Tuesday, February 26, 2013

Gulfport energy's accounts payable and accrued liabilities

Gulfport Energy reports later this week. Strangely one of the balance sheet items that most intrigues me is their accounts payable and accrued liabilities.

Here is the current liability section from the last 10-Q.


GULFPORT ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,
2012
December 31,
2011





Current liabilities:
Accounts payable and accrued liabilities
$
107,058,000

$
43,872,000

Asset retirement obligation - current
60,000

620,000

Short-term derivative instruments
8,816,000


Current maturities of long-term debt
147,000

141,000

Total current liabilities
116,081,000

44,633,000










I just want you to note that accounts payable and accrued liabilities are just over 107 million. That is up from 44 million at December 2011 and from 96 million in the second quarter.

And here is the profit loss statement listing all expenses for the past nine months.

GULFPORT ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30,
Nine Months Ended September 30,
2012
2011
2012
2011
Revenues:
Oil and condensate sales
$
58,609,000

$
56,447,000

$
187,633,000

$
154,559,000

Gas sales
973,000

923,000

2,127,000

3,155,000

Natural gas liquids sales
874,000

653,000

2,374,000

2,346,000

Other income
81,000

58,000

189,000

248,000

60,537,000

58,081,000

192,323,000

160,308,000

Costs and expenses:
Lease operating expenses
6,638,000

5,744,000

18,201,000

15,103,000

Production taxes
7,070,000

6,281,000

22,411,000

18,520,000

Depreciation, depletion, and amortization
25,377,000

14,736,000

70,424,000

40,606,000

General and administrative
3,098,000

2,034,000

9,370,000

6,209,000

Accretion expense
176,000

168,000

529,000

491,000

42,359,000

28,963,000

120,935,000

80,929,000

INCOME FROM OPERATIONS:
18,178,000

29,118,000

71,388,000

79,379,000



I want you to notice that the only expenses in the past nine months are:


  • 18.2 million of lease operating expenses
  • 22.4 million of production taxes
  • 70.4 million of depreciation, depletion and amortization
  • 9.4 million of general administrative expenses, and
  • 0.5 million of accretion expense (though I am not sure I know what that is).

The depreciation, depletion and amortization is - I presume - non cash. Cash expenses for the nine months add up to about $50 million.

I presume most of those were paid relatively promptly. (It does not endear you to regulators for instance if you do not pay your production taxes.)

Simple question

What sort of business is it that accrues $107 million in (unpaid) current liabilities but incurs only about $50 million of expense over the past nine months?

I have spent a bit of time puzzling out the answer - but I will leave that for another post.






John

Disclosure: short Gulfport.

24 comments:

Brad R said...

Look at the cash flow statement. The change in those accounts only amounted to $28M - not the full $63M. I would bet that the difference is solely due to purchases of oil and gas properties or capex for which only a portion of the purchase price has been paid and the remainder was thrown into accrued liabilities as the company recorded the full value of the asset on the balance sheet.

In fact the increase in properties on the balance sheet was $306.9M for nine months and the cash flow statement shows an outflow if just $269.2M. There is your difference.

Nonetheless, $28M is a large increase on the expense base for the nine months. There is likely some other items in payables that is not run through the income statement. Possibly further contributions to equity investees whereby only a partial payment was initially made but the full value of the asset was accrued.

The best thing to do in this case is to pull their Dun and Bradstreet report to see if they have stretched out payment terms to suppliers. That will help narrow things down a bit.

Anonymous said...

Does this have anything to do with RNO? I'll guess that's your next post.

Stock Chump said...

Environmental liabilities or dry hole expenses... but that would be pretty bearish as well.

Anonymous said...

Could easily be capital expenditures. Not an expense but can still accrue liabilities for unpaid balances.

Anonymous said...

One thing that comes to mind is that it's royalties owed to the owners of the mineral rights, although even then it's still an unconventional accounting method for E&P's.

John Hempton said...

Someone has got the first point right - it is obviously for capital expenditures - because it can't be for revenue expenditures.

So what capital expenditures and why and to whom?

John

dede said...

Maybe they have two accountants : one responsible for the P&L accounts and the other for the balance sheet?

They need to hire a clerk for reconciliation as well, that should help to fix the problem.

gv said...

I find it confusing but here are my cts.
Under Notes "Acquisitions" the company says that on September 30, 2012 it acquired the leasehold of 128000 acres in Utica shale for 205 Mio (50/50 with Wexford). The remainder of the capital increase in 2011 was used to pay for it.
That must be the cash left on the balance sheet end 2011 or about 90 Mio. Some of the cash flow of the period must have been used but they should have given some more details on the financing of the acquisition.
So the date and lack of detail are hints that payment for this acquisition is still hanging.

Chris L said...

Just because of your previous posts, I'm going to guess the liability is to Mike Liddell or something else owned by Wexford.

I am not sure what because I don't know anything about Gulfport. They have a lot of agreements with Wexford, perhaps some create a future payment to Wexford as Gulfport earns revenue from a project. They had $187M in revenue which generated about $60+M in liabilities since December--I'd guess they are obligated to buy assets, or otherwise contracted to pay Wexford based on revenues generated from a certain asset.

I'm curious if this is any more damning than all of the other ties you've identified with Wexford/Liddel, though--those were pretty convincing in themselves that this company has horrific governance.

aegaia said...

Maybe this table helps clarify the situation (it shows the quarterly additions to the items discussed in the post and in comment nr. 1):

http://www.aegaia.com/2013/02/26/gulfport-energy-corporation/

GG said...

It appears to be an addition to oil and gas properties.

It should have been disclosed in the supplemental disclosure of non-cash transaction on the cash flow statement.

1) What are they trying to hide, that they did not disclose it?

2) How did they get away with not disclosing it?

Schwazye said...

Thanks to Aegaia for the helpful table.

John, it seems like you are off here. The difference between increase in additions to PP&E on the BS vs. the CF ($306.961-269.177=$37.784mm) is nearly equivalent to the difference between increases in AP & Acc Liab on the BS. vs. the CF ($63.186-28.017=$35.169mm). This implies the BV of the land purchased (for the recent Utica purchase I assume) is greater than the cash paid so an Accrued Liability was assumed for expected capital outflows to match the BV of the additions to PP&E.

Therefore, the large increase in AP & Acc Liab is tied to the recent asset purchases as they will require a higher level of CapEx going forward thus increasing the future liability.

If you go back and read historical filings, you'll notice much of the same. We see the same phenomenon for the period ending 9/30/11. The difference between the BS additions to PP&E vs. the CF ($210.408-202.164=$8.244mm)is essentially equivalent to the difference between the BS increase in AP & Acc Liab vs. the CF ($20.005-11.127= $8.878mm).

The increase in AP & Acc Liab is an expense we will eventually see in the IS through DD&A, as this BS account is largely tied to CapEx. So your reference to expenses is frankly irrelevant.

Junior Analyst said...

NOG had the same issue at the end of 2011. In that case, they were classifying Development Expenditures (which were paid to their operators, as they were non-op) as Capex and delaying some of these payments beyond the end of their fiscal year, which kept the full amount from appearing on their Statement of Cash Flow.

I became aware of this discrepancy when they said that "Annual Capex was X" on their YE conference call, and then realized that X was roughly $100m above what they reported as Capex in Cash Flow from Investments. The difference was fully captured by the increase in Accounts Payables (on the Balance Sheet) from 2010 to 2011, but interestingly this was NOT accounted for under Change in Working Capital within Cash Flow from Operations. To simplify, what I mean is that Balance Sheet Accounts Payable had risen from Y in Q4 '10 to Y + $100m in Q4' '11, while Change in Accounts Payable on the Statement of Cash Flow only showed an increase of a few million dollars.

Shockingly, I could never get management to satisfactorily explain this: all they would tell me was that capex included both payments for new lease properties as well as development expenses, and that payment terms for the latter had recently become "more flexible as far of timing with some of [their] larger operators."

In both cases the accounting seems very suspect, and was never called out (surprise, surprise) by any of the sell-side coverage.

BIG Emeritus Officer said...

John,

How do you determine if a company is accruing a cookie jar reserve?

Is that your implication in this case?

I looked at DDD's accrued liabilities and it does not match the CF statement due to changes in accruals related to contingent acquisition payouts.

How do you know if they are reversing these accruals into income?

Donald Shekels said...

While I haven’t had time to look through gulfports financials and public records, at first glace I suspect it could have nothing to do with gas or oil. I've long suspected one of the places they hid the subprime toxic CDO's was on the balance sheet of oil, gas, and coal companies. There's way more too it but if you have the book the Big Short, page 131,

In reference to the names of many CDOs, "A lot of them for some reason we never figured out were named for mountains in the Adirondacks". Jamie Ma, Cornwall Capital.

What are the Adirondacks rich in?

I've found no better proof of this laundering of structured sewage onto seemingly legitimate companies balance sheets than a casino "project" in Macau undertaken solely by a CDO manager and distressed debt hedge fund.

Donald Shekels
CycleOfStructuredNonsense@blogspot.com

Unknown said...

Given the increase in both oil and gas properties and equity method investments over the year, the increase in payables is not so surprising, particularly because of the friendly nature of the parties involved. Sure is lucky that the high yield market and equity market is wide open. At the end of the day, they have best reported reusults in the Utica. Is there such a thing as a barrel of oil equivalent? Only on a BTU basis. Probably a while before this one breaks...but who knows.

Anonymous said...

you should take a look at CRM.. probably a well know short.

the sales increase is nearly offset by marketing & sales expenses and stock comp.. let us know what you think.

Anonymous said...

While I too am puzzled, I suspect it has something to do with their February 2012 purchase of the May River property. It was in Q1 2012 when the AP/AL line took a noticeable jump higher, going from $44m to $76m on cash expenses of $16m. Q1 of last year is when this all began. What kind of accrued liability could this be?

I dont quite get it...balance sheet accruals such as this are for expenses that are expensed, not capitalized. Liabilities for capital obligations are separated and disclosed under "Capital Obligations" sections of 10k's. Higher levels of capex spending, as other commenters have suggested, is not correct. Also, since GPOR uses full-cost accounting, all of their drilling costs whether for exploration or development, are capitalized, as is all of the G&A associated with it. Feel free to read the "Summary of Significant Accounting Policies" for the full details.

Still, I cant figure this out. I cant think of any exceptions whereby a non-capitalized charge could be accrued for without running it through the income statement. Are they violating the matching principle? Again, I think it probably traces back to the May River purchase, with some sort of liability associated with that. What it is, I dont know.

Anonymous said...

Yesterday I had a look at tha database of GMI Ratings, a company which analyzes things like corporate governace and gives ESG scores. I asked to check GPOR, and their ESG score was high, in particular they signalled absolutely no problems about third party related transactions! go figure.

Anonymous said...

I for one, can vouch for the fact that I haven't received any royalty payments for all of 2012. Last week I rec'd a small check less than 1/10th amount I had figured, attached to a three page supplemental check voucher AND a Severence Tax Withholding Statement. I have called GP five times regarding the word 'Accrual' Gross Payments when I haven't seen any money. I cannot get a straight answer. Show Me The Money!!

Michael said...

Their most recent investor pres further confirms that it is CAPEX. They are tripling production this year.

Anonymous said...

All roads lead to the massive capital expenditure occurring at Grizzly Oil Sands. Gulfport and Wexford are into that entity for over $750M, between land and project costs. Their active project is purported to be at least 3 months behind schedule and at least 80% over the initial budget.

Anonymous said...

In March I left a comment regarding not having rec'd any royalties.

In all fairness to GP, I want to add that a few days following my comment, I did receive my check encompassing all royalties due me.

Anonymous

Anonymous said...

John/anyone else here - I was curious if you have had a look at page 13 of GPOR's April presentation. The numbers they are reporting assume full ethane recovery (per the footnote) this inflates the NGL production numbers dramatically. Thoughts? Makes the utica seem that much less interesting.

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