Gulfport Energy Corporation — 2017 Q3 Form 10-Q Summary
Business context and reporting period
Gulfport Energy is an independent U.S. oil and natural gas exploration and production company focused primarily on the Utica Shale in Ohio, the SCOOP Woodford and Springer plays in Oklahoma, and selected Louisiana properties. The company also holds investments in Grizzly Oil Sands, Mammoth Energy Services and Strike Force Midstream.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods. Gulfport completed the approximately $1.85 billion Vitruvian acquisition on February 17, 2017, adding approximately 46,400 net surface acres in Oklahoma.
Financial and operating metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue, including derivative gains/losses | $265.5 million | $193.7 million | $922.5 million | $322.5 million |
| Operating income (loss) | $50.5 million | $(158.0) million | $375.3 million | $(677.2) million |
| Net income (loss) | $18.2 million | $(157.3) million | $278.6 million | $(739.3) million |
| Basic EPS | $0.10 | $(1.25) | $1.56 | $(6.12) |
| Net cash from operating activities | Not separately provided | Not separately provided | $491.7 million | $245.3 million |
| Net cash used in investing activities | Not separately provided | Not separately provided | $(2.0) billion | $(420.3) million |
Approximate operating and net margins were 19.0% and 6.9% in Q3 2017, compared with negative margins in Q3 2016. For the first nine months, approximate operating and net margins were 40.7% and 30.2%, respectively.
- Production increased 63% year over year in Q3 to 110,367 MMcfe, or 1,199.6 MMcfe per day. The mix was approximately 88% natural gas, 8% NGLs and 4% oil.
- Q3 natural gas, oil and NGL sales before derivative effects were $288.4 million, versus $158.4 million in the prior-year quarter. Reported revenue was reduced by a $22.9 million derivative loss.
- Q3 lease operating expense increased to $20.0 million, but unit LOE declined 30% to $0.18 per Mcfe. Nine-month unit LOE declined 16% to $0.21 per Mcfe.
- Q3 midstream gathering and processing expense increased to $69.4 million, and DD&A increased to $106.7 million, primarily due to higher production and the SCOOP acquisition.
- Cash and cash equivalents were $125.3 million at September 30, 2017, down from $1.276 billion at December 31, 2016. Restricted cash declined from $185.0 million to zero.
- Total assets were $5.578 billion and stockholders’ equity was $2.943 billion at September 30, 2017.
- Reported debt, net of issuance costs, was approximately $1.959 billion, including $365.0 million drawn on the revolving credit facility and $23.8 million under the construction loan. Revolver availability after $237.5 million of letters of credit was $397.5 million.
- The company was in compliance with its credit facility covenants at September 30, 2017.
Material changes versus the prior comparable periods
- Revenue increased 37% in Q3 and 186% for the first nine months, driven by higher production, commodity prices and the Vitruvian assets.
- The company recorded no oil and gas property impairment in 2017, compared with $212.2 million in Q3 2016 and $601.8 million in the first nine months of 2016. Management reported that the September 30, 2017 full-cost ceiling test did not require an impairment.
- Interest expense increased to $27.1 million in Q3 and $74.8 million for nine months, primarily because of the 2025 Notes and revolver borrowings.
- Operating cash flow more than doubled year over year, but investing cash use increased substantially because of the $1.339 billion property acquisition payment, $789.7 million of oil and gas property additions and equity investment funding.
- Common shares outstanding increased to 183.1 million from 158.8 million at year-end 2016, primarily due to 23.9 million shares issued in the Vitruvian acquisition.
- Equity investments increased to $279.3 million from $243.9 million. The nine-month equity-method loss included approximately $23.4 million of out-of-period activity related to Windsor Midstream’s accounting for EnLink securities.
Guidance, outlook, risks and unusual items
- Management estimated 2017 drilling and completion capital expenditures of approximately $985 million, including approximately $735 million for Utica and $215 million for SCOOP. Approximately $846 million had been spent at September 30, 2017.
- Management also expected approximately $130 million of 2017 acreage expenditures and approximately $45 million of Strike Force cash contributions. It expected total 2017 capital spending and related investments to be funded by operating cash flow, cash on hand and borrowings.
- As of November 1, 2017, management expected to spud 96 gross Utica horizontal wells and 22 gross SCOOP wells during 2017, and had four operated horizontal rigs in each play.
- On October 11, 2017, Gulfport issued $450 million of 6.375% senior notes due 2026. Proceeds were used to repay all $365 million of revolver borrowings; remaining proceeds were intended to fund 2017 capital spending.
- Commodity prices remain the principal operating risk. At September 30, 2017, the company had hedged approximately 62% to 64% of expected 2017 production. Derivative contracts limit downside exposure but also limit benefits from higher prices and expose the company to potential losses if production is below expectations.
- A 10% change in underlying commodity prices was estimated to change the fair value of derivatives by approximately $147.9 million in the opposite direction.
- Future commodity price declines could reduce reserves, liquidity and the revolver borrowing base and could trigger full-cost impairments. The company recorded a $548.4 million valuation allowance against its deferred tax assets, other than certain state NOLs and AMT credits.
- Louisiana coastal litigation remains unresolved. The company cannot estimate a potential loss because discovery had not begun; management stated that currently known litigation was not expected to materially affect financial condition, cash flows or results of operations.
- The company reported no off-balance-sheet arrangements and stated that disclosure controls and procedures were effective.
Most important facts for investors to verify
- Whether production growth and the Vitruvian/SCOOP assets generate sufficient cash flow to support the enlarged drilling program and debt burden.
- The post-quarter impact of the $450 million 2026 Notes issuance, revolver repayment, interest expense and remaining liquidity.
- Actual 2017 drilling, completion and acreage spending versus the approximately $985 million, $130 million and $45 million targets.
- Commodity prices, hedge settlements, short-call exposure and the potential for future full-cost ceiling-test impairments.
- The outcome and potential financial exposure of the Louisiana coastal litigation.
- The sustainability of reported earnings given the absence of impairment charges, derivative fair-value volatility and the $23.4 million out-of-period equity-method adjustment.