Gulfport Energy Corporation — Q2 2020 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 Ohio and the SCOOP formations in Oklahoma. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods.
Results were materially affected by COVID-19, lower commodity prices, reduced drilling activity and production shut-ins. Management implemented salary reductions, furloughs, cost controls and a 50% reduction in 2020 capital spending versus 2019.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenues, including derivatives | $132.4 million | $459.0 million | $379.3 million | $779.6 million |
| Oil, gas and NGL sales before derivatives | $105.4 million | $287.9 million | $254.1 million | $628.5 million |
| Net income (loss) | $(561.1) million | $235.0 million | $(1,078.6) million | $297.2 million |
| Operating income (loss) | $(555.8) million | $218.5 million | $(1,035.8) million | $311.5 million |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $247.2 million | $399.8 million |
| Capital expenditures | Not separately provided for the quarter | Not separately provided for the quarter | $274.9 million | $508.3 million |
| Net loss per diluted share | $(3.51) | $1.47 | $(6.75) | $1.84 |
The principal Q2 loss driver was a $532.9 million non-cash impairment of oil and natural gas properties. The six-month impairment charge was $1.086 billion. The filing states that additional full-cost impairments were expected in the third quarter based on commodity prices and the near-term pricing outlook.
Q2 production averaged 1,027.1 MMcfe per day, down 24% from 1,359.0 MMcfe per day in Q2 2019. Six-month production averaged 1,040.4 MMcfe per day, down 21% year over year. Q2 natural gas, oil and NGL sales declined 63%, primarily due to lower prices and volumes.
Q2 average realized prices before settled derivatives were $1.02/Mcf for natural gas, $20.14/Bbl for oil and condensate, and $0.25/Gal for NGLs. Including settled derivatives, the average prices were $2.01/Mcf, $117.26/Bbl and $0.25/Gal, respectively.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $2.8 million at June 30, 2020, down from $6.1 million at December 31, 2019.
- Net working capital deficit was $176.2 million, compared with a $145.3 million deficit at year-end 2019.
- Total principal debt was approximately $1.9 billion, versus approximately $2.0 billion at December 31, 2019. Long-term debt reported on the balance sheet was $1.910 billion, excluding current maturities and net of debt issuance costs.
- The revolving credit facility had $123.0 million outstanding, a $700.0 million borrowing base and $252.9 million of availability after $324.1 million of letters of credit. Borrowings carried a weighted-average interest rate of 2.44% at June 30.
- The company repurchased approximately $73.3 million principal amount of senior notes for $22.8 million during the first six months, recognizing a $49.6 million gain on debt extinguishment.
- Management concluded that substantial doubt existed regarding Gulfport’s ability to continue as a going concern over the following twelve months.
Material changes versus the prior comparable period
- Revenue fell 71% in Q2 and 51% for the six-month period, reflecting lower commodity prices, lower production and reduced derivative gains.
- The company moved from net income of $235.0 million in Q2 2019 to a net loss of $561.1 million in Q2 2020; the six-month result moved from $297.2 million of income to a $1.079 billion loss.
- Production declined as development activity was reduced beginning in late 2019 and as Gulfport temporarily shut in lower-margin, liquids-weighted production during Q2.
- Operating expenses declined in absolute dollars, including lower lease operating, production tax, midstream and DD&A expense, but the cost reductions did not offset the revenue decline and impairment charges.
- Operating cash flow decreased 38% to $247.2 million for the first six months, while capital expenditures decreased 46% to $274.9 million.
- Stockholders’ equity declined from $1.315 billion at December 31, 2019 to $231.3 million at June 30, 2020, primarily due to the year-to-date net loss and accumulated deficit.
- Gulfport sold its SCOOP water infrastructure assets for $50.0 million in cash in January 2020, with potential additional incentive payments. Proceeds were used to reduce revolver borrowings.
Guidance, outlook, risks and unusual items
- Management estimated 2020 drilling and completion capital expenditures of $265 million to $285 million, plus $20 million to $25 million of non-drilling and completion expenditures.
- Management expected 2020 production to be approximately 22% to 27% below 2019 levels and expected 2020 revenue, operating cash flow and EBITDA to be significantly lower than in 2019.
- The company stated that its revolver matures in December 2021 and would become a current liability at year-end 2020 unless refinanced. Management identified substantial risk that refinancing may not be available on reasonable terms.
- A further borrowing-base reduction at the November 2020 redetermination could constrain liquidity, impair capital spending and increase default or acceleration risk. The July 2020 credit amendment permitted issuance of up to $750 million of second-lien or permitted refinancing debt subject to conditions.
- Gulfport expected to incur potentially significant deficiency fees under firm transportation contracts because reduced development and production could prevent it from meeting minimum volume commitments. Total firm transportation commitments were approximately $3.420 billion through the stated contract terms.
- Other material exposures include $324.1 million of letters of credit, $119.5 million of surety bonds, litigation and regulatory proceedings, and an SEC investigation involving former management. The company stated that the ultimate outcomes and liabilities of several matters cannot be predicted.
- The company’s disclosure controls were not effective at June 30, 2020 because of a material weakness related to controls over the evaluation and transfer of unevaluated costs to the amortizable full-cost pool. Management was implementing remediation measures.
- At June 30, 2020, commodity derivatives had a net asset position of $3.3 million. Gulfport had hedged approximately 59% to 63% of estimated 2020 production. In August 2020, it entered into fourth-quarter natural gas swaps covering approximately 100,000 MMBtu per day at an average price of $2.38/MMBtu.
Important facts for investors to verify
- Whether Gulfport could refinance or otherwise address the December 2021 revolver maturity and avoid a year-end current-liability classification.
- The outcome of the November 2020 borrowing-base redetermination and continued compliance with revolver and note covenants.
- The amount and timing of additional full-cost impairment charges after June 30, 2020.
- Actual deficiency fees under firm transportation commitments and the company’s ability to manage minimum-volume obligations.
- Whether operating cash flow, available revolver capacity and asset sales were sufficient to fund capital expenditures, debt service and other obligations.
- Progress on the material-weakness remediation and any subsequent restatements or control deficiencies.
- Developments in the SEC investigation, securities and derivative litigation, environmental matters and the Stingray counterclaim.