Q2 2022 Gulfport Energy Corp Earnings Call

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Good day, ladies and gentlemen, and welcome to your Gulfport Energy Corporation's second quarter 2022 earnings call. All lines have been placed in a listen only mode and the floor will be open for your questions and comments following the presentation.

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At this time it is my pleasure to turn the floor over to your host Jessica Antle ma'am the floor is yours.

Thank you Melinda and good morning, welcome to Gulfport Energy Corporation's second quarter 2022 earnings Conference call I Am Jessica Antle director of Investor Relations Speaker on today's call include Kim <unk>, Chief Executive Officer, and they'll be the executive Vice President and Chief Financial 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 actual results could differ materially from those that are indicated in these forward looking statements due to a variety of factors information concerning these factors can be.

We found in 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 an 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.

Thanks, Jessica and good morning, and thank you for joining the call I will begin this morning with a summary of the second quarter highlights followed by an operational update before turning the call to bill to discuss the financials. As you saw from our release, we had a strong quarter delivering 960 million cubic feet equivalent per day.

Okay.

Production and $80 million of free cash flow, we exited the quarter with a conservative leverage ratio of <unk> eight times and liquidity of $469 million we.

We made significant progress in our share repurchase program and have repurchased $189 million year to date decreasing our outstanding shares by 8%.

Representing approximately 50% of full year 2022 expected free cash flow. In addition, the board has recently approved an incremental $100 million of share repurchases, taking the program to $300 million in total.

Turning to production our strong second quarter results were driven by the continued outperformance of our 2021 development program.

Excellent uptime across our operations and the robust productivity from our Scoop NELA pad brought online in March of 2022.

Given the timing of our development program, we expect production to decline slightly in the third quarter before growing significantly in the fourth quarter.

Following the casing remediation discussed last quarter in the Utica, we have successfully brought on the Charlotte pad and are within days of turning to sales that Clarke Pat.

The delays associated with these pads along with the approximately 45 day knock on effect to the timing of our subsequent completion program. That's caused us to lower the high end of our 2022 production guidance range. This was strictly a timing issue and but for the timing shift we would've exceeded expected too.

To exceed the top end of our production guidance for 2022, we expect strong performance from the remaining Utica and scoop turned in lines in the back half of the year, our strong first half production results and expectations for the remainder of the year are clearly demonstrated on slide eight of the IR deck that as previously discussed.

We continue to expect to grow production in 2023 by more than 5% over 2022.

Turning to our development program during the second quarter, we turned in line three wells in the Utica and are projecting to bring seven gross wells online in the Utica and two gross wells in the scoop during the third quarter.

On page 10 of our IR deck, you can see how strong the five nelda development. It's a five well development in the Scoop continues to perform which is now expected to remain on flat time production for over half of the year the.

The next page illustrates the significant improvement in development cost and well performance generated by these nelda wells and our 2021 program compared to historical development driven by the team integrating learnings across both of our assets and focusing on optimizing value. We highlighted a similar slide for the Utica.

In early 2022, and those wells continue to perform well compared to historical development.

To improve the efficiency of our drilling program and mitigate the risk of or leasing and picking up rigs in a tight market. We are implementing a continuous rig program in the Utica and anticipate doing the same in the scoop in 2023.

On the completion side the market for Frac units is also tight to.

To create a more continuous frac schedule, we are evaluating the opportunity to add a top hole rig in the Utica during the fourth quarter of 2022 accelerating our drilling program entering 2023.

We would plan to continue running the top hole rig alongside our current rig for the first half of the year and expect this activity level could enable us to execute a continuous eight month Frac program in the Utica starting in January of 2023.

In order to create the option for a top hole rig program and stay ahead of our current continuous rig program. We have increased our 2022 land capital by $10 million. We are still evaluating all available options for 2023, and if we choose to proceed with this plan, we will discuss the costs and the benefits of this opportunity.

During our next call.

On capital, we continue to experience inflationary pressure and now expect inflation to be up 20% to 25%. This year, an increase from 15% to 20% discussed last quarter.

This along with the additional $10 million in land capital takes the midpoint of our capital guidance to $425 million for 2022 <unk>.

Despite these impacts our guidance for free cash flow remains unchanged.

We continue to focus on improving our total per unit operating costs and are actively identifying efficiencies across the company. We continue to optimize the reuse of water in our Frac operations in the Utica and we released all winter maintenance rental equipment during the quarter, resulting in second quarter elderly of 16 per Mcf fee.

Down 16% from the first quarter of 2022.

In summary, we remain focused on cost effective production capital discipline, and delivering peer leading development cost per mcf.

We have implemented wider spacing and more intensive completion designs, which continued to deliver exceptional results are low leverage along with significant free cash flow will allow us to organically grow the business, while returning significant capital to our shareholders our commitment to returning capital to shareholders is further demonstrated.

By the boards of $100 million increase to the share repurchase program I'll now turn the call over to bill to discuss the financial results.

Thanks, Tim and good morning, everyone as Tim just discussed we delivered another strong quarter on both the operational and financial fronts I will now spend the next few minutes, providing a high level overview of our second quarter financial results liquidity position and return of capital initiatives before opening the call up for Q&A.

We reported net income of $257 million and generated $205 million of adjusted EBITDA during the second quarter of 'twenty two.

Net cash provided by operating activities totaled $130 million during the second quarter and.

And we generated free cash flow $80 million for the same period, we utilized the vast majority of this free cash flow to fund our common share repurchase program during the quarter.

On the derivative front, we focused our attention on layering on derivative contracts for 2024 during the second quarter and we currently have natural gas swap contracts totaling approximately 55 million cubic feet per day at an average price of $3 98 per Mcf and natural gas collar contracts totaling approximately 60.

Dollars cubic feet per day at an average floor price of $3 50.

Per Mcf and an average ceiling price of $7 49 per Mcf. Please.

Please see our Form 10-Q for additional details on our derivative portfolio.

Turning to our balance sheet at the end of the second quarter total assets were approximately $2 4 billion.

Our total gross debt was approximately $674 million consisting.

Consisting of $124 million outstanding under our credit facility and $550 million of outstanding Senior notes.

We also had $7 million of cash on hand, and $113 million of letters of credit outstanding at the end of the quarter.

On the liquidity front, we exited the second quarter with $469 million of total liquidity, consisting of the $7 million of cash and $462 million of borrowing capacity under our revolver.

Moving onto our return of capital initiatives, we made significant progress executing on our common share repurchase program during the second quarter during which we repurchased approximately one 4 million common shares at an average price of $90. Three says for the total cost of $127 $5 million.

Since the inception of our share repurchase program in March of 'twenty, two we have repurchased approximately $2 2 million common shares at an average price of $86 59 for a total cost of $189 3 million, which represents over 8% of our outstanding common shares.

As Tim mentioned in his comments earlier, the board authorized an additional $100 million to be added to our common share repurchase program.

With this increase we now have authorization to repurchase a total of $300 million of our common shares which is expected to be fully funded with the free cash flow generated in 2022.

We will continue to repurchase shares Opportunistically and as was the case with the earlier authorizations, the timing and amount of any share repurchases continues to be subject to available liquidity market conditions creditor agreement restrictions.

Requirements as well as any other applicable.

Applicable factors, we will continue to evaluate all return of capital options, including additional share repurchases and instituting a common dividend in future quarters.

Moving on to guidance for the reasons, Tim mentioned in his comments earlier, we now forecast our capital investment range of $410 million to $440 million in 2022, which includes $35 million of capital for leasehold.

Our updated 2022 total production guidance is 975 to 1000 million cubic feet equivalent per day, and we continue to expect 2023 production volumes to grow more than 5% over 2022.

In addition to these updates to guidance. We are also updating guidance for our <unk> expense per Mcf for the year, which is detailed in our IR deck on slide 15.

Despite these adjustments we maintained our free cash flow guidance of $375 million to $425 million for the full year 2022.

In summary, we continue generating significant free cash flow during the quarter, which allowed us to return a significant amount of capital to shareholders through our share repurchase program. We are confident that our strong asset base will continue to support our ability to generate positive free cash flow in future quarters at a wide range of commodity prices, allowing us to continue.

To return capital to shareholders, all while maintaining a strong financial position, including a leverage ratio of below one times.

With that we will now open the call up for questions.

Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad.

You're using a speaker phone. Please make sure your mute function is turned off to allow your signal to reach our equipment again press star one to signal for a question.

We do go into our first question from Neal Dingmann with Chris Securities. Please go ahead.

Good morning, all thanks for the time and my first question and maybe I'll just.

And I think the one that kind of tied together.

Let's move on overall.

The castle strategy.

Just wondering now given where you are sorted in the district.

Well great.

Great job there just wondering specifically you all continue.

Continue to believe that material shareholder returns.

No buybacks are sort of.

More prudent than.

And using the cash to build scale at this point and I guess, maybe my second HIFU.

And just one specifically.

You know kind of in the same vein globally that you can achieve.

You can see is with the one rig in each operating area.

Is there any plans to reallocate the capital.

Yes so.

I'll take the first question on the scale versus the buybacks I think the good news Neal is we can do both.

The board has approved the extra $100 million when you look at our third quarter.

A little bit tighter on cash flow, we're doing a lot of our completions that were deferred slightly in the third quarter and then it starts dropping off we generate a lot of cash in the fourth quarter and that continues on into next year. So the good news is we can do we can do both as far as you know.

Growing scale.

One of the things, we're doing with our land budget and also looking at this.

Rig in the Utica, we call it the top hole rig that drills the entire.

Vertical section of the well and then we bring in a larger rig to drill the curve and the horizontal with that does it gives us the optionality for some additional growth if the prices support that growth. So.

Just trying to make sure we set the stage to where we can be very continuous and our program both drilling and very importantly on fracking, it's getting very difficult in a tight market to let a frac unit go try and pick that back up so if we can.

Execute against the tentative plan for the top hole rig we think we could do we could frac continuously for eight or nine months next year, which will.

Lead to some growth like we've talked about but also start setting the stage for a more continuous and a more efficient program going forward.

And then the second part of the question.

The second part.

But it was more just on regionally speaking right now.

The top hole rig.

Any thoughts about just having all activities.

Or whatever maybe after those eight or nine months.

Activity in the Scoop or would you continue to have I think right now what are you about maybe 70 525 split I'm just wondering.

Yes, I mean over the long term that kind of has to be the split because that's how our inventory lays out but in the near term and the results. We're seeing in the Scoop, we're quite encouraged and that's why we haven't come out with definitive 2023 guidance, yet we want to see how we can maximize what's going on in the scoop.

So we believe go into a continuous rig is the right thing to do but we also want to bring as many of these good wells online as quickly as we can so that's what we're going to be doing over the next few months when we come out of next quarter, we will provide guidance for ultimately what we're going to do in the Utica, we feel like we're getting on step in the Utica and the program. We've just described should lead to efficiencies.

In the Scoop just by the nature of where that is in the amount of inventory, we have and the activity level. It's hard to think we'd get to continuous fracking program, there, but certainly moving to a more continuous drilling program can be very helpful.

Well thanks, Tim.

There are no further questions, we turned back to Tim for closing remarks.

Alright. Thank you very much we appreciate the interest and Neil Thanks for the questions of course like always if you have further questions. Please reach out to Jessica in our Investor Relations team. Thank you very much and that concludes the call.

Thank you. This concludes today's teleconference. We thank you for your participation you may disconnect. Your lines at this time have a great day.

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