Gulfport Energy Corporation — 2019 Q2 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Gulfport is an independent U.S. oil and natural gas exploration and production company focused primarily on the Utica Shale in Ohio and the SCOOP plays in Oklahoma, with additional interests in Canada and Mammoth Energy Services.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenues, including derivatives | $459.0 million | $252.7 million | $779.6 million | $578.1 million |
| Income from operations | $216.9 million | $13.8 million | $308.4 million | $124.1 million |
| Net income | $235.0 million | $111.3 million | $297.2 million | $201.4 million |
| Diluted EPS | $1.47 | $0.64 | $1.84 | $1.13 |
| Cash flow from operations | Not separately provided | Not separately provided | $309.0 million | $411.0 million |
- Q2 operating margin was approximately 47%; six-month operating margin was approximately 40%. Net margins were approximately 51% and 38%, respectively, substantially affected by a $179.3 million income tax benefit.
- Production increased approximately 2% year over year in Q2 to 123,668 MMcfe, or approximately 1,359.0 MMcfe per day. Natural gas production increased, while oil and NGL volumes declined.
- Q2 revenue included a $171.1 million derivative gain, compared with a $70.5 million derivative loss in Q2 2018. Six-month derivative gains were $151.1 million versus an $87.1 million loss in the prior-year period.
- Cash and cash equivalents were $20.8 million at June 30, 2019, down from $52.3 million at December 31, 2018. Investing cash outflow was $419.4 million, including $417.5 million for oil and gas properties.
- Total debt was approximately $2.2 billion, including $155.0 million outstanding under the revolving credit facility. Revolver availability after letters of credit was $593.5 million, and Gulfport was in compliance with its financial covenants.
- Total assets were $6.5 billion and stockholders’ equity was $3.6 billion at June 30, 2019.
Material changes versus the prior comparable period
- Q2 net income rose $123.7 million, primarily from higher derivative results, increased reported oil and gas revenue, and the deferred tax benefit.
- Six-month net income increased $95.8 million despite lower cash flow from operations and higher losses from equity-method investments.
- Gulfport recorded a $125.4 million other-than-temporary impairment of its Mammoth Energy investment. The investment’s carrying value was $67.7 million at June 30, 2019; further impairment remains possible.
- Natural gas, oil and NGL sales before derivative effects decreased in Q2 because of lower commodity prices, partially offset by higher gas volumes. Six-month production was broadly flat in gas equivalents, while oil and NGL volumes declined.
- Midstream gathering and processing expense increased 5% for the six-month period, while general and administrative expense decreased 8%.
- The company adopted the new lease accounting standard prospectively on January 1, 2019, recognizing approximately $110 million of right-of-use assets and corresponding lease liabilities at adoption.
- Gulfport repurchased approximately 3.8 million shares for $30.0 million during the first six months under a new $400 million authorization.
Guidance, outlook, risks and unusual items
- Management expected 2019 drilling and completion capital expenditures of $525 million to $550 million, plus $40 million to $50 million of non-drilling and completion expenditures. Through June 30, spending was $436.0 million and $23.2 million, respectively.
- The 2019 capital program was expected to be approximately 29% below 2018 spending, reflecting lower forward natural gas prices and a stated objective of operating within cash flow and generating free cash flow.
- Management expected to spud 13 to 15 gross Utica wells and 9 to 10 gross SCOOP wells in 2019, with planned sales commencements of 47 to 51 gross Utica wells and 15 to 17 gross SCOOP wells.
- Management stated that cash flow from operations, cash on hand and revolver borrowings should meet normal operating and capital requirements for the next twelve months, but warned that lower commodity prices, higher costs, additional investment requirements or acquisitions could require additional financing or asset sales.
- Approximately 94% to 96% of estimated 2019 production was hedged. At June 30, derivative instruments had a net asset position of approximately $139.5 million. Hedging limits upside if prices rise and can create losses if production is below expectations.
- Subsequent to quarter-end, Gulfport closed the sale of certain Louisiana assets for approximately $19.7 million, including $9.2 million of cash received, with potential future contingent payments. The buyer assumed associated plugging and abandonment liabilities.
- In July 2019, Gulfport borrowed under its revolver to repurchase approximately $104.4 million principal amount of senior notes for $80.3 million.
- Legal and regulatory matters include Louisiana coastal-damage litigation, an SEC investigation involving former management and alleged personal use of company assets, and EPA Clean Air Act Findings of Violation at Ohio locations. Potential losses are uncertain; EPA sanctions may exceed $100,000.
Important facts for investors to verify
- Separate recurring operating performance from the $171.1 million Q2 derivative gain and the $179.3 million discrete tax benefit.
- Assess leverage, debt maturities, revolver availability, letters of credit and the effect of subsequent debt repurchases on liquidity.
- Review whether the planned capital program can be funded by operating cash flow at prevailing natural gas prices.
- Monitor Mammoth Energy’s market value and the potential for additional impairment charges.
- Verify drilling, completion and production results in the Utica and SCOOP, including the economics of the company’s hedged volumes.
- Evaluate exposure from firm transportation, sales, sand supply and lease commitments, including approximately $3.5 billion of firm transportation commitments and $60 million of remaining sand commitments.
- Follow developments in the SEC investigation, Louisiana litigation and EPA proceedings, as final outcomes could differ materially from management’s current assessment.