Wednesday, May 23, 2012

Gulfport Energy and Wexford Capital Part V: Parsing Gulfport's cash flow statement

From the last 10Q here are Gulfport Energy's revenue numbers for the past three months:

Three Months Ended March 31, 
   2012  2011 
Oil and condensate sales
  $64,004,000   $45,196,000  
Gas sales
   613,000    720,000  
Natural gas liquids sales
   806,000    659,000  
Other income
   38,000    63,000  


   65,461,000    46,638,000 

They had $65 million in revenue.

Net income was $26.7 million dollars.

Here is the cash flow statement for operating cash flows:

   Three Months Ended March 31, 
   2012  2011 
Cash flows from operating activities:
Net income
  $26,869,000   $21,174,000  
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion of discount - Asset Retirement Obligation
   176,000    159,000  
Depletion, depreciation and amortization
   21,395,000    12,158,000  
Stock-based compensation expense
   681,000    77,000  
Loss from equity investments
   268,000    316,000  
Interest income - note receivable
   —      (36,000
Unrealized loss on derivative instruments
   266,000    —    
Amortization of loan commitment fees
   112,000    110,000  
Changes in operating assets and liabilities:
Increase in accounts receivable
   (1,718,000  (5,419,000
Increase in accounts receivable - related party
   (463,000  (160,000
(Increase) decrease in prepaid expenses
   (57,000  618,000  
Increase (decrease) in accounts payable and accrued liabilities
   22,431,000    (709,000
Settlement of asset retirement obligation
   (531,000  —    


Net cash provided by operating activities
   69,429,000    28,288,000  



The cash generated was - believe it or not - slightly larger than the revenue - and over 40 million higher than profits. Part of that was depletion (depreciation adds to cash flow). Most the rest was simply an increase in accounts payable of 22 million.

Here is the cash flow from investing for that three months:

Cash flows from investing activities:
Additions to other property, plant and equipment
   (82,000  (13,000
Additions to oil and gas properties
   (84,778,000  (33,285,000
Proceeds from sale of other property, plant and equipment
   140,000    —    
Proceeds from sale of oil and gas properties
   —      1,384,000  
Advances on note receivable to related party
   —      (1,319,000
Contributions to investment in Grizzly Oil Sands ULC
   (67,063,000  (4,878,000
Distributions from investment in Tatex Thailand II, LLC
   200,000    —    
Contributions to investment in Tatex Thailand III, LLC
   (483,000  (895,000
Contributions to investment in Muskie Holdings LLC
   (312,000  —    
Contributions to investment in Timber Wolf Terminals LLC
   (1,000,000  —    
Contributions to investment in Windsor Midstream LLC
   (7,021,000  —    


Net cash used in investing activities
   (160,399,000  (39,006,000



In those three months they invested $160 million but only had cash flows of $69 million and earnings of $26.7 million.

How did they finance this?

As noted the company had to finance $160 million of investing activities from only $26.7 million in operating earnings. This presents financing issues.

Firstly the company (as noted) ran up its accrued liabilities.

Then the company borrowed $10 million dollars.

But mostly the company ran down its cash holdings from $93 million to $13 million.

Where did those cash holdings come from?

The cash holdings did not represent past profits. What they were was proceeds from equity issuance. The company cash flow statement in 2011 shows $307 million in equity issuance - much of which has gone into investing in various quarters. The cash is now heavily depleted (note only $13 million is left).

If they intend on investing at these rates they will need to raise more capital.

What were the investments?

In the last quarter they invested $67 million in Grizzly Oil Sands. That is controlled by Wexford.

They also invested in Tatex, Muskie, Timberwolf and Windsor. All of these are Wexford entities.

Indeed they invested more than their entire revenue in Wexford Entities.

But they also added $85 million to oil and gas properties. A fair bit of that was with respect to the Permian Basin properties (they drilled wells and acquired acreage). Those assets are also being sold to a Wexford controlled entity. Other releases have envisaged a sale of that entity which will raise some cash allowing them to continue to invest.

I read many 10K and 10Q filings. Few are this fascinating.



Scott Bremner said...

To paraphrase Jarod Kintz, At even one penny, this stock would be overpriced. In fact, free is too expensive, because you'd still waste time by analyzing it.

Pereg25 said...

So they invest/buy some really good stuff from their friends @ Wexford and then sell stuff they don't want anymore back to Wexford.
Such good people there @ Wexford to buy all those old useless investments from Gulfport. Must be something in it for them?? OH no no that's not it, they are just really nice benevolent people. It's just not possible that they would be selling Gulfport the useless stuff @ inflated prices, after all Gulfort is like a little brother to them. Family and all ....

llogan said...

new reader here. good stuff john keep em coming.

Ferry van Asperen said...

What other assets will Diamondback own besides the Permian assets?
It's possible that Wexford has just repackaged the producing asset in order to manipulate the perceived value of yet another batch of exploration acreage. But how do you know this for sure?

Ofcourse it would make sense for Wexford to persue this strategy if they they can get away with it. Shifting risks while maintaining upside is a common strategy of insiders in exploration and research stage companies. But unless you know this for sure it doesn't justify increasing your short position.

How do you know Diamondback isn't going to IPO with a 4bn market cap?

Carl HT said...

Great post John - I guess they financed their distributions from Tatex as well?

Anonymous said...

I think this thread would be more productive if we put forward some hypothesis about why Wexford has Gulfport wrapped up in so many related party transactions, and why it has Gulfport transferring its key production assets to a different company.

One obvious reason might be that Wexford is gutting Gulfport. It could be that Gulfport was simply a vehicle to finance Exploration risk. Having located one excellent producing resource, and several that are just dogs, Wexford extracts the valuable resource for less than its true asset value, and leaves the carcass behind.

A second hypothesis would be that having so many different entities and asset transfers gives Wexford opportunities to extract "fees" and to thereby juice its own returns.

Do others see other potential reasons for these complex related party transactions?

It's worth noting that the GPOR chart doesn't seem to show John's concerns (yet). The selloff in GPOR seems almost totally related to the selloff in crude, and GPOR's chart looks identical to many other small E&P producers. So the market doesn't see a smoking gun yet. But at minimum John does a convincing job of showing that GPOR is little more than Wexford's playtoy for various transactions and accounting tricks. I have an impossible time believing that this level of self-dealing benefits GPOR shareholders more than Wexford's partners.

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