Gulfport Energy Corporation: 2016 First-Quarter 10-Q Summary
Reporting period: Three months ended March 31, 2016; comparative period is the three months ended March 31, 2015. The interim financial statements are unaudited. Gulfport 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, North Dakota and Montana, and equity investments in Canada and Southeast Asia.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $157.0 million | $176.3 million | Down 11% |
| Operating income/(loss) | $(195.8) million | $28.8 million | Declined $224.6 million |
| Net income/(loss) | $(242.3) million | $25.5 million | Declined $267.8 million |
| Net loss per diluted share | $(2.17) | $0.30 | Turned negative |
| Operating margin | Approximately (124.7%) | Approximately 16.3% | Material deterioration |
| Net margin | Approximately (154.3%) | Approximately 14.5% | Material deterioration |
| Cash flow from operations | $83.8 million | $99.0 million | Down 15% |
| Capital additions to oil and gas properties | $151.3 million | $226.9 million | Down 33% |
| Cash and cash equivalents | $454.4 million | $74.7 million at March 31, 2015 | Increased substantially |
Production increased 65% to 62,993 MMcfe from 38,198 MMcfe, averaging approximately 692.2 MMcfe per day versus 424.4 MMcfe per day. The production mix was approximately 85% natural gas, 9% NGLs and 6% oil. Realized gas-equivalent prices declined 46% to $2.49 per Mcfe from $4.61, including average oil prices of $28.45 per barrel, natural gas prices of $2.46 per Mcf and NGL prices of $0.21 per gallon.
Reported costs included $218.991 million of oil and gas property impairment, $65.477 million of DD&A, $37.652 million of midstream gathering and processing expense, $16.657 million of lease operating expense and $16.023 million of interest expense. The impairment and other noncash items were major drivers of the quarterly loss.
Balance Sheet, Debt and Liquidity
- Total assets were $3.503 billion and stockholders’ equity was $2.221 billion at March 31, 2016.
- Long-term debt was $949.7 million, consisting principally of $600.0 million of 7.75% senior notes due 2020 and $350.0 million of 6.625% senior notes due 2023, together with a $5.0 million construction loan, net of discounts and issuance costs.
- No borrowings were outstanding under the $1.5 billion secured revolving credit facility. After $227.8 million of letters of credit, borrowing availability was $472.2 million. Gulfport was in compliance with its financial covenants.
- Cash increased by $341.4 million during the quarter, primarily because of $411.9 million of net proceeds from a March 9, 2016 public offering of 16.905 million common shares.
- Net cash used in investing activities was $157.5 million, while net cash provided by financing activities was $415.2 million.
Material Changes Versus Q1 2015
- Revenue declined despite substantially higher production because commodity prices fell and the production mix shifted toward lower-priced natural gas.
- The company moved from $25.5 million of net income to a $242.3 million net loss, primarily due to the $219.0 million full-cost ceiling-test impairment and a $23.1 million impairment of the Grizzly Oil Sands investment.
- Midstream gathering and processing expense increased $12.3 million to $37.7 million as Utica production expanded.
- Interest expense increased $7.3 million to $16.0 million, principally because of the $350.0 million of 2023 senior notes issued in April 2015.
- Operating cash flow decreased $15.3 million even though production rose, reflecting weaker realized prices and the absence of a $7.2 million Blackhawk escrow release received in Q1 2015.
- Capital spending declined from $231.5 million of total investing cash uses to $157.5 million, reflecting a reduced development program in the low-price environment.
- Common shares outstanding increased from 108.3 million at December 31, 2015 to 125.3 million at March 31, 2016, primarily from the equity offering.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2016 drilling and completion expenditures of approximately $335 million to $375 million, with total 2016 capital expenditures including acreage and Strike Force contributions estimated at approximately $425 million to $475 million.
- Gulfport expected to spud 29 to 32 gross, or 19 to 21 net, operated Utica wells and commence sales from 44 to 48 gross wells in 2016. It also expected $90 million to $100 million of expenditures related to wells drilled by other operators and $60 million to $65 million for Utica acreage expenses.
- Management reduced its operated Utica activity to an average of approximately 2.5 rigs from 3.7 rigs in 2015. Completion and hydraulic fracturing activities were suspended during the first quarter and resumed April 1, 2016.
- Management expected second-quarter 2016 average daily production to be flat or slightly below first-quarter levels because of natural declines and the timing of wells placed on production, with renewed completion activity expected to affect production later in the year.
- Gulfport contributed gathering assets valued at $22.5 million for a 25% interest in Strike Force Midstream and expected to contribute an additional $30 million to $35 million in cash during 2016.
- The company’s 24.9% Grizzly investment had a carrying value of approximately $39.1 million after the $23.1 million impairment. Grizzly had $57.2 million outstanding under its credit facility, with Gulfport’s proportionate share of the June 2016 maturity approximately $14.3 million.
- Commodity prices remain the principal risk. Further price declines could cause additional full-cost ceiling-test impairments, reserve reductions, lower borrowing-base availability and reduced liquidity. Gulfport had hedged approximately 74% to 78% of estimated 2016 production, but hedges can create losses if production is below expectations or market prices rise.
- Open derivatives had a net asset value of $178.8 million at March 31, 2016. A 10% change in underlying commodity prices was estimated to change derivative fair value by approximately $85.5 million in the opposite direction.
- Other notable commitments included $131.1 million of remaining sand supply and pressure-pumping commitments through 2018, $1.2 million of remaining office lease commitments, and a $3.1 million plugging and abandonment trust. Management stated that pending litigation was not expected to have a material adverse effect.
- Management believed cash on hand, operating cash flow and available borrowings would meet normal operating needs and capital requirements for the next twelve months, but noted that additional financing could be required if prices decline, costs rise, investments require further funding or acquisitions are pursued.
Most Important Facts for Investors to Verify
- Whether Utica production growth and resumed completion activity can offset low realized commodity prices.
- The sensitivity of future earnings, reserves, borrowing-base availability and liquidity to oil, gas and NGL prices.
- The sustainability of the $472.2 million of revolver availability after letters of credit and compliance with debt covenants.
- Whether the planned $425 million to $475 million of 2016 capital spending is consistent with operating cash flow and available liquidity.
- The valuation and funding requirements of Grizzly, Strike Force and other equity-method investments, including the potential $14.3 million Grizzly debt-related obligation.
- Potential additional impairments of oil and gas properties or equity investments if commodity prices remain depressed.
- The effect of the 16.905 million-share offering on per-share value, dilution and future capital funding needs.