Friday, May 18, 2012

Gulfport Energy and Wexford Capital: Part 2

The very long set of transactions entered into by Gulfport Energy with Wexford Capital was surprising to me as well as to a couple of readers.

One question though was (and I am paraphrasing): are these transactions large with respect to Gulfport Energy? Is that the reason you are short?

I can answer the first question simply: yes - related party transactions are important in Gulfport. That is easily seen by looking at their assets as mapped on their home page:


The company has interests in the Canadian Oil Sands, the Niobrara Shale, Thailand, the Permian Basin, Southern Louisiana and the Utica Shale.

Lets go through them individually.

The Canadian Oil Sands operations are held through Grizzly Oil Sands. The proxy tells us that Gulfport own a "24.9999% interest in Grizzly, a Canadian unlimited liability company, through our wholly owned subsidiary Grizzly Holdings, Inc. The remaining interests in Grizzly are owned by other entities controlled by Wexford."

The Niobrara Shale is "effective April 1, 2010 ... an area of mutual interest agreement with Windsor Niobrara LLC, which we refer to as Windsor Niobrara, to jointly acquire oil and gas leases on certain lands located in Northwest Colorado for the purpose of exploring, exploiting and producing oil and gas from the Niobrara Formation." That agreement provides that each party must offer the other party the right to participate in such acquisitions on a 50/50 basis. The parties also agreed, subject to certain exceptions, to share third-party costs and expenses in proportion to their respective participating interests and pay certain other fees as provided in the agreement." Gulfport is "the operator" of the Nobrara acreage - but the partner - Windson Niobrara is controlled by Wexford.

The Thailand assets are in two parts - Tatex Thailand II and Tatex Thailand III.

Gulfport have a 23.5% ownership interest in Tatex Thailand II, LLC. The remaining interests in Tatex II are owned by other entities controlled by Wexford.

Gulfport have a 17.9% ownership interest in Tatex III. Approximately 68.7% of the remaining interests in Tatex III are owned by other entities and individuals affiliated with Wexford.

Windsor, an entity controlled by Wexford, is the operator of all Gulfport's assets in the Permian Basin.

The Permian Basin Assets were (at year end) subject to an agreement with Windsor which provides that each party must offer the other party the right to participate in 50% of each such acquisition. The parties also agreed, subject to certain exceptions, to share third-party costs and expenses in proportion to their respective participating interests and pay certain other fees as provided in the agreement.

In other words Windsor owned 50 percent of these and operated them. There is an interesting post-year end transaction which may be the subject of another blog post.

The Southern Louisiana assets (known as West Cote and Hackberry) are not owned by Wexford but Wexford entities provide barging, drilling and pressure control services.

The Utica Shale assets are operated by Gulfport but like the Niobrara and Permian assets they are subject to a 50-50 sharing agreement with a Wexford controlled entity.

In other words Wexford is integral to the running or ownership or both of every asset controlled by Gulfport. The Chairman of Gulfport (Mike Lidell) cements this link. He is the operating member and in some cases an officer of many of the Wexford entities.

Wexford knows more than anyone else about this company

As we have shown Wexford is either a major owner or operator or supplier to every Gulfport Asset. The Chairman of Gulfport is also (at least in part) a Wexford man.

Wexford is a big fund - according to its website it has $5.6 billion under management.

It is worth knowing what Wexford is doing with their stake. The answer is selling. And selling. And selling some more:


  Trade Date  SymbolCompany Name (Issuer)Trade Type    Shares      Price ($)  Value ($)
2012-03-13GPORGulfport Energy CorpSale245,00032.808,035,020
2012-03-08GPORGulfport Energy CorpSale329,67032.5310,723,835
2012-03-09GPORGulfport Energy CorpSale370,42233.1712,285,416
2012-03-12GPORGulfport Energy CorpSale150,00032.434,864,200
2012-03-07GPORGulfport Energy CorpSale381,96832.3212,347,115
2012-03-06GPORGulfport Energy CorpSale50,00031.231,561,700
2012-03-05GPORGulfport Energy CorpSale59,00032.181,898,797
2012-02-29GPORGulfport Energy CorpSale17,00034.50586,585
2012-03-02GPORGulfport Energy CorpSale17,20033.75580,534
2012-03-01GPORGulfport Energy CorpSale459,00034.1115,657,408
2011-12-05GPORGulfport Energy CorpSale1,150,00027.8432,016,000
2011-03-30GPORGulfport Energy CorpSale2,760,00030.5684,345,600
2010-12-17GPORGulfport Energy CorpSale3,910,00019.4075,854,000


Still they have 5.3 million shares left - and these have a not-inconsiderable value. Moreover almost all the sales have been at prices far above the current price. Their ownership position (including capital raises) has far more than halved.

I take a highly knowledgeable and very rich seller selling aggressively at prices around $30 as a good sell signal at prices around $30.

It is less good a sell signal where we are currently trading (at prices around $20). The reasons I am still short will need to wait for another post.




John

11 comments:

Anonymous said...

"The reasons I am still short will need to wait for another post."

You tease!

Jeff said...

John,

A question about taking profits while shorting.

I am short a laughable company through put options expiring in September 2012.

The value of my put options has risen by +200% since I purchased them a month ago.

I feel like this is a good time to take some profits. But I know that this company is a house of cards. The value of my options could easily rise another 100-200%before September.

What's your general rule of thumb for profit taking?

Thanks!
J
(it's CALL)

Anonymous said...

How tantalising...of course that's likely the point!?

Could it by chance have something to do with the fact that 50 employees manage operations in three countries built up of more than 19m boe in reserves, generate 230m in sales and 110m (a not so shabby 48% margin)in operating earnings, while allocating almost 290m in capital expenditures? That's what I call a day's work.

John Hempton said...

Anonymous - who notes how hard working these employees must be - has a great sense of humour.

John

Anonymous said...

So... 3.9M shares for $75M dollars on 12/17/2010. That is way above volume.

Does that indicate an institutional buyer? Who? Why?

Anonymous said...

PART 1


Hi

Below is some of my research.

SUMMARY
- Biggest shareholder is the CIO at Wexford Capital. Next biggest shareholder is around 5-6%. Given the association of Wexford Capital and Gulfport, recent investment in Utica, he would want to maintain a stake as the largest shareholder. He had been selling out his private position in the company in March in the $30’s.
- The continued investments from Wexford Capital in assets that have much more time to be monetized (at least 3-4 years) also point to the fact about quality of operations of GPOR. The financial oversight/expertise from association with a PE should be a plus at the least.
- JV’s with PE are a common practice in oil and gas industry. And one can expect the same in the future too (as has been in the history). A quick example of another highly reputable company that comes into mind is CRZO. All these transactions are appropriately disclosed in the SEC filings.
- Utica has much more potential, both from returns and scale perspective than any other similar GPOR asset. So it makes sense to divert the capital from other assets to Utica. Risk of dry holes is less in shales.
- Based on worst case (hard) asset valuation (min. $1.2 to $1.5B), discount on multiple of being associated with PE operators, no debt, exposure to high LLS pricing, >90% oil exposure, existing cash generating assets, catalysts from Utica on the horizon in the next couple of quarters, and so on the stock is being beaten unfairly along with plummeting crude prices.


DETAILED ANALYSIS
The fact of the matter is Gulfport is a company that has significant influence/relationship of Wexford Capital and it will probably remain the same for quite some time. While it can be construed as a negative for short period of time as the recent one, over long time their vested interest is beneficial for Gulfport.

Wexford Capital and PE ownership in oil and gas:
Coming to the point about PE ownership in an oil and gas business, there are many examples of oil and gas companies that have PE ownership. The reason is that it is a capital intensive business. The value of capital is more so appreciated when everyone in the relevant media to the streets knows and talks about the shale discoveries in the US. How do smaller E&P operators acquire that capital to go into a resource play like a shale? It is by having relationships with capital markets, private capital providers and bye having knowledgeable operators/geologists/petro physicists in your team that help enter into a new territory and make the whole thing work. So many smaller companies in the need for capital and growth collaborate with private equity players who have higher risk tolerances compared to banks, etc. Moreover, with the growth ahead in shales, one would think that many PE’s redirect their capital toward this area. One can think of a couple of large publicly listed PE players who are doing this. Also, it is important to understand how an oil and gas company obtains loans from banks. It is based on the PDP. Or for a resource play it is based on delineating the play, being present there and starting to produce, etc. (look at KOG for an eg.). Also, very important is the fact that how big a player you become in a play. The more acres you can get hold of, it is more beneficial for you as a company to be able to have some say (or more negotiating power, etc.) over gas gathering/pipeline/sand companies. Plus the future capex requirement is also shared. From all these perspectives, if we look at GPOR’s arrangement with Wexford in Utica, it will make much more business sense than a headline association of its venture being with Wexford again.

Anonymous said...

PART 2

DETAILED ANALYSIS
The fact of the matter is Gulfport is a company that has significant influence/relationship of Wexford Capital and it will probably remain the same for quite some time. While it can be construed as a negative for short period of time as the recent one, over long time their vested interest is beneficial for Gulfport.

Wexford Capital and PE ownership in oil and gas:
Coming to the point about PE ownership in an oil and gas business, there are many examples of oil and gas companies that have PE ownership. The reason is that it is a capital intensive business. The value of capital is more so appreciated when everyone in the relevant media to the streets knows and talks about the shale discoveries in the US. How do smaller E&P operators acquire that capital to go into a resource play like a shale? It is by having relationships with capital markets, private capital providers and bye having knowledgeable operators/geologists/petro physicists in your team that help enter into a new territory and make the whole thing work. So many smaller companies in the need for capital and growth collaborate with private equity players who have higher risk tolerances compared to banks, etc. Moreover, with the growth ahead in shales, one would think that many PE’s redirect their capital toward this area. One can think of a couple of large publicly listed PE players who are doing this. Also, it is important to understand how an oil and gas company obtains loans from banks. It is based on the PDP. Or for a resource play it is based on delineating the play, being present there and starting to produce, etc. (look at KOG for an eg.). Also, very important is the fact that how big a player you become in a play. The more acres you can get hold of, it is more beneficial for you as a company to be able to have some say (or more negotiating power, etc.) over gas gathering/pipeline/sand companies. Plus the future capex requirement is also shared. From all these perspectives, if we look at GPOR’s arrangement with Wexford in Utica, it will make much more business sense than a headline association of its venture being with Wexford again.


Now if we just put ourselves in a company management’s shoes. Our primary aim is to operate efficiently, generate good ROE (using no leverage is a big plus where many companies don’t do this), and continue to grow your future earnings stream, etc. Now if we think of running an oil and gas capital intensive business, to grow we need capital. We know banks will be hesitant, probably a bit inefficient in the entire process relative to other capital sources, etc. We know that we have working relationships with a PE firm that also has focus here. What would you be inclined to do? I think the answer is quite obvious and that is specifically what GPOR has had. Yes, agreed there can be a case where there has been no other affiliation, one answer is that both parties are comfortable with the opportunity set each brings along. But to look deep into this we should look at the margins (SG&A, etc.). Gulfport’s margins have been in most cases ahead of the industry average if not leading (partially because of the high LLS premium cushion). The same argument holds true for Wexford Capital drilling, etc. companies working at GPOR’s Louisiana assets. Think drilling, completion, etc. are not highly differentiated/technology oriented jobs. So till the time margins are fine, one can think of such a mutually beneficial business setting. Netherland Sewell, industry leading third party reserve analysis firm is the evaluator for GPOR’s Louisiana assets.

Anonymous said...

PART 3

Largest shareholder and Chairman of Board:
Charles Davidson has private ownership of the shares. Wexford Capital does not own any shares of Gulfport directly.
• March 5th 2012: Charles Davidson had 6.431618 shares or 11.56% through CD holding company. Information set forth below is on the basis of 55,621,371 shares of common stock issued and outstanding, as reported in the Company’s Form 10K filed February 27, 2012.
http://www.sec.gov/Archives/edgar/data/874499/000104846212000011/formsc13g.htm
• From Gulfport’s 8k: Diamondback, Windsor Permian and DB Holdings are entities controlled by Wexford Capital LP (“Wexford”). Charles E. Davidson, the Chairman and Chief Investment Officer of Wexford, beneficially owned approximately 9.5% of Gulfport’s outstanding common stock as of March 13, 2012. Mike Liddell, Gulfport’s Chairman of the Board and a director of Gulfport, currently serves as the operating member and chairman of Windsor Permian and has an interest in DB Holdings.

Mike Liddell, who is the chairman of the board co-founded DLB Oil & Gas back in 1990’s along with Charles Davidson. Mike, Mark and Charles together owned 75% of the company and sold the company to $150M to Chesapeake back in 1997. That is quite impressive, giving some emphasis to the fact that they know how to run an oil and gas business. Also, helps understand that they know each other for over 20 years now. Mike Liddell was GPOR’s CEO till 2005.

News release: http://www2.prnewswire.com/cgi-bin/stories.pl?ACCT=104&STORY=/www/story/10-22-97/342825&EDATE=
Stock certificate of DLB oil & gas: http://ep.yimg.com/ca/I/yhst-86587441912981_2209_38421850
NewsOK article: http://newsok.com/executive-qa-gulfport-energy-corp.-chairman-mike-liddell/article/3569988


PE ownership and JV’s example in oil and gas – CRZO:
Again to mention the point of PE ownership in O&G firm assets, there are numerous examples but the most recent ones and one of the best and conservative management teams in the industry CRZO comes to mind. It is a company with assets in Marcellus, Utica, Eagleford. If we look through their presentation page 11, we can find the evidence of all JV’s. JV’s with Avista Capital appear multiple times. JV in Utica is more unique with the fact that Avista is 90% owner yet CRZO is the operator. Moreover, Avista’s Steve Webster is the Chairman of Board, owns more than 5% of company’s shares, and is the co-founder/co-managing partner/co-CEO at Avista Capital. All I know of is that CRZO is a very good company with excellent management team and good asset base. CRZO has quite a lot of leverage, and gas weighted assets, which is unlike GPOR.
http://www.crzo.net/uploads/3-26-12%20Carrizo%20Howard%20Weil.pdf
The fact that GPOR discloses all the relationships in public domain in all the filings is what is required by law and it is abiding by it (unless someone has some “specific” case/scenario/example to point out).


Annual Meeting: Annual meeting of stockholders is on Jun 7 2012 in Oklahama City, OK. We can find this information in the proxies. All shareholders can go there or send their votes by mail. Below is the link to the proxy also available on GPOR’s website.
http://www.sec.gov/Archives/edgar/data/874499/000119312512196642/d337122ddef14a.htm

John Hempton said...

To the last comment: Paul Simon has it right. He sings "A man sees what he wants to see and disregards the rest".

I think that applies to longs and shorts.

John

Anonymous said...

PART 2

Now if we just put ourselves in a company management’s shoes. Our primary aim is to operate efficiently, generate good ROE (using no leverage is a big plus where many companies don’t do this), and continue to grow your future earnings stream, etc. Now if we think of running an oil and gas capital intensive business, to grow we need capital. We know banks will be hesitant, probably a bit inefficient in the entire process relative to other capital sources, etc. We know that we have working relationships with a PE firm that also has focus here. What would you be inclined to do? I think the answer is quite obvious and that is specifically what GPOR has had. Yes, agreed there can be a case where there has been no other affiliation, one answer is that both parties are comfortable with the opportunity set each brings along. But to look deep into this we should look at the margins (SG&A, etc.). Gulfport’s margins have been in most cases ahead of the industry average if not leading (partially because of the high LLS premium cushion). The same argument holds true for Wexford Capital drilling, etc. companies working at GPOR’s Louisiana assets. Think drilling, completion, etc. are not highly differentiated/technology oriented jobs. So till the time margins are fine, one can think of such a mutually beneficial business setting. Netherland Sewell, industry leading third party reserve analysis firm is the evaluator for GPOR’s Louisiana assets.

Anonymous said...

PART 3

Largest shareholder and Chairman of Board:
Charles Davidson has private ownership of the shares. Wexford Capital does not own any shares of Gulfport directly.
• March 5th 2012: Charles Davidson had 6.431618 shares or 11.56% through CD holding company. Information set forth below is on the basis of 55,621,371 shares of common stock issued and outstanding, as reported in the Company’s Form 10K filed February 27, 2012.
http://www.sec.gov/Archives/edgar/data/874499/000104846212000011/formsc13g.htm
• From Gulfport’s 8k: Diamondback, Windsor Permian and DB Holdings are entities controlled by Wexford Capital LP (“Wexford”). Charles E. Davidson, the Chairman and Chief Investment Officer of Wexford, beneficially owned approximately 9.5% of Gulfport’s outstanding common stock as of March 13, 2012. Mike Liddell, Gulfport’s Chairman of the Board and a director of Gulfport, currently serves as the operating member and chairman of Windsor Permian and has an interest in DB Holdings.

Mike Liddell, who is the chairman of the board co-founded DLB Oil & Gas back in 1990’s along with Charles Davidson. Mike, Mark and Charles together owned 75% of the company and sold the company to $150M to Chesapeake back in 1997. That is quite impressive, giving some emphasis to the fact that they know how to run an oil and gas business. Also, helps understand that they know each other for over 20 years now. Mike Liddell was GPOR’s CEO till 2005.

News release: http://www2.prnewswire.com/cgi-bin/stories.pl?ACCT=104&STORY=/www/story/10-22-97/342825&EDATE=
Stock certificate of DLB oil & gas: http://ep.yimg.com/ca/I/yhst-86587441912981_2209_38421850
NewsOK article: http://newsok.com/executive-qa-gulfport-energy-corp.-chairman-mike-liddell/article/3569988


PE ownership and JV’s example in oil and gas – CRZO:
Again to mention the point of PE ownership in O&G firm assets, there are numerous examples but the most recent ones and one of the best and conservative management teams in the industry CRZO comes to mind. It is a company with assets in Marcellus, Utica, Eagleford. If we look through their presentation page 11, we can find the evidence of all JV’s. JV’s with Avista Capital appear multiple times. JV in Utica is more unique with the fact that Avista is 90% owner yet CRZO is the operator. Moreover, Avista’s Steve Webster is the Chairman of Board, owns more than 5% of company’s shares, and is the co-founder/co-managing partner/co-CEO at Avista Capital. All I know of is that CRZO is a very good company with excellent management team and good asset base. CRZO has quite a lot of leverage, and gas weighted assets, which is unlike GPOR.
http://www.crzo.net/uploads/3-26-12%20Carrizo%20Howard%20Weil.pdf
The fact that GPOR discloses all the relationships in public domain in all the filings is what is required by law and it is abiding by it (unless someone has some “specific” case/scenario/example to point out).


Annual Meeting: Annual meeting of stockholders is on Jun 7 2012 in Oklahama City, OK. We can find this information in the proxies. All shareholders can go there or send their votes by mail. Below is the link to the proxy also available on GPOR’s website.
http://www.sec.gov/Archives/edgar/data/874499/000119312512196642/d337122ddef14a.htm

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author.  In particular this blog is not directed for investment purposes at US Persons.