GULFPORT ENERGY CORP annual report, FY2016

Gulfport Energy Corporation — FY 2016 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2016; filed February 14, 2017. The filing is an annual report, not a standalone quarterly filing, although it includes unaudited fourth-quarter data. Gulfport is an independent U.S. oil and natural gas exploration and production company focused primarily on the Utica Shale in Ohio, with additional Louisiana, Niobrara, Bakken, Canadian oil sands, Thailand and oilfield-services investments.

Financial and Operating Metrics

Metric	2016	2015	Change
Revenue	$385.9 million	$709.0 million	Down 46%
Net loss	$979.7 million	$1.225 billion	Improved by $245.2 million
Basic loss per share	$7.97	$12.27	Improved
Net cash from operating activities	$337.8 million	$322.2 million	Up 5%
Capital additions to oil and gas properties	$724.9 million	$1.579 billion	Down 54%
Production	263,430 MMcfe	200,089 MMcfe	Up 32%
Realized sales price including settled derivatives	$2.69/Mcfe	$3.13/Mcfe	Down 14%
Total production, midstream and production-tax cost	$0.94/Mcfe	$1.12/Mcfe	Down 16%

The $715.5 million full-cost ceiling-test impairment was the principal unusual charge in 2016. Gulfport also recorded a $23.1 million impairment of its Grizzly Oil Sands investment and a $23.8 million loss on debt extinguishment.
Derivative results materially reduced reported revenue: 2016 included a $174.5 million net loss on gas, oil and NGL derivatives versus a $203.5 million net gain in 2015. Excluding derivatives, oil, gas and NGL sales increased to $560.4 million from $505.5 million.
Gas production increased 46% to 227,594 MMcf, while oil and condensate production declined 27% to 2,126 MBbls and NGL volumes declined 13% to 161,562 MGal.
Cash and cash equivalents were $1.276 billion, including $185.0 million of restricted cash deposited for the pending acquisition. Total assets were $4.223 billion and stockholders’ equity was $2.184 billion.
Total debt was approximately $1.594 billion, primarily consisting of $350.0 million of 6.625% notes due 2023, $650.0 million of 6.000% notes due 2024 and $600.0 million of 6.375% notes due 2025, plus a $21.0 million construction loan. There were no borrowings under the revolving credit facility; availability after letters of credit was $490.3 million.
The company reported a federal net operating loss carryforward of approximately $463.1 million and a $645.8 million valuation allowance against deferred tax assets.
Year-end proved reserves were 2.321 Tcfe, up from 1.705 Tcfe in 2015, driven primarily by 1.1 Tcfe of Utica extensions and discoveries. PV-10 was $696.0 million versus $765.8 million in 2015; standardized measure was $688.0 million versus $764.3 million.

Material Changes Versus 2015

Production grew substantially from continued Utica development, but lower commodity prices and unfavorable derivative mark-to-market changes drove the 46% decline in reported revenue.
Net loss narrowed because the 2016 impairment was $724.9 million lower than the $1.440 billion impairment recorded in 2015, and DD&A declined by $91.7 million. These improvements were partly offset by lower commodity revenues, higher midstream costs, higher interest expense and the debt-extinguishment loss.
Unit lease operating expense improved 25% to $0.26/Mcfe, and unit midstream gathering and processing expense improved 9% to $0.63/Mcfe.
Gulfport issued approximately $1.1 billion of common stock in 2016, including $698.8 million of net proceeds from a December offering, and issued $1.25 billion of senior notes. It used the October 2024 notes offering and cash to repurchase or redeem all $600.0 million of 2020 notes.
Shares outstanding increased to 158.8 million at December 31, 2016 from 108.3 million at December 31, 2015, reflecting substantial equity financing and dilution.
Gulfport formed Strike Force Midstream with Rice Energy, retaining a 25% interest, and contributed or invested $11.0 million during 2016.

Guidance, Outlook and Management Commentary

Management estimated 2017 production of 381,425 to 401,500 MMcfe.
Planned 2017 drilling and completion spending was $845 million to $915 million, including $645 million to $690 million for Utica activities and $170 million to $190 million for the pending SCOOP assets. Additional planned spending included $110 million to $120 million for acreage expenses and $50 million to $60 million for Strike Force.
For the Utica, Gulfport expected to drill 87 to 97 gross wells and commence sales from 72 to 80 gross wells. It had six operated horizontal rigs drilling as of February 10, 2017, and had locked in approximately 85% of anticipated 2017 drilling and completion costs.
Gulfport agreed to acquire approximately 46,400 net acres in Oklahoma’s SCOOP play for $1.35 billion in cash and approximately 23.9 million shares, subject to adjustments. The assets were described as producing approximately 183 MMcfe per day and having approximately 1.1 Tcfe of estimated proved reserves. Closing was expected in February 2017 but remained subject to due diligence and other conditions.
Management stated that operating cash flow, cash on hand and available borrowings were expected to fund normal needs and planned capital requirements for the next 12 months, including the pending acquisition. It also noted that weaker commodity prices, higher costs, additional investment requirements or further acquisitions could require additional financing or reduced activity.
At year-end, 2017 hedges covered approximately 60% to 63% of expected production, including natural gas swaps generally around $3.17/MMBtu, oil swaps ranging from approximately $51.97 to $54.98 per barrel, and NGL swaps. Hedge contracts limit downside exposure but also limit benefits from higher prices and create counterparty and production-volume risks.

Risks, Contingencies and Unusual Items

Commodity-price volatility remains the central risk. Lower prices could reduce revenues, cash flow, reserves, borrowing-base availability and the economic value of undeveloped acreage, and could trigger additional non-cash ceiling-test impairments.
Approximately 63% of year-end proved reserves were proved undeveloped. Development requires substantial future capital, with estimated PUD development costs of $401.5 million in 2017, $331.4 million in 2018 and $192.7 million in 2019.
Approximately 19% of Utica undeveloped acreage was scheduled to expire in 2017 and 36% in 2018, although leases generally provide five-year extension rights. Niobrara acreage also faced scheduled expirations.
Firm transportation commitments totaled approximately $3.8 billion, including $176.8 million due in 2017. Gulfport must deliver minimum volumes or pay deficiency fees, creating exposure if production or infrastructure is insufficient.
Two Louisiana coastal-management lawsuits allege environmental damage related to historic oil and gas operations. The matters were at an early procedural stage, and management could not estimate any potential loss.
Other significant risks include hydraulic-fracturing and produced-water regulation, induced seismicity concerns, environmental liabilities, operational hazards, limited customer concentration, dependence on third-party infrastructure, acquisition integration risk and substantial leverage.
Grizzly’s Algar Lake bitumen production remained suspended because of commodity prices. Further impairment of Gulfport’s $45.2 million Grizzly investment remained possible if prices declined.
Gulfport had approximately $6.35 billion of contractual obligations, including debt service, firm transportation, purchase obligations and asset-retirement obligations. No off-balance-sheet arrangements were reported.

Investor Verification Checklist

Verify completion, final consideration and financing effects of the SCOOP acquisition, including the approximately $1.35 billion cash payment and 23.9 million shares.
Reconcile reported revenue with production growth by separating commodity prices, derivative settlements and derivative mark-to-market changes.
Assess whether 2017 production and capital-spending guidance was achieved and whether planned activity generated sufficient operating cash flow.
Review debt maturities, covenant compliance, borrowing-base redeterminations and liquidity after the acquisition and planned capital program.
Evaluate the sensitivity of reserves, PV-10 and future impairments to commodity prices, particularly because most reserves were proved undeveloped.
Monitor firm transportation utilization, deficiency fees and gathering infrastructure availability in the Utica and SCOOP.
Track the Louisiana coastal litigation, environmental obligations and any developments concerning hydraulic fracturing, methane, water disposal or induced seismicity regulation.