Gulfport Energy Corp

NYSE:GPOR

Earnings Call Transcript 2023-Q2

[Operator]

Greetings, and welcome to the Gulfport Energy Corporation's Second Quarter 2023 Earnings 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, Director of Investor Relations. Please proceed.

[Jessica Antle, Director-Investor Relations]

Thank you, and good morning. Welcome to Gulfport Energy Corporation's second quarter 2023 earnings conference call. I’m Jessica Antle. Speakers on today's call include John Reinhart, President and Chief Executive Officer; Michael Hodges, Executive Vice President and Chief Financial Officer and Matthew Rucker, Senior Vice President of Operations will be available for the Q&A portion of today's call.

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 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 reference non-GAAP measures. Reconciliations to these 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 Reinhart, President and CEO.

[John Reinhart, President and Chief Executive Officer]

Thank you, Jessica and thank you to everyone for listening to our call. I'm pleased to provide highlights today on the company's outperformance in the second quarter with strong well performance and operational cycle times outpacing budget expectations, playing a key role in our quarterly production, operating costs, adjusted EBITDA and capital spend realizations all coming in better than analyst consensus estimates. The strong execution across the board led to positive revisions in our 2023 full year production and operating cost guidance.

The company remains focused on delivering disciplined growth, lowering costs, improving operational cycle times and efficiencies and enhancing both asset level and corporate returns, all while maintaining an attractive balance sheet and utilizing our top quartile free cash flow yield to enhance shareholder returns and expand our high quality inventory. All of which positions the company attractively for continued fundamental value improvements.

Highlighting the second quarter results, our financial position remains strong despite a volatile commodity market, generating $144.5 million of adjusted EBITDA. The company funded our second quarter capital program within our cash flow and with the front-loaded nature of our 2023 activity behind us, we expect adjusted free cash flow to accelerate in the second half of the year from $59 million in the first half of 2023.

Our average daily production totaled 1.039 billion cubic feet equivalent per day ahead of analyst expectations and was driven by the accelerated timing of wells brought online in the quarter, as well as the continued strong performance from our development program. During the second quarter, the company drilled and rig released eight gross wells, seven of which were in the Utica.

On the completion side, we completed and brought online 13 gross wells during the quarter, 11 in the Utica and two wells in the SCOOP. We continued to deliver strong operational execution and realize consistent cycle time improvements, accelerating the turn-in-lines of all 13 gross wells brought online during the quarter, each realizing a two-week acceleration of planned turn-in-line dates.

Year-to-date, the team has been able to perform at a high level of efficiency and we have included Slide 11 of the investor deck to highlight and summarize several of the key focus areas contributing to our results. On the planning front, by fully integrating the planning function into our operations group, continuous improvements are being realized with operational risk mitigation, improved logistics and idle time reduction between all phases of our operations.

Regarding operations, all functions of our business are realizing efficiency gains. Drilling performance continues to improve with a 6% quarter-over-quarter improvement in footage drill per day. On the completion side, we have seen a significant increase in frac pumping hours per day, reduction in non-productive time, as well as decreasing dead space between frac and drill out phases. Our focus on logistics improvements and design modifications have led to improving average frac pumping hours per day by 4% in the second quarter with many days reaching 19 and 20 plus pumping hours per day, which is highly efficient performance considering the daily stage counts, stage sizes and stage perforating operations.

The operational efficiency gains significantly improved turn-in-line timing, and ultimately acceleration of cash flow. These cycle time reductions play an integral role in our corporate level returns and we remain intently focused on improving capital efficiencies and enhancing margins, which we believe will result in lower maintenance capital expenditures going forward.

As mentioned last quarter, we continue to focus on our pressure managed production approach, which is generating strong pad production rates with minimal average initial pressure drawdown. In the Utica, our three well Barber Ridge pad located in Monroe County, which we mentioned the last quarter, continues to outperform historic results in the same area. This three well pad continues to produce in excess of 70 million cubic feet equivalent per day at an attractive average well pressure drawdown of 15 psi per day. Early results are leading to reserve estimates in excess of 2.5 billion cubic feet equivalent per 1000 feet of lateral for these Monroe County wells.

Historic development in Monroe County has averaged 1.5 billion cubic feet equivalent per 1000 feet of lateral, which represents an outperformance relative to offsetting development by a minimum of 60%. We are very encouraged for the remainder of our consolidated Monroe County Utica dry gas development. We believe our development planning with optimized well spacing, enhanced stimulation treatments and pressure managed flow back will ultimately lead to longer production plateau periods, shallower declines, improved reserves, and improved economics and capital efficiencies relating to rightsizing of production facilities and compression.

When looking at the full 2023 Utica development program, we continue to deliver improved ultimate hydrocarbon recoveries relative to the last three years and currently forecast our EUR for 1000 feet of lateral in the Utica has improved by over 50% since 2020 as shown in our investor presentation on Slide 12. Not to be outdone in the SCOOP, our two well Fowler pad came online during the second quarter and is responding very positively to a pressure managed production approach, with higher than expected oil yields, lower average initial pressure drawdown, as well as moderated profit flow back.

The company has delivered some of the best wells in the SCOOP as seen in recent years, and our Fowler wells look to be in line with those results, highlighting consistent development across our acreage.

Looking at Slide 13 of our investor deck, you can see our program average EUR per 1000 feet of lateral in the SCOOP has improved by over 75% since 2020. We look forward to returning to a more historic level of development activity in Oklahoma in 2024. In terms of current activity, we have one drilling rig operating in Ohio, which is drilling ahead on our Marcellus development in Belmont County and continue to expect these wells to turn to sales during the fourth quarter.

We look forward to farther discussing our Marcellus development progress later in the year and see upside value with our Marcellus acreage holding the potential to unlock approximately 40 to 50 wells of incremental inventory additions to the company. The continued strength in our well performance and operational efficiency gains allow us to increase our 2023 production guidance while maintaining the same base drilling and completion capital budget.

We now forecast our 2023 production will be in the range of 1.035 to 1.055 billion cubic feet equivalent per day, an increase of 1% to 3% based upon the company's previously issued guidance range. Production cost for the second quarter totaled $1.16 per million cubic feet equivalent better than analyst consensus expectations and below our initial full year 2023 guidance range.

The improvement is primarily driven by a decrease in realized and expected per unit firm transportation and processing expenses for the year. For full year 2023, we've reduced our operating unit cost guidance, which includes LOE, midstream and taxes other than income to $1.16 to $1.24 per million cubic feet equivalent, an improvement of approximately 4% based upon the midpoint of our previously issued guidance range. The teams continue to aggressively work opportunities to optimize and reduce our per unit operating costs to improve on both LOE and midstream costs during the remainder of the year.

The company maintained our top quartile general and administrative spend during the quarter with our reoccurring cash G&A, totaling $0.11 per million cubic feet equivalent. On the capital side, driven by operational efficiency improvements to-date, we forecast the company has realized roughly 5% savings on our full year 2023 drilling and completion budget. These savings are being reinvested in our ongoing maintenance leasing efforts, facilitating the company's ability to improve our average working interest in nearly every well in our 2023 development program. This results in an increase in our net well counts and further contributes to our expected production and drilling and completion capital results for the year.

Based on the budgeted activity for the remainder of the year, we remain confident in our full year drilling and completion capital guidance range and affirm our budget of $375 million to $400 million of base development capital spending. The team will continue to focus on operational improvements that are expected to translate into further savings in 2023 as well as meaningful capital efficiency gains going into 2024.

Turning to land capital expenditures. We reaffirm our plans to allocate $50 million to $75 million on maintenance, leasehold and land investment. This land spend is focused on bolstering our 2023 and 2024 drilling programs and facilitating increases in our working interest and lateral footage in units we plan to drill near-term. As outlined in our earnings announcement yesterday evening and discussed on last quarter’s conference call, the company is providing further detail regarding the discretionary acreage acquisitions being pursued this year. These acquisitions expand our high quality resource depth, which is predominantly held long-term by production and will provide optionality to our near-term development plans.

We are actively pursuing these attractive acreage acquisition opportunities towards which we intend to allocate approximately $40 million from a robust 2023 adjusted free cash flow. We believe these are attractive opportunities to acquire high quality organic acreage at attractive valuations that are accretive to overall value of our business. We believe this opportunistic organic leasing strategy is the most cost efficient approach to extending our strong core inventory position.

Depending on the phase window and exact area of interest, we anticipate the approximately $40 million of discretionary acreage acquisitions will add roughly 1.5 years of drilling inventory at our current development pace with an average cost of approximately $1.4 million to $1.5 million per location.

In closing, the current natural gas environment reinforces the importance of developing our assets in an efficient and sustainable development manner. Our team is focused on enhancing margins, optimizing efficiencies and protecting the financial strength of the company. This in addition to the enhancement of our attractive acreage portfolio and a robust shareholder return strategy will further improve our strong positioning going forward.

We continue to prioritize the return of capital to our shareholders through common stock repurchases as evidenced by the concurrent repurchase alongside the secondary equity offering in June 2023. Since initiating the program, we have reduced our outstanding common shares by over 13% and we plan to continue allocating substantially all of our adjusted free cash flow to common share repurchases after accounting for discretionary acreage acquisitions.

Now I’ll turn the call over to Michael to discuss our financial results.

[Michael Hodges]

Thank you, John, and good morning everyone. During the second quarter, the company continued to achieve strong results in almost every area of the business. Net cash provided by operating activities before changes in working capital totaled approximately $134 million during the second quarter, more than funding our capital expenditures, despite the soft gas macro and our accelerated level of activity.

We reported adjusted EBITDA of approximately $145 million during the quarter, and as John mentioned, due to our capital program waiting to the first half of the year, reported a slight outspend in adjusted free cash flow of just $4 million for the same period better than analyst expectations driven by our strong production and operating cost performance. With less than 40% of our D&C and maintenance leasehold spending left to occur in 2023 and with an improving commodity price environment expected later in the year, the second half of the year should deliver accelerating adjusted free cash flow that provides a strong tailwind as we enter 2024.

Our all-in realized price during the second quarter was $2.76 per Mcfe before the impact of cash settled derivatives and firm transportation. This realized unit price is $0.66 above NYMEX Henry Hub Index price, highlighting the benefit of Gulfport’s diverse marketing portfolio for natural gas and the pricing uplift from our liquids in both of our asset areas. We realized a cash hedging gain of approximately $53 million for the quarter as commodity pricing softened and our hedge books strengthened our cash flow.

We believe our hedging position for the remainder of 2023 will provide ample protection should prices remain at or below current levels. Our natural gas price differential before hedges was negative $0.25 per Mcfe compared to the average daily NYMEX settled price during the quarter and driven by seasonality and strip pricing increasing as we progress through the year, we expect our third quarter differential to move wider before narrowing in the fourth quarter.

We reaffirm our natural gas basis differential before hedges to average $0.20 to $0.35 cents per Mcf below NYMEX for the full year, and based on current forward prices and basis marks expect the average toward the end – toward the wide end of our provided range. In addition to reflect market impacts to realized prices to date and the company’s expectations for the remainder of the year, we have revised our realized natural gas liquids guidance and anticipate realizing 35% to 40% of WTI for the calendar year.

On the capital front, we incurred capital expenditures of $110.6 million related to drilling and completion activity and $18.7 million related to leasehold and land investment. Through the first half of the year, we have now spent approximately 61% of our expected base D&C capital for 2023 and approximately 62% of our expected maintenance leasehold and land capital for 2023, and we remain confident that we will deliver full year results within our initial guidance.

Our continued cycle time improvements and acceleration of planned activity has pulled capital forward and we estimate approximately 85% of the drilling completion capital for the year will occur during the first three quarters of 2023. Our operational efficiency improvements, robust hedge position, healthy balance sheet and strong cash margins provide significant flexibility as we consider the proper setup for 2024 and plan our activity as we enter what we believe will be a stronger commodity price environment.

With respect to the current hedge position, we are pleased to have downside protection covering approximately 55% of our remaining 2023 natural gas production at an average floor price of $3.48 per Mcf and roughly 480 million cubic feet per day of downside protection in 2024 at an average floor price of $3.84 per Mcf. We have also begun opportunistically layering in hedges for 2025 and currently have natural gas swap and collar contracts totaling approximately 190 million cubic feet per day at an average price of $3.90 per Mcf to the floor.

On the basis front, we have locked in around 40% of our 2023 natural gas basis exposure, providing pricing security at our largest sales points for the remainder of the year. We believe there are better days ahead for natural gas and yet we remain committed to a disciplined approach to hedging our future cash flows with plans to layer in targeted amounts of incremental hedges, primarily in 2025 as opportunities present themselves.

Turning to the balance sheet. Our financial position remains very strong with trailing 12 month leverage exiting the quarter at 0.9x and our liquidity totaling $732 million comprised of $5.3 million of cash plus $726.6 million of borrowing base availability, which takes into account our previously announced successful spring borrowing base redetermination and our amendment to our credit facility.

Our liquidity today is more than sufficient to fund any development needs we might have for the foreseeable future and provides tremendous flexibility from a financial perspective going forward. As we are positioned to be opportunistic should situations arise that allows us to capture value for our stakeholders.

In the equity capital markets, we completed a secondary equity offering in June with the selling stockholders reducing their ownership by approximately 1.5 million shares and increasing Gulfport’s public equity float by roughly 18%. Further in connection with the transaction, we executed a $25 million concurrent buyback of Gulfport shares and in total repurchased approximately 442,000 common shares at an average price of $93.67 during the second quarter.

As of July 27, we had repurchased approximately 3.8 million shares of common stock at an average share price of approximately $85.51, lowering our share account by 13% since the inception of our share repurchase program. We currently have approximately $75 million of availability under our $400 million share repurchase program and our plan to deliver shareholder value remains the same. We will continue to return substantially all of our full year 2023 adjusted free cash flow to shareholders through common share repurchases, excluding the debt discretionary acreage acquisitions that John mentioned earlier.

As we close out 2023 and look ahead to 2024, we forecast continued significant free cash flow generation and common share repurchases will remain a key part of our return of capital strategy. Given the recognized value, we believe remains in our equity. Given this continuation of our existing plan with respect to shareholder returns, we anticipate expanding our current share repurchase authorization in the near future.

In summary, this is an exciting time to be part of Gulfport. This year’s program is delivering on all fronts and we look forward to continued progress both operationally and financially as we move forward. Simply put, the first half of 2023 has been a success. We now plan to deliver more production than promised at lower operating costs than projected, while investing within our existing guidance and delivering premium free cash flow yields to our investors.

While we fully recognize that the natural gas macro environment has been volatile the last few months, we believe that Gulfport’s current valuation possess a substantial upside, especially in light of our strong results and our operational execution capabilities. We believe this current landscape provides a significant investment opportunity for those willing to recognize both the potential for multiple expansion as well as an improving outlook for natural gas and the upside that these could deliver to our investors.

With that, I’ll turn the call back over to the operator to open up the call for questions.

[Operator]

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

[Unidentified Analyst]

Good morning team. On the Marcellus de-risking when you get those results just trying to get an idea of what we should be looking for. Are you expected to make a decision on whether or not to pursue a program there? Or is this more about how many locations that maybe you think you could bring on board?

[John Reinhart, President and Chief Executive Officer]

Yes, Bert. This is John. Appreciate the question and your participation today. We’re pretty excited about as we’ve mentioned it the last couple quarters the potential that the Marcellus development brings. So we’re actually closing out drilling on our second well, and as I noted, looking forward to starting that production here in early Q4. As I would bucket the opportunity set as we look at it, there are very attractive wells just right across the river and to the south.

We’ve ran also some early pilot logs and some sidewall cores, and what I’ll tell you is that early results are as expected. So as I would bucket the opportunity set from our perspective, we’re looking to delineate the liquids content to the south and to the northwest to better get a handle on how economic these are and what the pressures are in a production profile might look like to better help us in our midstream discussion.

So what would be more of a assessing the productivity of the formation and outline better where we might want to initially prioritize subsequent development? So hopefully that answers your question.

[Unidentified Analyst]

That that does. That’s great. And then the follow-up is just on the prepared commentary. You kind of described the remaining share repurchases as the amount of free cash flow you have for the year. So, obviously 2Q was a lower gas price environment, so maybe you pulled some of that forward. So I just want to make sure we understand, is it a similar program going forward or are you looking at more of a year forward calculation for the year of free cash flow and then you’re just kind of using those buybacks? Or should we expect just a ratable amount of opportunistic share repurchases as they come along? Thanks guys.

[Michael Hodges]

Yes. Bert, this is Michael. That’s a great question. So we’ve described this throughout the year as being kind of a full year program. So we look at our 2023 full year available free cash flow. We can kind of look at that every month at where that sits and what we think might be coming, and certainly commodity prices play into that. And then we assess the amount of share repurchases that we feel like we can make once we take into account any of the acreage opportunities that John described this morning.

So that can vary from quarter-to-quarter. And certainly we’ve been active buyers throughout the year. We think the equity is extremely attractive at current levels and have felt that way consistently. And so with our healthy balance sheet, with our liquidity on the revolver, we don’t really need to chase kind of quarterly changes in the free cash flow. We look at it on that full year basis. And so as we look out to the second half of the year, we’re still assessing it in that fashion and plan to make additional repurchases as we have the available free cash flow.

[Unidentified Analyst]

I think that’s a great way to go about it. Thanks guys.

[Operator]

Our next question comes from Tim Rezvan with KeyBanc Capital. Please proceed.

[Tim Rezvan, KeyBanc Capital]

Okay. Good morning, everybody. Thank you for taking my questions. As we look out to 2024, if we ignore the sold calls, you look to be roughly 50% hedged, just curious given where the balance sheet is and the sort of operational momentum. Is that a good level where you want to be or would you opportunistically push much higher to like the 2023 level if you saw the strip improve? Just curious on your thoughts there.

[Michael Hodges]

Yes, Tim, this is Michael. Another really good question, I think we feel good about where we're at and certainly the hedge position we have in place is significantly in the market or in the positive mark given where the strip sits right now for 2024. You mentioned the balance sheet, I think that gives us the flexibility to vary a little bit, whether we want to be a little higher or a little lower, I would call where we're at somewhere in the middle of our typical range or our typical strategy for our hedge book. So, I think where the strip sits currently, I think we'd feel pretty comfortable with our existing book. If the strip were to move significantly higher, we could certainly layer in a little bit. We probably don't have a ton of room left to add to 2024, but I think for the most part we're really comfortable with where that sits. And I mentioned in my prepared comments, we're really focused on 2025 and we have a pretty optimistic and bullish view on 2025.

So we've been using some structures that allow us to keep the upside there. So, I think most of our focus will be on 2025, but if we saw some improvement in the strip for 2024, there's probably a little bit of room where we could do some additional work there.

[Tim Rezvan, KeyBanc Capital]

Okay, I appreciate that color. And next question, follow up maybe more for John. In the investor deck, you're talking about increasing CapEx in Oklahoma next year, sort of minimal CapEx this year, so an increase like trying to understand how material that can be, it's just a couple more wells or as you've learned more about the asset, is there a chance we could see a full-time rig running out there? Just curious, kind of overview on the SCOOP now that you've been in the seat for a few months?

[John Reinhart, President and Chief Executive Officer]

Hey Tim, thanks for participating in the call. I appreciate the question. Listen, we're pretty excited about the SCOOP coming in. Quite frankly, it's highly economic and the economics certainly warrant capital allocation as we talked about it in the prior quarters due to the HBP nature. We did take some funds from that with regards to our capital program in 2023 and really wanted to reinvest that into Marcellus delineation, which we've done. But now as we turn to 2024, again with the really good results, we are going to be allocating more of a historic capital allocation to the Oklahoma SCOOP area.

And you can think about that in the neighborhood of that 25% to 30% of the capital range plus or minus moving forward. So we'll put out our guidance, in January for – or early February for the full year. But I can tell you we're pretty excited about kind of getting back to our normal cadence of this highly economic part of our portfolio, so appreciate the question.

[Tim Rezvan, KeyBanc Capital]

Okay, thank you.

[Operator]

Thank you. At this time, I will turn the call back to Mr. John Reinhart, CEO for final remarks.

[John Reinhart, President and Chief Executive Officer]

Yes. Thank you for taking the time to join our call today. Our message has been a consistent one, run a healthy company by maintaining a healthy and attractive balance sheet with moderate growth, minimal levels of commitment and generate substantial free cash flow that is directed towards shareholder value accretion. This allows the company to have many levers to be opportunistic tactically and strategically for further value enhancement in the future. Should you have any questions, please don't hesitate to reach out to our investor relations team in the future. Thanks again for joining our call, and have a great day.

[Operator]

This concludes today's teleconference. You may disconnect your line at this time and thank you for your participation.