Gulfport Energy Corporation: Q2 2017 Form 10-Q Summary
Business context and reporting period
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 Woodford and Springer plays in Oklahoma, with additional Louisiana, Canadian oil sands and oilfield-services investments. This unaudited Form 10-Q covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods.
- On February 17, 2017, Gulfport completed the approximately $1.85 billion Vitruvian acquisition, adding approximately 46,400 net surface acres in Oklahoma for $1.35 billion of cash and approximately 23.9 million common shares.
- Production increased 56% year over year in the second quarter to 94,490 MMcfe, primarily from Utica development and the Vitruvian assets.
Financial performance and key metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue, including derivatives | $324.0 million | $(28.2) million | $657.0 million | $128.8 million |
| Income from operations | $143.2 million | $(323.4) million | $324.9 million | $(519.2) million |
| Net income (loss) | $105.9 million | $(339.8) million | $260.4 million | $(582.0) million |
| Diluted EPS | $0.58 | $(2.71) | $1.47 | $(4.91) |
| Operating margin | 44.2% | Not meaningful | 49.4% | Not meaningful |
| Net margin | 32.7% | Not meaningful | 39.6% | Not meaningful |
| Net cash from operating activities | Not separately provided | Not separately provided | $286.7 million | $142.7 million |
- Q2 production was 82,903 MMcf of natural gas, 650 thousand barrels of oil and 53,808 thousand gallons of NGLs. The production mix was approximately 88% natural gas, 8% NGLs and 4% oil.
- Six-month oil, natural gas and NGL sales before derivative gains were $492.5 million, compared with $208.5 million in 2016. Including settled derivatives, average realized prices were $2.87 per Mcfe in 2017 versus $2.71 per Mcfe in 2016.
- Six-month unit lease operating expense improved to $0.23 per Mcfe from $0.25, and unit general and administrative expense declined to $0.15 per Mcfe from $0.18.
- Six-month capital spending included $460.8 million for oil and natural gas properties, $1.339 billion for the Vitruvian acquisition and $24.2 million of equity-investment contributions.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $117.6 million at June 30, 2017, down from $1.276 billion at December 31, 2016. Restricted cash declined from $185.0 million to zero.
- Total assets were $5.294 billion and stockholders’ equity was $2.915 billion at quarter-end.
- Long-term debt, net of current maturities, was $1.803 billion, with approximately $1.6 billion of senior notes, $210.0 million outstanding under the revolving credit facility and approximately $24.0 million under the construction loan.
- The revolving facility had a $1.0 billion borrowing base, $552.5 million of availability after $237.5 million of letters of credit, and a December 2021 maturity. Gulfport was in compliance with its financial covenants.
- Operating cash flow of $286.7 million was substantially below the $1.645 billion of investing cash outflows, resulting in a $1.158 billion decrease in cash during the first six months.
Material changes versus the prior comparable period
- Revenue increased by $352.1 million in Q2 and $528.2 million for the six-month period. The improvement reflected higher production and commodity prices, as well as favorable changes in derivative fair values.
- The company recorded no oil and gas property impairment in 2017, compared with $170.6 million in Q2 2016 and $389.6 million in the first six months of 2016.
- Derivative results shifted from a $137.4 million loss in Q2 2016 to a $64.9 million gain in Q2 2017, and from a $79.7 million loss to a $164.4 million gain for the six-month periods.
- Interest expense rose to $24.2 million in Q2 and $47.7 million for six months, primarily because of the 2025 senior notes and revolver borrowings.
- Midstream gathering and processing expense increased to $58.9 million in Q2 and $106.9 million for six months, reflecting higher production and SCOOP activity.
- Common shares outstanding increased to 182.9 million from 158.8 million at year-end 2016, principally from shares issued for the Vitruvian acquisition.
- Gulfport contributed certain service-company investments to Mammoth Energy in June 2017 and held approximately 25.1% of Mammoth at quarter-end. The company recorded a $12.5 million gain on the transaction, while approximately $23.4 million of equity-method investment loss related to out-of-period accounting for an investee’s EnLink investment.
Guidance, outlook, risks and unusual items
- Management expected 2017 drilling and completion capital expenditures of $845 million to $915 million, acreage expenditures of $110 million to $120 million and Strike Force contributions of $50 million to $60 million.
- Planned 2017 activity included 87 to 97 gross Utica wells, 19 to 21 gross SCOOP wells and $30 million to $35 million for Southern Louisiana drilling and recompletions.
- Management stated that operating cash flow, cash on hand and available borrowing capacity should fund normal operating needs 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 reduced activity.
- At June 30, 2017, Gulfport had fixed-price swaps covering substantial 2017 production, with management estimating approximately 62% to 64% of 2017 production was hedged. Hedging limits upside participation and creates exposure if production is below contracted volumes.
- The full-cost ceiling test did not require an impairment at June 30, 2017. Future commodity-price declines or reserve reductions could require significant noncash write-downs.
- Two Louisiana coastal-management lawsuits seek restoration costs, damages and other relief. The matters were at an early procedural stage, and management could not estimate any potential loss.
- The company had approximately $626.8 million of federal NOL carryforwards and a $556.9 million valuation allowance against its net deferred tax asset, except for $4.7 million of certain state NOLs and AMT credits.
- Subsequent to quarter-end, Gulfport entered into additional natural gas swaps and sold 2019 call options. It also initiated exchange offers for the 2024 and 2025 notes, expected to close in September 2017.
Important facts for investors to verify
- Whether the production growth and revenue improvement from the Vitruvian acquisition can be sustained while the company funds its large drilling program.
- Cash burn, remaining borrowing capacity, letters of credit and compliance with revolver covenants as capital spending continues.
- Exposure to natural gas, oil and NGL prices, including the effect of swaps, sold call options and potential production shortfalls.
- Future full-cost ceiling-test results and the sensitivity of reserves and asset values to commodity prices.
- Performance and valuation of the approximately 25.1% Mammoth Energy investment and other equity-method investments.
- Potential outcomes and financial exposure from the Louisiana coastal litigation and long-term plugging, abandonment and firm transportation commitments.