However Wexford have over the past few years dramatically reduced their holding in Gulfport. In the 30 April 2009 proxy Charles E Davidson (the principal of Wexford) spoke for 15,235,786 shares or just over 35 percent of the company.
After years of sustained selling by Wexford and sustained issuance by Gulfport, Wexford's ownership position is about two thirds lower.
Despite Wexford's reduced holding Gulfport remains tied to Wexford.
Wexford and Gulfport are still doing related party transactions. On 7 May (ie this month) they announced a transaction whereby they are selling their Permian assets in exchange for a stake in a soon-to-be-listed entity called Diamond Back.
There was no specific press release for this transaction - but it was announced via a long 8K. On May 8 they announced their quarterly results which briefly described this transaction. To quote the earnings release:
As previously announced, on May 7, 2012, Gulfport entered into a contribution agreement with Diamondback Energy, Inc. ("Diamondback Energy"), in which Gulfport agreed to contribute, prior to the closing of Diamondback Energy's initial public offering, all of Gulfport's oil and natural gas interests in the Permian Basin in exchange for (i) common stock representing 35% of Diamondback Energy's outstanding common stock immediately prior to the closing of its initial public offering and (ii) approximately $63.6 million to be paid to Gulfport upon closing of such offering, subject to adjustment. Gulfport's obligation to complete the proposed contribution is subject to various closing conditions, including Gulfport's satisfaction with the terms of the Diamondback offering.
The earnings release however does not include the observation that this is a related party transaction. You had to go to the 8K for that. Here is what the 8K says:
On May 7, 2012, Gulfport Energy Corporation (“Gulfport”) entered into a Contribution Agreement (the “Contribution Agreement”) with Diamondback Energy, Inc. (“Diamondback”). Diamondback was incorporated on December 30, 2011 for purposes of undertaking an initial public offering (“Diamondback IPO”) of its common stock, par value $0.01 per share (the “Common Stock”), pursuant to a Registration Statement on Form S-1 (Registration No. 333-179502) initially filed with the Securities and Exchange Commission on February 13, 2012. Diamondback has not conducted and will not conduct any material operations prior to the transactions described below. Prior to the completion of the Diamondback IPO, Diamondback will acquire all the outstanding equity interests in Windsor Permian LLC (“Windsor Permian”), which as of March 31, 2012, owned and operated approximately 30,025 net acres of oil and gas interests in the Permian Basin in West Texas.
Under the terms of the Contribution Agreement, Gulfport agreed to contribute to Diamondback, prior to the closing of the Diamondback IPO, all of its oil and gas interests in the Permian Basin in exchange for (i) shares of Common Stock representing 35% of Diamondback’s outstanding Common Stock immediately prior to the closing of the Diamondback IPO and (ii) $63,590,050.00 in the form of a non-interest bearing promissory note, which will be repaid in full upon the closing of the Diamondback IPO with a portion of the net proceeds from that offering. The aggregate consideration payable to Gulfport is subject to a post-closing cash adjustment based on changes in Windsor Permian’s working capital, long-term debt and other items referred to in the Contribution Agreement as of the date of the contribution. Windsor Permian is the operator of the acreage to be contributed by Gulfport. Gulfport’s obligation to make this contribution is contingent upon, among other things, the contribution to Diamondback of all the outstanding equity interests in Windsor Permian by DB Energy Holdings LLC (“DB Holdings”), Gulfport’s satisfaction with the terms of the Diamondback IPO and customary closing conditions. Under the contribution agreement, Gulfport is generally responsible for all liabilities and obligations with respect to the contributed properties arising prior to the contribution and Diamondback is responsible for such liabilities and obligations arising after the contribution.
In connection with the contribution, Gulfport and Diamondback will enter into an Investor Rights Agreement in which Gulfport will have the right, for so long as Gulfport beneficially owns more than 10% of Diamondback’s outstanding Common Stock, to designate one individual as a nominee to serve on Diamondback’s board of directors. Such nominee, if elected to Diamondback’s board, will also serve on each committee of the board so long as he or she satisfies the independence and other requirements for service on the applicable committee of the board. So long as Gulfport has the right to designate a nominee to Diamondback’s board and there is no Gulfport nominee actually serving as a Diamondback director, Gulfport shall have the right to appoint one individual as an advisor to the board who shall be entitled to attend board and committee meetings. Gulfport will also be entitled to certain information rights and Diamondback will grant Gulfport certain demand and “piggyback” registration rights obligating Diamondback to register with the SEC any shares of Common Stock owned by Gulfport.
The preceding descriptions of the Contribution Agreement and the Investor Rights Agreement are qualified in their entirety by reference to the full text of such agreements, copies of which are attached as Exhibits 10.1 and 10.2, respectively, to this Current Report on Form 8-K and are incorporated herein by reference.
Diamondback, Windsor Permian and DB Holdings are entities controlled by Wexford Capital LP (“Wexford”). Charles E. Davidson, the Chairman and Chief Investment Officer of Wexford, beneficially owned approximately 9.5% of Gulfport’s outstanding common stock as of March 13, 2012. Mike Liddell, Gulfport’s Chairman of the Board and a director of Gulfport, currently serves as the operating member and chairman of Windsor Permian and has an interest in DB Holdings. A special committee of the Board of Directors consisting solely of independent directors negotiated and approved this transaction on behalf of Gulfport.
The related party nature of this transaction requires (and is being granted) a committee of the independent directors.
How important are the Permian assets?
The last annual report (10K) contained a table with Gulfport's proved reserves by field:
West Cote Blanche Bay Field (4)
E. Hackberry Field (5)
W. Hackberry Field
Williston Basin (6)
12.9 million of the 19.4 million barrels of oil equivalent in the proved reserves is in the Permian Basin. On this table Gulfport has sold the bulk of its proved reserves to a related party.
In their defence - after the transaction they own 35 percent of the related party which is lower but not massively lower than their prior ownership of the field. All that has happened is that they have lost control of the assets which they directly owned and are now owned by a Wexford entity. In this I presume the Wexford interests in those assets were also contributed and on similar terms. [I do not know - I am just giving Wexford the benefit of my doubt...]
Whatever: losing control means that they also lose control of the cash flows from these assets. Moreover as they own less than 80 percent of the assets if they get these cash flows out there will be a tax event. The 8K quoted above envisages a sell-down of the assets. This transaction does not make sense from a tax perspective unless that sell-down happens. So I presume a sell-down is expected.
As a shareholder it seems you are swapping productive assets you know for some cash which will (presumably) be used to develop other assets. Some of that cash only arrives when the IPO of Diamondback happens. There is nothing obviously wrong with that - but the related-party nature of the transaction does raise governance risks which make shareholders dependent on the non-executive directors to guard their interests.