GULFPORT ENERGY CORP quarterly report, Q3 FY2012

Gulfport Energy Corporation — Form 10-Q Summary

Reporting period: Quarterly and nine-month periods ended September 30, 2012. The financial statements are unaudited. Gulfport is an independent U.S. oil and natural gas exploration and production company with producing properties in Louisiana and development interests in the Utica Shale, Niobrara, Bakken, Alberta oil sands and Southeast Asia.

Financial Performance and Position

Metric	Q3 2012	Q3 2011	9M 2012	9M 2011
Total revenue	$60.5 million	$58.1 million	$192.3 million	$160.3 million
Income from operations	$18.2 million	$29.1 million	$71.4 million	$79.4 million
Net income	$0.5 million	$29.0 million	$52.5 million	$77.4 million
Diluted EPS	$0.01	$0.57	$0.93	$1.61
Operating margin	30.0%	50.1%	37.1%	49.5%
Net margin	0.8%	50.0%	27.3%	48.3%

Production increased 11% year over year in Q3 to approximately 655,000 BOE; nine-month production increased 18% to approximately 1.964 million BOE.
Q3 realized price declined 6% to $92.24 per BOE, while the nine-month realized price increased 2% to $97.82 per BOE. Q3 average oil, gas and liquids prices were $101.17 per barrel, $3.09 per Mcf and $0.88 per gallon, respectively.
Depreciation, depletion and amortization increased to $25.4 million in Q3 and $70.4 million for nine months, primarily because of a larger full-cost pool, higher production and changes in proved reserve volumes.
Cash flow from operations was $165.9 million for the first nine months, compared with $122.0 million in the prior-year period.
Investing cash outflow was $387.9 million, including $269.2 million for oil and gas properties and $119.0 million of contributions to equity-method investments. Financing cash flow was $140.4 million, primarily from revolving-credit borrowings.
Cash and cash equivalents declined to $12.3 million at September 30, 2012, from $93.9 million at December 31, 2011.
Total assets were $970.6 million and stockholders’ equity was $680.6 million at September 30, 2012. Net property and equipment was $705.8 million, and equity investments totaled $206.7 million.

Material Changes Versus Prior Comparable Period

Q3 revenue increased 4%, but net income fell 98%, primarily because of a $15.5 million deferred income tax expense associated with the projected tax effects of the Permian Basin contribution to Diamondback Energy.
Nine-month revenue increased 20%, but net income declined 32% because of the deferred tax expense, higher lease operating expenses, production taxes, general and administrative costs and DD&A.
Q3 lease operating expenses increased 16%, production taxes 13%, DD&A 72% and general and administrative expense 52%.
Interest expense increased to $1.0 million in Q3 and $1.6 million for nine months, reflecting higher average borrowings. Long-term debt increased to $143.2 million at September 30, 2012, including $141.0 million outstanding under the secured revolving facility.
Accumulated other comprehensive income declined to a $5.0 million loss, principally because of an $11.7 million unfavorable change in derivative fair value for the nine-month period.

Operations, Outlook and Unusual Items

Gulfport held approximately 128,000 gross, or 64,000 net, Utica Shale acres acquired for approximately $205.8 million. The company had spud 12 wells by November 1, 2012, and reported strong initial test results from several wells.
Q3 drilling and recompletion activity included 26 gross new wells and 25 gross recompletions. Management intended to drill approximately 30 wells and recomplete approximately 60 wells at WCBB and drill 22 wells and recomplete 26 wells at East Hackberry during 2012.
On October 11, 2012, Gulfport contributed its Permian Basin assets to Diamondback Energy in exchange for 7,914,036 Diamondback shares and a $63.6 million promissory note, which was repaid on October 17. Following the Diamondback IPO and overallotment, Gulfport owned approximately 21.4% of Diamondback; the investment will be accounted for under the equity method.
On October 17, 2012, Gulfport issued $250 million of 7.750% senior notes due 2020 and used part of the proceeds to repay all borrowings under its revolving credit facility. The remaining proceeds are intended for general corporate purposes and 2012–2013 development plans. The revolving facility borrowing base was reduced to $45 million pending redetermination.
Management estimated 2012 drilling-related capital expenditures of $229.5 million to $242.0 million and 2013 drilling capital expenditures of $283.0 million to $299.0 million, excluding certain potential Grizzly expenditures.
Management stated that cash on hand, operating cash flow, proceeds from the notes and the Contribution, and revolving-facility availability should fund normal operating needs and capital requirements for the next twelve months. Additional funding could be required for accelerated drilling, acquisitions, Canadian oil sands development or other expansion.
Oil-price swaps covered approximately 43% to 44% of estimated 2012 production. At September 30, derivative liabilities exceeded assets by approximately $9.5 million. A 10% change in underlying commodity prices was estimated to change derivative fair value by approximately $17.9 million in the opposite direction.

Risks, Contingencies and Other Matters

Results remain highly sensitive to oil, natural gas and NGL prices, production volumes, reserve estimates, operating costs, drilling results, pipeline and takeaway capacity, weather and regulatory conditions.
The company uses full-cost accounting and performs quarterly ceiling tests. No ceiling-test impairment was required for the quarter, but lower commodity prices could require a material write-down of oil and gas properties.
Gulfport had $13.9 million of asset retirement obligations at September 30, 2012 and held approximately $3.1 million in a WCBB plugging and abandonment trust.
The Louisiana Department of Revenue is pursuing severance-tax claims, including a 2009 lawsuit seeking approximately $2.3 million plus interest and costs and two later lawsuits with unspecified damages. Management considers the possibility of loss remote, but the outcomes are uncertain.
In the Cudd litigation, a jury awarded no damages; the court denied post-trial motions, although further motions and an appeal were expected.
The Reeds environmental contamination litigation remains active, with plaintiffs seeking remediation, restoration, lost profits and other damages. Management cannot estimate any potential loss and considers the possibility of loss remote.
Related-party transactions and equity investments involve entities controlled by Wexford, including operating, acquisition, drilling, completion, midstream and oil sands ventures. These relationships and associated funding obligations warrant review.
The company was in compliance with its revolving-credit financial covenants at September 30, 2012, and reported effective disclosure controls and procedures.

Investor Verification Checklist

Verify the accounting and valuation of the Diamondback contribution, including the unresolved post-closing working-capital and debt adjustment.
Reconcile the post-quarter-end capital structure: the $250 million senior notes, repayment of the revolving facility, reduced $45 million borrowing base and remaining liquidity.
Assess whether projected 2012 and 2013 capital expenditures can be funded from operating cash flow and available financing.
Evaluate Utica well productivity, decline rates, completion costs, gathering and processing capacity and the economic impact of natural gas and NGL prices.
Monitor commodity-hedge settlements, derivative liabilities and the amount of production exposed to market prices.
Review the carrying value and future funding requirements of Grizzly and other equity-method investments, particularly the Algar Lake oil sands project.
Follow the Louisiana severance-tax matters, Reeds environmental litigation and any post-trial developments in the Cudd case.
Confirm reserve revisions, full-cost ceiling-test sensitivity and the company’s ability to convert proved undeveloped reserves into production.