Gulfport Energy Corporation — Q1 2013 Form 10-Q Summary
Business context and reporting period
Gulfport is an independent U.S. oil and natural gas exploration and production company with producing assets in Louisiana, Ohio’s Utica Shale, Colorado and the Bakken, plus equity investments in Diamondback Energy, Grizzly Oil Sands and other service and midstream entities. This unaudited report covers the three months ended March 31, 2013, compared with the three months ended March 31, 2012.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $55.0 million | $65.5 million | Down 16% |
| Oil and gas revenue | $54.9 million | $65.4 million | Down 16% |
| Income from operations | $14.9 million | $27.3 million | Down 45% |
| Net income | $44.6 million | $26.9 million | Up 66% |
| Diluted EPS | $0.61 | $0.48 | Up $0.13 |
| Cash flow from operations | $35.0 million | $69.4 million | Down 50% |
| Capital additions to oil and gas properties | $320.5 million | $84.8 million | Up materially |
| Cash and equivalents at March 31 | $226.0 million | $12.9 million | Up materially |
Operating margin declined to approximately 27% from 42%, primarily because of lower production and realized prices, while net income benefited from a $61.1 million mark-to-market gain on the Diamondback investment. The gain was partly offset by $28.2 million of income tax expense. The filing does not provide a clearly comparable adjusted or cash earnings margin.
Production decreased 11% to 575,543 BOE from 645,056 BOE. Average realized BOE price declined 6% to $95.34 from $101.42. Oil production fell to 517 thousand barrels from 595 thousand barrels, while gas production rose to 320 MMcf from 211 MMcf and NGL production declined to 223 thousand gallons from 625 thousand gallons.
Balance sheet, debt and liquidity
- Total assets were $2.00 billion at March 31, 2013, versus $1.58 billion at December 31, 2012.
- Stockholders’ equity increased to $1.53 billion from $1.13 billion, mainly reflecting common-stock offerings and quarterly net income.
- Total debt was approximately $299.1 million, consisting primarily of $300 million of 7.75% senior unsecured notes due 2020 and approximately $2.1 million of building loans, net of discounts and current maturities.
- The revolving credit facility had no outstanding borrowings; the borrowing base was $40 million pending a proposed increase to $50 million and extension to May 2018, subject to syndicate approval.
- The company was in compliance with its debt covenants at March 31, 2013. The notes require semiannual interest payments beginning May 1, 2013.
- Net cash provided by financing activities was $357.1 million, primarily from the February 2013 equity offering. Cash increased by $58.9 million during the quarter.
Material changes versus the prior comparable period
- Net income increased despite lower revenue and operating income, primarily because of the Diamondback fair-value gain and lower operating costs associated with the contributed Permian Basin properties.
- The October 2012 contribution of Permian Basin assets to Diamondback eliminated related production and operating expenses from Gulfport’s results. Permian production represented approximately 90,714 BOE in Q1 2012.
- Gulfport acquired approximately 22,000 additional net Utica acres in February 2013 for approximately $220 million, increasing its Utica position to approximately 128,000 net acres. Including the December 2012 acquisition, the company acquired approximately 37,000 net acres for aggregate consideration of approximately $592 million.
- The company issued 8.9 million common shares in February 2013 and received approximately $325.8 million of net proceeds. Shares outstanding increased to 77.4 million at May 1, 2013, from 67.5 million at December 31, 2012.
- Investing cash outflows increased to $333.2 million from $160.4 million, driven by Utica lease acquisitions, development spending and equity-investment funding.
- Interest expense increased to $3.5 million from $0.2 million following the issuance of the senior notes; $2.6 million of interest was capitalized to undeveloped properties.
Guidance, outlook, risks and unusual items
- Management estimated 2013 capital expenditures of $570 million to $590 million, excluding additional acquisitions. Approximately 85% was expected to be spent in the Utica Shale.
- Planned 2013 activity included 55 to 60 gross Utica wells, $494 million to $504 million of Utica capital expenditures excluding leasehold acquisitions, $42 million to $45 million for WCBB and $24 million to $26 million for Hackberry.
- Management expected Grizzly’s Algar Lake oil sands project to begin first oil production in Q3 2013. Gulfport’s remaining Grizzly commitment, including its share of potential cost overruns, was approximately $12.4 million at March 31, 2013.
- Management stated that cash on hand, operating cash flow, offering proceeds and credit availability should fund normal operating needs and planned capital requirements for the next twelve months. Additional funding could be required for accelerated drilling, acquisitions, the Blackhawk option or an accelerated Canadian oil sands project.
- Gulfport hedged approximately 23% of expected 2013 production through fixed-price oil swaps covering 5,000 barrels per day through December 2013. The swaps had a net liability of approximately $9.3 million at March 31, 2013 and limit upside if oil prices rise.
- Key risks include volatile oil and gas prices, production declines, execution and permitting delays in the Utica, pipeline and infrastructure constraints, full-cost ceiling-test impairments, reserve-estimation uncertainty, project cost overruns and financing availability.
- Utica well start-up was delayed by MarkWest rights-of-way and permitting challenges; management stated that the necessary rights-of-way and permits had been obtained by May 1, 2013.
- Pending litigation includes Louisiana severance-tax disputes and environmental litigation relating to the Hackberry field. Management assessed the probability of loss as remote but stated that adverse outcomes could materially affect results; potential losses were not determinable.
Most important facts for investors to verify
- Whether the $61.1 million Diamondback mark-to-market gain is recurring; it is dependent on the quoted market value of Gulfport’s approximately 21.4% investment.
- Whether Utica drilling, production ramp-up, infrastructure access and permitting progress support the substantially higher 2013 capital program.
- Actual operating cash flow and funding needs relative to the $570 million to $590 million capital-spending estimate.
- The status and final terms of the proposed revolving-credit borrowing-base increase and maturity extension.
- Commodity-price exposure, hedge settlements and the potential impact of lower prices on cash flow and full-cost ceiling testing.
- Progress and cost exposure related to Grizzly’s Algar Lake project and the remaining $12.4 million commitment.
- Developments in the Louisiana severance-tax and Hackberry environmental cases, for which the filing does not provide a clear potential loss amount.