Gulfport Energy Corporation — Form 10-Q Summary
Business Context and Reporting Period
Gulfport Energy is an independent oil and natural gas exploration and production company with producing properties in Louisiana and the Permian Basin, and development interests in the Niobrara, Utica Shale, Alberta oil sands and Thailand. This unaudited Form 10-Q covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods.
Key Financial Metrics
| Metric | Three Months 2011 | Three Months 2010 | Nine Months 2011 | Nine Months 2010 |
|---|---|---|---|---|
| Total revenues | $58.1 million | $33.4 million | $160.3 million | $89.9 million |
| Oil and gas revenues | $58.0 million | $33.3 million | $160.1 million | $89.7 million |
| Income from operations | $29.1 million | $13.7 million | $79.4 million | $35.5 million |
| Net income | $29.0 million | $12.7 million | $77.4 million | $33.0 million |
| Diluted EPS | $0.57 | $0.28 | $1.61 | $0.75 |
| Net cash from operations | Not separately provided | Not separately provided | $122.0 million | $58.2 million |
Third-quarter operating margin was approximately 50.1% and net margin approximately 49.9%. Nine-month operating margin was approximately 49.5% and net margin approximately 48.3%.
- Third-quarter production increased to approximately 590,000 BOE from 527,000 BOE; average realized price increased to $98.32 per BOE from $63.14.
- Nine-month production increased to approximately 1.671 million BOE from 1.439 million BOE; average realized price increased to $95.76 per BOE from $62.31.
- At September 30, 2011, cash and cash equivalents were $22.7 million, compared with $2.5 million at December 31, 2010.
- Total current assets were $55.6 million and current liabilities were $61.9 million, resulting in a current ratio of approximately 0.90.
- Total debt was $2.3 million, consisting primarily of the building loan; no balance was outstanding under the revolving credit facility at September 30, 2011.
- Net cash used in investing activities was $230.2 million, including $202.2 million of additions to oil and gas properties.
- Net cash provided by financing activities was $128.4 million, primarily from $178.7 million of equity issuance and option exercises, offset by $84.6 million of principal payments and other financing costs.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue rose 74%, operating income rose 113%, and net income rose 129%. Nine-month revenue rose 78% and net income rose 134%.
- Production growth reflected drilling and recompletion activity, while higher oil prices were the primary driver of the increase in realized revenue.
- Lease operating expenses increased 41% in the third quarter and 24% for the nine-month period. Production taxes increased 72% and 78%, respectively, largely because of higher production and prices.
- DD&A increased to $14.7 million in the quarter and $40.6 million year to date, reflecting a larger full-cost pool and higher production.
- Interest expense declined to $225,000 in the quarter and $1.2 million year to date as revolving debt was repaid.
- Common shares outstanding increased to 50.9 million from 44.6 million at year-end 2010 following two public offerings totaling 6.2 million shares and net proceeds of approximately $178.3 million.
- Property and equipment, net, increased to $412.1 million from $242.1 million at December 31, 2010, largely due to drilling, development and Utica Shale lease expenditures.
Guidance, Outlook, Risks and Unusual Items
- Management estimated 2011 capital expenditures of $162 million to $168 million, excluding Utica Shale and other potential acquisitions. Planned spending included drilling and recompletions in WCBB, East Hackberry and the Permian Basin, Niobrara activity, Grizzly oil sands development and Thailand investments.
- As of September 30, Gulfport held approximately 75,000 gross, or 37,500 net, Utica Shale acres. Management expected to begin drilling in January 2012 and had commitments that could increase the position to approximately 125,000 gross, or 62,500 net, acres. The company was also evaluating a joint venture or sale of part of the position.
- On October 31, 2011, after the reporting date, the revolving credit borrowing base was increased from $90 million to $125 million. The facility’s maximum commitment was $350 million and its maturity was May 2015.
- Gulfport had fixed-price oil swaps covering 2,000 barrels per day at $86.96 per barrel for October–December 2011 and 2,000 barrels per day at $108.00 per barrel for 2012. The swaps had a net fair-value asset of $8.7 million at September 30, 2011.
- Management stated that cash on hand, operating cash flow and available borrowing capacity were expected to fund normal operations and planned capital requirements for the next twelve months. Additional funding could be required for accelerated drilling, acquisitions or expansion of the Canadian oil sands project.
- Commodity prices, production levels, drilling results, reserve estimates, operating costs, weather and regulatory conditions remain significant risks. A sustained decline in oil or gas prices could reduce cash flow and trigger a full-cost ceiling-test impairment.
- Material litigation included Louisiana severance-tax disputes, a Cudd trade-secret lawsuit seeking $26.5 million plus additional damages, and environmental contamination claims in Cameron Parish. Management could not determine the amount of any potential loss.
- The company maintained a $54.4 million valuation allowance against deferred tax assets, except for $573,000 related to alternative minimum taxes. No ceiling-test impairment was required for the quarter.
Important Facts for Investors to Verify
- Reconcile production growth and realized pricing with future commodity-price assumptions and the effect of the company’s oil hedges.
- Assess the funding requirements and potential dilution associated with the Utica Shale acreage commitments and planned 2012 drilling.
- Review the borrowing-base amendment, covenant compliance and availability under the revolving credit facility after September 30, 2011.
- Evaluate the recoverability of the Grizzly investment and related-party note receivable, including the status and financing needs of the Algar Lake project.
- Monitor the outcome and possible financial exposure from the severance-tax, Cudd and environmental litigation matters.
- Assess the effect of higher lease operating costs, production taxes and DD&A on sustainable margins if oil prices decline.