Gulfport Energy Corporation 2018 Form 10-K Summary
Business context and reporting period
Gulfport Energy Corporation is an independent U.S. oil and natural gas exploration and production company. Its principal assets are in the Utica Shale in Ohio and the SCOOP Woodford and Springer plays in Oklahoma, with additional interests in Louisiana, Colorado, North Dakota, Canada, Thailand and Mammoth Energy Services. This Form 10-K covers the fiscal year ended December 31, 2018, including fourth-quarter results. The filing was signed February 28, 2019.
- 2018 production was 496,505 MMcfe, up 25% from 397,543 MMcfe in 2017.
- Utica and SCOOP were the primary growth areas; 2018 production was approximately 397,406 MMcfe from the Utica and 94,268 MMcfe from the SCOOP.
- At year-end, Gulfport reported 4.743 Tcfe of proved reserves, including 55.4% proved undeveloped reserves, with PV-10 of $3.407 billion and standardized measure of $2.983 billion.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $1.355 billion | $1.320 billion | Up 3% |
| Net income | $430.6 million | $435.2 million | Down $4.6 million |
| Basic EPS | $2.46 | $2.42 | Up $0.04 |
| Income from operations | $392.3 million | $548.4 million | Down $156.0 million |
| Operating cash flow | $752.5 million | $679.9 million | Up $72.6 million |
| Capital additions to oil and gas properties | $865.3 million | $1.065 billion | Down $199.4 million |
| Cash and cash equivalents | $52.3 million | $99.6 million | Down $47.3 million |
| Total debt | $2.087 billion | $2.039 billion | Up $48.5 million |
| Total stockholders’ equity | $3.328 billion | $3.102 billion | Up $226.2 million |
Reported revenue included $1.122 billion of natural gas sales, $177.8 million of oil and condensate sales, $178.9 million of NGL sales and a $123.5 million net loss on derivatives. Before derivatives, oil, natural gas and NGL sales totaled approximately $1.479 billion, up 36% from 2017.
- Natural gas production increased 27% to 443,742 MMcf; natural gas sales before derivatives increased to $1.122 billion.
- Oil and condensate production increased 9% to 2,801 MBbls; sales before derivatives increased 43% to $177.8 million.
- NGL production increased 12% to 251,720 MGal; sales before derivatives increased 32% to $178.9 million.
- Average production, gathering and tax costs declined to $0.83/Mcfe from $0.88/Mcfe. Lease operating expense declined to $0.18/Mcfe from $0.20/Mcfe, and midstream costs declined to $0.58/Mcfe from $0.63/Mcfe.
- DD&A increased to $486.7 million from $364.6 million, and interest expense increased to $135.3 million from $108.2 million.
- No oil and gas ceiling-test impairment was recorded in 2018 or 2017. A $715.5 million impairment was recorded in 2016.
Cash flow, debt and liquidity
Operating cash flow of $752.5 million exceeded reported capital additions to oil and gas properties of $865.3 million before other investing and financing activity. Investing cash use was $643.1 million, compared with $2.474 billion in 2017, which included the cash portion of the SCOOP acquisition. Financing cash use was $156.7 million, primarily reflecting approximately $200.0 million of stock repurchases.
- Total debt was approximately $2.087 billion, consisting primarily of senior notes due 2023 through 2026, plus $45.0 million drawn under the revolving credit facility and $23.1 million under the construction loan.
- The revolving credit facility had a $1.4 billion borrowing base, a $1.0 billion elected commitment and $638.4 million of availability after $316.6 million of letters of credit.
- The company reported compliance with its financial covenants at December 31, 2018.
- Contractual obligations totaled approximately $6.710 billion, including $3.504 billion of firm transportation commitments, $2.118 billion of debt principal and interest obligations as presented, $205.0 million of drilling and purchase commitments and $80.0 million of asset retirement obligations.
Material changes versus the prior comparable period
- Production and commodity sales increased substantially due to continued Utica and SCOOP development, but reported net income was broadly flat because of higher DD&A, midstream expense and interest expense.
- Derivative results changed from a $213.7 million gain in 2017 to a $123.5 million loss in 2018, materially reducing reported revenue and earnings.
- Gulfport sold its 25% interest in Strike Force Midstream for $175.0 million and recognized a $96.4 million gain. It also sold Mammoth Energy shares for approximately $51.5 million of net proceeds and retained a 21.9% interest.
- The company repurchased approximately 20.7 million shares for $200.0 million, reducing outstanding shares to 162.986 million at year-end.
- Proved reserves declined from 5.395 Tcfe to 4.743 Tcfe. Extensions and discoveries added approximately 711 Bcfe, but approximately 1.0 Tcfe was removed through revisions, primarily because 139 PUD locations were moved beyond the five-year development window under a lower-activity plan.
- Gulfport adopted ASC 606 in 2018 without a material transition adjustment. It planned to adopt ASC 842 leases in 2019, with approximately $110 million of right-of-use assets and lease liabilities expected at adoption.
Guidance, outlook, risks and unusual items
- Management estimated 2019 production of 496,400 to 511,000 MMcfe.
- 2019 drilling and completion capital expenditures were estimated at $525 million to $550 million, with an additional $40 million to $50 million for non-drilling and completion expenditures, primarily lease extensions. Management indicated total spending would be approximately 29% below 2018 levels and targeted operation within cash flow.
- For 2019, Gulfport expected to drill 13 to 15 gross Utica wells and 9 to 10 gross SCOOP wells, while commencing sales from 47 to 51 gross Utica wells and 15 to 17 gross SCOOP wells.
- Approximately 94% to 97% of expected 2019 production was hedged. Open year-end 2019 Henry Hub swaps covered 1,254,000 MMBtu per day at an average price of $2.83/MMBtu. Hedging limits upside participation and exposes the company to volume and counterparty risk.
- Management stated that cash flow from operations, cash on hand and borrowing capacity were expected to meet normal operating needs and 2019 capital requirements for the next twelve months, but noted that lower commodity prices, higher costs, additional equity-investment funding or acquisitions could require additional financing or asset sales.
- Key risks include natural gas and oil price volatility, high leverage and interest expense, reserve revisions and full-cost ceiling-test impairments, firm transportation deficiency payments, infrastructure and takeaway constraints, drilling and completion performance, lease expirations, environmental and hydraulic-fracturing regulation, induced seismicity, severe weather and uninsured operational events.
- Gulfport was named in Louisiana coastal-zone litigation concerning historical oil and gas operations. The cases were in early procedural stages, and management could not estimate any potential loss.
- The company held a $782.7 million federal NOL carryforward and maintained a $212.0 million valuation allowance against net deferred tax assets. Future utilization may be limited by Section 382 ownership-change rules.
Most important facts for investors to verify
- Whether 2019 production and capital-spending targets were achieved and whether the business generated sustainable free cash flow after drilling, transportation commitments and stock repurchases.
- The effect of derivative settlements and mark-to-market changes on realized prices, revenue and cash flow, particularly given the high percentage of 2019 production hedged.
- Debt maturities, borrowing-base redeterminations, covenant compliance and liquidity after letters of credit and firm transportation obligations.
- The sustainability of the 4.743 Tcfe reserve base, the development timing of the 2.628 Tcfe PUD balance and any further reserve revisions caused by commodity prices or reduced drilling activity.
- Potential impairment exposure under full-cost accounting if oil, gas or NGL prices decline.
- Developments in the Louisiana coastal litigation and other environmental, hydraulic-fracturing, water-disposal and seismicity matters.
- The value and liquidity of Gulfport’s Mammoth Energy investment and the status of the $400 million stock-repurchase authorization approved in January 2019.