Valeant Pharmaceuticals Part II: GAAP and non-GAAP accounts

In Part 1 I introduced Valeant Pharmaceuticals and its business model which is to acquire pharmaceutical companies, strip them of their research expense and earn very high gross margins on sales.

This has become a hugely successful stock, however you could not tell by looking at the GAAP accounts. Here is the P&L for the last five years, latest on the left, courtesy of Capital IQ. 

For the Fiscal Period Ending	LTM 12 months Mar-31-2014	12 months Dec-31-2013	Reclassified 12 months Dec-31-2012	Reclassified 12 months Dec-31-2011	Reclassified 12 months Dec-31-2010	Reclassified 12 months Dec-31-2009
Currency	USD	USD	USD	USD	USD	USD
Revenue	6,577.6	5,765.4	3,480.4	2,427.5	1,181.2	820.4
Other Revenue	5.6	-	-	-	-	-
Total Revenue	6,583.2	5,765.4	3,480.4	2,427.5	1,181.2	820.4
Cost Of Goods Sold	1,784.6	1,528.5	890.9	636.8	352.1	218.2
Gross Profit	4,798.6	4,236.9	2,589.5	1,790.6	829.2	602.3
Selling General & Admin Exp.	1,545.3	1,305.2	756.1	572.5	256.4	167.6
R&D Exp.	194.3	156.8	79.1	65.7	67.9	47.6
Depreciation & Amort.	-	-	-	-	-	-
Amort. of Goodwill and Intangibles	1,326.0	1,248.7	865.6	530.1	219.8	104.7
Other Operating Expense/(Income)	37.7	41.1	18.1	4.1	89.2	-
Other Operating Exp., Total	3,103.2	2,751.7	1,718.8	1,172.3	633.4	319.9
Operating Income	1,695.4	1,485.2	870.7	618.3	195.8	282.3
Interest Expense	(935.5)	(844.3)	(481.6)	(334.5)	(90.1)	(25.4)
Interest and Invest. Income	8.2	8.0	6.0	4.1	1.3	1.1
Net Interest Exp.	(927.3)	(836.3)	(475.6)	(330.4)	(88.8)	(24.3)
Currency Exchange Gains (Loss)	(24.3)	(9.5)	19.7	-	0.6	0.5
Other Non-Operating Inc. (Exp.)	-	-	-	7.5	-	-
EBT Excl. Unusual Items	743.9	639.5	414.8	295.3	107.6	258.5
Merger & Related Restruct. Charges	(969.5)	(923.7)	(501.8)	(170.8)	(253.3)	(35.6)
Impairment of Goodwill	-	-	(12.8)	-	-	-
Gain (Loss) On Sale Of Invest.	3.9	5.8	2.1	22.8	(5.6)	17.6
Gain (Loss) On Sale Of Assets	(10.2)	(10.2)	-	5.3	-	-
Asset Writedown	(734.9)	(783.2)	(212.9)	(132.9)	-	-
In Process R&D Exp.	(12.0)	-	-	-	-	(59.4)
Legal Settlements	(142.5)	(192.5)	(56.8)	(11.8)	(52.6)	(6.2)
Other Unusual Items	(133.6)	(50.2)	(26.8)	(25.9)	(32.4)	-
EBT Incl. Unusual Items	(1,254.9)	(1,314.5)	(394.2)	(18.0)	(236.3)	175.0
Income Tax Expense	(398.4)	(450.8)	(278.2)	(177.6)	(28.1)	(1.5)
Earnings from Cont. Ops.	(856.5)	(863.7)	(116.0)	159.6	(208.2)	176.5
Earnings of Discontinued Ops.	-	-	-	-	-	-
Extraord. Item & Account. Change	-	-	-	-	-	-
Net Income to Company	(856.5)	(863.7)	(116.0)	159.6	(208.2)	176.5
Minority Int. in Earnings	(4.8)	(2.5)	-	-	-	-
Net Income	(861.2)	(866.1)	(116.0)	159.6	(208.2)	176.5

It is that net income line at the end that sort of gets you. There are losses in all years except 2011 and large and increasing cumulative losses. The $866 million loss in calendar 2013 is a surprising number.

The losses are not quite so bad on an EPS basis because of a massively increasing share count, but these are hardly typical of a company with such a rapidly increasing stock price.

The losses however are net of vast "merger and restructuring charges", "asset writedowns" and "legal settlements" - so called "one-offs".

In 2013 merger and related costs were $923 million, asset write-downs a further $783 million and legal settlements were $192.5 million. These amounts constitute well over 100 percent of the loss recorded.

Net of these costs earnings are going up very nicely. The company actively encourages you to look at it this way - and the market has adopted that guidance (as reflected in the stock price).

Moreover this is precisely how they present it in analyst conference calls. Here is a slide from the 4Q 2013 conference call:

Note that the cash EPS reported ($6.24 per share profit) is considerably more attractive than the GAAP EPS (a loss of $2.70 according to the press release or Capital IQ).

And herein is the rub. Do you want to believe the GAAP EPS (in which case this company is a loss-making disaster) or do you want to look through the GAAP EPS and see what management directs you to, their definition of "cash EPS"?

In other words do you believe in the GAAP accounts or some non-GAAP accounts?

There is another way of saying this. To believe in the GAAP accounts you need to believe that the "one-off" charges are reasonable and truly one-off. [They are truly vast - so this matters.]

There is a possibility that the whole Valeant exercise is something from the Wizard of Oz. Profits are going up nicely if you pay no attention to that man behind the curtain - the man being the large restructuring and one-time items.

It would be an awful for investors if Valeant made its ferociously profitable budgets by putting any unwanted expenses (recurring or otherwise) into the "one-off" bucket.

And this is where we will start our long examination of Valeant. We want to work out whether the one-off charges are reasonable (in which case this is a great company) or whether they are inflated (in which case this is a Wizard-of-Oz-style con-on-the-market).

Till next time.





John

Valeant Pharmaceuticals International: an extended look

Valeant Pharmaceuticals is the hottest stock in the hottest sector (pharmaceuticals and biotech). It also has the strangest business model: it acquires existing companies, strips them of most of their research and development and a large proportion of their other staff and extracts huge margins.

As John Gapper observed in the FT: if the entire industry adopted Valeant’s approach, drug discovery would grind to a halt.

Gapper's article (accurately) stated:

Valeant’s business model is as simple as its accounting and tax structure are complex. While at McKinsey, Mr Pearson [the Valeant CEO] concluded that the industry he advised was spendthrift, not only in the sums it spent on headquarters and staff but in its investment in drug discovery. Employing scientists to search for new drugs was a waste of money because they often failed.

When he got the chance to put his ideas into practice he cut Valeant’s research to 3 per cent of revenues – compared with about 19 per cent at big pharma companies – and acquired products by buying other companies with debt. Valeant has taken over more than 35 companies since 2008, including Bausch + Lomb, which it acquired for $8.7bn last year.

To the extent that the stock price does the analysis this has been an outrageous success. The market clearly thinks Mr Pearson has the goods. This is one of those charts that is so good it makes no sense to view it in anything other than log-scale. 

The market cap is now over $43 billion. If you add in the net debt the enterprise value approaches $60 billion. This is one of the largest companies in the space by enterprise value. Enterprise value is over ten times historic sales (though somewhat less than that relative to the current sales run-rate). Whatever: this is very highly valued.

I am however a disagreeable person. I don't look at charts much - and my skill sets are accounting and tax driven. So I am inclined to take the accounting (and hopefully tax) issues head on and thus assess Mr Pearson's achievement. 

Alas - and I stating this in advance - this will be one of the more complicated projects this blog has and I have little idea how many posts this will take. I might learn a few things along the way too. So with the next post I will start you on the journey proper. Hopefully, dear readers, this will be useful for you too.

John

PS: In the interests of disclosure I should let you know I have done enough work in advance to have a position here. Short. 

Just what Canada needs: more exposure to a resource/China driven economy

Tony Abbott - the Australian Prime Minister - is in Canada at the moment. The Australian press reports that he is meeting a whole lot of fund managers to encourage them to invest in Australia. To quote the Murdoch National Newspaper (The Australian):

Mr Abbott is due to meet leaders from Sun Life Financial, the Canadian Council of Chief Executives, the Ontario Teacher’s Pension Plan, Barrick Gold, Barclays Canada, Saputo and Cameco.

I want to be blunt. There are advantages in investing in your own country: you know it better. You are less likely to make mistakes.

And there are reasons to invest overseas: you can get exposure to industries and economic cycles that might not be available at home. You get diversification.

Also every now and again a foreign market can become very cheap (not everywhere is in a bull market simultaneously). Blind Freddy could make money buying the Korean market at the height of the Asian crisis.

None of these reasons apply to a Canadian investing in Australia. Australia most certainly is not cheap. Sydney makes London and New York seem inexpensive.

And Australia and Canada have about the most similar economies in the Western World. We are large land masses, rich in resources, with small population bases and currencies and economies driven by Chinese resource demand. A Canadian investor in Australia gets little diversification benefit.

At the risk of seeming unpatriotic I am going to give you some advice. If you are a Canadian investment leader and Tony Abbott is seeing you today keep it brief. Don't waste his time or yours.





John

The lesson of today's New York Post Herbalife story

Today Michelle Celarier in the New York Post blew the cover of some fairly harmless anonymous blogger. You can read the story here and the blog here.

The lesson of this story is that the New York Post at an editorial level - and certainly at the Michelle Celarier level does not believe in anonymity.

Given that journalists rely on anonymous sources for stories this is career dangerous.

Michelle Celarier is now - as far as anyone who thinks journalists should protect anonymity is concerned - damaged goods.

It is so sad to see a journalist self-immolate in the pages of her own paper.




John



PS. For the record I have agreed with the anonymous blogger only sometimes.

The New York Times pile onto Insys

The New York Times picks up where this blog leaves off, piling onto Insys Therapeutics. To quote:

Interviews with several former Insys sales representatives suggest the company, based in Chandler, Ariz., has aggressively marketed the painkiller, including to physicians who did not treat many cancer patients and by paying its sales force higher commissions for selling higher doses of the drug. 

Under F.D.A. rules, manufacturers may market prescription drugs only for approved uses. But doctors may prescribe drugs as they see fit. Over the last decade, pharmaceutical companies have paid billions of dollars to settle claims that they encouraged doctors to use drugs for nonapproved treatments, or so-called off-label uses, to increase sales and profits. 

Drug-safety experts said the range of medical professionals who appeared to be prescribing Subsys was troubling, particularly given concerns about the widespread use — and abuse — of narcotic painkillers. In December, Insys disclosed that it had received a subpoena from the federal health department’s Office of the Inspector General for documents related to its sales and marketing practices. The company has said it is cooperating with the investigation.

Marketing the drug off-label is a criminal offence and as the drug has near substitutes it will not be much if any loss to consumers if this company were closed.

The Feds are clearly interested having indicted a doctor who was allegedly prescribing large quantities of the drug off-label.

Can somebody please explain to me why this company is trading at 21 times historic earnings and almost 7 times historic sales? Because I don't quite get it.





John

Insys Therapuetics issues a statement

Insys has issued a statement regarding their Subsys business...

Insys Therapeutics Issues Clarifying Statement


PHOENIX, AZ--(Marketwired - May 12, 2014) - Insys Therapeutics, Inc. (NASDAQ: INSY) today issued a clarifying statement regarding its Subsys® (fentanyl sublingual spray) product.

Insys takes patient safety very seriously and we are committed to working with physicians to help ensure the proper prescribing and use of our products.

In terms of our business, we have continually expanded our commercial organization since launch due to the success of Subsys in treating break through cancer pain in opioid tolerant cancer patients who are 18 years or older. As such, we have expanded our prescriber base and for 2014 year-to-date, no single physician has written more than 5% of total Subsys prescriptions.

Based on recent activity, we feel it is appropriate to summarize and address some of the important items regarding Subsys. Subsys is governed by the Transmucosal Immediate Release Fentanyl ("TIRF") Risk Evaluation and Mitigation Strategy ("REMS") Access program, which was approved and launched by the FDA in March 2012. lnsys began commercializing Subsys on March 26, 2012 after the implementation of this TIRF-REMS program.

This TIRF-REMS program is designed to ensure informed risk-benefit decisions before initiating treatment and appropriate use of TIRF medicines. The purpose of the TIRF-REMS program is to mitigate the risk of misuse, abuse, addiction, overdose and serious complications due to medication errors with the use of TIRF medicines. Subsys can only be prescribed after physicians have undergone training on the risks and benefits of such products and products can only be dispensed via pharmacies who are REMS enrolled. Additionally, all patients and physicians are required to sign a prescriber patient agreement form as part of this process. Insys continues to support the TIRF-REMS program that was co-developed with other participant companies. More information regarding the TIRF-REMS program can be found at www.tirfremsaccess.com.

Insys does not sell directly to physicians. lnsys only sells Subsys through DEA approved wholesalers who monitor and track prescribing activity for this TIRF class of drugs and all opioids. Insys remains committed to our compliance program and protocols in place that are designed to ensure our sales and marketing practices comply with applicable laws.

About Insys Therapeutics, Inc.
Insys Therapeutics is a specialty pharmaceutical company that develops and commercializes innovative products for supportive care of cancer and pain patients. Using its proprietary sublingual spray technology and its capability to develop pharmaceutical cannabinoids, the company addresses the clinical shortcomings of existing commercial products. The company currently markets two products, Subsys, which is sublingual Fentanyl spray for break through cancer pain, and a generic version of Dronabinol (THC) capsules. The company plans to file a New Drug Application (NDA) for an oral liquid formulation of Dronabinol in the second half of 2014 and believes it is a clinically superior product to current Dronabinol capsules. The company is developing a pipeline of sublingual sprays, as well as pharmaceutical CBD.

Forward-Looking Statements
This press release contains forward-looking statements including the statements related to plans to file a New Drug Application (NDA) for an oral liquid formulation of Dronabinol in the second half of 2014, the Company's belief that this oral liquid formulation of Dronabinol is a clinically superior product to current Dronabinol capsules and the Company's statement regard a pipeline of sublingual sprays, as well as pharmaceutical CBD. These forward-looking statements are based on management's expectations and assumptions as of the date of this press release, and actual results may differ materially from those in these forward-looking statements as a result of various factors, many of which are beyond our control. For a description of these risks facing the Company, please see the risk factors described in our filings with the United States Securities and Exchange Commission, including those factors discussed under the caption "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2013 and any subsequent updates that may occur in our Quarterly Reports on Form 10-Q. Forward-looking statements speak only as of the date of this press release and we undertake no obligation to update or revise these statements, except as may be required by law.

Contact:

Contact:

Lisa M. Wilson
President
In-Site Communications, Inc.
T: 212-452-2793
E: lwilson@insitecony.com


I will restrain myself to two things.

(a). They point out correctly they do not sell directly to doctors. No drug company does. Instead they educate doctors about the drug and hopefully the doctors write a script which is collected by the patients. This whole section elides the issue of how the incentive marketing scheme grates against the laws regarding off-label marketing and the like. It is the interaction between the incentive program and alleged off-label prescriptions by the indicted doctor that matter here.

(b). They observe that Subsys can only be prescribed under restrictive conditions... "Subsys can only be prescribed after physicians have undergone training on the risks and benefits of such products and products can only be dispensed via pharmacies who are REMS enrolled. Additionally, all patients and physicians are required to sign a prescriber patient agreement form as part of this process. Insys continues to support the TIRF-REMS program that was co-developed with other participant companies."

This does not match the alleged behaviour of the doctor in question who was allegedly prescribing narcotics for something that looked like carpels tunnel syndrome.


Just saying.




John

Insys Therapeutics: drug dealers and the Feds. Can the business survive?

Insys Therapeutics (INSY:NASDAQ) is a seller of marijuana based anti-nausea drugs and super-strong opiates (Fentanyl) and nothing much else. Nothing has anything that resembles strong patent protection and their version of sublingual Fentanyl is a relatively new comer to the opiate scene - having only been on the market since early 2013.

Remarkably the market cap is over $1 billion. Here is a description from the last 10K. 

We are a commercial-stage specialty pharmaceutical company that develops and commercializes innovative supportive care products. We have two marketed products: Subsys, a proprietary sublingual fentanyl spray for breakthrough cancer pain, or BTCP, in opioid-tolerant patients and Dronabinol SG Capsule, a generic equivalent to Marinol (dronabinol), an approved second-line treatment of chemotherapy-induced nausea and vomiting, or CINV, and anorexia associated with weight loss in patients with AIDS. We market Subsys through an incentive-based sales model.

Drobinol is just marijuana extract. Subsys is a sublingual spray version of fentanyl - an opiate stronger than but shorter acting than heroin whose only legitimate use is to treat pain so sharp the morphine doesn't cut it.

Subsys - by far their important product - is a me-too product. It is - as the form 10K stated - the fourth Transmucosal Immediate Release Fentanyl (TIRF) product released in recent years. However very rapidly gained sales - indeed far more rapidly than any Fentanyl ever. Again to quote the 10K.

We launched Subsys as a commercial product in March 2012. Subsys is the fourth new branded product in the TIRF market over the last four years. Within the first four weeks of product launch, Subsys realized greater market share than the previous three branded products combined at their respective peak market penetration levels to date according to Source Healthcare Analytics. In December 2013, Subsys was the most prescribed branded TIRF product with 28.3% market share on a prescription basis according to Source Healthcare Analytics. Through our ongoing commercial initiatives, we believe we can continue to grow our market share and net revenue for Subsys. According to Source Healthcare Analytics, in 2013, TIRF products generated $421.2 million in annual U.S. product sales. The physician prescriber base for TIRF products is concentrated with approximately 1,850 physicians writing 90% of all TIRF product prescriptions in 2013, according to Source Healthcare Analytics. As a result, our commercial organization is able to promote Subsys using a highly targeted approach designed to maximize impact with physicians.

Now given that there is not a huge difference between TIRF products it is remarkable that Subsys immediately became the dominant TIRF product with a greater share than the three previous leaders combined. It is not entirely obvious how they did that.

But the key was quoted above - and I underlined it just to make sure you noticed. Insys markets Subsys through "an incentive-based sales model".

Its a little hard to work out what that actually means - but it is the key risk in this business. The 10-K only says this:

We market Subsys through our U.S.-based, field sales force focused on supportive care physicians. We utilize an incentive-based sales model that employs a pay structure where a significant component of the compensation paid to sales representatives is in the form of potential bonuses based on sales performance.

This is not well-described in the form 10-K. They state several times that the sales approach is similar to one used at Sciele Pharma - a company that management were previously associated with. Again to quote:

We commercialize Subsys through a cost-efficient commercial organization utilizing an incentive-based sales model similar to that employed by Sciele Pharma and other companies previously led by members of our board of directors, including our founder and Executive Chairman. We intend to market Dronabinol Oral Solution and other proprietary supportive care products, if approved, using the same approach and our commercial organization. 

Beyond that - and a description of the size of the marketing force - the marketing scheme is not well described. Here is the description of the size and extent of the marketing force. 

As of December 31, 2013, we had 145 full-time sales and marketing personnel. We expect the number of our sales and marketing personnel to increase as we seek to continue to increase our existing product sales and as any subsequently approved products are commercialized. We expect our sales and marketing expenses, along with our research and development expenses, to be our largest categories of operating expenses for the foreseeable future. In addition, because we use an incentive-based compensation model for our sales professionals, we expect our sales and marketing expenses to fluctuate from period to period based on changes in Subsys net revenue. Specifically, we expect our sales and marketing expenses to increase in 2014 to the extent that expected increases in Subsys net revenue are realized.

So, what have we got?

A me-too drug - another sublingual Fentanyl - but with a marketing incentive scheme that works and that encourages people to sign up.

One way is that - like Galena - the company offers free samples. I have cut and paste the offer below:

But the main differentiation for this company is the "incentive-based pay structure" whereby "a significant component of the compensation paid to sales representatives is in the form of potential bonuses based on sales performance". 

Oh, of course the drug is wildly addictive and makes you massively high.

There is one more thing that makes this drug particularly susceptible to rapid but ultimately undesirable growth. I will leave that to later in this post.

This is kind of special - its a business model almost designed for something to go wrong - very wrong.

Very wrong of course is off-label selling and diversion to drug addicts. Worse still is the systematic creation of drug addicts by your sales force who are paid by incentives.

The beginning of the unravelling

On Friday in the late afternoon Insys stock rapidly dropped about 20 percent on no apparent news. Twitter had the story though - a story in a Michigan local paper about a doctor being arrested for allegedly defrauding medicare. 

The money quotes in the paper:

Medicare paid Awerbuch [the allegedly corrupt doctor] $6.9 million from Jan. 1, 2009, through Feb. 6, 2014, for Subsys he prescribed. The next highest amount a U.S. prescriber received was $1.6 million. 

"Awerbuch is responsible for approximately 20.3 percent of the Subsys prescribed to Medicare beneficiaries nationwide during this time," the affidavit stated. 

He wrote 1,283 prescriptions for the drug in five years, while the next closest prescriber wrote 203 prescriptions, the complaint stated.

Now there are something wrong with these dates - because Subsys was only marketed from March 2012 - but - if the paper is to be believed - a single doctor was responsible for over 20 percent of all Medicare Subsys prescriptions. And that doctor is not going to be prescribing any more.

This doctor took to prescribing Subsys very freely and if the story is to be believed contrary to the black-label warnings. He also allegedly defrauded private health care companies - so he is responsible for more of the sales. Allegedly the doctor also prescribed Subsys to the police officer. To quote:

On one visit, an undercover officer asked for a Vicodin prescription and attempted to bribe Awerbuch for the drug with $1,000. The officer told Awerbuch he would sell the drug to coworkers. 

Awerbuch refused the bribe and asked the officer not to sell Vidodin again. He also asked if the officer was a Drug Enforcement Administration for FBI agent. The officer said he was not, and Awerbuch issued him the Vicodin prescription. 

During a later visit, Awerbuch proscribed Subsys to the officer even though the officer had not been diagnosed with cancer.

The affidavit also talks about the doctor giving the "free 30 day trial" to people who are not cancer patients.

Increasing doses

Just in passing the affidavit mentions prescriptions to individual patients. They go up very rapidly consistent with addiction. If you want the bull case for the company that is it. Rapid growth based on addiction.

Diversion

It doesn't take long prowling the internet to work out that there are other issues with Subsys. I am not going to lead you through the underground of drug-diversion websites - but it is not hard on the web to find people who have taken this drug intravenously and some of them report getting distributors to give them the thirty day free samples. Moreover - and this really is an issue - this is a sublingual spray - that is a liquid. The other forms of the drug (lollipops, rice-paper tabs etc) are not liquids. [However if you want a guide to extracting Fentanyl from patches look here... Never underestimate the ingenuity of an addict needing hit.]

It is much easier for a narcotics user to prepare a sterile liquid for IV use than a medicated lollipop. I have a pet suspicion - not proven - that one reason for the very rapid uptake of the spray version is that it is much more suitable for diversion.

Do the Feds close the company?

I am never fond of short-cases where the short seller is reliant on the government to close a business for them (see Herbalife). However this seems as good a candidate as any for government closure.

We have 

(a) easily detectable diversion [indeed we have the prescription of the drug to a police officer without cancer and who previously said that he planned to sell narcotics to his work colleagues],
(b) a drug that seems designed for diversion,
(c) an incentive system for sales people that encourages them to make sales regardless and who - because of their incentives - may be tempted to sell off label,
(d) a single doctor who prescribes a double-digit percentage of the Medicare total for the drug and who is currently under indictment.

Finally we have (e) a drug with perfectly good substitutes such that the loss of the company marketing the drug will mean no real loss to society or patients.  

It seems like an okay short to me. At the minimum the Feds will investigate the sales practices and their link to the Michigan doctor. After all there was someone who was working with patients to get refund approval on many of these prescriptions and there was a salesperson paid a big incentive bonus for these sales.

Oh, and the company is trading at a big multiple of sales and of earnings.

John

Disclosure: unsurprisingly I am short. However I worry about shorting addictive products generally. So take that with a grain of salt.

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


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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.

Gulfport Energy's (GPOR) guidance

Dear Investor (sucker):

We will be producing far less oil…but only after spending far more of your dollars (that you kindly provided for us in that last stock offering that we consummated on the original unrealistic but safe-harbor-protected assumptions.) 

Sorry to disappoint, but thanks a billion (or two).

Sincerely

Ye Oklahoma City Boys

Link: First Quarter results