtu per day of 2022 sold call options, incurring approximately $60.2 million of additional revolver debt.
- The SEC is investigating actions by former management, including alleged improper personal use of company assets and potential Sarbanes-Oxley violations. The company expects no material impact, but the outcome and financial liability remain uncertain.
- Material litigation includes coastal and property-damage claims, royalty claims, a securities class action, contract disputes with Stingray and Muskie, and employment-related claims. The Stingray counterclaim was estimated at approximately $37.0 million and the Muskie claim at approximately $2.5 million as of September 2020; ultimate exposure remains uncertain.
- Disclosure controls were ineffective as of September 30, 2020 because of a previously identified material weakness involving controls over the evaluation and transfer of unevaluated costs into the amortizable full-cost pool. Remediation was in process.
Most Important Facts for Investors to Verify
- Whether the deferred 2023 and 2024 Notes interest payments were made within the grace periods and whether any defaults or further lender forbearance occurred.
- The status and terms of any restructuring, refinancing, second-lien financing or other liability-management transaction.
- Subsequent revolver borrowing-base redeterminations, outstanding borrowings, letters of credit and actual liquidity.
- Whether the company continued as a going concern and whether the revolver became a current liability at year-end 2020.
- Actual 2020 production, capital spending, cash flow and deficiency fees under firm transportation commitments.
- Any additional full-cost impairment charges, given management’s warning that a fourth-quarter 2020 impairment was possible.
- Developments in the SEC investigation and material litigation, including the Stingray and Muskie disputes.
- Progress in remediating the material weakness in internal control over financial reporting.