Gulfport Energy Corporation — Q3 2023 Form 10-Q Summary
Business context and reporting period
Gulfport is a natural-gas-weighted U.S. exploration and production company with principal assets in eastern Ohio’s Utica and Marcellus plays and central Oklahoma’s SCOOP. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total revenues | $266.7 million | $191.1 million | $1.303 billion | $348.6 million |
| Oil, gas and NGL sales before derivatives | $227.3 million | $666.0 million | $788.3 million | $1.785 billion |
| Net derivative gain (loss) | $39.4 million | $(474.9) million | $514.3 million | $(1.436) billion |
| Income from operations | $67.2 million | $(3.9) million | $692.4 million | $(221.6) million |
| Net income | $608.4 million | $(18.5) million | $1.225 billion | $(253.9) million |
| Net income attributable to common stockholders | $517.6 million | $(19.8) million | $1.041 billion | $(258.0) million |
| Diluted EPS | $27.37 | $(1.01) | $55.08 | $(12.58) |
| Operating cash flow | $156.3 million | Not separately provided in source text | $567.7 million | $551.1 million |
| Capital expenditures paid | Not separately provided in source text | Not separately provided in source text | $421.1 million | $332.0 million |
Calculated operating margins were approximately 25.2% for Q3 and 53.2% for 9M 2023, compared with negative operating margins in the comparable 2022 periods. These improvements were driven primarily by derivative gains; reported net income also included a $554.7 million deferred tax benefit from a partial release of the valuation allowance.
Production, pricing and operating performance
- Q3 total production averaged 1,056.9 MMcfe per day, up 16% from 914.9 MMcfe per day in Q3 2022. Nine-month production averaged 1,051.2 MMcfe per day, up 9% year over year.
- Q3 natural gas production increased 19%, while oil and condensate volumes declined 27% and NGL volumes declined 9%.
- Q3 natural gas sales declined 70% to $177.4 million because the average unhedged gas price fell to $1.99/Mcf from $7.80/Mcf. Settled derivatives increased realized gas pricing to $2.53/Mcf.
- Q3 oil and condensate sales declined 36% to $22.9 million, and NGL sales declined 39% to $27.0 million.
- Q3 lease operating, taxes and midstream costs totaled $1.12/Mcfe, down from $1.44/Mcfe. Transportation, gathering, processing and compression costs declined to $0.89/Mcfe from $1.06/Mcfe.
Cash flow, balance sheet, debt and liquidity
- Cash and equivalents were $8.3 million at September 30, 2023, versus $7.3 million at December 31, 2022.
- Net cash provided by operating activities was $567.7 million for 9M 2023. Investing cash use was $420.0 million, principally for oil and gas property additions. Financing cash use was $146.6 million.
- Total principal funded debt was approximately $645.0 million, consisting of $550.0 million of 8.0% senior notes due May 2026 and $95.0 million drawn under the Credit Facility. The carrying value of debt was $644.3 million.
- The Credit Facility had a $1.1 billion borrowing base and $900 million of elected commitments after the October 27, 2023 redetermination. At September 30, $66.9 million of letters of credit were outstanding, and the Company reported compliance with all covenants.
- The Company repurchased 976,769 common shares for approximately $82.9 million during 9M 2023. The authorized repurchase program was increased to $650 million and extended through December 31, 2024; approximately $316.3 million remained available at September 30.
- Preferred stock had a September 30 carrying amount of $45.3 million and carries cumulative dividends of 10% in cash or 15% in PIK dividends. Outstanding preferred shares could convert into approximately 3.2 million common shares.
Material changes versus the prior comparable period
- Commodity sales before derivatives fell sharply because of lower natural gas, oil and NGL prices, despite higher gas-equivalent production.
- Derivative results improved from a $474.9 million Q3 2022 loss to a $39.4 million Q3 2023 gain, and from a $1.436 billion nine-month loss to a $514.3 million gain.
- Production increased, while per-unit lease operating, tax and midstream costs generally improved.
- Depreciation, depletion and amortization increased 23% in Q3 and 26% for 9M, reflecting development activity.
- Debt declined by approximately $49.8 million from December 31, 2022, while capital expenditures and share repurchases remained significant uses of cash.
- The Company recorded $4.8 million of personnel-related restructuring costs in the first half of 2023, including $1.3 million of non-cash accelerated share-based compensation, following leadership changes.
- Leadership changed during 2023, including the appointment of John Reinhart as CEO and Michael Hodges as CFO.
Guidance, outlook, risks and unusual items
- Management estimated 2023 drilling and completion capital expenditures of $385 million to $395 million, maintenance leasehold and land investment of approximately $50 million to $60 million, and discretionary acreage acquisitions of approximately $40 million.
- The 2023 capital program was expected to produce approximately 1,045 to 1,055 MMcfe per day.
- Key risks include volatile natural gas, oil and NGL prices, interest-rate increases, inflation, production and reserve execution, midstream capacity commitments, environmental matters, litigation and geopolitical disruptions.
- Firm transportation and gathering commitments totaled approximately $1.421 billion, including $219.4 million in 2024 and $737.1 million thereafter. These commitments are generally not recorded as balance-sheet obligations.
- As of September 30, the Company held a net derivative asset position of $64.4 million. A 10% increase in commodity prices was estimated to increase derivative liability exposure by approximately $112.8 million, before the offsetting effect on physical sales.
- The Company received a $17.8 million interim distribution related to a TC bankruptcy claim in 2023, but the timing and amount of future distributions are uncertain. Management stated that pending litigation and disputes are not currently expected to have a material adverse effect, although actual outcomes could exceed accrued amounts.
- Management stated that operating cash flow, borrowing capacity and cash on hand should provide sufficient liquidity for operations, capital expenditures, interest and planned repurchases for the next 12 months, subject to commodity prices and actual cash requirements.
Important facts for investors to verify
- Separate recurring operating performance from the substantial derivative gains and the $554.7 million deferred tax benefit.
- Evaluate liquidity relative to the $550 million senior notes maturity in 2026, floating-rate Credit Facility exposure and required letters of credit.
- Assess whether forecast production and capital spending remain consistent with the 1,045–1,055 MMcfe per day 2023 outlook.
- Review the economic impact and utilization risk of the $1.421 billion of future firm transportation and gathering commitments.
- Monitor future commodity prices, hedge settlements, collateral or counterparty exposure and the effect of the Company’s sold call options and costless collars.
- Consider potential dilution or cash requirements associated with the convertible preferred stock and cumulative preferred dividends.
- Confirm the sustainability of share repurchases given the Company’s low cash balance, capital program and debt obligations.