Gulfport Energy Corporation — Form 10-Q Summary
Business context and reporting period
Gulfport Energy Corporation is an independent oil and natural gas exploration and production company with producing properties in Louisiana, West Texas, Colorado and other regions, plus interests in the Utica Shale, Canadian oil sands and Southeast Asia. This unaudited Form 10-Q covers the three and six months ended June 30, 2011, compared with the corresponding 2010 periods.
Key financial metrics
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Six months ended June 30, 2011 | Six months ended June 30, 2010 |
|---|---|---|---|---|
| Oil and gas revenues | $55.5 million | $29.0 million | $102.0 million | $56.4 million |
| Total revenues, including other income/(expense) | $54.9 million | $28.9 million | $101.3 million | $56.2 million |
| Income from operations | $27.5 million | $11.0 million | $49.3 million | $21.5 million |
| Operating margin | Approximately 50.1% | Approximately 38.1% | Approximately 48.7% | Approximately 38.3% |
| Net income | $27.3 million | $10.4 million | $48.4 million | $20.4 million |
| Diluted EPS | $0.57 | $0.24 | $1.04 | $0.47 |
| Net cash from operating activities | Not separately provided | Not separately provided | $65.4 million | $34.6 million |
Second-quarter production increased 21% to approximately 567,000 BOE from 468,000 BOE. Realized BOE pricing increased 57% to $97.77 from $62.10, primarily reflecting higher oil prices. Six-month production increased 19% to 1.081 million BOE, while realized BOE pricing increased 53% to $94.36.
At June 30, 2011, cash and cash equivalents were $4.7 million, compared with $2.5 million at December 31, 2010. Total current assets were $36.0 million and current liabilities were $53.9 million. Total debt was approximately $32.4 million, including $30.0 million outstanding under the revolving credit facility and $2.4 million of building loans. Stockholders’ equity increased to $347.2 million from $211.1 million, substantially reflecting net income and the March equity offering.
Material changes versus the prior comparable period
- Second-quarter net income increased 162% and six-month net income increased 138%.
- Oil and gas revenues increased 91% in the second quarter and 81% for the six-month period.
- Production growth resulted from drilling and recompletion activity, including 25 gross wells drilled and 23 gross wells recompleted during the second quarter.
- Lease operating expenses, production taxes, depreciation, depletion and amortization, and general and administrative expenses all increased with higher production, activity and commodity prices.
- Interest expense declined because of lower debt balances and borrowing rates.
- The company completed a March 2011 offering of 2.76 million common shares, generating approximately $84.3 million before offering expenses. It used proceeds partly for Utica Shale acquisitions and debt repayment.
- Utica Shale leasehold interests totaled approximately 33,000 gross acres, or 16,500 net acres, at June 30, 2011. Subsequent acquisitions increased the position to approximately 60,000 gross acres by August 3, 2011, with commitments that could increase it to approximately 115,000 gross acres.
Cash flow, capital spending, debt and liquidity
Six-month investing cash outflows were $127.4 million, including $108.4 million of additions to oil and gas properties, $15.5 million invested in Grizzly Oil Sands, and $3.2 million loaned to Grizzly. Financing cash inflows were $64.2 million, principally from the March equity offering and stock option exercises, partially offset by $54.6 million of principal payments and other financing costs.
Management estimated 2011 capital expenditures of approximately $127 million to $133 million, excluding Utica Shale and other potential acquisitions. Planned spending included drilling and recompletion programs in WCBB, East Hackberry and the Permian Basin, Niobrara seismic and drilling, Grizzly development activity, Thailand investments and an expected approximately $6 million investment in Bison Drilling.
The amended senior secured revolving facility had a $350 million maximum commitment, a $90 million borrowing base and a May 2015 maturity. The company was in compliance with its debt covenants at June 30, 2011. After quarter-end, the company raised approximately $94.7 million before offering expenses through a July 15, 2011 offering of 3.45 million shares and repaid all outstanding revolving-credit borrowings pending use of the proceeds.
Guidance, outlook, commentary and unusual items
- Management expected 2011 WCBB activity to include approximately 60 recompletions and 20 to 24 new wells, with estimated spending of $36 million to $38 million.
- East Hackberry spending was estimated at $24 million to $26 million for 15 to 17 wells and 15 recompletions.
- Permian Basin spending was estimated at $37 million to $39 million for 37 to 42 gross wells, including recompletion activity.
- Niobrara spending was estimated at approximately $4 million for seismic work and three to four wells.
- Grizzly expected regulatory approval for the proposed 11,300-barrel-per-day Algar Lake facility in the third quarter of 2011 and planned to begin first-phase construction in the fourth quarter, subject to approval and other conditions.
- The company stated that cash on hand and operating cash flow were expected to fund normal operating needs and planned capital requirements for the next twelve months. Additional funding could be required for accelerated drilling, acquisitions or acceleration of the Canadian oil sands project.
- Oil price swaps covered 2,000 barrels per day for July through December 2011 at a weighted average price of $86.96 per barrel. The related derivative liability was $3.4 million at June 30, 2011. The hedges limit upside on covered production and may create losses if production is below commitments or market prices rise.
- No ceiling-test impairment was required for the quarter. However, lower oil, gas or natural gas liquids prices could cause future impairment of full-cost oil and gas properties.
Risks, contingencies and unusual matters
- The Louisiana Department of Revenue is disputing severance tax payments and seeks approximately $2.3 million, plus interest and costs, in one lawsuit; two additional lawsuits do not specify damages. Gulfport denies liability.
- Cudd Pressure Control seeks $26.5 million, approximately $6.0 million of disgorgement and punitive damages in litigation involving alleged trade-secret and fiduciary-duty violations. Gulfport denies the claims.
- Gulfport is a defendant in environmental contamination litigation concerning Louisiana properties. The plaintiffs seek assessment, remediation, restoration, lost profits and other damages; management cannot estimate a potential loss.
- Potential federal and state regulation of hydraulic fracturing could increase permitting, disclosure, compliance and operating costs or delay development.
- Drilling and exploration results in newer shale plays may be uncertain, and the company may not recover its investment in undeveloped acreage or unsuccessful wells.
- Commodity-price volatility, weather and hurricanes, production declines, drilling costs, environmental obligations and reliance on operators of non-operated properties may materially affect results.
- Related-party activity is significant. At June 30, 2011, receivables from related parties were $9.6 million, the company’s Grizzly note receivable was $23.9 million, and several investment and service arrangements involve entities controlled by or affiliated with Wexford.
Important facts for investors to verify
- Whether post-quarter-end Utica Shale acquisitions and commitments were completed on the expected terms and how they affect capital requirements.
- Actual 2011 production, drilling success rates, capital expenditures and cash flow compared with management’s stated plans.
- The status and outcome of the Louisiana severance-tax, Cudd and environmental litigation matters.
- Available borrowing capacity and compliance with revolving-credit covenants after the July equity offering and debt repayment.
- Realized commodity prices, hedge settlements and the effect of the $86.96-per-barrel swaps on future revenue.
- Regulatory approval and financing requirements for the Grizzly Algar Lake project.
- The recoverability of undeveloped leasehold costs and potential exposure to future full-cost ceiling-test impairments.