GULFPORT ENERGY CORP quarterly report, Q3 FY2016

Gulfport Energy Corporation 10-Q Summary

Business context and reporting period

Gulfport Energy Corporation is an independent oil and natural gas exploration and production company focused primarily on the Utica Shale in eastern Ohio, with additional properties in Louisiana, Colorado and the Bakken. The unaudited filing covers the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods.

Key financial metrics

Metric	Q3 2016	Q3 2015	9M 2016	9M 2015
Revenue	$193.7 million	$230.6 million	$322.5 million	$519.2 million
Operating loss	$(158.0) million	$(529.1) million	$(677.2) million	$(521.9) million
Net loss	$(157.3) million	$(388.2) million	$(739.3) million	$(394.0) million
Net loss per diluted share	$(1.25)	$(3.59)	$(6.12)	$(4.06)
Operating cash flow	Not provided for the quarter	Not provided for the quarter	$245.3 million	$235.1 million
Capital expenditures and other investing cash flow	Not provided for the quarter	Not provided for the quarter	$(420.3) million	$(1.37) billion

Q3 operating margin was approximately negative 81.6% and net margin was approximately negative 81.2%. Nine-month operating and net margins were approximately negative 210.0% and negative 229.2%, respectively, heavily affected by non-cash impairment charges.

Q3 production increased 13% to 67,541 MMcfe, or approximately 734.1 MMcfe per day. The mix was approximately 86% natural gas, 9% NGLs and 5% oil.
Nine-month production increased substantially in gas, reaching 164,233 MMcf versus 107,208 MMcf in the prior-year period. Oil and condensate production declined to 1,675 MBbls from 2,225 MBbls.
Q3 impairment of oil and gas properties was $212.2 million; the nine-month charge was $601.8 million, compared with $594.8 million for all of the comparable 2015 period.
Cash and cash equivalents were $364.3 million at September 30, 2016, compared with $113.0 million at December 31, 2015.
Total debt was approximately $961.3 million, including $600.0 million of 7.75% notes due 2020, $350.0 million of 6.625% notes due 2023 and $16.5 million under a construction loan, net of applicable adjustments and current maturities.
The revolving credit facility had no borrowings outstanding and $493.0 million of availability after $207.0 million of letters of credit. The company reported compliance with its financial covenants.
Stockholders’ equity declined to $1.73 billion from $2.04 billion at year-end 2015, despite $411.7 million of net proceeds from a March 2016 common-stock offering.

Material changes versus the prior comparable period

Q3 revenue declined 16%, primarily because derivative results were less favorable, partially offset by higher gas volumes and prices before derivatives.
Nine-month revenue declined 38%. The principal drivers were unfavorable changes in derivative fair values and settlements, lower realized commodity prices and lower oil and NGL volumes.
Q3 net loss improved by $230.9 million, primarily because the property impairment charge was $382.6 million lower and DD&A expense was $28.0 million lower.
Nine-month net loss worsened by $345.3 million, reflecting lower revenue, a $213.2 million reduction in income tax benefit, higher midstream costs, higher interest expense and the larger impairment charge.
Midstream gathering and processing expense increased 33% for the nine-month period to $122.5 million, although unit midstream expense declined 10% to $0.64 per Mcfe. Unit lease operating expense declined 30% to $0.26 per Mcfe.
The company resumed completion activity on April 1, 2016 after suspending hydraulic fracturing activity during the first quarter. It added a fourth Utica rig in September and planned two additional rigs for November and December.

Guidance, outlook, risks and unusual items

Management estimated 2016 total capital expenditures of $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 for Strike Force contributions. Approximately 95% was expected to be spent in the Utica.
Management expected to spud 42 to 46 gross, or 36 to 39 net, Utica wells in 2016 and commence sales from 50 to 56 gross wells operated by Gulfport. It also expected additional activity by other operators.
The company 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, while cautioning that lower commodity prices, higher costs, additional investment requirements or acquisitions could require additional financing.
Higher-than-anticipated gathering-line pressures affected production in part of the dry-gas development area. Pad-level compression was installed during Q3, and field-level compression was expected around year-end 2016.
Commodity hedges covered approximately 75% to 79% of estimated 2016 production. At September 30, the net derivative position was a $2.5 million asset, compared with a $161.7 million asset a year earlier. A 10% commodity-price increase or decrease was estimated to change derivative fair value by approximately $79.8 million in the opposite direction.
On October 14, 2016, after quarter-end, Gulfport issued $650.0 million of 6.0% senior notes due 2024. Proceeds and cash on hand were used to repurchase or redeem the $600.0 million of 2020 Notes. The 2020 Notes were fully satisfied and discharged.
After quarter-end, Mammoth Energy completed its IPO. Gulfport sold 76,250 shares for net proceeds of $1.1 million and retained an approximate 24.2% interest.
Gulfport was named in two Louisiana coastal-management lawsuits involving alleged environmental damage from oil and gas operations. The matters were in early stages, and management could not estimate any potential loss.
The company recorded a $23.1 million impairment of its Grizzly Oil Sands investment in Q1 2016 and warned that further impairment could result from declining commodity prices.
The company had a $559.1 million valuation allowance against its net deferred tax asset, excluding certain state NOLs and AMT credits expected to be utilized.

Important facts investors should verify

Whether the planned 2016 capital program and additional rig additions were executed and whether production growth generated sufficient returns at prevailing gas prices.
The impact of the October 2016 refinancing, including the final carrying value, premiums, fees and any gain or loss from retiring the 2020 Notes.
The company’s full-cost ceiling-test sensitivity to commodity prices and the potential for additional impairment charges.
Actual liquidity after funding capital expenditures, hedge settlements, debt refinancing and commitments to Grizzly and Strike Force.
The status and potential financial exposure of the Louisiana coastal litigation.
The effect of gathering constraints and planned compression on Utica production, realizations and operating costs.
The sustainability of cash flow given substantial commodity-price exposure, derivative obligations and approximately $961 million of debt outstanding at September 30, 2016.