Gulfport Energy Corporation — 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 Woodford and Springer plays in Oklahoma. It also has interests in Southern Louisiana, the Alberta oil sands, Mammoth Energy Services and other midstream investments. This unaudited filing covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Reported revenue, including derivative gains or losses | $325.4 million | $333.0 million | Down 2% |
| Oil, gas and NGL sales before derivative effects | $341.9 million | $233.4 million | Up 46% |
| Income from operations | $110.3 million | $181.7 million | Down 39% |
| Net income | $90.1 million | $154.5 million | Down 42% |
| Diluted earnings per share | $0.50 | $0.91 | Down 45% |
| Operating margin | 33.9% | 54.6% | Lower |
| Net margin | 27.7% | 46.4% | Lower |
| Net cash provided by operating activities | $226.3 million | $142.6 million | Up 59% |
| Capital additions to oil and gas properties | $302.8 million | $181.8 million | Up 67% |
| Cash and cash equivalents at period-end | $118.6 million | $102.5 million | Prior-period cash-flow balance |
Production increased 52% to 115,977 MMcfe, or 1,288.6 MMcfe per day. First-quarter production was approximately 88% natural gas, 8% NGLs and 4% oil. Natural gas production increased 54%, oil and condensate production increased 47%, and NGL production increased 32%.
Reported revenue was pressured by a $16.5 million net derivative loss in Q1 2018 versus a $99.6 million net derivative gain in Q1 2017. Excluding derivative effects, commodity sales increased materially because of higher production volumes and improved oil and NGL pricing, although natural gas market prices declined 9%.
Costs increased in several areas: midstream gathering and processing rose to $64.2 million from $47.9 million, and depreciation, depletion and amortization rose to $111.0 million from $66.0 million. Lease operating expense declined slightly to $18.9 million, while production taxes increased to $6.9 million. Interest expense increased to $34.0 million from $23.5 million.
Liquidity, debt and capital structure
- Long-term debt, including current maturities and net of issuance costs, totaled approximately $2.24 billion at March 31, 2018, compared with $2.04 billion at December 31, 2017.
- Debt consisted principally of $2.05 billion of senior unsecured notes due 2023 through 2026, $200.0 million outstanding under the revolving credit facility and a $23.6 million construction loan.
- The revolving facility had a $1.2 billion borrowing base, a $1.0 billion elected commitment and $557.2 million of availability after $242.8 million of letters of credit. Borrowings outstanding bore a weighted-average rate of 3.52%.
- The company was in compliance with its financial covenants at March 31, 2018. Lenders proposed increasing the borrowing base to $1.4 billion and reducing the applicable interest rate by 25 basis points, subject to required approvals.
- Cash flow from operations of $226.3 million did not cover investing outflows of $306.9 million. Financing activities provided $99.6 million, including $200.0 million of revolver borrowings partially offset by $100.0 million of share repurchases.
- Stockholders’ equity was $3.09 billion at March 31, 2018. The company repurchased and retired 9.7 million shares for approximately $100.0 million at an average price of $10.32 per share.
Material changes versus the prior comparable period
- Production growth from Utica and SCOOP development substantially increased underlying commodity sales and operating cash flow.
- Derivative results reversed from a large gain in Q1 2017 to a loss in Q1 2018, more than offsetting the benefit from higher production and commodity sales.
- Higher production and the continued development of the asset base increased midstream costs and DD&A, reducing operating and net margins.
- Interest expense increased primarily because of the $450.0 million issuance of 6.375% senior notes due 2026 and higher average revolver borrowings.
- Cash used in investing activities declined sharply from $1.53 billion to $306.9 million because Q1 2017 included approximately $1.34 billion related to the cash portion of the Vitruvian/SCOOP acquisition.
- Gulfport adopted ASC 606 revenue recognition, the restricted-cash cash-flow guidance and other accounting updates in Q1 2018. Management reported no material impact from ASC 606 or the other adopted standards.
- The company sold its 25% interest in Strike Force Midstream LLC on May 1, 2018 for $175.0 million in cash, eliminating future capital obligations associated with that investment.
Guidance, outlook, risks and unusual items
- Management estimated 2018 drilling and completion capital expenditures of $630.0 million to $685.0 million, plus $120.0 million to $130.0 million of non-drilling and completion expenditures. Approximately two-thirds of the capital budget was expected to be spent in the first half of the year.
- Expected 2018 drilling and completion spending was $425.0 million to $455.0 million in the Utica and $185.0 million to $210.0 million in the SCOOP. The company expected to spend approximately $20.0 million on Southern Louisiana recompletions and no material capital in the Niobrara, Grizzly or Thailand.
- Management stated that it expected cash flow from operations, cash on hand and available borrowings to fund normal operating needs and capital requirements for the next twelve months, while retaining flexibility to adjust drilling activity based on commodity prices.
- Approximately 76% to 77% of estimated 2018 production was hedged. The hedge portfolio reduced exposure to lower prices but limits upside participation and could result in losses if production is below expectations or commodity prices rise.
- At March 31, 2018, derivative instruments had a net asset position of $26.6 million. A 10% increase in underlying commodity prices was estimated to reduce derivative fair value by approximately $172.8 million.
- Principal risks include volatile oil, natural gas and NGL prices; potential full-cost ceiling-test impairments; reserve and production-estimate uncertainty; drilling and completion costs; pipeline and firm transportation commitments; liquidity and borrowing-base reductions; floating-rate debt; and the ability to execute planned development programs.
- Gulfport remains a defendant in Louisiana coastal-management litigation. Discovery had not begun, and management could not estimate any potential loss.
- Firm transportation commitments totaled approximately $3.69 billion, with commitments extending beyond 2022. The company also had $26.2 million of future minimum commitments under sand supply and pressure-pumping agreements through September 2018.
- The company’s 2018 full-cost ceiling test did not require an impairment. A future decline in commodity prices or reserves could nevertheless produce a material non-cash impairment.
- The board expanded the 2018 share-repurchase authorization in May 2018 from $100.0 million to a total of up to $200.0 million, subject to liquidity and market conditions.
Important facts for investors to verify
- Reconcile reported revenue with underlying product sales and derivative settlements, particularly the effect of the Q1 2018 derivative loss.
- Assess whether production growth and lower unit operating costs can offset higher DD&A, midstream expenses and interest costs.
- Review the funding requirement for the $750.0 million to $815.0 million 2018 capital program relative to operating cash flow, cash balances and revolver availability.
- Monitor borrowing-base redeterminations, covenant compliance and the proposed increase to the borrowing base.
- Evaluate hedge volumes, fixed prices, sold call options and the risk that production differs from hedged volumes.
- Confirm the timing and use of the $175.0 million Strike Force sale proceeds and the effect of eliminating related future capital obligations.
- Review potential exposure from the Louisiana coastal litigation, firm transportation commitments and other minimum-volume or service commitments.
- Test the sensitivity of full-cost accounting, reserves and impairment risk to changes in natural gas, oil and NGL prices.