Gulfport Energy Corporation — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2019, compared with the same periods in 2018. Gulfport is an independent U.S. oil and natural gas exploration and production company focused principally on the Utica Shale and SCOOP plays.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenue | $285.2 million | $361.0 million | $1.065 billion | $939.1 million |
| Income from operations | $(18.8) million | $113.6 million | $289.6 million | $237.7 million |
| Net income (loss) | $(48.8) million | $95.2 million | $248.4 million | $296.6 million |
| Diluted EPS | $(0.31) | $0.55 | $1.51 | $1.68 |
| Operating margin | (6.6%) | 31.5% | 27.2% | 25.3% |
| Net margin | (17.1%) | 26.4% | 23.3% | 31.6% |
| Operating cash flow | Not separately provided | Not separately provided | $617.4 million | $630.8 million |
| Capital additions to oil and gas properties | Not separately provided | Not separately provided | $646.5 million | $777.1 million |
Q3 production increased 7% to approximately 1,527.0 MMcfe per day. However, commodity prices declined substantially: Q3 natural gas prices excluding derivatives fell 29%, oil and condensate prices fell 25%, and NGL prices fell 48%. Derivative gains partly offset the decline in physical sales.
At September 30, 2019, cash and cash equivalents were $10.1 million, compared with $52.3 million at December 31, 2018. Total assets were $6.273 billion and stockholders’ equity was $3.559 billion. Long-term debt, net of current maturities, was $2.077 billion, with total debt obligations including current maturities of approximately $2.078 billion.
The revolving credit facility had $135.0 million outstanding, $1.4 billion of borrowing base capacity, $1.0 billion of elected commitments and $616.4 million of availability after $248.6 million of letters of credit. The weighted average borrowing rate was 3.52%, and Gulfport was in compliance with its financial covenants.
Material changes versus the prior comparable periods
- Q3 revenue decreased 21% and net income declined from $95.2 million of income to a $48.8 million loss.
- Q3 operating results were affected by a $35.6 million impairment of oil and natural gas properties, a $35.5 million impairment of the Mammoth Energy investment, and a $25.6 million increase in DD&A expense.
- Q3 results included a $23.6 million gain from repurchasing approximately $104.4 million principal amount of senior notes for $80.3 million.
- Nine-month revenue increased 13% primarily because derivative gains improved by $274.9 million year over year. Excluding derivative effects, physical natural gas, oil and NGL sales declined.
- Nine-month net income decreased 16% because of a $160.8 million Mammoth Energy impairment, the absence of $124.8 million of 2018 equity-investment sale gains, and higher DD&A and midstream costs.
- A $205.9 million income tax benefit was recognized for the nine months, primarily from releasing valuation allowances on deferred tax assets. This benefit materially increased reported earnings and is not an operating cash inflow.
- Cash from operations decreased modestly by $13.4 million, while investing cash outflows increased to $638.6 million. Financing activity included $640.0 million of revolver borrowings, $550.5 million of principal repayments, $79.5 million of senior-note repurchases and approximately $30.7 million of stock repurchases.
- The company adopted the new lease standard prospectively on January 1, 2019, recognizing approximately $110 million of right-of-use assets and corresponding lease liabilities.
Guidance, outlook, risks and unusual items
- Management expects 2019 capital expenditures of approximately $565 million to $600 million, net of planned divestitures, versus $814.7 million incurred in 2018. The company expects to operate within operating cash flow and is emphasizing disciplined capital allocation.
- Management expects approximately $40 million to $50 million of 2019 non-drilling and completion expenditures; $33.1 million had been incurred through September 30, 2019.
- Management expects cash flow from operations, cash on hand and revolver availability to fund normal operating needs and capital requirements for the next twelve months, but notes that lower commodity prices, higher costs, additional investment requirements or acquisitions could require additional financing or asset sales.
- Full-cost accounting creates risk of additional oil and gas property impairments if commodity prices remain below the prior-year average. Management specifically expects that additional impairments may occur in upcoming quarters.
- Approximately 91% to 94% of estimated 2019 production was hedged. Open positions included natural gas swaps, oil swaps, NGL swaps, basis swaps and sold call options. Hedging reduces downside exposure but limits benefits from higher prices and can create losses if production is below expectations.
- Material commitments include approximately $3.621 billion of firm transportation obligations, $54 million of sand supply commitments through 2021 and $64.6 million of operating lease payments before imputed interest.
- Legal and regulatory matters include coastal restoration litigation in Louisiana, royalty and property-damage claims, a Mammoth Energy derivative action, an action against TH Exploration, an SEC investigation concerning former management, and EPA Clean Air Act findings at approximately 12 Ohio locations. Potential outcomes are uncertain; the EPA matter may result in sanctions exceeding $100,000.
- The company sold its South Louisiana WCBB and Hackberry assets on July 3, 2019, received approximately $9.2 million in cash and transferred approximately $30.0 million of plugging and abandonment liabilities to the buyer.
Investor verification checklist
- Verify the sustainability of reported earnings excluding the $205.9 million deferred tax benefit, derivative gains and debt-extinguishment gain.
- Assess potential additional full-cost impairments under current and forward natural gas, oil and NGL prices.
- Review liquidity after considering only $10.1 million of cash, revolver borrowings, letters of credit, transportation commitments and remaining capital expenditures.
- Evaluate the impairment risk and strategic significance of the Mammoth Energy investment, whose carrying value was $24.4 million at September 30, 2019.
- Confirm execution of the $565 million to $600 million capital expenditure plan and whether drilling activity can be funded within operating cash flow.
- Review hedge volumes, prices, call-option ceilings and counterparty exposure, particularly for 2020 and later periods.
- Monitor litigation, EPA proceedings, the SEC investigation and the outcome of the TH Exploration transaction dispute.