Gulfport Energy Corporation — Form 10-Q Summary
Reporting period: Three months ended March 31, 2012; unaudited interim results. Gulfport is an independent oil and natural gas exploration and production company with producing assets in Louisiana, West Texas, Colorado and the Bakken, and development investments in the Utica Shale, Alberta oil sands and Thailand.
Financial Performance and Position
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenues | $65.5 million | $46.6 million | +40% |
| Oil and gas revenues | $65.4 million | $46.6 million | +40% |
| Income from operations | $27.3 million | $22.1 million | +23% |
| Net income | $26.9 million | $21.2 million | +27% |
| Basic and diluted EPS | $0.48 | $0.47 | Increase |
| Operating margin | 41.6% | 47.4% | Down |
| Net margin | 41.0% | 45.4% | Down |
| Net cash from operating activities | $69.4 million | $28.3 million | +145% |
- Production increased 25% to approximately 645,000 BOE, from 514,000 BOE. Average realized BOE pricing increased 12% to $101.42 from $90.60.
- Oil production rose to 595,000 barrels from 472,000 barrels. Average oil price increased to $107.56 per barrel from $95.73; average gas price declined to $2.91 per Mcf from $4.37.
- Lease operating expense increased 26% to $5.8 million, production taxes increased 41% to $7.8 million, DD&A increased 76% to $21.4 million, and general and administrative expense increased 46% to $3.0 million.
- Cash used in investing activities was $160.4 million, including $84.8 million for oil and gas properties and $67.1 million contributed to Grizzly Oil Sands.
- Cash and cash equivalents declined to $12.9 million at March 31, 2012, from $93.9 million at December 31, 2011.
- Total debt was approximately $12.3 million, including $10.0 million outstanding under the revolving credit facility and approximately $2.3 million in building loans. The revolver had a $125.0 million borrowing base at quarter-end, subsequently increased to $155.0 million on May 2, 2012.
- The company was in compliance with its debt covenants at March 31, 2012. Management stated that cash on hand, operating cash flow and revolver availability should cover normal operating needs and capital requirements for the next twelve months.
- Stockholders’ equity increased to $650.6 million from $632.4 million at December 31, 2011. Equity investments increased to $163.2 million, principally because of the $67.1 million Grizzly contribution.
Material Changes Versus the Prior Comparable Period
- Revenue and earnings growth was driven by higher production and realized oil prices, while expense growth—particularly DD&A, production taxes, lease operating costs and G&A—reduced operating and net margins.
- Operating cash generation more than doubled, but substantially higher capital expenditures and investments caused an $81.0 million net decrease in cash, compared with a $24.4 million increase in Q1 2011.
- The company drilled 16 gross wells and recompleted 21 wells during the quarter; 17 of 22 gross new wells were completed as producers, one was non-productive and four were awaiting completion.
- Utica Shale leasehold interests reached approximately 107,000 gross, or 53,500 net, acres, acquired for approximately $150.7 million through March 31, 2012. The company spudded its first Utica well in February and subsequently spudded two additional wells.
- Grizzly investment increased to $136.7 million after a $67.1 million cash contribution. New Q1 investments included Timber Wolf Terminals and Windsor Midstream.
- Stock-based compensation expense increased to $1.1 million from $0.1 million, with a portion capitalized into oil and gas properties.
Guidance, Outlook, Risks and Unusual Items
- Management estimated 2012 capital expenditures for drilling activities of $206 million to $221 million, including approximately $59.3 million spent in Q1. Planned spending included WCBB, East Hackberry, Permian, Niobrara, Utica and Grizzly activities.
- Expected 2012 activity included 22–24 WCBB wells plus approximately 60 recompletions; 12 East Hackberry wells and 15 recompletions; 23–25 gross Permian wells; five to seven Niobrara wells; and approximately 20 gross Utica wells, with five net wells expected to be completed by year-end.
- The company committed approximately 33% to 36% of estimated 2012 production under fixed-price oil swaps. At March 31, 2012, swap volumes were 3,000 barrels per day for April–December 2012 at $109.73 per barrel and 1,000 barrels per day for January–June 2013 at $113.20 per barrel. The swaps had a $9.4 million net liability fair value.
- Commodity prices remain the principal operating risk. Lower oil and gas prices could reduce cash flow, impair reserves and trigger a full-cost ceiling-test write-down. No ceiling-test impairment was required for Q1 2012.
- Liquidity depends on production, commodity prices, operating cash flow and access to the revolving facility. Accelerated drilling, acquisitions or development of the Canadian oil sands project could require additional financing.
- On May 7, 2012, Gulfport agreed, subject to conditions, to contribute its Permian Basin interests to Diamondback Energy in exchange for a 35% pre-IPO equity interest and a $63.6 million non-interest-bearing note payable upon Diamondback’s IPO. Completion was contingent on the IPO and other customary conditions.
- Material litigation includes Louisiana severance-tax disputes, a Cudd trade-secret lawsuit seeking $26.5 million plus additional amounts and punitive damages, and environmental litigation relating to Hackberry properties. Management could not estimate potential losses, and adverse outcomes could materially affect results.
- Related-party transactions and investments involving entities controlled by Wexford are significant and should be evaluated for governance, valuation and liquidity implications.
Important Facts for Investors to Verify
- Whether the Diamondback contribution and IPO were completed, and the resulting effect on Gulfport’s assets, reserves, production and borrowing base.
- Actual 2012 capital spending, Utica drilling results, lease-acquisition commitments and funding requirements.
- Current cash balances, revolver borrowings, borrowing-base availability and compliance with financial covenants.
- Production volumes, realized commodity prices and the effect of hedges on future revenue and cash flow.
- Valuation, funding obligations and development progress for Grizzly Oil Sands and other equity-method investments.
- Status and potential exposure from the Louisiana tax, Cudd and Hackberry environmental lawsuits.
- Potential full-cost ceiling-test impairment if oil and gas prices decline or reserve estimates weaken.