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 focused on the Utica Shale in eastern Ohio, Louisiana Gulf Coast properties, and smaller positions in Colorado and the Bakken. It also holds equity investments in Diamondback Energy, Grizzly Oil Sands and oilfield-service businesses. This unaudited filing covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods.
Key Financial Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenue | $69.3 million | $60.5 million | $194.7 million | $192.3 million |
| Income from operations | $15.1 million | $18.2 million | $52.5 million | $71.4 million |
| Net income | $40.5 million | $0.5 million | $128.9 million | $52.5 million |
| Diluted EPS | $0.52 | $0.01 | $1.69 | $0.93 |
| Operating margin | 21.9% | 30.0% | 27.0% | 37.1% |
| Net margin | 58.5% | 0.8% | 66.2% | 27.3% |
| Net production | 1.19 million BOE | 0.66 million BOE | 2.58 million BOE | 1.96 million BOE |
| Net cash from operations | Not separately provided | Not separately provided | $141.0 million | $165.9 million |
Q3 revenue increased 14%, while production rose 82% to approximately 12,976 BOE per day. The increase was driven primarily by Utica Shale development. Realized BOE prices declined 38% to $57.65 from $92.24 because of the shift toward natural gas and NGL production. Nine-month realized BOE prices declined 23% to $75.02.
Reported earnings were substantially affected by the fair-value accounting for Gulfport’s Diamondback investment. Gulfport recognized approximately $52.9 million of Diamondback-related income in Q3 and $165.4 million in the first nine months. These gains are non-operating and market-driven, and materially inflate reported net income relative to operating income.
Cash Flow, Liquidity and Capital Structure
- Cash and cash equivalents were $95.5 million at September 30, 2013, down from $167.1 million at December 31, 2012.
- Operating cash flow was $141.0 million for the first nine months, down from $165.9 million, primarily because of lower realized commodity prices.
- Investing cash outflow was $570.8 million, including $608.3 million of additions to oil and gas properties, $25.1 million invested in Grizzly and $9.8 million invested in other equity investments.
- Financing cash inflow was $358.2 million, primarily from the February 2013 equity offering, which generated approximately $325.8 million of net proceeds.
- Total debt was approximately $299.1 million, consisting principally of $300 million of 7.75% senior unsecured notes due 2020 and approximately $2.0 million of building loans, net of discounts and current maturities.
- No borrowings were outstanding under the $50 million revolving credit borrowing base at quarter-end. The facility was extended to June 2018, and management stated that the lead lender had proposed increasing the borrowing base to $150 million, subject to syndicate approval.
- Management stated that cash on hand, operating cash flow, securities proceeds, Diamondback share-sale proceeds and revolver availability should fund normal operating needs and capital requirements for the next twelve months.
Material Changes Versus Prior Comparable Period
- Utica production drove a major increase in gas and NGL volumes: Q3 gas production rose to 2,982 MMcf from 315 MMcf, and NGL production rose to 4.48 million gallons from 1.00 million gallons.
- Oil and condensate sales declined to $53.0 million from $58.6 million in Q3, but gas and NGL sales increased substantially.
- Midstream transportation, processing and marketing expense increased to $3.6 million from $0.1 million as Utica volumes expanded.
- DD&A increased to $30.7 million from $25.4 million in Q3, and general and administrative expense increased to $5.3 million from $3.1 million.
- Interest expense increased to $2.6 million from $1.0 million in Q3 and to $9.4 million from $1.6 million for the nine-month period, primarily because of the 7.75% senior notes.
- Gulfport issued approximately 9.8 million common shares in public offerings during the first nine months, increasing shares outstanding to 77.6 million from 67.5 million at year-end 2012.
- Gulfport sold 2.23 million Diamondback shares for approximately $74.5 million of proceeds and reduced its ownership to approximately 12.1% at September 30, 2013.
- Oil and gas properties increased to $2.25 billion gross from $1.61 billion at year-end 2012. Non-producing properties excluded from amortization increased to $952.7 million from $626.3 million, primarily reflecting Utica acreage.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2013 total capital expenditures of approximately $615 million to $638 million, excluding Utica acreage acquisitions, with approximately 85% directed to the Utica. The 2014 exploration and production capital program was estimated at $675 million to $725 million, plus $225 million to $275 million for additional Utica acreage.
- For 2013, Gulfport planned to drill 55 to 60 gross Utica wells, spend approximately $494 million to $504 million on Utica development excluding lease acquisitions, and acquire approximately 157,000 gross acres as of November 1, 2013.
- Management expected Grizzly’s Algar Lake project to begin steam injection before year-end 2013 and first oil production in the first quarter of 2014. Gulfport’s remaining Grizzly commitment, including its share of cost overruns, was approximately $6.1 million.
- At September 30, 2013, fixed-price swaps covered portions of oil production through 2014 and natural gas production through April 2016. Gulfport stated that approximately 46% of expected 2013 production was hedged. Hedge ineffectiveness and other hedge-related items produced a $6.7 million loss in Q3.
- In October 2013, Gulfport entered into additional natural gas swaps at weighted average prices of $4.11 per MMBtu for 2014 and $4.15 per MMBtu for January 2015 through April 2016.
- Gulfport entered into an Ohio regulatory compliance agreement concerning brine contamination at seven drilling sites. It agreed to implement remediation and pay $250,000; failure to comply could lead to suspension of some or all Ohio drilling and production operations and additional costs.
- Louisiana severance-tax litigation includes claims of approximately $2.3 million plus interest and costs in one case and allegations of nearly $12 million of underpaid taxes plus an additional $4.4 million and possible penalties in related cases. Management assessed the likelihood of loss as remote, but the outcomes remain uncertain.
- Gulfport is also defending environmental contamination litigation in Louisiana. Mediation occurred in July 2013, discovery continued, and the trial was scheduled for July 2014. No loss amount could be estimated.
- No full-cost ceiling-test impairment was required for the quarter. Commodity-price declines could nevertheless cause future impairment, reduce cash flow and constrain development spending.
Most Important Facts for Investors to Verify
- Separate recurring operating performance from the $52.9 million Q3 and $165.4 million nine-month Diamondback fair-value gains.
- Verify Utica well productivity, completion timing, takeaway capacity and whether the planned 2014 capital program can be funded without additional equity or debt.
- Review commodity-price sensitivity, hedge volumes, counterparty exposure and the effect of fixed-price swaps if production is below expectations or market prices rise.
- Monitor liquidity after the planned capital program, the proposed revolver borrowing-base increase and the company’s ability to maintain covenant compliance.
- Assess the Ohio compliance agreement, remediation obligations and potential operational suspension risk.
- Track Louisiana severance-tax and environmental litigation, including developments that could change management’s “remote” loss assessment.
- Consider dilution from the 2013 equity offerings and the concentration of assets in non-producing Utica acreage and equity investments.