Gulfport Energy Corporation (GPOR) Earnings Call Transcript & Summary

Greetings and welcome to the Gulfport Energy Corp.'s Fourth Quarter 2019 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Jessica Antle. You may begin.

Thank you, and good morning. Welcome to Gulfport Energy Corporation's Fourth Quarter and Full Year 2019 Earnings Conference Call. I am Jessica Antle, Director of Investor Relations. Speakers on today's call include David Wood, Chief Executive Officer and President; and Quentin Hicks, Executive Vice President and Chief Financial Officer. In addition, with me today for the question-and-answer portion of the call is Donnie Moore, Executive Vice President and Chief Operating Officer. I would like to remind everybody that during this conference call, the participants may make certain forward-looking statements relating to the company's financial condition, results of operations, plans, objectives, future performance and business. We caution you that the actual results could differ materially from those that are included in these forward-looking statements due to a variety of factors. Information concerning these factors can be found in the company's filings with the SEC. In addition, we may make reference to non-GAAP measures. Reconciliations to the comparable GAAP measures will be posted on our website. An updated Gulfport presentation was posted yesterday evening to our website in conjunction with this earnings announcement. Please review at your leisure. At this time, I would like to turn the call over to David Wood, CEO of Gulfport Energy.

Thank you, Jessica. Welcome, everyone, and thank you all for joining us this morning. For the full year 2019, Gulfport reported $118.6 million of adjusted net income and generated $814.4 million of adjusted EBITDA. In addition, despite the difficult pricing environment Gulfport's operating cash flow before the changes in working capital and inclusive of capitalized expenses totaled $640.3 million, and we reported free cash flow of $37.8 million in 2019. Overall, I am pleased with our full year financial results and operational performance. Net of the previously announced sale of certain non-operated interests in the Utica, capital expenditures incurred in 2019 totaled $574 million. This total is in line with our 2019 guidance of $565 million to $600 million and approximately 25% lower than full year 2018. Total production was roughly flat in 2019 versus 2018 and in line with guidance and expectations. Our ability to generate cash flow in 2019 despite a declining price environment was attributable to our strong natural gas hedge book and the dedication and focus of our operations teams who work to optimize efficiencies and improve our cost structure throughout the year. To underscore this, during the fourth quarter of 2019, our per-unit operating expense including LOE, production taxes and midstream gathering and processing expense totaled $0.77 per Mcfe, which was 13% below the levels we saw in the fourth quarter of 2018. We continue to focus on ways to improve our cost structure across the business, which Quentin will discuss further in his comments. On the strategic front, we delivered on our goal to simplify the portfolio during 2019 and completed several noncore asset sales throughout the year in a difficult environment, which generated cash proceeds of over $95 million. We were also able to retire approximately $190 million of senior debt at a $50 million discount during 2019, which improved both our leverage and cash flow profile. Year-to-date in 2020, we have repurchased an additional $10.2 million in principal amount of unsecured senior notes for $6.9 million in cash. As we continue to evaluate potential uses of cash, we will remain disciplined in our allocation of capital, balancing maintaining a strong liquidity position and enhancing value. Touching on reserves. Gulfport's year-end 2019 proved reserves totaled approximately 4.5 Tcfe and were comprised of 89% natural gas and 11% liquids. Lastly, we made numerous structural and personnel changes to improve the organization during 2019. We assembled our talented new management team, which we believe will serve the organization well in the future. We added Patrick Craine as Executive Vice President and General Counsel, who brings extensive legal, governance and compliance expertise to the organization. We recently also named a new head of our human resources group and brought in a new chief information officer. Finally, on the finance and accounting side, we recently hired an extremely qualified controller for our accounting group and a new assistant controller. These are in addition to bringing Quentin onboard in August as our new CFO. These key additions have substantially improved our organizational structure, processes and capabilities. We are building a team-orientated culture here at Gulfport in which all are working to achieve our shared strategic and financial priorities and where transparency, active communication and accountability are all fostered. In addition, our ongoing Board refreshment process continues to ensure shareholders are represented by fresh, diverse voices with strong expertise and qualifications at the Board level. We recently announced Valerie Jochen and Al Bledsoe have joined our Board and believe both Valerie and Al bring strong skill sets, capabilities and experience to our Board. Following these 2 appointments, in the past 2 months, Gulfport's Board is now comprised of 8 directors, 7 of whom are independent and 5 of whom have joined the Board in the last 3 years. As we recently disclosed, David Houston, our Chairman, has decided not to seek reelection at our next Annual Meeting. Gulfport has benefited from his many years of distinguished leadership on Gulfport's Board, and our employees and Board thank him for the many contributions he has made to Gulfport over the years. Gulfport recently published our inaugural corporate sustainability report, which you can find on our website. The report highlights the success we had last year in improving our company as we responsibly developed our assets and illustrates our commitment to the highest standards of health, safety and environmental stewardship. The report also highlights our efforts to improve the communities in which we operate through volunteering, charitable giving and other initiatives. We also recently adopted formal corporate governance guidelines and a Board diversity policy, underscoring our commitment to ensuring sound corporate governance policies. These can also be found on our website. In summary, Gulfport did a good job of controlling what was within our control and managing things out of our control in the best way possible. We executed on our operational plan within budget and generated positive free cash flow despite a sharply declining commodity environment. Our focus on capital discipline and cash flow generation carries into 2020, which is setting up to be a challenging year for the entire energy sector. On the macro front, due to natural gas supply growth over the past several years and unseasonably warm winter, we entered 2020 with natural gas prices at the lowest level seen in 20 years. Having said this, we firmly believe that low gas prices cure low gas prices. Producers are faced with ever-declining access to capital, shrinking borrowing bases and a steady drumbeat from investors to generate cash flow. These factors should lead to a decline in U.S. supply in 2020, and the strong U.S. economy and continued demand growth give me belief that there will be bright days ahead for gas prices and gas-weighted companies such as Gulfport. Because we believe in a much higher gas price in the future, we are aggressively cutting our activity levels in 2020 to preserve our high-quality inventory for a better day. Simply put, this level of pricing is not sustainable and producers are slowing down, which we believe will result in the price recovery. We want to be poised to drill our high-quality inventory when this recovery takes place rather than turning to sales higher-rate gas wells at low prices. Gulfport's 2020 operational plan and financial outlook prioritizes free cash flow generation, which ensures we maintain our strong liquidity position. Accordingly, we are managing activity to align total capital expenditures within cash flow at strip. During 2020, we plan to invest approximately $300 million across our core assets, which is half of what we spent in 2019. We forecast minimal reliance on our revolver to fund our operations throughout the year, which again, allows us to maintain a strong liquidity position and underscores our focus on capital discipline. Turning to our specific core areas in the Utica. Our 2020 program will be centered around the dry gas window play. We entered 2020 with 2 rigs running and currently have 1 rig drilling ahead today. We plan to continue with 1-rig program throughout the third quarter of 2020. In the SCOOP, our 2020 program is focused on the liquids-rich wet gas area of the Woodford, where we continue to see strong efficiency gains. When normalized to a 7,500-foot lateral, our fourth quarter of 2019 average spud to rig release was 40.7 days, an improvement of 36% from the 2018 program average, and we are continuing that momentum going into 2020. During 2020, we plan to run 1.5 rigs on average for the year and currently have 2 rigs drilling in the play today. In summary, our 2020 budget is highlighted by a significant reduction in capital and our commitment to exercise capital discipline, maintain strong liquidity, generate free cash flow and remain intensely focused on further cost reductions and efficiency gains in this challenging commodity environment. With that, I will turn the call over to Quentin for his comments.

Thank you, Dave, and good morning, everyone. As announced in our earnings release, for 2020, Gulfport's Board of Directors has approved a capital budget of $285 million to $310 million, which, as Dave mentioned, we forecast will generate free cash flow at current strip prices. The 2020 budget includes $265 million to $285 million of capital expenditures related to drilling and completion activities and approximately $20 million to $25 million of capital expenditures associated with leasehold activities. At this level of capital spend, we forecast our 2020 full year average daily production to be 1.1 billion to 1.5 -- 1.15 billion cubic feet equivalent per day. While CapEx is down 50% year-over-year, we expect only a high teens decline rate in production when compared to the prior year. Looking to the first quarter. Due to the low level of activity during the fourth quarter of 2019 and our previously announced asset sales, we currently expect our first quarter production to average roughly 1.1 billion cubic feet equivalent per day. With regard to realizations, before the effect of hedges and including transportation cost, we expect our realized natural gas price to range from $0.70 to $0.80 per Mcfe below NYMEX prices in 2020. We are forecasting a wider differential versus 2019 due to our decision to reduce activity, which results in periods when our production falls below our firm transportation commitments. We hope to improve these realizations through midstream optimization efforts but are not reflecting these opportunities in our guidance. In addition, we expect to realize 30% to 35% of WTI for natural gas liquids and $4.50 to $5 discount to WTI for oil for the full year 2020, which is in line with our fourth quarter 2019 differentials following the sale of our Southern Louisiana assets. Our realized prices continue to be supported by our strong hedge position, and we currently have over 50% of our expected 2020 natural gas production hedged at $2.86 per MMBtu. We estimate our 2020 hedge book is worth approximately $180 million at current strip. Maintaining a strong strategic hedging program is an important element to supporting the long-term economic development of our assets, and we continue to look for ways to layer in additional hedges to support our realizations and cash flows. In terms of cash expenses, we estimate LOE to be in the range of $0.14 to $0.16 per Mcfe in 2020, slightly lower than the full year 2019 levels. We expect production taxes to be in the range of $0.05 to $0.07 per Mcfe, a modest decline versus 2019 due to the lower pricing environment. Midstream gathering and processing is currently forecasted to be in the range of $0.55 to $0.60 per Mcfe, which is roughly consistent with 2019 levels. To provide further clarity into our cash cost structure, we have changed our methodology for G&A guidance going forward and are providing guidance as total recurring G&A, including both cash and capitalized portions. For the full year 2020, we are forecasting G&A to total $69 million to $74 million. As previously disclosed, in an effort to better align our cost structure, in December of '19, we completed a workforce reduction, representing approximately 13% of our total head count. As we continue through this year, we will look for ways to further optimize our cost structure and reduce our total G&A burden in this challenging commodity price environment. We are turning over every stone trying to improve our cost structure. Moving on to the balance sheet. I want to reiterate our commitment to generating cash flow with a focus on not materially drawing our revolver and maintaining a strong liquidity position. We believe maintaining adequate liquidity is highly important for us during this downturn. It provides optionality to do things such as pursuing accretive PDP-weighted acquisitions at good value or execute discounted bond repurchases, among other things. It also keeps the banks in our bank group in a relatively constructive place as secured leverage stays low through 2020, which is important as we are looking towards our spring redetermination in the extension of our revolver, which we will pursue later this year. The downside to us aggressively slowing activity is that our leverage metrics will pick up over time due to low gas prices and lower production. However, we believe that we can manage this dynamic within our bank group, especially if our thesis of better gas prices in late 2020 and 2021 develops. We will continue to stay aligned with our bank group as we believe actively managing these relationships and being transparent about our strategy and plans results in a better outcome for all involved. We firmly believe that drilling through the trough, depleting our quality inventory and exhausting our liquidity to manage total leverage and/or maintain production is the wrong strategic and financial decision. Liquidity is king in a downturn like this, and acting as a good steward of capital by exercising capital discipline during a downturn is always a better answer than drilling ahead and hoping for a recovery in prices. Before turning it over to Dave, I want to address the material weakness and related third quarter restatement that was in our filings yesterday. During the year-end accounting review conducted by our new management team, including myself and our new controller and his staff, we identified an error related to the transfer of unevaluated leasehold costs to the full cost amortization base. As a result, certain leasehold costs were excluded from quarterly DD&A calculations and full cost ceiling test in prior periods. This is a legacy issue but one that needs to be addressed. Based on this evaluation, we concluded that the error resulted from a material weakness in our internal controls over financial reporting, and we properly developed a plan to remediate this deficiency, which is discussed further in our Form 10-K. As a result, we restated our third quarter 2019 Form 10-Q. We did not restate any other prior periods as the third quarter of 2019 was the only period where this error had a material impact. The error does not impact our proved reserves, liquidity, covenant compliance or other key metrics that drive consensus expectations, including adjusted EBITDA and cash flow from operations. With that, I'll turn the call back over to Dave for his closing remarks.

Thank you, Quentin. From my perspective, I feel very good with the organizational changes we have made over the past several months, adding several highly qualified and talented individuals in key roles within the accounting department, and I'm confident that the new leadership will improve our internal controls, process and procedures going forward. These improvements, coupled with the key additions to the senior leadership team mentioned earlier, will result in a more effective and efficient company going forward. Our new teams are always looking at all options to create value and improve our company, and when combined with our high-quality assets, we are positioned to build long-term value. While the low natural gas prices we see today are certainly a headwind for us and our peers, we firmly believe there will be better prices in the future. Our 2020 outlook and financial plan to substantially reduce capital spend, save inventory and maintain liquidity ensures Gulfport is well positioned to enjoy the benefits of a commodity rebound as it occurs. Looking to 2021, based on the supply and demand dynamics in the current market and the previous mentioned items, we have the view that gas prices will rebound to more rational levels as we move into next year. Considering this as we plan for 2021, we look to carry forward our commitment to continuing capital discipline, targeting cash flow generation and not focusing on production levels but rather building our capital plan towards positive cash flow. This concludes our prepared remarks. Thank you again for joining us for our call today, and we look forward to answering your questions. Operator, please open up the phone lines for questions from the participants.

[Operator Instructions] Our first question is coming from Neal Dingmann of SunTrust.

My first question is on capital allocation. Just looking -- you generated some nice free cash flow in the fourth quarter. And I'm just wondering. If you're able to keep cutting spending as you mentioned and driving the free cash flow, my question is how do you prioritize allocation, especially when you look -- given where some of your bonds and things are trading of that nature?

Yes. Thanks, Neal. As stating the obvious, this is a pretty tough market for most in the business. For small/mid-cap gas producers, I'd say it's particularly tough. As Quentin said in his prepared remarks, really, liquidity, balance sheet strength are key for us. We have, the way I look at it, all options on the table. We do have an approved bond repurchase program. We look at that, and we'll continue to look at that. In terms of capital allocation within the business, we clearly want to spend within cash flow. We took the position this year as the shoulder winter changed from what we were expecting and this thing called coronavirus started to impact the demand side. We took the view that we should have a budget that was a combination of our hedge book and the strip. We actually think that the second half of the year will be better than strip for supply fundamentals, but we took the conservative view to live within cash flow. And so that's kind of what we've done. As you know, when we spoke at prior times, I really wanted to get a more ratable spend in our capital program through the year. Unfortunately, the way that the external factors have moved, we've kind of had to give away with that. And Donnie and his team will have most of the capital spent before the middle of the year. So that's kind of where we are. I was hoping to be a little more ratable between the 2 basins. But again, we're responding to where the market is. But simple answer, keep all options open, keep flexibility here, keep liquidity are kind of keys for us.

Okay. Great. And then just my second question, just on the slowdown in activity. Could you just talk about any potential holding acreage or just talk about leasing, if you would?

Yes. So good question. We have good core positions in our 2 basins. There is a small amount of dollars in the budget to keep some key leases. As you know, in this game, longer laterals is better in your core areas. So there are some leases that we have that help promote that, and so there's a little bit of capital in there. But other than that, there's no real attention on that at all.

Our next question is coming from Holly Stewart of Scotia Howard Weil.

Dave, any color you can provide on the future cost reduction opportunities? I know you mentioned it both in the release, and then in your presentation, it quotes vendors, service providers as well as midstream counterparties.

Yes. So Holly, I think, certainly, given the market that we're in, cost-cutting is really important, and Quentin and his new team are very, very focused on that. And I would say that there's opportunities here. I think there's opportunities to deal with our midstream providers as well. So for us, it's another scrub through everything. How much when you've got low levels of activity is a little bit tough, but we're looking at everything to cut costs out of our business.

Okay. Great. And then maybe, Quentin, could you provide the well cost assumption numbers that are in the 2020 guidance for both the SCOOP and the Utica?

Yes. Actually, I think Donnie is better suited to answer that.

Holly, this is Donnie. What we're looking at for Utica, we're targeting for drilling and completion only about $770 to $870 per lateral foot. That kind of compares to the best wells we did last year of about $850 in the Utica D&C only. SCOOP, I think, as Dave mentioned in his prepared remarks, continue to see those days come down, around 40 days now. SCOOP, we're targeting around $1,200 to $1,300 per lateral foot. So the teams are very focused on that. As Dave said, we're going to be out of capital spend here pretty shortly, so there's not a lot left in front of us. We're really focused now on LOE and things like that to drive our costs down.

And Donnie, what was the 2019 SCOOP?

2019 SCOOP was about 12 -- the best well in the SCOOP was $1,250, I believe it was. And our range now that we're targeting is about $1,200 to $1,300.