Gulfport Energy Corporation (GPOR) Q2 2021 Earnings Report, Transcript and Summary

Greetings, and welcome to the Gulfport Second Quarter 2021 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jessica Antle. Thank you, Jessica. You may begin.

Thank you, and good morning. Welcome to the Gulfport Energy Corporation's second quarter 2021 earnings conference call. I am Jessica Antle, Director of Investor Relations. Speakers on today's call include, Tim Cutt, Interim Chief Executive Officer and; and Bill Buese, Executive Vice President and Chief Financial Officer. 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 non-GAAP measures. Reconciliations to the comparable GAAP measures will be posted on our website. 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 Tim.

Thank you, Jessica. And good morning, and thank you very much for joining the call today. I am here today with Bill Buese, who I had the pleasure of working with recently at QEP Resources. I am personally very excited to be here and look forward to sharing with you the significant value opportunity within Gulfport Energy. I would like to start by thanking our employees for their hard work during a challenging and successful restructuring process. Today, for the first time in a long time, we have a balance sheet that complements the value of our asset base with the right size corporate overhead and top quartile operating costs. We have the same high quality natural gas assets that you are familiar with. However, our 2021 program is delivering strong results above historical averages reflecting our new development plan built upon free cash flow generation, capital discipline and value optimization. As a company, we have a new, highly engaged Board of Directors and we’ve adopted a new business model focused on free cash flow generation and returns over production growth, we expect to use excess cash flow to continue to reduce our outstanding debt until we are able to begin returning capital to shareholders. I will begin with an update on our second quarter operational results and an overview of the development plan performance in both the Utica and SCOOP. Bill will then discuss Gulfport’s financial performance and provide guidance for 2021. We have emerged from restructuring process with a renewed focus on sustainability and delivering on the key metrics outlined in our corporate sustainability report. We are very proud of the progress made in reducing our greenhouse gas and methane emissions. We recently appointed Stephanie Timmermeyer, Vice President of EH&S to the executive team and she is already playing a key leadership role with regards to environmental stewardship, social responsibility and governance of the company. Stephanie will work closely with the executive team and look forward to progress our important ESG initiatives. Moving to our second quarter operational results, as shown on Slide 6 of the IR deck, production averaged 989 million cubic feet of gas equivalent per day during the second quarter which included a strong contribution from both the Utica and SCOOP development programs. We anticipate a slight drop in production during the third quarter as the SCOOP comes off its feet production. We expect the decline to reverse in the fourth quarter when the six well Angela pad comes online in the Utica. Gulfport invested $68 million of capital in the second quarter. We continue to work towards lowering drilling and completion costs while staying primarily focused on delivering peer-leading cost per Mcf produced. I will explain this further as I talk through our development strategy in a few minutes. Moving forward, we are targeting a maintenance-level capital spend of approximately $300 million per year, the annual number will fluctuate slightly presenting on the exact timing of our drilling and completion activity. This level of spend is expected to result in roughly 1 Bcf equivalent per day of production. Turning now to our development plan. I am pleased to report our results in both the SCOOP and the Utica are outperforming historical development results. On Page 9 in the IR deck, you'll find recent results from our 2021 Utica program where production totaled 744 million cubic feet equivalent per day during the quarter. The Shannon and Hendershot wells have been online for approximately five months and remain on plateau. Based on the current pressure decline, these wells could stay on plateau for eight to ten months, which compares favorably to the historical averages of six months or less. In addition, our Morris pad was in online for over a month now and we are seeing similar and encouraging early time data. We believe that this performance is a direct result of moving to wider spacing and slightly larger frac ups. We are currently completing the Angelo pad using simul-frac technology and look forward to bringing this pad online during the fourth quarter as planned. On Slide 11, you will see the results of our most recent wells in the SCOOP. The wells are performing better than the historical Gulfport wells, which we attribute for wider spacing and longer laterals. The 2021 SCOOP program can beat economically with the Utica with rates of return of approximately 80% at $2.75 gas and $60 oil. Looking at the economics of our core program in both the Utica and SCOOP, we have detailed on Slide 12 the compelling returns we are seeing at the varying price scenarios. During the first half of the year, we've been able to substantially improve our operating cost structure with the largest gains in the area of transportation, gathering and processing, and interest expense, largely aided by our restructuring process, which leveraged our balance sheet and right-sized our midstream contracts. The $0.43 per Mcf or 23% year-on-year cost reduction significantly improves our margin is expected to lead us sustainable free cash flow generation moving forward. Midstream volume commitments have been reduced to 900,000 decatherm per day gross capacity, which is well below the planned deliverability for the foreseeable future. Despite this dramatic reduction in firm transportation commitments, our right-sized portfolio continues to provide diversified takeaway capacity and optionality to premium markets out of the basin. We remain keenly focused on reducing our corporate overheads and as a result, we recently flattened our organization structure by reducing the number of executives and more appropriately sizing the organization for our planned operations. With these reductions, we are confident that we will achieve top quartile G&A costs of $0.12 per Mcf for the full year of 2022. Lastly, while the team is working in the field focusing on per unit LOE, which is expected to average $0.14 per Mcfe for 2021 and continuous to drive to bring these costs down even further. I'll now spend a few minutes describing Gulfport’s development programs. We agree that lowering drilling and completion cost per foot is always important and are committed to lowering cost moving forward. We also believe that the most important outcome is to deliver the lowest cost molecule for each dollar spent especially, when looking at the first few year's production. As shown on Slide 19 in the IR deck, we are investing approximately $150 per foot to deliver more intense frac jobs that support wider spaced wells with the objectives of delivering superior economic outcome. The Utica has historically been developed on a 1,000 foot spacing and some operators has driven cost down by pumping smaller completions , which has started to impact the plateau periods and lead to steeper declines. We believe that the optimal design is to target wider spacing of at least 1250 feet, which eliminates one well drilling unit in the example shown on Slide 20. At this spacing, we treat the wells with higher fluid intensity and proppant loading. We also believe the longer laterals of approximately 15,000 feet lower our DMC cost per foot and improve overall well economics and we have redesigned our development plan to reflect this going forward. The cost to develop a four well, wider space pad versus a five well tighter space pad is similar, but we believe that Gulfport’s performance will demonstrate longer plateaus and higher cumulative production during the first few years online. Our 2021 Utica wells are demonstrating and benefited this development approach, which will ultimately lead to greater free cash flow generation, superior EURs and IRRs and as demonstrated on Slide 20 and 21. This approach will also improve the economic performance in areas of the field with lower original gas in place. We believe that the completion approach we have taken in 2021 and planned for 2022 will support our premise and we are encouraged by recent performance. In summary, we have emerged from our restructuring process with continuous improvement mindset, focused on cost-effective production and capital discipline, supported by a strong balance sheet. We are fully committed to safely executing in the field and improving our environmental, social and governance performance. We flatten our corporate structure, reduced overhead, and our focus on optimizing the development program to deliver strong free cash flow and the highest returns possible to our investors. I will now turn the call over to Bill to discuss our financial results and 2020 guidance.

Thank you, Dan, and good morning, everyone. As Tim suggested in his remarks, a lot of hard work has gone into getting the company during the restructuring process. As we look to the future, we firmly believe that all the hard work has positioned us to offer a compelling opportunity for investors. Our efficient asset base supports a low reinvestment rate and the potential for strong return of capital to shareholders in the future. Our 2021 free cash yield is the best in our peer group and we believe that our ability to generate significant free cash going forward is underappreciated. As Tim mentioned earlier, our business plan is committed to developing our assets in a disciplined manner investing $300 million of capital to deliver roughly 1 billion cubic feet per day of equivalent production while targeting annual free cash flow of approximately $300 million. Finally, while our liquidity has already much improved, we expect it to continue to get even better as we execute on our business plan. Upon emergence on May 17, we adopted fresh start accounting which resulted in the company becoming a new entity for financial reporting purposes. As a result, our operating results is now split between free and post emergence periods. Fresh start accounting requires that we establish new fair values to the company's assets, liabilities and equity as of the date of emergence. Consequently, certain pre and post emergence financial and operational results will not be comparable. The specific valuation approaches and key assumptions used to arrive at those values, as well as the value of the discrete assets and liabilities will be described in greater detail in our second quarter 10-Q. Our recent restructuring also had a dramatic impact on our capital structure, which delevered our balance sheet by over $1.2 billion. In the interest of time, I will not walk through all the details now, but they are reflected in the IR deck and 10-Q and I will be happy to answer any questions during today's Q&A session. Turning to our second quarter results, despite managing through our emergence from bankruptcy, our team continued its persistent focus on cost control across the organization, which helped drive strong financial results for the quarter. For the combined three month period ending June 30, 2021, we reported net income of $33 million and generated $157 million of adjusted EBITDA. Net cash provided by operating activities totaled $87 million during the combined second quarter and we generated free cash flow of $74 million for the same period. As a reminder, we define free cash flow as adjusted EBITDA, less incurred capital expenditures, interest expense and capitalized G&A. To ensure our ability to fund our capital program and generate free cash, we continued to enter into commodity derivative contracts during the quarter. For the remaining six months of 2021, we currently hold natural gas swap & collar contracts totaling approximately 800 million cubic feet per day with an average floor price of $2.64 per Mcf. We also have natural gas swap &collar common contracts totaling approximately 550 million cubic feet per day at an average floor price of $2.65 per Mcf for 2022. Please see our 10-Q for additional details on our derivative portfolio. Turning briefly now to our balance sheet, at the end of the second quarter, total assets were approximately $2.1 billion and total shareholders’ equity was approximately $453 million. Total gross debt was $835 million, consisting of $105 million outstanding under our revolver, $180 million outstanding under our term loan, and $550 million of outstanding senior notes. We also had $9 million of cash on hand and $115 million of letters of credit outstanding at the end of the quarter. On the liquidity front, we exited the second quarter with approximately $150 million of total liquidity, made up of that $9 million of cash approximately $141 million of borrowing capacity under our revolver. Moving on to guidance, our 2021 total production guidance is 975 million to 1,000 million cubic feet equivalent per day. Our 2021 guidance for lease operating expense is $0.13 point to $0.15 per Mcfe. Earlier, Tim discussed the significant improvement on the midstream front and as a result of these improvements, our guidance for gathering, processing and transportation expense or GP&T $0.92 to $0.96 per Mcfe for 2021. Our guidance for recurring G&A expense is $45 million, - $47 million. It is important to note that we do not expect to incur any meaningful restructuring charges in the second half of 2021 or in 2022. The midpoint of this reoccurring G&A guidance is 13% lower, compared to 2020. Finally, excluding acquisition and divestiture activity, our 2021 guidance for capital investment is $290 million to $310 million, which includes approximately $20 million of capital for leasehold. Now little over two-thirds of our 2021 budget will be allocated to the Utica. Please see our earnings release for a few additional details on our 2021 guidance. In summary, we believe that we are well positioned to execute our business plans. Our improved cost structure and focus on continuous improvement will enable us to deliver material and sustainable free cash flow. We believe that our ability to deliver a peer leading free cash flow yield provides a unique opportunity for investors. In the near-term, we plan to allocate the majority of our free cash to paying down our revolver and term loan and look forward to returning capital to shareholders in the future. With that, we will now open the call up for questions.

[Operator Instructions] Thank you. Our first question comes from Neal Dingmann with Truist. Please proceed with your question.

Good morning, all. A nice first call Tim and Bill. My first question, again, I like the slides. You've got some good op slides in there today. And my question is, now that you both sort of gone through - the properties gone through the details sort of post-restructuring, have you gone through enough to decide just any potential non-core sales? Or how you're thinking about your locations or inventory? And again, kind of why I am asking that, it seems like in the market today, as you all probably might agree this. But I think I'd agree that right now, a lot people aren't getting paid or right now getting value for their full inventory. So, based on that, based on sort of free cash flow, sort of importance these days, two questions. Have you had enough time to go through? And would you consider any sort of non-core sales?

Thanks for the question, Neal. I appreciate that. So what we're doing, what we've been doing over the last few months is really looking at the standalone case for the business, taking a really hard at the Utica and SCOOP, the inventory levels and what the value is for shareholders on a standalone basis. We've also looked out the asset base, obviously, you can see from the slides SCOOP has some incredible opportunities in the near term and we're going to execute against those. So, certainly when we don't see anything within our core acres that we would call non-core. Just like every other company, we have small things. We have small things up in the wells. We have some overriding interest. We some joint interest. Those kind of things will clearly clean up. But we don't see anything right now that we would say non-core core and some of the completions design we're applying, we're really testing in some of the areas and they have a little bit lower gas in place that I talked about. And we want to improve and we really want to understand those areas before we would consider doing any sort of divestment or trade.

Okay. Makes a lot of sense. And then, just on capital allocation, it sounds like you have gone quite detail through both Utica and the SCOOP. Given sort of pricing, is there one that sticks out? You'll be focusing more and kind of in that same vein obviously these days just your thoughts on kind of target maybe more natural gas versus NGLs and either of the properties, is there anything in that sort of vein that you'll do?

Yes. So, if you look at the Utica, we are targeting dry gas, so that's the program in the Utica. We do have the opportunity for actual oil production in the SCOOP, which obviously is up in the economics quite a bit. So we'll have some liquids production out of the SCOOP development. If you look at - we looked at - we put our whole inventory in there, which is plus or minus 500 wells, when you look at the next ten years, which I always focus on about 70 plus percent of that drilling will be focused in the Utica.

Okay. And then one last one if I could, just maybe for Tim. Tim, what are the - remind me the – I assume there is some restrictions still. I am just wondering how long those will go on as far is- is it something that you are required to do as far as - you talk about the capital allocation. It makes a lot of anyways. But I am just wondering would you have to - your debt is already down under I think, $300 million. Would you have to, at a certain point, just continue to pay that down? I am just wondering on free cash flow allocation and hedges, kind of maybe your thoughts or what's required? Or again, I think I've talked to Justin you could be on the Board could change that. Your thoughts on maybe hedges and free cash allocation if - I don't know, by the end of the year or so?

Yes. I'll start on that. I think the number you quoted on the $300 million and that was a very helpful number. So, we've been higher than that. So, we are really confident of being able to generate 1 Bcf hopefully growing slightly with time as we get more efficient spending about $300 million and generating about $300 million of cash flow that we are going to focus on paying down the debt with that. And we do have some restrictions on issuing dividends and those kind of things that you can talk to Jessica, about a little more detail on sidebar. But, we're running this as a normal company now. We're fully emerged and we like the leverage. It will get better. And so, there is nothing. And on the hedge side on your question, we feel really good about of hedges for 2022 and we feel like we are fully hedged. Obviously, there is some upside on the price with where we sit and we are looking all the optionality we have going into 2023 with the gas curve and vaccination, we're not moving heavily into 2023 yet, but we're certainly studying that.

Got it. Yes. I guess that was nearly getting to 550. So, thanks. Thanks, Tim.

Yes. Thanks Neal.

Thank you. Our next question comes from Leo Mariani with KeyBanc. Please proceed with your question.

Hey guys. Just a question on your Utica production here. If I am reading the financials right, I think you guys brought seven wells online in Utica in the first quarter. And I guess, I was expecting that to have some benefit here on second quarter Utica production, but I guess your Utica production if my math right was down about 9% in this second quarter versus the first quarter. Can you kind of help us kind of understand what was driving that?

Yes. I think, Leo, it’s going be really important as we implement a fairly small development program. It's going to be lumpy. And as we go through and we go quarter-on-quarter, we'll start providing more and more details where just like in this quarter, we put the torch in there that show when our anticipated timing is for the new wells. So that, you're asking about the Utica and the Scoop, finish – its chill program in the beginning of year. So that's on decline. And you can see where we were bringing the wells on, so the only wells that were really online and producing during that period were the Shannon and Hendershot. And they were online for a good period of time. And then you'll see, Morris came on just before the end of the quarter. You'll see the Gehrig and then very importantly, you'll see the Angelo come on. So it's a little bit back-end loaded. And so, with a decline rate of north of 40%, you're going to see those kind of dips, but they are going to - so it's going to be a little bit lumpy as you go through. But as we go forward, we're going to provide you guys enough detail looking forward. So you can anticipate that a little bit better and not be surprised about it.

Okay. Were there any kind of midstream initiatives issues you might experienced in the Utica in the second quarter that caused your production to be quite a bit lower than first quarter? I know there were some midstream issues caught up in different parts of Appalachia during the quarter.

No. So, again, in the first quarter we had all weather issues like everybody else. And coming into the second quarter, it’s more - again, you need to look at what's coming - actually coming online. And then what the base plan is, if you it do the math on that, I think you get pretty close. But we're very happy to spend a little bit time offline describing the dynamics of that with you.

Yes. That'd be great. It's hard to - hard time reconciling the numbers since your 10-Q as you bring seven wells online in the first quarter. So I am just trying to figure out where the benefit from those wells was. I didn't really see it in the numbers. So, okay. And I guess just out the SCOOP here, obviously, it's a multi phase play as you guys described. You talked about having kind of 500 locations in inventory. I think you said 70% was Utica, I guess that leaves the remainder here in SCOOP. Can you give us a sense of the different kind of remaining inventory in the SCOOP in terms of phases? Is more of that concentrated in kind of the condensate window? Or is little bit more of it kind of a rich gas? Can you maybe just tell us more about kind of what's left to drill in the SCOOP and kind of the phase of that inventory and kind of what's the focus in the relative economics? Do you guys look to drill more valley or condensate state rich wells in the SCOOP here? I know the plan is done for a year was as we get into next year, oil prices remain high. How do you see the economics in those different windows?

Yes. I think the – so, one thing you said early on was the 500 wells. What I said on the 70:30 was with our next ten years of inventory. And so we'll have to describe it a little bit differently for the overall inventory. But in the near-term in the SCOOP, especially next year, we're drilling wells that have good liquid rich content in the condensate window. And so, we're going to see, if you look at one of the slides in the deck, you can see we show the economics of that. Obviously, that's bolstered somewhat by that liquid rich nature. So we are going to take advantage of those liquid rich locations, while the prices are high on the liquid side.

Okay. Now that's helpful. All alright. I guess just longer term you kind of alluded to this, but and I know there is no formal long-term guidance, but if I heard your prepared comments correctly, it sounded like you're basically saying, kind of steady activity, spend roughly $300 million a year and kind of keep the production flattish. But you hinted that there could be a little bit of modest upside in the next couple of years. You quoted the balance sheet is in pretty good shape at this point. I guess, is there no thought at all of maybe focusing more on gas activity this winter and next year if gas prices remain really high and in 2022? And this growth just something you don't even consider is kind of a newly merged company here?

Yes. I think in the near-term, it’s really important to steady everything out. And really we've developed a manufacturing process here that fits 1 Bcf a day and spends put the dollar in get the dollar out. I think that's a good starting point. Our goal always is going to be taking that $300 million investment down and having that Bcf a day inch up as we get more efficient. And as we deliver longer plateaus, we hope to see that happen. So, right now, I'd say, we would have to see much longer term sustainability on gas north of $3. But want to change that. We want to hear from our investors that that's something we'd like to see done, because the main thing for us right now is, not only paying down that debt, be getting to a point we're spending out quite a bit of cash being returned to the shareholders. So, if we start investing more comfortable to move that up, our cash flow drops and we'll go through a period of time. So you may feel good, if oil the price is at $3 $4 and then miss the window. And so we'd like more of a steady focus there. The $300 billion helps us to stop the decline. That's happened over the last few years. You'll see that build back up in the fourth quarter. And again, like, on the earlier question, production will be a little bit lumpy, but average around 1 Bcf and we have to see that move up with efficiency, not necessarily more capital in this.

Okay, great. Thank you.

Thank you. This is the end of our Q&A session. I would like to turn the floor back over to Tim Cutt, Interim CEO of Gulfport Energy for closing comments.

Alright. Well, thanks for joining us today. I know this is all fairly new news. So we didn't have so many questions, but I hope to see more on next call. We are happy to engage with you all and further questions or others would like to ask questions. Please don't hesitate to reach out to our Investor Relations team. And with that, that concludes the call. Thank you very much.

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