Gulfport Energy and Wexford Capital (Part IV): What is left after Gulfport sells the Permian Assets to a Wexford Related party?

In the last post I demonstrated that 12.885 million out of 19.367 million barrels of oil equivalent (BOE) in "proved reserves" was being sold by Gulfport to a related party of Wexford. These were the Permian Basin fields as per the table below.

																												Proved Reserves
Field		NRI/WI (1)				Productive Wells (2)								Non-Productive Wells								Developed Acreage (3)								Gas				Oil				Total
		Percentages				Gross				Net				Gross				Net				Gross				Net				MBOE				MBOE				MBOE
West Cote Blanche Bay Field (4)			80.108/100				95				95				189				189				5,668				5,668				352				3,617				3,969
E. Hackberry Field (5)			79.424/100				30				30				93				93				3,291				3,291				226				1,606				1,832
W. Hackberry Field			87.5/100				2				2				23				23				592				592				—				76				76
Permian Basin			35.4/46.87				121				57				—				—				8,880				4,119				2,008				10,877				12,885
Niobrara Formation			39.7/47.9				6				3				2				1				3,954				1,977				26				500				526
Williston Basin (6)			2.8/3.3				6				.2				—				—				1,708				132				7				67				74
Overrides/Royalty Non-operated			Various				133				.2				—				—				—				—				3				2				5
Total							393				187.4				307				306				24,093				15,779				2,622				16,745				19,367

The table is from the 10K.

Given that most the reserves and most the cash flows of Gulfport are being sold to a related party it is worth considering the quality of the assets left. After all - if you are a Gulfport shareholder that is what you are buying.

Lets just take the Niobrara acreage.

The claim of half a million barrels of oil in the Niobrara raised my eyebrows because I thought most that acreage was locked up. Indeed it was this claim that attracted me (as a short) to Gulfport in the first place. I wanted to see what they based their claim of half a million barrels of proved oil on.

Here is what the 10K says about the Niobrara acreage:

Location and Land 

Effective as of April 1, 2010, we acquired leasehold interests in the Niobrara Formation in northwestern Colorado, and held leases for 14,993 acres as of December 31, 2011. We are the operator on the acreage. 

Area History 

The Niobrara Formation is a shale oil rock formation located in Colorado, Northwest Kansas, Southwest Nebraska, and Southeast Wyoming. Oil and natural gas can be found at depths of 3,000 to 14,000 feet and is drilled both vertically and horizontally. The Upper Cretaceous Niobrara formation has emerged as another potential crude oil resource play in various basins throughout the northern Rocky Mountain region. As with most resource plays, the Niobrara has a history of producing through conventional technology with some of the earliest production dating back to the early 1900s. Natural fracturing has played a key role in producing the Niobrara historically due to the low porosity and low permeability of the formation. Because of this, conventional production has been very localized and limited in area extent. We believe the Niobrara can be produced on a more widespread basis using today’s horizontal multi-stage fracture stimulation technology where the Niobrara is thermally mature. 

Geology 

The Niobrara Formation oil play in northwestern Colorado is located between the Piceance Basin to the south and the Sand Wash Basin to the north. Rocks mainly consist of interbedded organic-rich shales, calcareous shales and marlstones. It is the fractured marlstone intervals locally known as the Buck Peak, Tow Creek and Wolf Mountain benches that account for the majority of the areas production. These fractured carbonate reservoirs are associated with anticlinal, synclinal and monoclinal folds, and fault zones. This proven oil accumulation is considered to be continuous in nature and lightly explored. Source rocks are predominantly oil prone and thermally mature with respect oil generation. The producing intervals are geologically equivalent to the Niobrara reservoirs of the DJ and Powder River Basins which are currently emerging as a major crude resource play. 

Production Status 

In the fourth quarter of 2011, our net production from our Niobrara acreage was 3,390 BOE, or an average of 37 BOE per day, 100% of which was from oil. From January 1, 2012 through January 31, 2012, our average daily net production from our Niobrara acreage was 41 BOE, 100% of which was from oil. 

Facilities 

There are typical land oil and gas processing facilities in the Niobrara Formation. Our facilities located at well locations include storage tank batteries, oil/gas/water separation equipment and pumping units. 

Recent and Future Activity 

We drilled three gross (1.5 net) wells at Niobrara during 2011. We have completed a 60 square mile 3-D seismic survey over our Craig Dome prospect, have received a processed version of the seismic and are selecting future drilling locations. We currently intend to drill five to seven gross wells at Niobrara during 2012.

Production - net - was 37 barrels of oil per day during the fourth quarter of 2011. In January they raised this to 41 barrels of oil per day.

The most recent 10Q filing contains this text.

Niobrara Formation. Effective as of April 1, 2010, we acquired leasehold interests in the Niobrara formation in Colorado and held leases for approximately 14,993 acres as of March 31, 2012. Aggregate net production from the Niobrara play during the three months ended March 31, 2012 was approximately 2,638 BOE, or 29 BOE per day. During April 2012, average daily net production in Niobrara was approximately 66 BOE due to completion of our 2011 drilling activity.

So for the first quarter the production fell to average only 29 BOE per day after averaging 41 BOE per day in January.

41 BOE per day in January implies production of 1271 barrels (approx) in January (being 41 BOE per day times 31 days).

We are told that production in the quarter was 2638 barrels. Simple arithmetic implies that production in February and March was 1367 BOE. Assuming 60 days in those months (29 in February, 31 in March) we get production of 22.8 barrels per day. A fairly sharp drop from 41 BOE per day in January. This may be a decline rate or it may be weather or other shut-in (we do not know). However shut-ins are more likely in January so decline is a reasonable guess.

After completing drilling activity for 2011 the production rose to 66 BOE per day.

These are not big numbers and production drops seem large. Indeed flow rates almost halved within the first quarter.

However the company states that 500 thousand barrels of oil in reserves are proven in this field.

It is a cliché that you only know what the reserves of an oil field were when the last barrel is produced. There are many fields that have surprised to the downside and some that have surprised to the upside.

I will leave it to my readers to judge - whether on the basis of the relatively small production and high decline rates demonstrated - they regard the 500 thousand barrels of proved reserves listed here as a solid number.





John