Greetings. Welcome to the Gulfport Energy Corporation Q1 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I'll now turn the conference over to your host, Jessica Wills, Manager Investor Relations and Research. Ms. Wills, you may begin.

Thank you, and good morning. Welcome to Gulfport Energy Corporation's first quarter of 2019 earnings conference call. I'm Jessica Wills, Director of Investor Relations. Speakers on today's call include David Wood, CEO and President and Keri Crowell, CFO. In addition, with me today and available for the question-and-answer portion for the call are Donnie Moore, Chief Operating Officer and Paul Heerwagen, Senior Vice President of Corporate Development and Strategy. I would like to remind everybody that during this conference call, the participants may make certain forward-looking statements relating to the company's financial condition, results of operations, plans, objectives, future performance and business. We caution you that the actual results could differ materially from those that are indicated in these forward-looking statements due to a variety of factors. Information concerning these factors can be found in the company's filings with the SEC. In addition, we may make reference to other non-GAAP measures. If this occurs, the appropriate reconciliations to the 11GAAP measures will be posted on our website. Yesterday afternoon, Gulfport reported first quarter 2019 net income of $62.2 million or $0.38 per diluted share. These results contain several noncash items, including an aggregate noncash derivative gain of $4.8 million and a gain of $4.3 million in connection with Gulfport interest in certain other equity investments. Comparable to analyst estimates, our adjusted net income for the first quarter of 2019, which excludes all of the previous mentioned items was $53.2 million or $0.33 per diluted share. An updated Gulfport presentation was posted yesterday evening to our website in conjunction with the earnings announcement. Please review at your leisure. At this time, I would like to turn the call over to Dave Wood, CEO of Gulfport Energy.

Thank you, Jessica and thank you all for joining us on this morning's call. Gulfport is off to a strong start in 2019 beginning of the year active in our core asset areas and remaining on track to deliver on our previously announced 2019 capital budget, 2019 capital budget, operational outlook and commitment to free cash flow generation. For the first quarter of 2019 as announced alongside earnings yesterday evening, we've reported approximately $53.2 million of adjusted net income on $315.8 million of adjusted oil and natural gas revenues and generated $206.8 million of adjusted EBITDA. Production averaged 1.26 billion cubic feet of gas equivalent per day for the first quarter coming in as expected, following a muted level of activity during the fourth quarter of 2018 and on a debt-adjusted per sure basis increasing approximately 2% over the fourth quarter of 2018. As I mentioned, we started the year active on the ground, running on average 3.4 horizontal drilling rigs and 4.4 completion crews in total across our Utica Shale and SCOOP assets during the first quarter of 2019. This robust level of activity capitalized on our existing DUC inventory and will lead to an active turn-in-line schedule in the coming months as we expect to turn-to-sales in excess of 30 wells progressively throughout the second quarter of 2019. We forecast that this activity will result in strong quarter-over-quarter production growth and positioning us well as we continue to execute on our 2019 program and reaffirm our expectation that Gulfport's total net production will average in the range of 1.36 billion to 1.4 billion cubic feet of gas equivalent per day for the full year of 2019. I reiterate my comments from our February call that Gulfport remains committed to building an organization that is focused on capital discipline,…

Thank you, Dave, and good morning all. As announced in the earnings release yesterday evening, we reaffirm our full year 2019 capital budget and forecast to invest $565 million to $600 million across our assets funded entirely within cash flow and bolstered by our hedged revenue stream. First quarter production averaged 1.26 billion cubic feet of gas equivalent per day composed of 90% natural gas, 7% natural gas liquids and 3% oil, and we continue to forecast our full year 2019 average daily production to be in the range of 1.36 billion to 1.4 billion cubic feet per day. In addition, as Dave mentioned, we currently forecast to turn-to-sales 30 gross wells progressively throughout the second quarter of 2019 and expect to realize strong single-digit production growth for the quarter. On the realization front, our first quarter of 2019 realized natural gas sales before the effect of hedges and including transportation cost settled approximately $0.46 per Mcf below the average NYMEX price, a 15% improvement over the first quarter of 2018 and narrower than the low end of the 2019 guidance range. Based upon our current portfolio including both Utica and SCOOP and utilizing current strip prices and basis marks for end markets reached, we reiterate our expectations for basis differentials to range from $0.49 to $0.66 per Mcf of NYMEX monthly settle price for natural gas during 2019. Driven by the seasonality of natural gas and the markets we reached, we continue to expect our differential will settle at the wider end of the range during the second and third quarter and narrow into the fourth quarter of 2019. Before the effective hedges, our realized oil price came in at $1.80 of WTI and we reiterate our expectation to realize approximately $3 to $3.50 of WTI per oil. Turning…

Thank you, Keri. In closing, our 2019 plan demonstrates the low capital intensity of our core operations highlighting the quality of these assets by delivering sustainable production with low capital requirements and all supported by a full hedging programs aimed at underpinning our plan and goals. I will echo my comments from February, our focus on capital discipline and cash flow generation goes beyond this calendar year and we are committed to running Gulfport with a focus on enhancing shareholder returns going forward. This is further heightened by the Board's decision to incorporate a free cash flow metric as well as maintain a corporate level return metric, return on average capital employed, all in our 2019 compensation metrics, measuring the value of every dollar we invest, balancing objectives to maximize the 2019 program and demonstrating our commitment to Gulfport shareholders. This concludes our prepared remarks. Thank you again for joining us for our call today. And we look forward to answering your questions. Operator, please open up the phone lines for questions from the participants.

[Operator Instructions] Our first question today comes from Neal Dingmann of SunTrust. Please go ahead.

Dave, could you help me a little bit, I think, I know talking to you and Paul, you've gone through this, but I just want to make sure I understand this better. Could you help me better reconcile how you're going to balance achieving the 1.4 Bcf per day production average this year, after hitting the 1.26 in 1Q? And again I guess what I'm balancing where I'm going with that, you basically have about $310 million left to spend the remainder of the year in order to stay within the low side of your CapEx. So I'm wondering how you balance this while also may be repurchasing up to $370 million worth of your shares. I guess my question would be maybe try to walk through, I assume it's the DUC count and the proceeds from the noncore that gets you there. And I just want to make sure I understand how you're thinking about basically achieving that on the production side and the repurchase side for the remainder of the year?

Yes, Neal, good morning. So, our program for repurchasing was to use free cash flow from this year and also sale of noncore assets we announced in the call of those noncore assets, we've done a small one and used the proceeds for that to do the first of the buybacks. The intent was to conclude those sales through the 24-month period from the time we announced it. So some of it will take place this year and some will take place next year. The free cash flow generation is really the second half of this year. So it from -- purchases from that will be heavily weighted into the second half. There is nothing in that that causes me concern in terms of timing our progress. It's not necessarily the easiest thing to do to monetize some of these things, but they are actively being worked. So I feel good about trajectory and timing of the share repurchase. In terms of the second one, on production, we took a hard look at where we are today for the rest of the year. Feel good about the spend levels and feel good about the overall year targets. So the spend early in the first quarter was faster but that was me within the teams here to try and get the stuff on as soon as possible. So Donnie and his teams did a great job in beating that schedule. So I feel pretty good about where we are.

Okay. And then just one last one if I could, just on holding leases in the Utica. I'm just wondering, I know you have, I think some leases that come due, I think this year maybe more so next year. Is -- one, have you kind of already been working on holding those? And I'm just wondering is there much cost in, I don't know either been able to hold those, I guess, going forward?

Hi, Neal. Paul. The budget we have this year for land spend is mostly -- is almost entirely associated with lease extensions associated with the exercising five-year kickers on leases coming to primary terms here. As you recall, those were higher spends in prior years. And it's sort of tapering off now as we have more and more of the acreage held and also we paid incentives over the last several years. So, it's 40 this year and we would expect it to continue to taper down next year.

Okay. Look forward to all the activity. Thanks, guys.

Thank you.

The next question comes from Ron Mills of Johnson Rice & Company. Please go ahead.

Good morning. Just may be a follow-up on part of Neal's questions. When we think about kind of completion cadence Utica versus SCOOP, the one we look at the remaining completions and particularly the second quarter when you say 30-plus are turn-to-line. How are those split between Utica and the SCOOP? And then the remaining whatever that would be, call it, 20 completions that would be left, are those going to be fairly evenly split during the third and fourth quarter? Or are they going to be more weighted to one particular time?

Hey, Ron, good morning. This is Donnie. Yes, if you look at that first quarter heavily weighted toward the Utica over 30 wells completed, roughly 25-plus of those were in the Utica during the first quarter. Second quarter is still pretty heavily weighted toward the Utica, we've got two completion crews running there today. And then the rest of the year it kind of trickles down and it's fairly split between the two.

Okay. And is that also -- and that would also imply then that from a turn-in-line standpoint really a lot of the growth here particularly in the second quarter, is it fair to assume will be more gassy and then you end up adding more the liquids production in the third quarter and fourth quarter? Just trying to think about our quarterly production cadence?

Yes, that's absolutely right, Ron. Most of our turn-in-lines at second quarter will be more the dry gas Utica wells. So we're excited about getting those online. A lot of activity in the first quarter to set us up for this.

Okay. And from a -- you talked about, I think Keri mentioned strong single-digit sequential growth here in the second quarter. Would you expect something similar to that in the third quarter? Or can it even be a little bit higher in the third quarter as you kind of have a full quarter impact from that completion rush? Or how should we think about that longer outlook of production?

Yes. I mean, I think that's a good way of looking at. Over the second quarter is pretty ratable as the buying on these new wells, then you have a full quarter of those for 3Q. So you'll see growth, second to third quarter for sure.

Okay, great. And then lastly, the nonproduction question. David, on the water sell, the $10 million to $12 million of EBITDA, I think you said that's current EBITDA run rate. It sounds like there is this water handling and recycling. I don't know exactly what kind of leverage those assets have. But when we think about the kind of growth you're going to have here in the second and third quarters, how much leverage do you have on the EBITDA of that -- those assets? And is that all Gulfport or is that a third-party volumes?

It's primarily all Gulfport, a pretty attractive assets we think and will be well received by the market. We were taking a deep dive through our business earlier in the year, identified those as being something that would be highly valued in the market much more so than they're valued in our business. There is growth both from us and also potential third parties in that infrastructure. And so I think that $10 million to $12 million of standalone EBITDA could do substantially better being expanded. So hence the attractiveness I think to third-party. So the process is just getting kicked off. It will be a this year piece of business I believe. And I'm happy to say that we're going to use some of the proceeds of that $50 million which the overall sale will be a lot more than that by the way to address debt reduction. So real happy about where that sits.

Great. Thank you very much.

Ron, thank you.

The next question is from Jason Wangler of Imperial Capital. Please go ahead.

Hey, good morning, all.

Jason, good morning.

Good morning. I wanted to ask -- the hedge book obviously for 2019 looks very good. As you think about 2020, obviously it will ways out. But how do you think about kind of the strategy of building that up as this year goes on, and kind of where you want to be from a longer-term perspective there?

Jason, that's kind of a key question I think. We've been looking very closely particularly at oil for this year and next year. And as was mentioned in Keri's comments, we're pretty nicely covered for this year, and now next year at around $60 for oil. I think the belief we have here is that oil is likely to trade back down. And so we wanted to reach into '20 and get ourselves some coverage there. So we can check that box. In terms of natural gas prices next year, I think we need a little longer look probably around the third quarter as always been my view before we get a good sense of where 2020 is. As I look back at the beginning of this year and where the general sentiment was for 2020, it was pretty negative. I think today irregardless of kind of where the strip has started to play, there's a little bit more green sheets of enthusiasm. I'm very curious to see if that's going to materialize. So in the third quarter, we'll get a pretty good look, I think in 2020. And then just like we did this year, we'll end up in a pretty full hedge position. But we're a quarter away from getting comfortable on that.

Okay. That's helpful. I look forward to that. And then obviously the $30 million sale and then, it looks like you repurchased a good amount of that in the first quarter. Is that just a timing situation where the money will be showing up all bit later but the $30 million was basically repurchased in the first quarter, is that the way to think about that?

Yes, Jason, that's exactly right. We actually use cash on hand to do it. These things you never actually time them right nor probably should time them where you wait for the proceeds before you act. But we felt pretty good about the sale and we had cash on hand so that's what we did. And I wanted to try and do something every quarter, that's the goal anyway elsewhere set out to do this somewhat ratably, it's a very difficult thing to do it that way but that was the intent. So we're off to a good start and we will be doing more as the year goes on.

Okay. I just wanted to get confirmation. Thank you very much.

Yes, sir. Thank you.

The next question is from Tim Rezvan of Oppenheimer. Please go ahead.

Hi, good morning, folks. I'd like to follow-up on Jason's question on the hedges, that was something we were asking about. The strip is at $2.70. So I'm just -- is 3Q sort of when David you kind of feel like you need to pull the trigger on something? Like, would you feel comfortable if you think this strip is not there is kind of going on hedged into the 4Q period?

Yes. Tim, I can do a few things but predicting gas prices I'm not that great at, I will tell you. I really want to get a look to see some of the impacts of the shoulder season going into winter. I think $2.60 is a soft bottom, in general, $3 is a hard cap, I kind of have that view where the year settles out. I think a lot of it will face where storage is and etc, etc. I think next year looks somewhat similar to this year. So I'm thinking not a $2.70 number, I'm thinking better than that, $2.80 number, that's kind of my thought today. But I reserve the fact that I could be wrong and we'll take a look later in the year. But I think directionally that's about where we're at.

Okay. And then would you ever consider using any asset sale proceeds to get to higher swaps than what the strip has given you?

That's a great intellectual thought. But today it is on the table for us now.

Okay. Okay, that's fair. And then just one more on the asset sale side. It sounds like the closing for the water system may be around year-end. Just curious why did you feel that the need or want to publicly disclose it now? Was it sort of to show the depth of the assets that you can monetize? Or had the discussions reach a certain point? Or was information started to get out in the public domain? Just kind of curious why you said rolling out this information like this?

Well, I guess the simple thing is you got to roll it out some time. We actually were taking a deep dive as I mentioned earlier in all of our assets. We're very keen on streamlining this business and getting us down to the core properties. This was one of the things that popped out. I took a look at it, I'm very familiar with how these assets value in the market, the market today seems to be pretty attractive for these assets. And so it made a lot of sense to us to take something that's valued at our multiple and put it at the market that something that's substantially higher multiple. So it just make sense. I think I'm cognizant of where we are debt wise. I think we're in a nice fairway here. But like in everything it's a moving state. So taking some of these proceeds here and helping our debt position, I thought was pretty smart thing to do. So that's kind of the game, it wasn't any do I need to make an announcement, it's just we've recognized the quality of this, we've recognized the market today and recognized the value uptick. So that was really the decision process there.

Okay. Thank you for the comments.

You bet.

The next question is from John Aschenbeck of Seaport Global Securities. Please go ahead.

Good morning, everyone. Thanks for taking my questions.

Hey, John.

So, I wanted to follow-up on the water assets. And I apologize if I missed this. But you mentioned the $10 million to $12 million a year of EBITDA with substantial growth. So what you think are good EBITDA run rate for those assets could be to say at the end of the year when you're planning to wrap up the monetization? Thanks.

John, great question. I think I would defer that because I know we're going to have a lot of people in the data room looking at that and have their own opinions of it. And I really would not like to color that. The way I look at it, this is a great add to somebody's system or position in it or a great starter position for somebody. We're clearly going to be active using this system other people are as well. So I think $10 million to $12 million is what I call a baseline. And I think there's opportunity for a pretty nice growth. Into the comment by the end of the year, the data room here will be lightened up pretty quick. I expect that the process will be concluded well within this year.

Okay. Great. Completely understand that. So then for my second one. I was wondering how do you plan to allocate proceeds for future asset sales? You mentioned how you're planning to do that around the water assets which was helpful. But just thinking of the strategy going forward between share repurchases but also making sure that the balance sheet stays in check. I just wondering if there is a specific leverage metric you'd like to maintain? And then have additional proceeds go to repurchases or perhaps you're just looking at it a different way? Thanks.

Yes. So John, we're I think nicely on track with what our program was laid out at the beginning of the year which is the $400 million share repurchase which includes 2019 free cash and also the sale of certain noncore assets, one of which was the Marcellus which we've already mentioned. But we have a number of others that are all being worked that I hope to be able to announce as the year moves on. So I think that program is all working. This order asset that we've talked about was identified after we'd come up with that $400 million number in program. And so really the use of those funds I thought was kind of appropriate to start targeting something like debt reduction. And so that's the game plan with that.

Okay, got it. That's it from me. Thanks for the time.

Perfect. Thanks, John.

The next question is from Leo Mariani of KeyBanc. Please go ahead.

Hey, Leo.

Hey, how are you? Just wanted to follow up a little bit on the sale of the SCOOP water assets here. Would you focus to see post the deal close here assuming it's gets done later this year. To see some increase in your LOE out there in the SCOOP as a result? Just trying to get a sense if that $10 million to $12 million of EBITDA that sort of becomes I guess added to company, some of that may result at a little higher LOE?

Yes. Leo, the way we've headed in-house here is kind of charging ourselves market rate. So that's where the deal will be struck. So I wouldn't expect us to cut a deal that kind of hurts us. I would be very disappointed in myself if we did that. So the simple answer is no. I think we'd have market rates for this deal. And I think there's pretty keen interest in it so we'll see what kind of price we get.

Okay. I guess with respect to the DUCs there in Utica, you obviously described a pretty aggressive sort of completion schedule you've had there of late. Just trying to get a sense of how many DUCs in the Utica you guys plan to reduce the total buy? In 2019, how many you think you'll have by the end of the year? Just trying to get a sense if you kind of deplete that whole DUC backlog this year?

Yes. Usually an ongoing business will kind of -- like ours will have some DUCs at the end of the year. And for me it is kind of, call it, low 20s. And so we have about 40 DUC to take care of this year and that's the game plan. So that's how we'll look at the end of the year, I think something in the low 20s.

Okay. Thanks very much.

You bet. Thanks.

The next question is from Marshall Carver of Heikkinen Energy Advisors. Please go ahead.

Yes. Just a question on the EBITDA, the $10 million, $12 million of EBITDA impact. Is that all flowing through your LOE line item or there's some that show up another line item?

Yes, hey, Marshall, it's Paul. So the system itself is a water reuse and recycling and distribution system. So there are two components to that. One is a produced water aggregation system, the other is a flow back in the frac sourcing system. And so some of that will go to capital and some of that will go to LOE.

Do you have a ballpark split?

I don't at the top of my head here.

Okay. Thank you.

The next question comes from Jeffrey Campbell of Tuohy Brothers. Please go ahead.

Good morning. First question was I just wondered if there was any active in South Louisiana during the quarter?

God, I hope so, we still own that asset, so that should be active. But yes, we're -- it's one of the assets noncore that we're moving forward with. So hopefully we'll be able to announce something here along with other things later.

Okay. Well, that's a nice color. You mentioned the $50 million of the water sale was going to go to debt reduction and you also said that you think it's going to fetch for an excess of $50 million. So I was just wondering do we assume whatever windfall above $50 million is going to go to the buyback? Or do you want to keep some cash on the balance sheet? Just kind of wondering what you want to do there?

Yes. No, as I hopefully was clear in my comments, that none of the proceeds of the sale of water assets is for the announced buyback program. The $50 million was just to say hey that's what we are going to use that $50 million for. But we haven't made any decision on the proceeds above that. And once we get to know what that number is, then we'll kind of make a judgment call as to where that money should go. But you've hit one of the options for sure.

Okay. Great. I appreciate that. And if I could just sneak one last one. I just wonder what was the mix of the wells drilled and completed in the Utica? It really, I'm just asking did were there any wells drilled or completed or is it all dry gas?

Yes, Jeff, this is Donnie. We drilled the two wet wells in Utica, the rest, dry gas.

Okay, great. Thanks a lot.

Jeffrey, thank you.

The next question comes from Rehan Rashid of B. Riley FBR. Please go ahead.

Good morning. Thank you for taking my questions. Two quick ones. One, how much acreage was associated with that Marcellus rights sale? And then second, just from a kind of framework for 2020 capital allocation standpoint, operationally speaking, is the -- any early ideas on what kind of focus will be on the Utica and what kind of focus will be on your SCOOP assets? Thank you.

Yes, Rehan, it's not a very good footprint of Marcellus rights. So a little bit bigger than my range but not that big. And then the second question, can you repeat the second question please?

May be an early take on kind of capital allocation for 2020, have you seen may be a better from your operational results so far? Any kind of changes or thoughts around what kind of capital allocation would be for 2020 between the two assets?

Yes. So I think that's a -- yes, that's a very fair question. We've been moving capital more towards more liquids part of our portfolio which is kind of in the SCOOP. So just in broad sense, I think that about 60% of our capital will go into SCOOP next year. But we will get a sense of what actually that is when we get a little bit of tighter handle on prices next year. But that's directionally the ratio about 50:50 this year.

Okay. Thank you.

The next question comes from Kashy Harrison of Simmons Piper Jaffray. Please go ahead.

Hi. Good morning and thank you for taking my questions.

Good morning.

So, since it hasn't come up yet and it does seem to be the topic of the season. I was just wondering if you could share your views on just M&A and what role you see yourself playing over the next several years? Just any color would be helpful.

Yes. So it is very topical. And we don't comment as a policy on M&A and what we're doing. I think on a broad sense based on consolidation and M&A is probably going to happen more in the future as we are at the bottom of the market. And so our role and what we play in that I think is yet to be determined, that will be the way I would answer that.

Okay. Fair enough. And then if I recall correctly, there were some Springer wells brought online last year. I was just wondering if you all could provide an update on just how the Springer is performing relative to your internal expectations? And that's it from me. Thank you.

Yes. This is Donnie. Last year we brought some Sycamore well on but not a Springer wells back in '17. But as far as the Springer goes, we're in a lot of non-operated well, so Springer continue to light what we are seeing there. Really like the Woodford performance we're seeing in our home acreage as well. So we'll continue to watch that and see where it goes.

Yes. I think priority wise, Woodford, then Lower Sycamore, is kind of where we're focused.

This concludes the Q&A period. I will now turn the call over to David Wood for closing remarks.

Thank you, operator. We appreciate everyone's time and interest in Gulfport today. And should you have any further questions, please do not hesitate to reach out to our Investor Relations team. This concludes our call. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.