Q2 2021 Gulfport Energy Operating Corp Earnings Call
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Greetings and welcome to the Gulfport second quarter 2021conference call at this time, all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Jessica Antle. Thank you Jessica you may begin.
Thank you and good morning, welcome to Gulfport Energy Corp, second quarter 2021 earnings Conference call I Am Jessica Antle director of Investor Relations.
On today's call include Tim <unk> interim Chief Executive Officer, and Bill <unk> Executive Vice President and Chief Financial Officer.
I'd like to remind everybody that during this conference call 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 actual results could differ materially from those that are indicated on these forward looking statements due to a variety of factors information concerning.
These factors can be found on the company's filings with the SEC. In addition, we may reference non-GAAP measures reconciliations to the comparable GAAP measures will be posted on our website.
Updated Gulfport presentation was posted yesterday evening to our website in conjunction with the earnings announcement. Please review at your leisure at this time I would like to turn the call over to Tim. Thank.
Thank you Jessica and good morning, and thank you very much for joining the call today I am here today from BELBUCA, you I had the pleasure of working with recently <unk> resources.
Personally I'm very excited to be here and look forward to sharing with you the significant value opportunity within Gulfport energy I.
I would like to start by thanking our employees for their hard work during a challenging but successful restructuring process today for the first time in a long time, we have a balance sheet that complements the value of our asset base with a right sized corporate overhead and top quartile operating costs. We have the same high quality gas assets that you are familiar.
However, our 2021 program is delivering strong results above historical averages, reflecting our new development plan focused on free cash flow generation capital discipline and value optimization.
As a company we have a new highly engaged board of directors and we've adopted a new business model focused on free cash flow generation and returns over production growth, we expect to use excess cash flow to continue to reduce our outstanding debt until we were able to begin returning capital to shareholders I will begin with an update over.
Second quarter operational results and an overview of the development plan performance in both the Utica and Scoop Bill will then discuss Gulfport financial performance and provide guidance for 2021.
We have a merger and restructuring process with a renewed focus on sustainability and delivering on key metrics outlined in our corporate sustainability report. We are very proud of the progress made in reducing our greenhouse gas and methane emissions. We've recently appointed Stephanie timber Mart, Vice President of <unk> to the executive team and.
She is already playing a key leadership role with.
With regards to environmental stewardship.
Share responsibility and governance of the company Stephanie will work closely with the executive team and the board to progress our important ESG initiatives moving to our second quarter operational Brazil results as shown on slide 6 of the deck production averaged 989 million cubic feet of gas equivalent per day during the second quarter, which included.
A strong contribution from both the Utica and Scoop development programs, we anticipate a slight drop in production during the third quarter as the Scoop comes off its peak production, we expect the decline to reverse in the fourth quarter with a 6 well pad comes on line in the Utica.
Gulfport invested $68 million of capital on the second quarter, we continued to work towards lowering drilling and completion costs, while staying primarily focused on delivering pure leading cost per Mcf produced I will explain this further as I talk through our development strategy in a few minutes moving forward, we are targeting a maintenance level of capital spend of approximately 300 million.
Per year, the annual number will fluctuate slightly depending on the exact timing of our drilling and completion activity. This level of spend is expected to result in roughly 1 bcf equivalent per day of production.
Turning now to our development plan I am pleased to report our results from both the Scoop and the Utica are outperforming historical development results on page 9 of the deck Youll find recent results from our 2021 Utica program, where production totaled 744 million cubic feet equivalent per day during the quarter the Shannon.
On a shelf wells.
Volume for approximately 5 months to remain on price to based on the current pressure decline. These wells can stay on plateau for 8 to 10 months, which compares favorably to the historical averages of 6 months or less in addition, our Morris pad has been online for over a month now and we're seeing similar and encouraging early time data we believe that.
This performance is a direct result of moving to wider spacing and slightly larger frac jobs. We are currently completing the Angela pad using final Frac technology and look forward to bringing this pad on line during the fourth quarter as planned.
On Slide 11, you will see the results of our most recent wells in the Scoop. The wells are performing better than the historical Gulfport wells, which we attribute to the wider spacing and longer laterals.
'twenty, 1 scoop program compete economically with the Utica with rates of return of approximately 80% to 75 gas on $60 oil.
Looking at the economics of our core program and both Utica and the Scoop. We have detailed on slide 12. The compelling returns we are seeing at the various price scenarios during.
During the first half of the year, we've been able to substantially improve our operating cost structure with the largest gains in the area of transportation gathering and processing and interest expense largely aided by our restructuring process, which deleveraged, our balance sheet and rightsize, our midstream contracts, the <unk> 43 per mcf or 23% year on year.
Cost reduction significantly improves our margin expected to lead to.
Sustainable free cash flow generation moving forward midstream volume commitments have been reduced to 900000 tickets on per day gross capacity, which is well below the plan on deliverability for the foreseeable future. Despite this dramatic reduction in firm transportation commitments are right sized portfolio continues to provide diversified takeaway capacity on.
<unk> analogy to premium markets out of the basin.
We remain keenly focused on reducing our corporate overhead and as a result, we recently flattened our organizational structure by reducing the number of executives and more appropriately sized in the organization for our planned operations with these reductions we are confident that we will achieve top quartile G&A costs of <unk> 12 per Mcf from our full year 2022.
Lastly, I applaud the teams worked from the field focusing on our unit LOE.
Which is expected to average 14 per Mcf for 2021 and for the continuous drive to bring these costs down even further.
I'll now spend a few minutes describing gulfport developed programs, we agree that lowering drilling completion cost per foot is always important and are committed to lowering costs. Moving forward. We also believe that the most important outcome is to deliver the lowest cost molecule for each dollar spent especially when looking at the first few years production as shown on slide 19 of the <unk>.
IR deck, we are investing approximately $150 per foot to deliver more intense frac jobs that support wider space wells with the objectives of delivering superior economic outcome.
The Utica is historically been developed on a 1000.
The spacing and some operators have driven cost down by pumping smaller completions, which is starting to impact the plethora of periods and lead to steeper declines. We believe that the optimal design is to target a wider spacing of at least 250 feet, which eliminates 1 wealth drilling units in the example shown on slide 20 at the spacing we.
Treat the wells with higher fluid intensity and profit loading.
We also believe that longer laterals of approximately 15000 feet lower our D&C cost per foot and improve overall, well economics and when we have redesigned our development plan to reflect this going forward the.
The cost to develop a 4 well wider spaced pad versus a 5 well tighter spaced pad is similar but we believe the gulfport performance will demonstrate lager plateaus and higher cumulative production. During the first few years on line. Our 2021 Utica wells are demonstrating the benefit of this development approach, which will ultimately lead to greater free cash flow.
Generation superior <unk> on the IRR and as demonstrated on slide 2020..1. This approach will also improve the economic performance in areas of the field with lower original gas in place. We believe that the completion approach we have taken in 2021 and plan for 2022 will support our premise.
And we are encouraged by recent performance in summary, we have emerged from our restructuring process with continuous improvement mindset focused on cost effective production and capital discipline.
<unk> by a strong balance sheet, we are fully committed to safely executing in the field on improving our environmental social and governance performance, we flattened our corporate structure reduced overhead on our focus on optimizing the development program to deliver strong free cash flow and the highest returns possible to our investor.
I will now turn the call over to Bill to discuss our financial results and 2021 guidance.
Thank you Dan and good morning, everyone. Tim suggested in his remarks, a lot of hard work has gone into getting the company through the restructuring process.
We look to the future we firmly believe that all the hard work has positioned us to offer a compelling opportunity for investors.
Fishing asset base supports a low reinvestment rate at the potential for strong return of capital to shareholders in the future, our 2021 and free cash flow yield the best in our peer group and we believe that our ability to generate significant free cash going forward is underappreciated.
Tim mentioned earlier, our business plan is committed to developing our assets in a disciplined manner investing $300 million of capital to deliver roughly 1 billion cubic feet per day of equivalent production.
While targeting annual free cash flow of approximately $300 million.
Finally, while our liquidity is already much improved and we expect it to continue to get even better as we execute on their business plan.
Upon emergence on May 17th we adopted fresh start accounting, which resulted in the company, becoming a new entity for financial reporting purposes.
As a result, our operating results and are split between pre and post emergence periods.
Just on accounting requires that we established new fair values of the company's assets liabilities and equity as of the date of emergence.
Consequently, certain pre and post emergent financial and operational results will not be comparable to <unk>.
Pacific valuation approaches and key assumptions used to arrive at those values as well as the value of discrete assets and liabilities will be described in greater detail in our second quarter 10-Q.
Our recent restructuring also had a dramatic impact on our capital structure, which deleveraged our balance sheet by over $1.2 billion.
In the interest of time I will not walk through all the details now, but they are reflected in the IR deck and 10-Q and I'll be happy to answer any questions. During today's Q&A session.
Turning to our second quarter results, despite managing through our emergence from bankruptcy. Our team continued its persistent focus on cost control across the organization, which helped drive strong financial results for the quarter.
For the combined 3 months period, ending June 32021.
We reported net income of $33 million and generated $157 million from adjusted EBITDA.
Net cash provided by operating activities totaled $87 million during the combined second quarter, and we generated free cash flow of $74 million for the same period.
As a reminder, we define free cash flow as adjusted EBITDA less incurred capital expenditures interest expense and capitalized G&A.
To ensure our ability to fund our capital program and generate free cash we continue to enter into commodity derivative contracts during the quarter.
For the remaining 6 months of 2021, we currently hold natural gas swap and collared contracts totaling approximately 800 million cubic feet per day with an average floor price of $2.64 per Mcf.
We also have natural gas swap in cala contracts totaling approximately 550 million cubic feet per day at an average floor price of $2.65 per Mcf for 2022.
Please see our 10-Q for additional details on our derivative portfolio.
Turning briefly now on to our balance sheet at the end of the second quarter total assets were approximately $2.1 billion and total shareholders' equity was approximately $453 million.
Total gross debt was $835 million, consisting of $105 million outstanding under our revolver of $180 million outstanding under our term loans and $550 million of outstanding Senior notes.
We also had $9 million of cash on hand, and $115 million of letters of credit outstanding at the end of the quarter.
On the liquidity front, we exited the second quarter with approximately $150 million of total liquidity made up of that $9 million on cash and approximately $141 million of borrowing capacity under our revolver.
Moving.
On to guidance.
2021 total production guidance is 975 to 1000 million cubic feet equivalent per day.
2020 on guidance for lease operating expense is 13% to 15.
For Mcf.
Earlier, Tim discussed the significant improvement on the midstream front and as a result of these improvements are guidance for gathering processing and transportation expense or <unk> at night.
<unk> 92 to <unk> 96 per Mcf for 2021.
Our guidance for recurring G&A expense is $45 million to $47 million.
It is important to note that we do not expect to incur any meaningful restructuring charges in the second half of 'twenty, 1 or in 2022.
The midpoint of this reoccurring G&A guidance.
13% lower compared to 2020.
Finally, excluding acquisition and divestiture activity, our 2021 guidance for capital investment is $290 million to $310 million, which includes approximately $20 million of capital for leasehold.
A little over 2 thirds of our 2021 budget will be allocated to the Utica.
Please see our earnings release for a few additional details on our 2021 guidance.
In summary, we believe that we are well positioned to execute our business plan on improved cost structure and focus on continuous improvement will enable us to deliver material and sustainable free cash flow, we believe that our ability to deliver a peer leading free cash flow yield provides a unique opportunity for investors.
In the near term, we plan to allocate the majority of our free cash towards paying down our revolver and term loans and look forward to returning capital to shareholders in the future.
With that we will now open the call up for questions.
Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star 1 on your telephone keypad.
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1 moment, please while we poll for questions.
Thank you. Our first question comes from Neal Dingmann with Truth. Please proceed with your question.
Good morning to all.
First <unk>, Tim and Bill My first question.
Again I liked the slides you've got some good slides in there today and my question is now that you have.
Sort of gone through the property has gone through a detailed sort of close restructuring have you gone through enough to decide just any potential non core sales or how youre thinking about.
Youre locations or inventory again.
I'm asking that it seems like in the market today as you all price.
Might agree to disagree, but I think I agree that right now, let's move on to getting paid or right now getting value for their full inventory. So based on that based on sort of a free cash flow.
Sort of importance these days.
2 questions have you had enough time to go through and would you consider any sort of non core sales.
Thanks for the question Neil I appreciate that so.
What we're doing what we've been doing over the last few months is just really looking at.
Standalone case, where the business looking really hard on Utica and scoop inventory levels and what the value is for our shareholders on a stand alone basis. We've also looked out on the asset base. Obviously, you can see from the slides on scoop.
Incredible opportunities in the near term and we're going to execute against those so.
So certainly we don't see anything within our core acreage that we would comment on Corp.
Every other company, we have small things small things up in the Williston, we have some over on the interest we have some joint interest on those.
Things will clearly cleanup.
But we don't see anything right now that we would say non core and some of the.
The completion design, we are applying we're really testing in some of the areas that may have a little bit lower gas in place I talked about and we want to prove and we really want to understand those areas before we would consider doing any sort of divestment on trading.
Okay makes a lot of sense and then just on.
On capital allocation.
It sounds like you have gotten quite low.
Detailed through belt.
Both Utica and Scoop.
Given sort of pricing is there is there 1 that sticks out youll be felt we've seen more and Tony on that same vein. Obviously these days you just your thoughts on kind of target maybe more natural gas versus Ngls.
On either the properties is there anything in that that sort of day that youll do.
Yes, so if you look at the Utica, we're targeting dry gas.
Program in the Utica, we do have the opportunity for actual oil production in the Scoop, which obviously is helping the economics quite a bit so we'll have some liquids production.
On the Scoop development. If you look at we looked at we put our whole inventory in there, which is plus or -500 wells. When you look at the next 10 years, which always focus on.
70, plus percent of that drilling will be focused in the Utica.
Okay, and then 1 last 1 if I could just maybe for Tim Tim what are that remind me.
I assume there are some restrictions still I'm just wondering how long those will go on as far as is there something that you're required to do as far as you talked about the capital allocation makes a lot of sense anyways, but I'm just wondering would you have that.
That is already down under I think $300 million would you have to at a certain point just continue to pay that down I'm. Just wondering on on free cash flow allocation and hedges kind of maybe your thoughts or whats required or again I take it back to Jessica and you could be on the board could could change that if your thoughts on maybe hedges and free cash allocation, yes, I do.
On a by the end of the year or so.
Yeah I'll start on that I think the number you quoted on the 300 on that was.
It was a very helpful number.
We're a bit higher than that.
We're really confident of being able to generate bcf hopefully growing slightly with time as we get more efficient spending about $300 million on generating about $300 million.
Our cash flow net.
We are going to focus on paying down the debt with that.
And.
We do have some restrictions on issuing dividends on those kind of things that you can talk to just about a little more detail on the sidebar, but.
We're running this as a normal company now we're fully merged and we'd like to leverage it will get better.
And so there is nothing on the hedge side on your question, we feel really good about our hedges for 2022.
And we feel like we're fully that's obviously theres some upside on the price with where we sit and we're looking at all the Optionality, we have going into 'twenty 3.
<unk> curve in backwardation.
We're not we're not moving heavily into 'twenty 3 yet, but we're certainly studying that.
Got it yes, yes, I guess that was nearly forgetting the $5.50. So thanks. Thanks Tim.
Yes.
Thanks, Dan on queue. Our next question comes from Leo Mariani with Keybanc. Please proceed with your question.
Hey, guys just a question on your Utica production here.
If I'm reading the financials right I think you guys brought 7 wells online in the Utica in the first quarter and I guess I was expecting that to have some benefit here on second quarter Utica production, but I guess your Utica production. If my math is right. It was down about 9% on the second quarter.
She is the first quarter can you kind of help us kind of understand what was driving that.
Yes, I think Leo as can be really important as we as we implement a fairly small development program, it's going to be lumpy.
And as we go through and we would go quarter on quarter, we will start providing more and more details on where just like in this quarter. We've put the charts on there that show when our anticipated timing is for the new wells on that you're asking about the Utica the scoop finishes.
It's til program in the beginning of the year. So that's on decline and you can see where we were bringing the wells on so the only wells that were really online and producing during that period, where the channel Henry Sha. They were on line for a good period of time and then Youll see the Morris came on just before the end of the quarter Youll see the Garik and then very importantly, you'll see the Angela to come.
On so it's a little bit backend loaded and so with a decline rate.
North of 40% Youre going to see those kind of deaths, but theyre going on so it's going to be a little bit lumpy as we go through but as we go forward. We're going to provide you guys enough detail looking forward. So you can anticipate on a little bit better and not be surprised volume.
Okay were there any kind of midstream issues you might have experienced in the Utica in the second quarter of that.
Youre protection to be quick.
Quite a bit lower than first quarter.
No there were some midstream issues kind of in different parts of the in Appalachia during the quarter.
So on the first quarter, we had all the weather issues like everybody else.
Coming in the second quarter, It's Moore again, you need to look at what's coming on actually coming online and then what the based upon end of them. If you do the math on that and I think you'd get pretty close, but we're happy to spend a little bit of time offline describing the dynamics of that with you.
Yes, that'd be great target I'm, just having a hard time reconciling the numbers since your 10-Q has you bringing 7 wells online in the first quarter. So I'm just trying to figure out where the benefit from from those wells was I didn't really see it in the numbers.
Okay, and I guess just on the Scoop here, obviously, it's a multi phase play as you guys described you talked about having 500 locations in inventory I think you said, 70% with Utica I guess that leaves the remainder here.
Scoop can.
Can you give us a sense of.
On the different.
Kind of remaining inventory in the scoop in terms of phases is more of that concentrate on kind of the condensate window or is a little bit more of a kind of rich gas can you maybe just tell us more about kind of what's left to drill in the scoop.
Kind of the phase.
Net inventory and kind of what's the what's the focus on the relative economics do you guys look to drill more oily or condensate rich wells and scoop here I know the plan is done for the year, but as we get into next year, if oil prices remain high.
On your PD economics.
In those different windows.
Yes, I think so.
1 thing you said early on was the 500 wells what I said on the on the 70.30 was within our next 10 years of inventory and so.
They have to describe it a little bit differently from the overall inventory, but in the near term on scoop, especially next year, we're drilling wells that have good liquids rich content.
In the condensate window and so we're going to see if you look at 1 of the slides on the balance you can see we show the economics of that obviously thats bolstered somewhat by the liquid rich nature. So we're going to take advantage of those liquid risk locations. While the prices are high on the liquids on.
Okay No that's helpful.
Alright, I guess just longer term you guys kind of alluded to this but.
I know theres no formal long term guidance, but if I heard your prepared comments correctly it.
It sounded like Youre, basically, saying kind of steady activity spend roughly $300 million a year.
Kind of keep production flattish low you hinted that there could be a little bit of modest top side on the next couple of years.
Clearly the balance sheets in pretty good shape at this point I guess is their notes on at all or maybe focusing more on gas activity. This winter and next year, if gas prices remain really high in 'twenty, 2 and as growth just something you don't even consider.
Is it kind of a newly merged company here.
Yes, I think in the near term, it's really important to study everything out and really we've developed a manufacturing process here that spits out a bcf a day of expense with the dollar and gets $1 on I think that's a good starting point our goal always is going to be taking the $300 million investment down.
And having that Bcf a day inch up as we get more efficient and as we deliver longer plateaus, we hope to see that happen.
So right now I'd say, we would have to see much longer term sustainability on gas north of $3 to want to change that we'd want to we don't want to hear from our investors, but thats something wed like to.
See because the main thing for us right now.
Not only paying down.
But getting to a point, where we're spinning off quite a bit of cash flow. We returned to the shareholders. So if we start investing more capital to move that up our cash flow drops and we will go through a period of time. So you may you may feel good while the price of $34 and then missed the window.
So we'd like more of a <unk>.
Steady focus there the $300 million helps us to stop the decline and that's happened over the last few years Youll see that go back up in the fourth quarter and again on.
On the earlier question production will be a little bit lumpy, but average around 1 bcf and we don't see that move up with efficiency not Miss Moore capital investment.
Okay, great. Thank you.
Yes.
Thank you. This is the end of our Q&A session I would like to turn the floor back over to Tim <unk> interim CEO of Gulfport energy for closing comments.
Alright, well thanks for joining the day I know this is all fairly new news. So we didnt have too many questions I hope a C. Moore on next call, we're happy to engage with them.
Further questions or others would like to ask questions. Please don't hesitate to reach out to our Investor relations team and with that that concludes the call. Thank you very much.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.