GULFPORT ENERGY CORP annual report, FY2012

Gulfport Energy Corporation — FY2012 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2012; filed February 28, 2013. Gulfport is an independent oil and natural gas exploration and production company focused on Louisiana Gulf Coast properties and the Utica Shale, with equity investments in Diamondback Energy, Grizzly Oil Sands and other service and midstream entities. The filing also provides unaudited fourth-quarter and quarterly financial data.

Financial performance and operating metrics

Metric	FY2012	FY2011	Change
Revenue	$248.9 million	$229.3 million	+9%
Oil and gas revenue	$248.6 million	$229.0 million	+9%
Income from operations	$97.3 million	$111.0 million	-12%
Net income	$68.4 million	$108.4 million	-37%
Diluted EPS	$1.21	$2.20	-45%
Operating cash flow	$199.2 million	$158.1 million	+26%
Capital additions to oil and gas properties	$757.2 million	$287.3 million	+164%
Total debt	$299.0 million	$2.3 million	Significant increase
Cash and cash equivalents	$167.1 million	$93.9 million	+78%

Production increased 10% to approximately 2.573 million BOE from 2.333 million BOE. Oil production was 2.323 million barrels, gas production was 1.108 Bcf and NGL production was 2.714 million gallons.
Average realized price declined to $96.63 per BOE from $98.13. Average oil price was $104.46 per barrel, gas was $2.91 per Mcf and NGLs were $0.98 per gallon.
Total production costs and production taxes increased to $20.88 per BOE from $20.25 per BOE, including production costs of $9.45 and production taxes of $11.43 per BOE.
Income from producing activities was $78.3 million, compared with $119.8 million in 2011. The decrease reflected higher depletion, taxes and operating costs and higher income taxes.
Fourth-quarter 2012 revenue was $56.6 million and net income was $15.9 million, compared with fourth-quarter 2011 revenue of $68.9 million and net income of $31.0 million.

Balance sheet, liquidity and financing

Total assets increased to $1.578 billion from $691.2 million, primarily due to Utica acreage acquisitions, development spending and the Diamondback investment.
Stockholders’ equity increased to $1.126 billion from $632.4 million, principally reflecting the December 2012 equity offering and retained earnings.
Gulfport issued $300.0 million of 7.750% senior unsecured notes due 2020 and used part of the proceeds to repay approximately $146.5 million outstanding under its revolving credit facility. The notes had a carrying value of approximately $296.9 million at year-end.
The secured revolving facility had a $40.0 million borrowing base at December 31, 2012, with no borrowings outstanding. Gulfport was in compliance with its financial covenants.
Net cash used in investing activities was $840.6 million, including $509.8 million of lease-related costs, $103.9 million invested in Grizzly and $43.4 million invested in other equity investments.
Net cash provided by financing activities was $714.6 million, driven by debt and equity offerings. Management stated that cash on hand, operating cash flow, recent financing proceeds and available revolver capacity should fund normal operations and planned capital requirements for the next twelve months.

Material changes versus the prior comparable period

Gulfport substantially shifted its growth strategy toward the Utica Shale. At year-end, it held approximately 137,000 gross, or 106,000 net, acres after acquiring approximately 37,000 net acres in December for approximately $372.0 million.
In October 2012, Gulfport contributed its Permian Basin assets to Diamondback in exchange for 7,914,036 Diamondback shares and a $63.6 million note, which was repaid at the Diamondback IPO. Gulfport owned approximately 21.4% of Diamondback after the IPO and accounted for the investment at fair value under the equity method.
The Diamondback transaction generated a $7.3 million gain on asset sale and an $8.3 million gain from equity method investments, but also removed Permian Basin reserves and production from Gulfport’s direct operations.
Proved reserves fell to 13.879 MMBOE from 19.367 MMBOE, primarily because of the Permian Basin contribution. Proved reserves included 8.251 million barrels of oil and 33.771 Bcf of gas. Approximately 40.2% of reserves were undeveloped.
PV-10 declined to $436.8 million from $490.5 million, and standardized measure declined to $348.6 million from $376.7 million.
General and administrative expense increased 71% to $13.8 million, DD&A increased 46% to $90.7 million, and interest expense increased to $7.5 million from $1.4 million.
Net income was reduced by a $3.5 million after-tax loss on disposal of Belize properties and by $26.4 million of income tax expense, compared with a small tax benefit in 2011.

Guidance, outlook and management commentary

Management estimated 2013 production of approximately 7.8 million to 8.1 million BOE, subject to drilling activity, economic conditions, hurricanes and other unforeseen events.
Estimated 2013 capital expenditures were $458 million to $512 million, excluding additional Utica acquisitions and Grizzly spending. Approximately 85% was expected to be directed to the Utica Shale.
Planned 2013 activity included 50 gross, or 44 net, Utica wells at an estimated cost of $382 million to $426 million; 22 to 24 WCBB wells and 60 recompletions for $42 million to $45 million; and 10 to 12 Hackberry wells and 24 recompletions for $26 million to $28 million.
Gulfport expected to invest $10 million to $15 million in its service and midstream entities during 2013 and $2 million to $2.5 million in Thailand drilling.
In February 2013, Gulfport acquired approximately 22,000 additional net Utica acres for approximately $220.4 million. The transaction increased its working interest in the applicable leases to approximately 93.8% and was funded partly with proceeds from a $325.8 million February equity offering.
Grizzly expected first oil production from its Algar Lake SAGD project in the third quarter of 2013. Gulfport had approximately $6.3 million of remaining Algar Lake commitments at year-end and expected potential cost overruns of approximately $3 million to $7 million.
Gulfport had fixed-price oil swaps covering 5,000 barrels per day for 2013 at an average price of $100.90 per barrel, representing approximately 23% of estimated 2013 production. The swaps limit upside from higher oil prices and expose Gulfport to counterparty and production-volume risk.

Key risks, contingencies and unusual items

Utica development is capital-intensive and depends on drilling results, completion performance, gathering and processing infrastructure, rights-of-way, permitting and access to sufficient financing. Production from initial wells was delayed by infrastructure and permitting challenges.
Oil and natural gas prices are volatile. Lower prices could reduce cash flow, reserves and drilling activity and could trigger non-cash ceiling-test impairments under the full-cost accounting method.
Approximately $82.8 million of 2013, $16.4 million of 2014 and $4.3 million of 2015 future development costs were associated with proved undeveloped reserves.
Hydraulic fracturing, air emissions, wastewater disposal, climate-change regulation and environmental requirements could increase costs, delay development or restrict operations. Gulfport and other WCBB operators received a government subpoena concerning a March 2012 alleged produced-water discharge.
Gulfport faces Louisiana severance-tax litigation. The Louisiana Department of Revenue seeks approximately $2.3 million plus interest and costs in one case and has filed two additional cases involving alleged underpayments; management assessed the likelihood of loss as remote.
The Reed environmental contamination litigation concerning Hackberry properties remained pending, with a trial scheduled for September 2013. The amount of potential loss was not estimable and management assessed the likelihood of loss as remote.
Cudd litigation resulted in no damages awarded by the jury, but plaintiffs’ post-trial motions remained pending as of the filing date.
The company is exposed to operational hazards, hurricanes and weather disruptions, uninsured losses, dependence on third-party transportation and concentration among purchasers. Approximately 92% of oil sales were to Shell, and $166.6 million of cash exceeded FDIC insurance limits at year-end.
Related-party transactions and investments involving Wexford affiliates are material, including Utica acreage participation, service entities and equity investments. Investors should review governance, pricing and potential conflicts related to these arrangements.

Most important facts for investors to verify

Whether 2013 Utica drilling and production guidance was achieved and whether infrastructure constraints affected timing, costs or realized prices.
Actual operating cash flow, capital spending, reserve additions and reserve replacement following the major Utica expansion and Permian Basin contribution.
Liquidity after funding the 2013 capital program, including cash balances, revolver availability, senior-note interest obligations and any additional equity or debt issuance.
Performance and valuation of the Diamondback investment and the economics, financing needs and production start-up of the Grizzly Algar Lake project.
Effects of oil and gas prices, hedging settlements, natural gas pricing and any future full-cost ceiling-test impairment.
Status and potential exposure from the Louisiana severance-tax cases, Hackberry environmental litigation, produced-water subpoena and other contingencies.
Results of independent reserve reports, particularly the approximately 40% undeveloped reserve base and the assumptions supporting PV-10 and standardized measure.