Gulfport Energy Corporation 2017 Form 10-K Summary
Business Context and Reporting Period
Gulfport Energy Corporation is an independent U.S. oil and natural gas exploration and production company. Its principal assets are in the Utica Shale in Ohio and the SCOOP Woodford and Springer plays in Oklahoma, with additional properties in Louisiana, Colorado and North Dakota and equity investments in Mammoth Energy, Strike Force Midstream, Grizzly Oil Sands and other entities. The filing covers the fiscal year ended December 31, 2017, with audited comparisons for 2016 and 2015. Fourth-quarter 2017 data is presented as unaudited quarterly information.
Gulfport completed the approximately $1.85 billion SCOOP acquisition on February 17, 2017, comprising approximately $1.35 billion of cash and 23.9 million common shares. The acquired assets contributed $213.4 million of revenue from the acquisition date through year-end.
Financial and Operating Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $1.320 billion | $385.9 million | +242% |
| Net income (loss) | $435.2 million | $(979.7) million | Improved |
| Income (loss) from operations | $548.4 million | $(868.2) million | Improved |
| Operating cash flow | $679.9 million | $337.8 million | +101% |
| Production | 397,543 MMcfe | 263,430 MMcfe | +51% |
| Oil, gas and NGL sales before derivatives | $1.107 billion | $560.4 million | +97% |
| Average realized price including settled derivatives | $2.85/Mcfe | $2.69/Mcfe | Improved |
| Total production, midstream and tax costs | $0.88/Mcfe | $0.94/Mcfe | Improved |
| Interest expense | $108.2 million | $63.5 million | +70% |
Revenue included $845.999 million of natural gas sales, $124.568 million of oil and condensate sales, $136.057 million of NGL sales and a $213.679 million net gain on derivatives. The reported net income benefited materially from the absence of a full-cost ceiling impairment; Gulfport recorded no such impairment in 2017 versus $715.5 million in 2016.
At December 31, 2017, total assets were $5.808 billion, total liabilities were $2.706 billion and stockholders’ equity was $3.102 billion. Cash and cash equivalents were $99.6 million, compared with $1.276 billion at year-end 2016, primarily reflecting the SCOOP acquisition and development spending.
Total debt, net of issuance costs, was approximately $2.039 billion, consisting primarily of $350 million of 2023 Notes, $650 million of 2024 Notes, $600 million of 2025 Notes and $450 million of 2026 Notes, plus a $23.7 million construction loan. The secured revolving credit facility had no borrowings outstanding, a $1.2 billion borrowing base, a $1.0 billion elected commitment and $759.0 million of availability after $241.0 million of letters of credit.
Net cash used in investing activities was $2.289 billion, including approximately $1.349 billion for the SCOOP acquisition, $1.065 billion of additions to oil and gas properties and $46.1 million of net investment in Strike Force. Net cash provided by financing activities was $433.0 million, principally reflecting the 2026 Notes issuance.
Material Changes Versus Prior Comparable Period
- Production increased 51%, driven by continued Utica development and the SCOOP acquisition.
- Natural gas production increased to 350,061 MMcf from 227,594 MMcf; oil and condensate production increased to 2,579 MBbls from 2,126 MBbls; and NGL production increased to 224,038 MGal from 161,562 MGal.
- Commodity prices and derivative results improved substantially. The 2017 derivative gain was $213.7 million versus a $174.5 million derivative loss in 2016.
- Lease operating expense increased in absolute dollars to $80.2 million but declined to $0.20/Mcfe from $0.26/Mcfe. General and administrative expense increased to $52.9 million but declined to $0.13/Mcfe from $0.16/Mcfe.
- Midstream gathering and processing expense rose to $249.0 million from $166.0 million, largely due to higher production and SCOOP-related volumes. DD&A increased to $364.6 million from $246.0 million.
- Debt increased by approximately $445 million, primarily due to the $450 million 2026 Notes issuance. Interest expense increased by $44.7 million.
- Proved reserves increased to 5.395 Tcfe from 2.321 Tcfe. Additions included 1.5 Tcfe from the SCOOP acquisition and 1.6 Tcfe from extensions and discoveries, partially offset by production and revisions.
- PV-10 increased to $2.883 billion from $696.0 million; standardized measure increased to $2.644 billion from $688.0 million. These measures reflect different commodity-price assumptions and the enlarged asset base.
- Approximately 64.9% of year-end proved reserves were proved undeveloped, requiring substantial future capital expenditures.
Guidance, Outlook, Risks and Unusual Items
Management estimated 2018 production of 456,250 to 474,500 MMcfe. Planned 2018 drilling and completion capital expenditures were $630 million to $685 million, including $425 million to $455 million for Utica activities and $185 million to $210 million for SCOOP activities. Management also expected $140 million to $150 million of non-drilling and completion expenditures, including lease extensions and Strike Force funding, plus approximately $20 million for Southern Louisiana recompletions. Management stated that capital spending was expected to decline approximately 23% from 2017 and was intended to be funded within cash flow.
At December 31, 2017, Gulfport had hedged approximately 78% to 81% of expected 2018 production. Open positions included 908,000 MMBtu per day of 2018 natural gas swaps at a weighted average price of $3.06/MMBtu, 269,000 MMBtu per day of 2019 gas swaps at $2.93/MMBtu, and various oil and NGL swaps. Hedging reduces downside exposure but limits participation in higher commodity prices and creates counterparty and volume risk.
Management cited commodity-price volatility, potential full-cost ceiling impairments, substantial debt service, high future development requirements, firm transportation commitments, lease expirations, drilling and completion risks, infrastructure constraints, environmental and hydraulic-fracturing regulation, induced seismicity, weather, insurance limitations and dependence on third-party operators as significant risks.
Gulfport had approximately $3.752 billion of firm transportation commitments, including $248.0 million due in 2018, and is obligated to pay deficiency fees if minimum transportation volumes are not delivered. The company also had approximately $3.1 million in a WCBB plugging and abandonment trust and $75.1 million of asset retirement obligations.
Two Louisiana coastal-management lawsuits remained unresolved. Management stated that the amount of any potential loss could not be determined because responsive pleadings and discovery had not begun. The filing also identifies an approximately $23.4 million out-of-period loss recorded in 2017 related to an equity-method investment in Windsor Midstream; management stated the correction was not material to previously issued financial statements.
In January 2018, the board authorized a stock repurchase program of up to $100 million, but no shares had been repurchased through February 22, 2018. The company does not pay dividends and does not anticipate paying them in the foreseeable future.
Grant Thornton issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management reported no material weaknesses.
Important Facts for Investors to Verify
- Whether 2018 production and capital-spending targets are achieved while maintaining positive free cash flow.
- The sustainability of production growth and well-level returns in the Utica and newer SCOOP development areas.
- Liquidity after planned capital spending, lease extensions, Strike Force contributions, debt service and any stock repurchases.
- Borrowing-base changes, covenant compliance and maturities or refinancing requirements for the 2023–2026 senior notes.
- Exposure to natural gas, oil and NGL prices after hedges expire, including the effect of short call options.
- Whether firm transportation commitments are matched by production and whether deficiency payments arise.
- Reserve revisions, conversion of proved undeveloped reserves and the potential for future full-cost ceiling impairments under lower prices.
- Developments and potential exposure in the Louisiana coastal litigation and other environmental or regulatory matters.
- Progress, funding requirements and returns from the SCOOP acquisition, Strike Force, Mammoth Energy and the suspended Grizzly oil-sands investment.