Thursday, May 8, 2014

Further explanation re Gulfports quarterly guidance

Someone, remarkably, as a response to the last post argued that Gulfport's quarter looked quite good and wondered what I was seeing that made me so bearish on the stock.

General observation: it has been widely observed that the single best measure of an oil and gas company management is their finding and development costs. Warren Buffett has made this observation many times.

Here - from fairly recently - 26 February this year - is their guidance for production and capital expenditures for this year.


2014 Guidance
Gulfport continues to estimate full year 2014 production to be in the range of 50,000 BOEPD to 60,000 BOEPD. Capital expenditures for exploration and production activities in 2014 are estimated to be in the range of $675 million to $725 million. Additionally, Gulfport anticipates spending approximately $225 million to $275 million on leasehold acquisitions in the Utica Shale during 2014.


GULFPORT ENERGY CORPORATION
COMPANY GUIDANCE

  Year Ending
  12/31/2014
Forecasted Production (BOE per day)
  
Utica
  44,500 - 54,500
South Louisiana
  ~5,500
  

Average Daily Oil Equivalent
  50,000 - 60,000
Total Equivalent - MMBOE
  18.25 - 21.90
Projected Cash Operating Costs per BOE
  
Lease Operating Expense - $/BOE
  $2.00 - $3.00
Transportation, Processing & Marketing - $/BOE
  $2.50 - $3.50
Production Taxes - % of Revenue
  4% - 6%
General and Administrative - $/BOE
  $1.25 - $2.25
Interest - $MM/Quarter
  $4.0 - $4.5
Depreciation, Depletion and Amortization per BOE
  $21.00 - $24.00
Budgeted Capital Expenditures - In Millions:
  
Utica
  $594 - $634
Southern Louisiana
  $66 - $71
Grizzly
  $15 - $20
  

Total Budgeted E&P Capital Expenditures
  $675 - $725
Budgeted Leasehold Expenditures - In Millions:
  $225 - $275


Quick summary: they intended to spend $675 to $725 million in capital expenditures and by year end their flow rates would be 50-60 thousand barrels per day.

From yesterday here is their guidance:

2014 Guidance
Gulfport currently estimates full year 2014 average daily production to be in the range of 37,000 BOEPD to 42,000 BOEPD. Capital expenditures for exploration and production activities in 2014 are estimated to be in the range of $715 million to $767 million. Additionally, Gulfport anticipates spending approximately $375 million to $425 million on leasehold acquisitions in the Utica Shale during 2014.
GULFPORT ENERGY CORPORATION
COMPANY GUIDANCE

  Year Ending
  12/31/2014
Forecasted Production (BOE per day)
  
Utica
  31,500 - 36,500
South Louisiana
  ~5,500
  

Average Daily Oil Equivalent
  37,000 - 42,000
Total Equivalent - MMBOE
  13.51 - 15.33
Projected Cash Operating Costs per BOE
  
Lease Operating Expense - $/BOE
  $3.50 - $4.50
Transportation, Processing & Marketing - $/BOE
  $3.50 - $4.00
Production Taxes - % of Revenue
  4% - 6%
General and Administrative - $/BOE
  $1.50 - $2.50
Interest - $MM/Quarter
  $4.0 - $4.5
Depreciation, Depletion and Amortization per BOE
  $21.00 - $24.00
Budgeted Capital Expenditures - In Millions:
  
Utica
  $634 - $676
Southern Louisiana
  $66 - $71
Grizzly
  $15 - $20
  

Total Budgeted E&P Capital Expenditures
  $715 - $767
Budgeted Leasehold Expenditures - In Millions:
  $375 - $425


We now intend to spend more - $715 to $767 million - that is more - and we intend to produce only 37-42 thousand barrels per day - substantially less.

They also plan to spend more on buying additional leasehold. Historically they have purchased all this leasehold from related parties.

So far the company has had many capital raises based on considerably more bullish guidance.

A considerable amount of the money raised has wound up in the hands of Gulfport's related parties as per the related party statement quoted below.

Are you comfortable?




John


===========================
Related Party Transactions and Relationships
We contract with Athena Construction, L.L.C., or Athena, to provide barge services in our West Cote Blanche Bay and Hackberry fields located along the Louisiana Gulf Coast. During 2013, we paid Athena $5.2 million and owed an additional $1.0 million for such services at December 31, 2013.
Caliber Development Company, LLC, or Caliber, provides building maintenance services for our headquarters in Oklahoma City, Oklahoma. We also lease office space from Caliber. During 2013, we paid Caliber $175,000 and owed $43,000 as of December 31, 2013.
We own a 24.9999% interest in Grizzly Oil Sands ULC, or Grizzly, a Canadian unlimited liability company, through our wholly owned subsidiary Grizzly Holdings, Inc. The remaining interests in Grizzly are owned by Grizzly Oils Sands Inc. As of December 31, 2013, Grizzly had approximately 830,000 acres under lease in the Athabasca and Peace River oil sands regions located in the Alberta Province near Fort McMurray. On October 5, 2012, we entered into an agreement with Grizzly in which we committed to make monthly payments from October 2012 to May 2013 in the aggregate amount of approximately $8.5 million to fund our proportionate share of the construction and development costs of the Algar Lake facility. We also agreed to fund our proportionate share of any unfunded cost overruns in excess of $2.0 million. During 2013, we paid an aggregate of $33.9 million under this agreement and in cash calls.
We have a 25% ownership interest in Muskie Proppant LLC, or Muskie (formerly known as Muskie Holdings LLC). Muskie processes and sells sand for use in hydraulic fracturing by the oil and natural gas industry and holds certain assets, real estate and rights in a lease covering land in Wisconsin that is prospective for mining oil and natural gas fracture grade sand. During the year ended December 31, 2013, we paid $2.2 million in cash calls, increasing our total net investment in Muskie to $7.5 million. We also entered into a loan agreement with Muskie effective July 1, 2013, under which we have loaned Muskie $0.9 million. Interest accrues at the prime rate plus 2.5%. The loan has a maturity date of July 31, 2014. At December 31, 2013, the outstanding balance of the loan was $0.9 million.
During 2011, we invested in Bison Drilling and Field Services LLC, or Bison. Bison owns and operates drilling rigs. During the year ended December 31, 2013, we paid $2.3 million in cash calls. We entered into a loan agreement with Bison effective May 15, 2012, under which Bison may borrow funds from us. Interest accrues at LIBOR plus 0.28% or 8%, whichever is lower, and is to be paid on a paid-in-kind basis by increasing the outstanding balance of the loan. The loan has a maturity date of January 31, 2015. We loaned Bison $1.6 million during the first nine months of 2012, all of which was repaid by Bison during the third quarter of 2012. We have made no loans to Bison since that time.
During the first quarter of 2012, we, Windsor Ohio LLC, or Windsor Ohio, and Rhino Energy LLC formed Timber Wolf Terminals LLC, or Timber Wolf. We currently have a 50% interest in Timber Wolf and paid $0.1 million in cash calls during 2013. Timber Wolf was formed to operate a crude/condensate terminal and a sand transloading facility in Ohio.
During the first quarter of 2012, we purchased a 22.5% ownership interest in Windsor Midstream LLC, or Midstream, at a cost of $7.0 million. Midstream owns a 28.4% interest in Coronado Midstream LLC (formerly known as MidMar Gas LLC), a gas processing plant in West Texas. During the year ended December 31, 2013, we paid an immaterial amount in net cash calls.
During the second quarter of 2012, we and Windsor Ohio formed Blackhawk Midstream LLC, or Blackhawk. We are the manager of Blackhawk and have a 50% ownership interest. Blackhawk coordinates gathering, compression, processing and marketing activities for us in connection with the development of our Utica Shale acreage. During the year ended December 31, 2013, we paid $0.7 million in cash calls to Blackhawk. On January 28, 2014, Blackhawk closed on the sale of its equity interest in Ohio Gathering Company, LLC and Ohio Condensate Company, LLC for a purchase price of $190.0 million, of which $14.3 million was placed in escrow. We received $84.8 million in net proceeds from this transaction.
Panther Drilling Systems, LLC, or Panther, performs directional drilling services for the Company. During the year ended December 31, 2013, we were billed $12.6 million for these services and, at December 31, 2013, we owed Panther approximately $1.8 million.
Redback Directional Services, LLC, or Redback, provides coil tubing and flow back services for the Company. Redback billed us $0.1 million for these services during the year ended December 31, 2013, and no amounts were owed to Redback at December 31, 2013.
Effective April 1, 2010, we entered into an area of mutual interest agreement with Windsor Niobrara LLC, or Windsor Niobrara, to jointly acquire oil and gas leases in Northwest Colorado for the purpose of exploring, exploiting and producing oil and gas from the Niobrara Formation. The 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. In connection with this agreement, we and Windsor Niobrara also entered into a development agreement, effective as of April 1, 2010, pursuant to which we and Windsor Niobrara agreed to jointly develop the contract area, and we agreed to act as the operator under the terms of a joint operating agreement. As operator, we are responsible for daily operations, monthly operation billings and monthly revenue disbursements for these properties. For the year ended December 31, 2013, we billed Windsor Niobrara $0.9 million and, at December 31, 2013, Windsor Niobrara owed us an immaterial amount for these services.
Windsor Ohio participated with us in the acquisition of certain leasehold interests in acreage located in the Utica Shale in Ohio. We are the operator of this acreage in the Utica Shale. As operator, we are responsible for daily operations, monthly operation billings and monthly revenue disbursements for these properties. For the year ended December 31, 2013, we billed Windsor Ohio approximately $73.4 million for these services. At December 31, 2013, Windsor Ohio owed us approximately $1.6 million for these services.
In February 2013, we entered into a purchase and sale agreement with Windsor Ohio pursuant to which Windsor Ohio agreed to sell to us approximately 22,000 net acres representing 100% of its right, title and interest in and to certain leasehold interests in the Utica Shale in Eastern Ohio for approximately $220.4 million, subject to certain adjustments. This transaction, which closed on February 15, 2013, excluded Windsor Ohio’s interest in 14 existing wells and 16 proposed future wells together with certain acreage surrounding those wells. Through this transaction, we acquired an additional approximately 16.2% interest in our Utica Shale leases, increasing our working interest in the acreage to 93.8%. All of the acreage included in this transaction was nonproducing at the time of the acquisition and we are the operator of all of this acreage, subject to existing development and operating agreements between the parties. Pending the completion of title review after the closing, approximately $33.6 million of the purchase price was placed in an escrow account. In May 2013, the escrow accounts for both this acquisition and a prior acquisition with Windsor Ohio that was completed in December 2012 were terminated, and an aggregate of $10.0 million was returned to us. The $77.5 million balance of the escrow accounts was disbursed to Windsor Ohio based on the results of title review. The transaction was approved by a special committee of our board of directors, which engaged independent counsel and financial advisors to assist with its review.
Mr. Mike Liddell, our former Chairman of the Board and one of our named executive officers during 2013, is the operating member and/or an officer of each of Windsor Niobrara, Windsor Ohio, Windsor Midstream, Athena, Panther, Redback, Timber Wolf, Bison and Caliber and holds a 10% participation interest in Windsor Ohio and a direct or indirect contingent participation or profits interest ranging from 2.5% to 10.0% in Windsor Niobrara, Athena, Redback, Caliber, Windsor Midsteam, Muskie, Bison, Panther and Grizzly Oil Sands Inc., none of which interests are dilutive to the interests, if any, that we hold in such entities.


7 comments:

Anonymous said...

"it has been widely observed that the single best measure of an oil and gas company management is their finding and development costs"

How does one put that into metric form?

Anonymous said...

Anon 10:57pm -- Huh? John just spent 3,000 words putting it into metric form.

BBOE / CapEx Spent = Period 0
vs.
BBOE / CapEx Spent = Period 1

Metric going down = Bad

Anonymous said...

Ouch, that's a pretty bad downward move in forward guidance. I don't follow the company closely so was unaware of the change in guidance. Thanks for the clarification.

Analyst said...

Yesterday an oil service company mentioned that traditional fracking techniques (e.g., hydro) have largely been unsuccessful in the Utica to date. Don't you find it strange that GPOR is spending all their capex in the Utica? It's reminiscent of another bad acquisition they made - in early 2012, GPOR purchased Petrobank's May River property for $225MM. According to PBG management, it was sold because it didn't have a great chance of economic success. Fool me once, shame on you...

Anonymoose said...

Anonymous 12:34AM, 1) finding and development costs are not calculated that way and in any case are not the whole picture, and 2) I think production growth is overrated (in general - not necessarily in the context of Gulfport).

1) F&D costs are [Capex / Reserves Added]. The most conservative denominator is to take the added proved developed producing reserves (ie, a "fully funded" reserve - sell-side analysts sometimes use 2P reserves which are NOT a good indication of how much it actually costs to find AND develop a reserve). Most of the time, the industry takes 3-year averages, but sometimes for oil sands or other long-lead projects they will rightfully take a longer time frame.

I agree it's very useful to look at F&D costs, but this needs to also be compared to netbacks (ie, the recycle ratio, which is a general proxy for free cash flow). Recycle ratio is just Netback / F&D Cost. You may have "low" F&D costs but if you are only adding low-margin reserves, then there's clearly some offset. Obviously a recycle ratio over 1x is good, since this implies free cash flow, but you'd be surprised how many companies fail or barely achieve this!

To properly assess the recycle ratio, an analyst must have a sense of how high-margin the INCREMENTAL reserves are being added as well.

2) Public companies tend to focus most on production growth, usually at any cost, in the "hottest" plays. I'm not denying that it is only production that ultimately leads to cash flows, but there are also ways a company can also boost production with seemingly-low capex.

For example, they can just develop reserves they already have, as opposed to exploring and finding new reserves. This works fine in the short-run, or perhaps if a company has an extremely large inventory of proved undeveloped reserves, but eventually they will need to spend money finding new reserves (that will not yet be producing) and this is expensive.

If you HAD to predict how much production would be generated from a given level of capex, a way you can estimate it is to take the inverse of their Proved Developed or Proved Developed Producing reserve life index, to get an idea of the decline rate. Let's say it was a 20% decline rate (ie, 36.5k barrels of annual production / 183k barrels of PDP reserves).

If this company was producing 100boe/d in 2012, we'd say that, absent of any capex, they would produce an estimated 80boe/d in 2013. If they ended up producing 110boe/d in 2013 and spent $1 million in capex during the year, then we can estimate that it costs [$1mm / (110 - 80)] = $33,333 to produce one boe/d.

Anonymous said...

Anon at 6:31pm -- good thoughts and appreciate the additional perspective. I was merely giving a shorthand metric comparison, since these development capex figures were Mgmt's projections for the entire project(s) and not a historical periods where the derivative on 1P may not be measureable.

Thanks for the comment though -- I've added them to my notes for valuing E&P companies :)

Ian Whitchurch said...

Have they broken up their oil/liquids production and their dry gas production anywhere ?

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