Gulfport Energy Corporation (GPOR) Q4 2022 Earnings Report, Transcript and Summary

Greetings, and welcome to the Gulfport Energy Corporation’s Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jessica Antle, Director of Investor Relations. Thank you, Jessica. You may begin.

Thank you and good morning. Welcome to Gulfport Energy Corporation’s fourth quarter and full-year 2022 earnings conference call. Speakers on today’s call include John Reinhart, President and CEO; 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 conditions, results of operations, plans, objectives, future performance, and business. We caution you that 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 John, President and CEO. John Reinhart Thanks, Jessica, and thank you to everyone for listening to our call today. To open, I would like to express my gratitude to the Board of Directors for the opportunity to be a part of the continuing evolution of Gulfport Energy. The company is positioned with high-quality natural gas weighted asset base and a balance sheet to provide optionality to enhance shareholder value. Working alongside the many talented individuals at Gulfport, we will remain focused on actions that facilitate efficient and sustainable development of the Company’s quality inventory, enhanced margins, and optimize efficiencies within our capital programs, all while maintaining an attractive balance sheet and utilizing our free cash flow to position the company for success. Further to this point, the board recently authorized the expansion of our common share of purchase program by an incremental $100 million. We believe allocating our free cash flow towards the continued investment in our undervalued stock, as well as utilizing it in acquiring incremental leasehold will add value, optionality and quality resource depth for the company moving forward. On behalf of the full board, I would like to also thank Tim Cutt for his leadership of the company through the initial post restructuring period. This was a critical phase of the company and his leadership positioned us for meaningful shareholder value enhancement moving forward. We all look forward to working closely with Tim as Chairman of the Board. I will begin with a summary of our 2022 operational highlights followed by our 2023 outlook, including the cadence of our capital and production in the upcoming year. Bill will then review our fourth quarter and full-year 2022 financial results and provide some additional commentary surrounding our 2023 plans. 2022 was a productive year for Gulfport, maintaining inventories of high quality acreage and delivering strong results from both the Utica and SCOOP development programs. The company generated over $240 million of adjusted free cash flow, which was utilized to return capital to shareholders and reduce our outstanding shares by over 12% or three million shares since initiating the common share or purchase program in early 2022. The quality asset base contributed to an increase in both proved reserves and borrowing base, while also delivering top quartile well productivity results. While the commodity markets have certainly been volatile, the company is well positioned to deliver value on our 2023 operating plans and maintain financial strength. Turning to the specifics, full-year 2022 capital expenditures totaled approximately 450 million production for the year average 983 million cubic feet equivalent per day at the midpoint of guidance, which includes the impacts from Winter Storm Elliott. For the full-year, the company drilled 28 gross wells, which were predominantly focused in the Utica. On the completion side, Gulfport completed and turned to sales, 15 gross wells in the Utica and 13 gross wells in the SCOOP throughout 2022. Operationally, we continue to be very pleased with the recent well results in both the Utica and SCOOP. On Slide 7 and 8 of the Investor Relations deck, we included slides that highlight Gulfport’s recent single well performance compared to peers normalizing the cumulative production on a 1,000 foot of lateral basis. In the Utica, Gulfport development results have led to production outperformance compared to peers with nine of the top-15 producing wells over the past two years being Gulfport operated wells. In the SCOOP for comparative purposes, data was included that depicts all wells drilled in both the SCOOP and stack. Similarly, the Gulfport operated development program over the past two years has outpaced our peers as 13 of the top 15 producing wells, which include all five wells from the Company’s now the development being top performers when comparing cumulative production on a per 1000 foot of lateral normalized basis. Turning to reserves, our strong and consistent well performance is reflected in the 2022 reserve report, as our approved reserves were up 4% year-over-year, totaling four trillion cubic feet equivalent. At the year-end 2022, SEC price deck of $6.36 per mmbtu and $94.14 per barrel oil. The Company’s before tax approved reserve value was $9.5 billion. At a flat $3 per mmbtu, and $70 per barrel oil case are after tax proved reserve values total approximately 2.8 billion or $108 per share after subtracting our current net debt. This highlights, along with our peer leading free cash flow yield, attractive margins, debt maturity profile, and attractive balance sheet. The compelling value opportunity that Gulfport energy represents. As the company progresses into 2023, we are focused on further optimizing margins and capital efficiencies through reductions in our cycle times and operating costs, ultimately supporting the Company’s expected free cash flow generation. Given the current market, we have taken proactive steps to moderate overall development activity with 2023, primarily focused on Utica development and Marcellus delineation activity. Total capital spend for the year, is projected to be approximately $450 million, which includes roughly $50 million to $75 million of land and leasehold investment. The land spend is focused on bolstering our 2023 and 2024 drilling program. Facilitating increases in our working interest and lateral footage and units we plan to drill near-term. Full-year D&C spend is expected to be in the range of $375 million to $400 million, a decrease of approximately 6% from full-year 2022. We expect minimal if any, oil field service inflation year-over-year and given the meaningful pullback in commodity prices, we believe there is potential to take advantage of a better service cost environment in the second half of the year. As we lock in our 2024 program. Looking at allocation between our assets, we project roughly 90% of D&C capital spend will be allocated to our Ohio development, which includes Gulfport’s first Marcellus delineation activities, developing two gross wells in Belmont County, Ohio. We currently forecast two thirds of our capital will be allocated in the first half of 2023, and trend lower in both the third and fourth quarters of the year. Turning to production, we anticipate this level of spend will deliver 1 to 1.04 billion cubic feet equivalent per day in 2023, an increase of 2% to 6% over full-year 2022. Production growth will be back half weighted driven primarily by timing of capital spend, and the Utica turn around schedule being heavily concentrated in the summer months. In our investor deck on Slide 11, we include a more detailed outlook on our expected 2023 capital and production cadence. For 2023, we expect our per unit operating cost to decrease by approximately 7% compared to 2022, driven primarily by production tax impacts associated with lower commodity prices and midstream cost reductions year-over-year. We continue to maintain top quartile G&A spend and forecast reoccurring cash G&A of $0.12 per million cubic feet equivalent for the full-year. On Slide 18 of our investor presentation, we have provided a range of 2023 adjusted free cash flow outlooks at various natural gas prices. We project adjusted free cash flow will range from roughly $175 million at $2.50 gas to $320 million at $3.50 gas, implying a free cash flow yield range of 14% to 25%. We plan to continue the return of capital to our shareholders through common share repurchases, while also actively pursuing incremental leasehold opportunities that increase our resource depth and provide optionality to our future development plans. These opportunities would have characteristics comparable to our existing assets and further build on our core position, while improving our opportunity set in drilling economics and our future development plan. In closing, we have right sized our drilling program for 2023 and are intently focused on reducing cycle times and operating costs to further improve margins. As we progress through the year, we plan to maintain capital discipline, prioritize free cash flow generation or return capital to shareholders through common share repurchases, enhance scale through incremental leasehold opportunities, all while protecting our balance sheet and adding value to the company. Now I will turn the call over to Bill to discuss our financial results.

Thank you, John, and good morning, everyone. Turning now to our fourth quarter financials. The company continued to achieve strong results in almost every area of the business during the quarter, despite a challenging commodity price environment. We reported net income of $749 million and generated $155 million of adjusted EBITDA during the quarter. A key driver of the net income was a $437 million net gain associated with our commodity derivative portfolio. For the 12-month period ending December 31, 2022, we reported net income of $495 million and generated $768 million of adjusted EBITDA. On the capital front, we incurred capital expenditures of $102 million during the fourth quarter, consisting of $89 million in drilling and completion capital and $13 million in land and related capital, both of which were in-line with expectations. For the full-year 2022, we incurred capital expenditures of $448 million, consisting of $411 million in the D&C capital and $37 million in land and related capital. Our total incurred capital for the year was negatively impacted by inflationary pressures on our oilfield services costs, as well as supply chain disruptions throughout the year. Net cash provided by operating activities totaled $188 million during the fourth quarter, and we generated adjusted free cash flow of $33 million for the same period. Despite some weather related headwinds during the quarter, we were still able to generate positive free cash flow for the seventh consecutive quarter of post emergence. For the full-year 2022, we generated roughly $240 million of adjusted free cash flow. Moving on to derivatives, to further support our ability to fund our capital program and return of capital initiatives going forward, we have continued to enter into commodity derivative contracts since our last call. As of February 23rd, we had downside protection covering approximately 56% of our 2023 natural gas production at an average floor price of $3.53 per Mcf and roughly 355 million cubic feet per day of downside production in 2024 at an average floor price just under $4 per Mcf. On the basis front, we now have nearly 40% of our 2023 natural gas bases covered, providing some pricing security at our largest points of exposure. We plan to continue to layer on additional basis hedges for 2023 as well as 2024 in the months to come. Finally, we recently restructured approximately 20% of our 2023 sold calls. The restructure increased the strike price from $2.90 per MCF to $3.70 per MCF on the restructured contract, and provides the ability to capture additional benefit up to a $3.70 price on those volumes. In total, the restructure increased our average 2023 strike price on the calls from $2.90 to $3.16 per MCF. Overall, we are pleased with the progress we have made on a derivative portfolio, and you should expect us to continue to optimize and add to our portfolio in the future when opportunities present themselves. Turning quickly to the balance sheet at the end of the fourth quarter, total assets were approximately $2.5 billion, while total gross debt was approximately 695 million consisting of 145 million outstanding under our credit facility and 550 million of outstanding senior notes. We also had $7 million of cash on hand and $113 million of letters of credit outstanding at the end of the quarter. We exited the fourth quarter with roughly 450 million of total liquidity, consisting of seven million of cash and 442 of borrowing capacity under the credit facility. We continued to execute our common share purchase program in the fourth quarter, during which we repurchase approximately 293,000 common shares at an average price of $79 per share. As of February 2023, we had repurchase approximately 3.1 million shares of common stock at an average share price of $85 per share, lowering our outstanding share account by approximately 12%. Inclusive of our recent expanded share purchase authorization, we now have approximately 135 million of availability under the 400 million program to utilize over the next 12 plus months. Let’s now shift to our 2023 guidance as outlined on slide 18 in the slide deck. Our 2023 total production guidance is 1.0 to 1.04 billion cubic feet equivalent per day with a midpoint up roughly 4% from the 2022 levels. Our year-over-year growth will be driven by our Ohio assets as we forecast a proactive moderation and SCOOP activity in 2023, which will lead to a production decline of 5% to 10% in that basin compared to full-year 2022. Our 2023 guidance for capital investment is 425 million to 475 million and includes 50 million to 75 million of capital for leasehold and land related activities. As John mentioned earlier, we expect inflation to be limited in 2023 as we believe we incurred the bulk of the oil field service cost inflation as part of our 2022 development program. Finally, we expect our 2023 realized natural gas differential before hedges to fall in a range of $0.20 to $0.35 off of NYMEX. Despite realizing wider gas differentials in the third and fourth quarters of 2022, we believe that the primary factors contributing to the weaker differentials are non-recurring in nature, and we are not seeing these impacts roll through the forward pricing used in our 2023 guidance. Please see our earnings released in slide deck for a few additional details on our 2023 guidance. In summary, despite a busy operational quarter and lower than expected realized natural gas pricing and differentials, we delivered another quarter of positive free cash flow. We are confident that our strong asset base will continue to support our ability to generate free cash flow in future quarters and a wide range of commodity prices, allowing us to continue to return capital to shareholders and to invest in incremental leasehold opportunities all while maintaining our strong financial position. With that, we will now open the call up for questions.

Thank you [Operator Instructions] Our first question is from Neal Dingmann with Truist Securities.

Good morning guys and welcome on board, John. My first question, just John, you sound confident, you guys have rated this a couple even, a couple times before you came on, just about the minimal or even no inflation this year. Just could you talk a bit about that, just what the confidence there and maybe a little bit more color on what this might lead you to do. I know, you don’t want to - I’m not expecting 2024 guide this early, but maybe what sort of opportunities you might have then, as you mentioned later on that maybe lock some things in.

Yes. Neal, good morning. Thanks for the question. As we look back at the company throughout 2022 post restructuring, I would say that the contracts or the services of the company was contracted for were pretty light, and so we were a bit exposed to some moderate inflation in 2022, perhaps maybe slightly above the peers. As we move forward though into2023, why we expect minimal is we have services contracted up throughout the year, at least the high spend services. So we feel very comfortable with where we sit on those, as well as we see with the fundamentals in the market, somewhat changing we expect towards the second half of the year. General activity will be impacted in the service side, which will create an environment for us to perhaps take a little bit better advantage in the second half of the year of some service pricing in addition to potential discussions about 2024 work. So once you combine the current environment, the inflation last year were locked up for contracts and we see the market being pretty volatile and a better kind of atmosphere moving into the rest of this year. There is some opportunity for us to actually make some headway, not only keeping it flat, but a possible reduction.

Great point. And then just wondering, I don’t know if it is still too early, you haven’t been there terribly long. Have you been able to sort of get your hand around, you guys have a lot of inventory, a lot of acreage, and I’m just wondering kind of wrap that into an M&A question. When you look at things, I mean, are there things to trade, are there, I’m just wondering when you think about sort of overall inventory and M&A what sort of opportunities you see?

Yes, it is another good question. What I will see is I have been very happy with the quality of resources that the company has in its portfolio. So we are very fortunate to have some very solid, as you see in the IR deck, some SCOOP results. Very good acreage, you can see in the Utica very good, well performance, good acreage, a lot of runway. And now we are recently talking about the Marcellus as far as the delineation, which the company has no value currently booked under. I mean, there is a lot of opportunities to actually get some - take some advantage of actually accruing that value within the company by this delineation test. So as we look at, where our focus is, we see a really quality good asset base, and we are going to be putting focus on value of the company, increasing value of the company, improving margins, protecting the balance sheet, keeping the company healthy, very attractive with some attributes that are very favorable as we navigate this kind of volatile market throughout the next 12-months to 18-months, and position the company in a really good place as we look at fundamentals changing and I guess macro changing to be a very attractive investment. So that is kind of where we are focused, I think right now, relative to positioning the company for value enhancement kind of with an eye towards the future.

And if I could just add one last one just on that macro focus you mentioned, Bill, you mentioned the hedges a little bit. Would into day’s market are you adding more hedges or would you wait until kind of see what prices do. I’m just wanting me the future curve still looks quite positive. So just I was wondering on your earlier comments, how much you are adding - are you - would you add in 2024, are you adding 2024, would you add in 2025, just your thoughts on hedging here? Thanks.

Yes. Good question. So the answer is. Yes, we are going to continue to layer on hedges, that is our philosophy as a company, we will continue to do that. We put some measures on the 24 as recently as last week. So we will continue to do that and we will as I mentioned in my comments, we started doing 23 basis, you can expect us to start looking at 24 basis as well going forward. So we take a methodical approach to hedging and we will continue to do it, as opportunities present themselves.

Glad you are doing it. Thanks guys.

Thanks Neal.

Thank you. Our next question will be from Tim Rezvan with KeyBanc Capital Markets. Please proceed with your question.

Good morning, everybody. Thank you for taking my call. I would like to start with digging into Slide 11, a little bit on your 2023 development plan. Can you talk about why you chose the spot you bid in Southeast Belmont for that Marcellus pad?

Yes. Good morning Tim and thanks for the question. As we look at our leasehold around the area, I think what’s attractive to that particularly is, we have an existing pad out there with infrastructure lease roads that we wanted to take advantage of. There is also right across river a lot of activity in the Marcellus that looks very attractive to us. So whenever you step back and take a look at, where the delineation test is, it gives us a lot of assurances that we are in a good spot here for a test. We can actually drill to the Southeast and Northwest to get a better handle on liquid’s content to see how prolific this side of the river is. So that is basically the genesis of the location in Southeast Belmont for the test.

Okay, I appreciate that. And then looking for the north, excuse me, in Ohio, a four well pad is planted in Western Harrison County, without knowing, where exactly the phased windows lie on this map. Is that a dry gas target, is that liquids rich and how are you thinking about liquid rich and dry gas overall in Ohio?

Yes. No, that is a great question. So this is targeting as it shows for late in the year for us. So this particular window here is definitely liquids rich and wet gas. As we view at the Marcellus to me is, we are going to be drilling as liquids rich as well. The economics on these things should compete with regards to capital or we wouldn’t be prioritizing. So we feel pretty bullish about where it stands as far as ranks on the economic scale. So I think as we look at it between the mix, we have a lot of liquids rich production in the SCOOP. That is a toggle for us. We have some Western type Utica acreage that we could kind of toggle for some liquids rich. We have dry gas that is solid in the core of the Utica from Jefferson and Belmont down in a row. And now we are introducing a test in the Marcellus, which gives us more optionality. So the more triggers we have to pull and the more toggles we have, for a variety of commodity type environment, depending on where prices go. It is nice to have a portfolio like that so you can kind of ebb and flow and reprioritize as needed.

Okay. I appreciate that color. And if I could sneak one last one in. I know post restructuring, you have been sort of -- there has been an intermittent program across your assets and you can sort of see the spud to pox schedule the variability across these pads. How do you think about running a more continuous program, as I guess you get through 2023 and beyond. You have talked about reducing cycle times. Is your plan to kind of get rid of these extended spud to pop cycles or I guess, how do you think about that in terms of driving more efficiencies through the business?

No, it is a great question actually, Tim. I appreciate it. I think, as we look at it from purely a pad level type rate of returns. So, minimizing and optimizing that cycle time when you spend money and when you deliver revenue. And what that means is there is going to be some overlap, certainly in 2023, where we have a couple frac crews running, and there will be times when we have zero frac crews running. And I think as long as we keep those balances within a cadence of one to two crews very manageable and quite frankly, it is much more efficient and it is much more efficient from a capital efficiency standpoint and actually a return on the investment. So, you are going to see some rigs, kind of the cadence of them will come, there will be some overlap. You are going to see frat crews somewhat overlap, but generally speaking, it will be that one and a quarter type rig and generally, one frac crew throughout the year. There will be though, however, some overlap as we look to optimize these cycle times and bring some value forward to the company.

Okay thanks John. I appreciate all the color.

Okay, you bet. Thank you very much.

Thank you. There are no further questions at this time. I would like to hand the floor back over to John Reinhart for any closing comments.

Yes, I would like to thank everybody for joining our call today. Appreciate the questions. We are very excited about 2023 and the development plan. The Company is in a great position to be able to generate free cash flow at a variety of commodity prices. And we are very focused, again, to reiterate on when actually focusing and targeting those funds to increase value of the company. And, and the toggles that we are using are the Share repurchase program, which we have recently announced an extension on, as well as incremental leasehold to bolster our total footprint and grow some scale from an inventory perspective. So, again very excited about 2023 and look forward to sharing more about the results for our next quarter’s call. So thank you very much.

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