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 plays. This report covers the quarter ended September 30, 2021. Gulfport emerged from Chapter 11 on May 17, 2021 and applied fresh start accounting; therefore, Successor and Predecessor financial statements are not directly comparable.
The third quarter represents the first full quarter of Successor operations. Management presents combined Successor and Predecessor year-to-date results as a non-GAAP, non-pro forma comparison to 2020.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 |
|---|---|---|
| Natural gas, oil and NGL sales | $379.9 million | $190.0 million |
| Total revenues, including derivatives | $(242.5) million | $136.2 million |
| Loss from operations | $(435.3) million | $(346.4) million |
| Net loss | $(461.3) million | $(381.0) million |
| Net loss attributable to common stockholders | $(463.4) million | $(381.0) million |
| Basic and diluted loss per share | $(22.50) | $(2.37) |
| Operating cash flow | Not separately provided for Q3 | Not separately provided for Q3 |
Reported revenue was reduced by a $622.5 million net loss on commodity derivatives, primarily due to higher forward prices. Product sales increased substantially because realized commodity prices improved, despite a 2% decline in total production.
- Natural gas sales: $301.5 million versus $155.2 million; realized price including settled derivatives was $2.74/Mcfe versus $2.25.
- Oil and condensate sales: $33.3 million versus $16.0 million; realized price including settled derivatives was $58.60 per barrel versus $32.58.
- NGL sales: $45.2 million versus $18.8 million; realized price including settled derivatives was $34.24 per barrel versus $20.37.
- Total production: 973.3 MMcfe per day versus 992.0 MMcfe per day.
- Production costs per Mcfe declined to $1.22 from $1.43, primarily because of lower transportation, gathering, processing and compression costs.
Cash Flow, Liquidity and Capital Structure
- Cash flow from operations was $164.6 million for May 18 through September 30, 2021, compared with $172.2 million for January 1 through May 17, 2021 and $200.0 million for the comparable 2020 nine-month period.
- Capital expenditures were $119.3 million for the Successor year-to-date period, including $109.1 million for drilling and completion.
- Cash and cash equivalents were $4.5 million at September 30, 2021, down from $89.9 million at December 31, 2020.
- September 30 debt included $35.6 million under the Exit Facility, $165.0 million under the First-Out Term Loan and $550.0 million of 8.0% senior notes due 2026. Total funded debt was approximately $750.6 million based on principal amounts.
- Letters of credit totaled $115.5 million, and surety bonds totaled $90.1 million.
- Net derivative liabilities were $830.6 million at September 30, 2021, compared with $20.8 million of net derivative liabilities at December 31, 2020.
Management stated that operating cash flow, cash on hand and borrowing capacity were expected to fund operations, capital expenditures, interest, debt repayments and potential shareholder returns for the next 12 months, subject to commodity prices and operating results.
Material Changes Versus Prior Period
- Product sales approximately doubled year over year because of materially higher natural gas, oil and NGL prices, although production declined modestly.
- Derivative losses increased sharply from $53.8 million to $622.5 million in the quarter, reflecting higher forward commodity prices and the mark-to-market impact of hedges.
- Transportation, gathering, processing and compression expense declined 24% to $84.4 million, benefiting from rejected or renegotiated midstream contracts.
- No oil and gas property impairment was recorded in Q3 2021, compared with a $270.9 million impairment in Q3 2020. The company recorded $117.8 million of oil and gas property impairment in the combined 2021 year-to-date period versus $1.4 billion in the comparable 2020 period.
- Interest expense declined to $16.4 million from $34.3 million following the restructuring and cancellation of predecessor debt.
- Gulfport reduced total indebtedness by approximately $1.4 billion through the Chapter 11 restructuring, cancelled its predecessor equity and issued new common and preferred stock.
- Accounts payable and accrued liabilities increased to $436.2 million, including $121.6 million of accrued contract rejection damages and shares held in reserve.
Guidance, Outlook, Risks and Unusual Items
- 2021 drilling and completion capital expenditures were estimated at $270 million to $290 million, with approximately $20 million of additional non-drilling and completion expenditures.
- The six-well Angelo pad in the Utica was completed in September and began producing in early October at a combined gross rate of approximately 250 MMcfe per day. Management expected fourth-quarter production to increase as the pad ramped up.
- On October 14, 2021, Gulfport refinanced the Exit Credit Facility with a New Credit Facility having an $850 million initial borrowing base and $700 million elected commitment, maturing in October 2025. Management stated that the refinancing increased liquidity by more than $160 million.
- On November 1, 2021, the board authorized repurchases of up to $100 million of common stock through December 31, 2022, subject to liquidity, market conditions and financing restrictions.
- Gulfport paid $43.8 million to TC Energy on October 7, 2021 to settle and reject firm transportation contracts. Gulfport expects to recover all or substantially all of the payment through assigned bankruptcy claims. Failure to reject the remaining Rover contract could result in liabilities exceeding approximately $40 million.
- Long-term firm transportation and gathering commitments totaled $1.84 billion at September 30, 2021, excluding contracts recently rejected or being rejected.
- Commodity price volatility remains significant. A 10% increase in underlying commodity prices would have increased the derivative liability by approximately $231.5 million; a 10% decrease would have reduced it by approximately $220.3 million, before considering the offsetting effect on physical sales.
- COVID-19 had not materially disrupted operations through the first nine months of 2021, but management identified potential supply-chain, service-provider and midstream infrastructure risks.
- The company recorded a workforce-reduction charge of $2.9 million in Q3 and maintained a full valuation allowance against deferred tax assets. Estimated federal net operating losses were approximately $1.2 billion after the anticipated reduction for cancellation-of-indebtedness income.
Investor Verification Checklist
- Reconcile Successor and Predecessor periods carefully because fresh start accounting makes post-emergence results non-comparable with historical periods.
- Assess the economic impact, cash requirements and potential collateral exposure of the $830.6 million net derivative liability.
- Verify liquidity after the October refinancing, the $43.8 million TC payment and any subsequent borrowings under the New Credit Facility.
- Review the $1.84 billion of firm transportation and gathering commitments and the outcome of the remaining Rover rejection proceeding.
- Evaluate whether the Angelo pad and planned drilling activity can offset declining Utica production and support management’s free-cash-flow objectives.
- Review the terms and potential dilution of the New Preferred Stock, including its 10% cash and 15% paid-in-kind dividend provisions and potential conversion into approximately 4.1 million common shares.
- Confirm the basis for the proposed $100 million share repurchase program given the company’s low cash balance, debt obligations and capital spending plans.