Gulfport Energy Corporation — 2015 Q2 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; filed August 7, 2015. Gulfport is an independent U.S. oil and natural gas exploration and production company focused primarily on the Utica Shale, with additional properties in Louisiana, Colorado, North Dakota, Canada and Southeast Asia.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $112.3 million, versus $114.7 million | $288.6 million, versus $232.8 million |
| Operating income (loss) | $(21.6) million, versus $18.1 million | $7.1 million, versus $43.2 million |
| Net income (loss) | $(31.3) million, versus $47.9 million | $(5.8) million, versus $130.4 million |
| Net income (loss) per diluted share | $(0.32), versus $0.56 | $(0.06), versus $1.52 |
| Operating margin | Approximately (19.3%), versus 15.8% | Approximately 2.5%, versus 18.6% |
| Net margin | Approximately (27.9%), versus 41.7% | Approximately (2.0%), versus 56.0% |
| Net cash provided by operating activities | $138.9 million, versus $201.5 million | |
| Net cash used in investing activities | $(979.8) million, versus $(624.8) million | |
| Net cash provided by financing activities | $1.224 billion, versus $39.6 million |
- Production increased 196% year over year in the second quarter to 43,128 MMcfe, and 178% for the first six months to 81,326 MMcfe. Growth was driven primarily by Utica development.
- Realized gas-equivalent prices fell to $2.60 per Mcfe from $7.85 in the second quarter and to $3.55 from $7.95 for the six-month period, reflecting lower commodity prices and a shift toward natural gas and NGL production.
- Second-quarter oil and gas revenue declined 2% despite higher volumes; six-month revenue increased 24% because volume growth more than offset lower prices.
- Second-quarter midstream gathering and processing expense rose to $32.9 million from $10.8 million. Six-month expense rose to $58.3 million from $18.5 million.
- At June 30, cash and cash equivalents were $525.5 million, restricted cash was $75.0 million, and total assets were $4.804 billion.
- Total debt was approximately $965.3 million, including $600.0 million of 7.75% senior notes due 2020, $350.0 million of 6.625% senior notes due 2023 and $1.7 million of current debt. The revolving facility had no borrowings outstanding.
- Revolving credit availability was $482.3 million after $92.7 million of letters of credit. Gulfport reported compliance with its debt covenants at June 30, 2015.
Material changes versus the prior comparable period
- Profitability deteriorated sharply: the company moved from net income of $47.9 million to a net loss of $31.3 million in the second quarter and from net income of $130.4 million to a net loss of $5.8 million for the first six months.
- Interest expense increased to $12.0 million in the second quarter and $20.8 million for six months, primarily because of additional 7.75% notes issued in 2014, the new 6.625% notes issued in April 2015 and temporary revolver borrowings.
- The prior-year periods benefited from significant non-recurring or portfolio-related equity investment income, including a $72.9 million Diamondback gain in the second quarter of 2014, $121.7 million of Diamondback income for six months, and $84.8 million from the Blackhawk asset sale. These benefits were not repeated in 2015.
- Capital expenditures and acquisitions increased substantially. Six-month additions to oil and gas properties were $898.6 million, including approximately $404.8 million attributable to the AEU acquisition.
- Gulfport issued 22.425 million common shares in two offerings for combined net proceeds of approximately $981.7 million and issued $350.0 million of senior notes for net proceeds of approximately $343.6 million.
Business developments, outlook and risks
- Gulfport completed the approximately $405.4 million AEU acquisition, including Monroe County acreage, producing assets, drilled but uncompleted wells and gathering infrastructure.
- The company agreed to acquire Paloma for approximately $301.3 million, subject to closing adjustments and conditions. The transaction was expected to close in the third quarter of 2015; $75.0 million was placed in escrow and classified as restricted cash.
- Management expected to spud 50 to 56 gross Utica wells in 2015 and forecast 2015 capital expenditures of $561 million to $611 million, plus $85 million to $95 million for additional Utica acreage. Approximately 96% of estimated capital expenditures was expected to be directed to the Utica.
- Management expected operational efficiencies and lower service costs to reduce overall well costs by approximately 15% in 2015 versus peak 2014 pricing.
- Management stated that operating cash flow, cash on hand and borrowing capacity should fund normal operating needs and capital requirements for the next twelve months. Additional acquisitions, accelerated drilling or future Grizzly funding could require additional financing.
- Grizzly ceased bitumen production at its Algar Lake facility in April 2015 because of commodity prices. No impairment was recorded at June 30, 2015, but further commodity-price declines could impair the investment.
- Commodity prices remain a major risk. A sustained decline in oil, gas or NGL prices could reduce cash flow, constrain development spending and trigger full-cost ceiling-test impairments. No ceiling-test impairment was required for the quarter.
- Derivative assets totaled $103.2 million and derivative liabilities totaled $3.7 million at June 30, 2015. The company estimated that approximately 53% to 55% of 2015 production was hedged; a 10% change in underlying commodity prices would have changed derivative fair value by approximately $78 million in the opposite direction.
- The company had contractual commitments of $170.4 million under sand supply and pressure-pumping agreements through 2018 and reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the Paloma acquisition closed on the expected terms and how it affected acreage, liquidity and debt.
- Utica production growth, well economics, gathering and processing costs, and the ability to achieve the projected 15% well-cost reduction.
- Commodity-price sensitivity, hedge volumes and hedge settlement effects on reported revenue and cash flow.
- Future full-cost ceiling-test results and potential impairment of oil and gas properties or the Grizzly investment.
- Compliance with the revolving-credit financial covenants, remaining borrowing capacity and future liquidity after acquisitions and capital spending.
- The sustainability of cash flow given the sharp decline in realized prices and the company’s shift toward gas and NGL production.