GULFPORT ENERGY CORP quarterly report, Q2 FY2018

Gulfport Energy Corporation — 2018 Q2 Form 10-Q Summary

Reporting period: Three and six months ended June 30, 2018; filed August 2, 2018. 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 in Oklahoma, with additional Louisiana, Canadian oil sands and equity investments.

Financial performance and position

Metric	Q2 2018	Q2 2017	Six months 2018	Six months 2017
Total revenue, including derivatives	$252.7 million	$324.0 million	$578.1 million	$657.0 million
Income from operations	$13.8 million	$143.2 million	$124.1 million	$324.9 million
Net income	$111.3 million	$105.9 million	$201.4 million	$260.4 million
Diluted EPS	$0.64	$0.58	$1.13	$1.47
Net cash from operating activities	Not separately provided	Not separately provided	$411.0 million	$286.7 million

Q2 operating margin was approximately 5.5%, versus 44.2% in the prior-year quarter. Net margin was approximately 44.0%, versus 32.7%, largely because of gains on equity investment sales.
Six-month operating margin was approximately 21.5%, versus 49.4%; six-month net margin was approximately 34.8%, versus 39.6%.
Q2 product sales before derivative effects were $323.3 million, up from $259.1 million. Reported revenue declined because derivative results shifted to a $70.5 million loss from a $64.9 million gain.
Six-month production increased 39% to 237,038 MMcfe, averaging 1,309.6 MMcfe per day; the mix was approximately 89% natural gas, 7% NGLs and 4% oil.
Cash and cash equivalents were $119.2 million at June 30, 2018, compared with $99.6 million at December 31, 2017. Total assets were $6.05 billion and stockholders’ equity was $3.20 billion.
Capital expenditures and other investing activity produced $360.5 million of net investing cash outflow. Oil and gas property additions were $579.7 million.
Net debt was approximately $2.19 billion, consisting primarily of $2.05 billion of senior notes, $75.0 million drawn on the revolving facility and $23.4 million of construction debt, net of cash. The company had $667.7 million of revolver availability after letters of credit.

Material changes versus the prior comparable periods

Production growth from Utica and SCOOP development increased volumes and underlying commodity sales, but higher DD&A, gathering and processing costs, interest expense and derivative losses reduced reported operating results.
DD&A increased to $121.9 million in Q2 and $232.9 million for the six months, from $82.2 million and $148.2 million, respectively.
Midstream gathering and processing expense rose to $71.4 million in Q2 and $135.6 million for the six months, although unit costs improved.
Interest expense increased to $33.7 million in Q2 and $67.7 million for the six months, primarily following issuance of the 2026 senior notes.
Equity investment gains materially benefited 2018 results: Gulfport recorded a $96.4 million gain on the Strike Force Midstream sale and a $25.6 million gain on the Mammoth Energy share sale.
Gulfport sold its 25% Strike Force interest for $175.0 million and sold Mammoth Energy shares for approximately $47.0 million during the period. It retained approximately 22.2% of Mammoth Energy at June 30.
The company repurchased 10.1 million shares for approximately $105.0 million during the first six months, reducing shares outstanding from 183.1 million to 173.3 million.

Guidance, outlook, risks and unusual items

Management expected 2018 drilling and completion capital expenditures of $630 million to $685 million, with total 2018 capital expenditures including non-drilling activities of approximately $750 million to $815 million.
Expected 2018 drilling and completion spending was $425 million to $455 million for Utica and $185 million to $210 million for SCOOP. Southern Louisiana recompletion spending was expected to be approximately $20 million.
Management expected to fund its development program within cash flow and stated that operating cash flow, cash on hand and available borrowings should meet normal needs for the next twelve months. It also reserved the possibility of additional debt, equity or asset sales if commodity prices decline or costs and investment requirements increase.
Approximately 76% to 77% of estimated 2018 production was hedged. The net derivative position was a $50.2 million liability at June 30, versus a $29.9 million asset at June 30, 2017. A 10% increase in commodity prices was estimated to reduce derivative fair value by approximately $226.6 million.
Commodity prices, reserve revisions, production performance, pipeline capacity, drilling costs and the full-cost ceiling test remain key risks. No ceiling-test impairment was required for the six months ended June 30, 2018, but lower prices could require a future noncash impairment.
Gulfport was named in Louisiana coastal-management litigation. The cases were stayed while the MDL Panel considers coordinated proceedings; management cannot estimate any potential loss.
The company maintained a $256.7 million valuation allowance against deferred tax assets and had approximately $574.4 million of federal net operating loss carryforwards.
Subsequent to quarter-end, Gulfport repurchased an additional $5.0 million of stock and sold additional Mammoth shares for approximately $4.5 million.

Investor verification priorities

Verify the sustainability of cash flow relative to the $750 million to $815 million 2018 capital program and remaining drilling commitments.
Reconcile reported revenue and earnings to underlying production growth after derivative settlements and mark-to-market derivative changes.
Monitor leverage, revolver availability, letters of credit and compliance with the 4.00-to-1.00 net funded debt-to-EBITDAX and 3.00-to-1.00 EBITDAX-to-interest covenants.
Assess the effect of natural gas prices on hedged volumes, future cash realization and possible full-cost ceiling-test impairment.
Review the value and concentration of the remaining Mammoth Energy investment and the unresolved Louisiana coastal litigation.