Gulfport Energy Corporation — 2016 Q2 Form 10-Q
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 eastern Ohio, with additional properties in Louisiana, Colorado, North Dakota/Montana, Canada and Southeast Asia. This unaudited filing covers the three and six months ended June 30, 2016, compared with the corresponding 2015 periods.
Financial performance and key metrics
| Metric | Three months ended June 30, 2016 | Six months ended June 30, 2016 |
|---|---|---|
| Revenue | $(28.2) million | $128.8 million |
| Operating loss | $(323.4) million | $(519.2) million |
| Net loss | $(339.8) million | $(582.0) million |
| Net loss per diluted share | $(2.71) | $(4.91) |
| Operating cash flow | Not separately presented for the quarter | $142.7 million |
- Quarterly revenue was negative because derivative losses recognized in gas, oil and NGL sales exceeded underlying product sales. Net derivative losses were $137.4 million in the quarter and $79.7 million for the six months.
- Production increased 40% year over year in the second quarter to 60,492 MMcfe, or approximately 664.7 MMcfe per day. The production mix was approximately 87% natural gas, 7% NGLs and 6% oil.
- The company recorded a $170.6 million second-quarter and $389.6 million six-month ceiling-test impairment of oil and gas properties, driven by lower commodity prices. The impairment was non-cash but materially reduced reported operating results and equity.
- Six-month operating cash flow increased from $138.9 million in 2015 to $142.7 million in 2016, despite the reported net loss. Cash flow benefited from non-cash impairment, derivative valuation losses and depreciation adjustments.
- Six-month investing cash outflows were $281.0 million, including $257.2 million for oil and gas properties, $13.7 million for Grizzly and $3.0 million for Strike Force.
- Cash and cash equivalents increased to $396.4 million at June 30, 2016, from $113.0 million at December 31, 2015. Financing cash flow was $421.8 million, primarily reflecting $411.7 million of net proceeds from a March 2016 equity offering.
- Total debt was approximately $968.7 million, consisting principally of $600.0 million of 7.75% senior notes due 2020, $350.0 million of 6.625% senior notes due 2023 and $12.0 million under a construction loan. Debt reflected on the balance sheet was $956.8 million after issuance-cost and premium adjustments.
- The $1.5 billion revolving credit facility had no borrowings outstanding and $494.2 million of availability after $205.8 million of letters of credit. Gulfport was in compliance with its financial covenants.
Material changes versus the prior comparable period
- Six-month revenue declined 55% from $288.6 million to $128.8 million, largely because of unfavorable changes in derivative fair values and lower oil, gas and NGL prices, partially offset by higher gas volumes.
- Six-month net loss increased from $5.8 million to $582.0 million, primarily due to the $389.6 million property impairment, lower revenue, higher interest expense and increased equity-method investment losses.
- Quarterly net loss increased from $31.3 million to $339.8 million, driven by the $170.6 million impairment, a $140.5 million reduction in oil and gas revenue and higher midstream and interest expenses.
- Six-month midstream gathering and processing expense increased 32% to $77.0 million, reflecting higher Utica production volumes, while lease operating expense declined 7% to $31.3 million.
- Unit lease operating expense declined 39% to $0.25 per Mcfe and unit midstream expense declined 13% to $0.62 per Mcfe for the six months.
- Common shares outstanding increased to approximately 125.4 million at June 30, 2016, from approximately 108.3 million at December 31, 2015, primarily due to the March equity offering.
Guidance, outlook, commentary and risks
- Management resumed completion and hydraulic fracturing activities on April 1, 2016 after suspending them during the first quarter. The company expected the production benefit to emerge in the second half of 2016.
- Higher-than-anticipated gathering-line pressures were limiting near-term dry-gas production. Gulfport and its midstream providers were implementing pad-level compression and expected field-level compression to be online by year-end 2016, with anticipated production benefits entering 2017.
- Gulfport planned to spud 42 to 46 gross, or 36 to 39 net, Utica wells in 2016. As of August 1, 2016, it had three rigs operating and had contracted a fourth rig for September.
- Updated 2016 capital expenditure guidance was $475 million to $550 million, including $415 million to $475 million for drilling and completion, $40 million to $50 million for Utica acreage expenses and $20 million to $25 million of Strike Force contributions. Approximately 95% was expected to be spent in the Utica.
- Management stated that operating cash flow, cash on hand and available borrowings were expected to fund normal operating needs and capital requirements for the next twelve months, but noted that further commodity-price declines, higher costs, additional equity-investment funding or acquisitions could require additional financing.
- Commodity-price exposure remained significant. The company had hedged approximately 75% to 79% of estimated 2016 production, but derivative positions can produce losses when prices rise, when production is below forecast, or when market prices change materially. The net derivative position was a $19.9 million liability at June 30, 2016.
- Gulfport recognized a $23.1 million impairment of its Grizzly investment in the first quarter. Grizzly had ceased bitumen production at its Algar Lake facility because of commodity prices; further impairment may be required if prices decline.
- Louisiana and parish authorities filed coastal-management lawsuits naming Gulfport among multiple oil and gas companies. The company had not been served with one complaint and could not estimate any potential loss because the matters were at an early stage.
- The company had $118.0 million of remaining 2016–2018 commitments under sand-supply and pressure-pumping agreements, including $26.2 million due during the remainder of 2016.
Most important facts for investors to verify
- Whether commodity prices and the full-cost ceiling test could produce additional oil and gas property impairments.
- Actual derivative settlements, fair-value changes, hedge coverage and the impact of sold call options on future revenue.
- Whether compression projects resolve gathering constraints and support the projected 2017 production increase.
- Funding capacity for the $475 million to $550 million 2016 capital program and the company’s ability to maintain credit-facility covenants.
- Future cash calls and potential impairment exposure related to Grizzly, Mammoth, Strike Force and other equity-method investments.
- The outcome and potential financial exposure of the Louisiana coastal-management litigation.
- Execution against the planned Utica drilling and completion schedule, including production declines and the timing of wells turned to sales.