Gulfport Energy Corporation — 2015 Q3 Form 10-Q Summary
Business context and reporting period
Gulfport is an independent U.S. oil and natural gas exploration and production company focused primarily on the Utica Shale in Ohio, with additional properties in Louisiana, Colorado and the Bakken. The filing covers the three and nine months ended September 30, 2015. Results are unaudited and are not necessarily indicative of full-year performance.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Total revenue | $230.6 million | $170.8 million | $519.2 million | $403.6 million |
| Operating income (loss) | $(529.1) million | $53.5 million | $(521.9) million | $96.7 million |
| Net income (loss) | $(388.2) million | $6.9 million | $(394.0) million | $137.3 million |
| Net income (loss) per diluted share | $(3.59) | $0.08 | $(4.06) | $1.60 |
| Net cash from operations | Not separately provided | Not separately provided | $235.1 million | $285.9 million |
| Capital additions to oil and gas properties | Not separately provided | Not separately provided | $1.373 billion | $1.041 billion |
- Q3 revenue increased 35%, while nine-month revenue increased 29%, driven by substantially higher production.
- Q3 operating margin was approximately negative 229.5% and net margin approximately negative 168.4%; nine-month operating margin was approximately negative 100.5% and net margin approximately negative 75.8%.
- Net production increased 155% in Q3 to 59,530 MMcfe, or approximately 647.1 MMcfe per day, and increased 168% for the nine-month period to 140,856 MMcfe.
- Q3 realized price per Mcfe declined 47% to $3.87 from $7.29; nine-month realized price declined 52% to $3.68 from $7.66.
- Q3 gas sales increased to $179.2 million from $85.2 million, while oil and condensate sales declined to $41.7 million from $58.2 million and NGL sales declined to $9.4 million from $27.0 million.
- Lease operating expense increased to $17.6 million in Q3 and $51.4 million for nine months. Midstream gathering and processing expense increased to $42.2 million in Q3 and $100.5 million for nine months.
- Depreciation, depletion and amortization was $90.3 million in Q3 and $251.4 million for nine months.
Liquidity, capital structure and balance sheet
- Cash and cash equivalents were $228.1 million at September 30, 2015, compared with $142.3 million at December 31, 2014.
- Total assets were $4.215 billion and stockholders’ equity was $2.871 billion at September 30, 2015.
- Total debt was approximately $964.7 million, consisting primarily of $600 million of 7.75% senior notes due 2020, $350 million of 6.625% senior notes due 2023 and $1.7 million of current building-loan maturities.
- No borrowings were outstanding under the revolving credit facility. Availability after $177.1 million of letters of credit was $522.9 million.
- The revolver borrowing base was increased to $700 million in September 2015, and the maximum permitted net funded debt-to-EBITDAX ratio was increased to 4.00-to-1.00. Management reported compliance with all covenants.
- Operating cash flow declined despite production growth because lower realized prices and higher operating costs more than offset increased volumes. Financing activities provided $1.223 billion, principally from equity offerings and the 2023 notes issuance, while investing activities used $1.372 billion.
Material changes versus the prior comparable period
- The company recorded a $594.8 million full-cost ceiling-test impairment of oil and gas properties because lower commodity prices reduced the calculated ceiling. This was the principal driver of the reported losses.
- Gulfport acquired approximately 24,000 net nonproducing Utica acres from Paloma for approximately $302.3 million and completed the AEU acquisitions for approximately $405.4 million, including Ohio acreage, production, drilled-but-uncompleted wells and gathering infrastructure.
- The company issued 22.425 million common shares in two offerings for approximately $981.7 million of net proceeds and issued $350 million of 6.625% senior notes due 2023 for approximately $343.6 million of net proceeds.
- Interest expense increased to $14.1 million in Q3 and $34.9 million for nine months, primarily because of additional senior notes and higher average revolver borrowings during the year.
- Equity-method investment results shifted materially. The 2014 nine-month period included approximately $84.8 million of Blackhawk-related income and $89.3 million of Diamondback-related income; Gulfport held no Diamondback shares at September 30, 2015.
- Gulfport recognized a $58.0 million other-than-temporary impairment of its Grizzly Oil Sands investment. Grizzly had ceased bitumen production at Algar Lake in April 2015 because of commodity prices.
Guidance, outlook, commentary and risks
- Management expected 2015 total capital expenditures of approximately $667 million to $677 million, plus $85 million to $95 million for additional Utica acreage. Approximately 97% of estimated capital expenditures were expected to be directed to the Utica.
- Management expected to spud 49 to 53 gross, or 39 to 41 net, Utica wells during 2015 and stated that production was trending ahead of expectations.
- Because of weak natural gas prices, Gulfport planned to voluntarily curtail approximately 100 MMcfe per day beginning November 1, 2015 through early 2016, idle completion crews and suspend hydraulic fracturing activities during the first quarter of 2016.
- Management stated that cash from operations, cash on hand and available borrowing capacity should meet normal operating and capital requirements for the next twelve months. Additional acquisitions, accelerated drilling or further Grizzly funding could require additional debt, equity or asset-sale proceeds.
- At September 30, 2015, derivatives had a net asset value of approximately $161.7 million. The company hedged approximately 47% to 49% of estimated 2015 production, reducing exposure to price declines but limiting participation in higher prices and creating volume and counterparty risks.
- Principal risks include oil, natural gas and NGL price volatility; further ceiling-test impairments; execution and integration of Utica acquisitions; high capital requirements; gathering and transportation constraints; reserve and production-estimate uncertainty; Grizzly’s potential further impairment; debt covenant compliance; and availability of external financing.
- Management stated that routine litigation was not expected to have a material adverse effect. The filing reported no off-balance-sheet arrangements and no material changes to previously disclosed contractual obligations.
Important facts for investors to verify
- Reconcile production growth with realized prices, hedging gains and the sustainability of operating cash flow.
- Assess the sensitivity of the $594.8 million ceiling-test impairment and the $58.0 million Grizzly impairment to future commodity prices.
- Verify the economics, title status, development obligations and remaining cash requirements associated with the Paloma and AEU acquisitions.
- Review the $700 million borrowing base, $522.9 million reported availability, $177.1 million of letters of credit and all leverage and interest-coverage covenant calculations.
- Evaluate whether planned curtailments and first-quarter 2016 completion suspensions affect production growth, lease obligations, gathering commitments and future reserve replacement.
- Review the terms and fair-value sensitivity of the company’s derivatives, including the effect of a 10% commodity-price change, estimated by management at approximately $69 million.