Gulfport Energy Corporation: 2018 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
Gulfport Energy Corporation is an independent U.S. oil and natural gas exploration and production company focused primarily on the Utica Shale in Ohio and the SCOOP plays in Oklahoma, with additional Southern Louisiana properties and equity investments, including approximately 22% of Mammoth Energy Services, Inc. The unaudited filing covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods.
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $361.0 million | $265.5 million | $939.1 million | $922.5 million |
| Income from operations | $113.6 million | $50.5 million | $237.7 million | $375.3 million |
| Net income | $95.2 million | $18.2 million | $296.6 million | $278.6 million |
| Diluted EPS | $0.55 | $0.10 | $1.68 | $1.56 |
| Operating margin | 31.5% | 19.0% | 25.3% | 40.7% |
| Net margin | 26.4% | 6.9% | 31.6% | 30.2% |
| Cash flow from operations | Not separately provided | Not separately provided | $609.0 million | $491.7 million |
Revenue consisted of natural gas sales of $271.2 million, oil and condensate sales of $45.7 million, NGL sales of $53.8 million and a $9.7 million net loss on derivatives in the third quarter. For the nine months, commodity sales before derivatives totaled $1.0358 billion, while derivative losses reduced reported revenue by $96.7 million.
- Production increased 19% year over year in the third quarter to 131,328 MMcfe, or 1,427.5 MMcfe per day.
- Nine-month production increased 31% to 368,366 MMcfe, averaging 1,349.3 MMcfe per day; the mix was approximately 89% natural gas, 8% NGLs and 3% oil.
- Nine-month production costs declined to $0.17 per Mcfe from $0.21 per Mcfe, while production taxes and midstream costs declined to $0.65 per Mcfe from $0.68 per Mcfe.
- Nine-month DD&A increased to $352.8 million from $254.9 million, primarily because of a larger full-cost pool and higher production.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $124.6 million at September 30, 2018, compared with $99.6 million at December 31, 2017.
- Total assets were $6.14 billion and stockholders’ equity was $3.29 billion.
- Total debt was approximately $2.16 billion, including $60.0 million drawn on the revolving credit facility, $2.05 billion of senior notes before debt issuance costs, and approximately $23.3 million on the construction loan.
- The revolving facility had a $1.4 billion borrowing base, a $1.0 billion elected commitment and $623.8 million of available borrowing capacity after $316.2 million of letters of credit.
- The revolving facility’s weighted-average borrowing rate was 3.72%. Management reported compliance with all financial covenants at September 30, 2018.
- Capital expenditures were $851.6 million through September 30, 2018, including $755.3 million of additions to oil and natural gas properties and $96.3 million of non-drilling and completion expenditures.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased 36%, primarily from higher production, higher oil and NGL prices and more favorable derivative fair-value changes.
- Third-quarter net income increased $77.0 million, helped by higher commodity revenue, improved equity-method investment results and a gain on sales of equity investments.
- Nine-month revenue increased only 2% because the $238.3 million year-over-year deterioration in derivative gains and losses largely offset volume and commodity-price growth.
- Nine-month operating income declined 37% because higher DD&A, midstream costs, interest expense and production taxes more than offset the revenue increase.
- Interest expense rose to $100.9 million from $74.8 million, mainly following the October 2017 issuance of $450.0 million of 6.375% senior notes due 2026.
- The company sold its 25% interest in Strike Force Midstream for $175.0 million, recognizing a $96.4 million gain, and sold portions of its Mammoth Energy investment for approximately $51.5 million of net proceeds.
- The company repurchased 10.5 million shares for approximately $110.0 million during the first nine months, reducing outstanding shares to 173.2 million from 183.1 million at year-end 2017.
Guidance, Outlook, Risks and Unusual Items
- Management estimated 2018 drilling and completion capital expenditures of approximately $685.0 million and non-drilling and completion expenditures of approximately $130.0 million. Approximately $638.1 million and $96.3 million, respectively, had been spent by September 30.
- Planned 2018 drilling and completion spending was approximately $455.0 million for the Utica, $210.0 million for the SCOOP and approximately $20.0 million for Southern Louisiana recompletions.
- Management expected to fund its 2018 development program primarily through operating cash flow, cash on hand and available borrowings, while retaining flexibility to adjust activity for commodity prices.
- Approximately 74% to 75% of estimated 2018 production was hedged. The company had a net derivative liability of $54.4 million at September 30, 2018. A 10% increase in underlying commodity prices was estimated to reduce derivative fair value by approximately $193.1 million.
- Commodity-price declines could reduce revenue, liquidity, reserves and the borrowing base and could trigger a full-cost ceiling-test impairment. No ceiling-test impairment was required through September 30, 2018, but approximately $2.9 billion of unevaluated properties remained excluded from amortization.
- Management maintained a $236.1 million valuation allowance against net deferred tax assets. The filing states that a future release could reduce tax expense, but the timing and amount are uncertain.
- Louisiana coastal-resource litigation remains in an early procedural stage. The company cannot estimate a potential loss, and the remand motions remained pending.
- Disclosure controls and procedures were deemed ineffective because the company did not timely identify and disclose unauthorized personal use of the corporate aircraft and personal charges on the former CEO’s company credit card. The company is seeking reimbursement and has initiated remedial measures.
- Effective October 29, 2018, Michael G. Moore resigned as CEO, president and director. Donnie Moore became interim principal executive officer. The separation agreement provides for aggregate separation payments of $400,000, subject to stated conditions.
- The company adopted ASC 606 in 2018 without a material effect. Adoption of the new lease standard is expected after December 15, 2018; the balance-sheet impact had not yet been determined.
Most Important Facts for Investors to Verify
- Whether production growth and planned capital spending remain achievable while operating cash flow funds development.
- The sensitivity of cash flow and reserve values to natural gas, oil and NGL prices, including the effects of the company’s substantial hedging program and derivative liabilities.
- Debt maturities, interest costs, borrowing-base redeterminations, covenant compliance and remaining revolver availability.
- The sustainability of earnings excluding the $124.8 million of nine-month gains on equity-investment sales and the volatility of equity-method investment results.
- The outcome and potential financial exposure of the Louisiana coastal litigation.
- Progress in remediating ineffective disclosure controls and the financial, governance and leadership implications of the former CEO matters and transition to interim leadership.
- The potential for full-cost ceiling-test impairment if commodity prices or reserve estimates deteriorate.