Q2 2023 Gulfport Energy Corporation Earnings Call
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Greetings and welcome to the Gulfport Energy Corporation second quarter 2023 earnings call.
At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If 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 director of Investor Relations. Please proceed.
Thank you and good morning, welcome to Gulfport Energy Corporation's second quarter 2023 earnings Conference call I Am Jessica Antle speakers on today's call include John Reinhart, President and Chief Executive Officer, Michael Hodges Executive Vice President and Chief Financial Officer, and Matthew Rucker, Senior Vice President of operation.
<unk> will be available for the Q&A portion of today's call I would 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 the 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 found in the company's filings with the SEC. In addition, we may reference non-GAAP measures reconciliations to these 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 John Reinhart, President and CEO .
Thank you Jessica and thank you to everyone for listening to our call.
I am pleased to provide highlights today on the company's outperformance in the second quarter with strong well performance and operational cycle times outpacing budget expectations, playing a key role in our quarterly production operating cost adjusted EBITDA and capital spend realizations all coming in better.
Than analyst consensus estimates the.
Strong execution across the board led to positive revisions in our 2023 full year production and operating cost guidance.
The company remains focused on delivering disciplined growth lowering costs, improving operational cycle times and efficiencies and enhancing both asset level and corporate returns.
All while maintaining an attractive balance sheet and utilizing our top quartile free cash flow yield to enhance shareholder returns and expand our high quality inventory.
All of which positions the company attractively for continued fundamental value improvements.
Highlighting the second quarter results, our financial position remains strong despite a volatile commodity market generating $144 5 million of adjusted EBITDA.
The company funded our second quarter capital program within our cash flow and with the Frontloaded nature of our 2023 activity behind US we expect adjusted free cash flow to accelerate in the second half of the year from $59 million in the first half of 2023.
Our average daily production totaled 1.039 billion cubic feet equivalent per day ahead of analysts' expectations and was driven by the accelerated timing of wells brought online in the quarter as well as the continued strong performance from our development program.
During the second quarter, the company drilled and rig released eight gross wells seven of which were in the Utica.
On the completion side, we completed and brought on line 13 gross wells during the quarter 11 in the Utica and two wells in the Scoop.
We continued to deliver strong operational execution and realize consistent cycle time improvements accelerating the turn in lines of all 13 gross wells brought online during the quarter each realizing a two week acceleration of planned turn in line dates.
Year to date the team has been able to perform at a high level of efficiency and we have included slide 11 of the investor deck to highlight and summarize several of the key focus areas contributing to our results.
On the planning front by fully integrating the planning function into our operations group continuous improvements are being realized with operational risk mitigation improved logistics and idle time reduction between all phases of our operations.
Regarding operations all functions of our business are realized and efficiency gains drilling.
Drilling performance continues to improve with a 6% quarter over quarter improvement in footage drilled per day.
On the completion side, we have seen a significant increase in frac pumping hours per day.
Reduction in nonproductive time, as well as decreasing dead space between Frac and drill out phases.
Our focus on logistics improvements and design modifications has led to improving average frac pumping hours per day by 4% in the second quarter with many days, reaching 19% and 20 plus pumping hours per day, which is highly efficient performance considering the daily stage counts.
Stage sizes and stage perforating operations.
The operational efficiency gains significantly improved turn in line timing and ultimately acceleration of cash flow.
The cycle time reductions play an integral role in our corporate level returns and we remain intently focused on improving capital efficiencies and enhancing margins, which we believe will result in lower maintenance capital expenditures going forward.
As mentioned last quarter, we continue to focus on our pressure managed production approach, which is generating strong pad production rates with minimal average initial pressure drawdown.
In the Utica are three well Barbara Ridge pad located in Monroe County, which we mentioned last quarter continues to outperform historic results in the same area.
This three well pad continues to produce in excess of 70 million cubic feet equivalent per day at an attractive average well pressure drawdown of 15 Psi per day.
Early results are leading to reserve estimates in excess of two 5 billion cubic feet equivalent per 1000 feet of lateral for these Monroe County wells.
Historic development in Monroe County has averaged one 5 billion cubic feet equivalent per 1000 feet of lateral.
Which represents an outperformance relative to offsetting development by a minimum of 60%.
We are very encouraged for the remainder of our consolidated Monroe County, Utica dry gas development.
We believe our development planning with optimize well spacing enhanced stimulation treatments and pressure managed flowback will ultimately lead to longer production plateau periods shallower declines improved reserves and improved economics and capital efficiencies relating to right sizing our production facilities and compression.
When looking at the full 2023 Utica development program, we continue to deliver improved ultimate hydrocarbon recoveries relative to the last three years and currently forecast our EUR per 1000 feet of lateral in the Utica has improved by over 50% since two.
'twenty as shown in our Investor.
After presentation on slide 12.
Not to be outdone in the Scoop are two well <unk> pad came online during the second quarter and is responding very positively to our pressure manage production where approach with higher than expected oil yields lower average initial pressure drawdown as well as moderated proppant flowback.
The company has delivered some of the best wells in the Scoop as seen in recent years and our Falor wells look to be in line with those results highlighting consistent development across our acreage.
Looking at slide 13 of our Investor deck, you can see our program average EUR per 1000 feet of lateral in the scoop has improved by over 75% since 2020.
We look forward to returning to a more historic level of development activity in Oklahoma in 2024.
In terms of current activity, we have one drilling rig operating in Ohio, which is drilling ahead on our Marcellus development in Belmont County, and continue to expect these wells to turn to sales during the fourth quarter.
We look forward to further discussing our Marcellus development progress later in the year and see upside value with our Marcellus acreage holding the potential to unlock approximately 40 to 50 wells of incremental inventory additions to the company.
The continued strength in our well performance and operational efficiency gains allow us to increase our 2023 production guidance, while maintaining the same base drilling and completion capital budget.
We now forecast our 2023 production will be in the range of 1.035 to 1.0, $5 5 billion cubic feet equivalent per day, an increase of 1% to 3% based upon the company's previously issued guidance range.
Production cost for the second quarter totaled $1 16 per million cubic feet equivalent better than analysts' consensus expectations and below our initial full year 2023 guidance range the.
The improvement is primarily driven by a decrease in realized and expected per unit firm transportation and processing expenses for the year.
For full year 2023, we've reduced our operating unit cost guidance, which includes LOE midstream.
Midstream and taxes other than income to $1 16 to $1 24 per million cubic.
Cubic feet equivalent an improvement of approximately 4% based upon the midpoint of our previously issued guidance range the.
The teams continue to aggressively work opportunities to optimize and reduce our per unit operating costs to improve on both low.
And midstream costs during the remainder of the year.
The company maintained our top quartile general and administrative spend during the quarter with our reoccurring cash G&A totaling <unk> 11 per million cubic feet equivalent.
On the capital side, driven by operational efficiency improvements to date, we forecast the company has realized roughly 5% savings on our full year 2023 drilling and completion budget.
These savings are being reinvested in our ongoing maintenance leasing efforts facilitating the company's ability to improve.
Our average working interest in nearly every well in our 2023 development program.
This results in an increase in our net well counts and further contributes to our expected production and drilling and completion capital results for the year.
Based on the budgeted activity for the remainder of the year, we remain confident in our full year drilling and completion capital guidance range and affirm our budget of 375 million to $400 million of base development capital spending.
The team will continue to focus on operational improvements that are expected to translate into further savings in 2023, as well as meaningful capital efficiency gains going into 2024.
Turning to land capital expenditures, we reaffirm our plans to allocate $50 million to $75 million on maintenance leasehold and land investment.
This land spend is focused on bolstering, our 2023, and 2024 drilling programs and facilitating increases in our working interest and lateral footage in units we plan to drill near term.
As outlined in our earnings announcement yesterday evening and discussed on last quarter's conference call. The company is providing further detail regarding the discretionary acreage acquisitions being pursued this year.
These acquisitions expand our high quality resource depth, which is predominantly held long term by production and we will provide optionality to our near term development plans.
We are actively pursuing these attractive acreage acquisition opportunities towards which we intend to allocate approximately $40 million from our robust 2023 adjusted free cash flow.
We believe these are attractive opportunities to acquire high quality organic acreage at attractive valuations that are accretive to overall value of our business.
We believe this opportunistic organic leasing strategy is the most cost efficient cost efficient approach to extending our strong core inventory position.
Depending on the phase window and exact area of interest we anticipate the approximately $40 million of discretionary acreage acquisitions.
Will add roughly one and a half years of drilling inventory at our current development pace with an average cost of approximately one four to $1 5 million per location.
In closing the current natural gas environment reinforces the importance of developing our assets in an efficient and sustainable development manner. Our team is focused on enhancing margins optimizing efficiencies and protecting the financial strength of the company.
This in addition to the enhancement of our attractive acreage portfolio and a robust shareholder return strategy, we will further improve our strong positioning going forward.
We continue to prioritize the return of capital to our shareholders through common stock repurchases as evidenced by the concurrent repurchase alongside the secondary equity offering in June 2023.
Since initiating the program, we have reduced our outstanding common shares by over 13%.
And we plan to continue allocating substantially all of our adjusted free cash flow to common share repurchases after accounting for discretionary acreage acquisitions.
Now I'll turn the call over to Michael to discuss our financial results.
Thank you John and good morning, everyone.
During the second quarter. The company continued to achieve strong results in almost every area of the business.
Net cash provided by operating activities before changes in working capital totaled approximately $134 million during the second quarter more than funding our capital expenditures, despite the soft gas macro and our accelerated level of activity.
We reported adjusted EBITDA of approximately $145 million during the quarter and as John mentioned due to our capital program weighting to the first half of the year reported a slight outspend in adjusted free cash flow of just $4 million for the same period better than analyst expectations, driven by our strong production and operating cost performance.
With less than 40% of our D&C and maintenance.
Leasehold spending less to occur in 2023, and with an improving commodity price environment expected later in the year. The second half of the year should deliver accelerating adjusted free cash flow that provides a strong tailwind as we enter 2024.
Our all in realized price during the second quarter was $2 76 per Mcf before the impact of cash settled derivatives and firm transportation.
This realized unit price is 66 above Nymex Henry hub index price highlighting the benefit of Gulf course diverse marketing portfolio for natural gas and the pricing uplift from our liquids in both of our asset areas.
We realized the cash hedging gain of approximately $53 million for the quarter as commodity prices softened and our hedge book strengthened our cash flow.
We believe our hedging position for the remainder of 2023 will provide ample.
Protection should prices remain at or below current levels.
Our natural gas price differential before hedges was negative <unk> 25 per mcf compared to the average daily Nymex settle price during the quarter and driven by seasonality and strip pricing increasing as we progress through the year, we expect our third quarter differential to move wider before narrowing in the fourth quarter, we <unk>.
Reaffirm our natural gas basis differential before hedges to average 20 to 35 per Mcf below Nymex for the full year and based on current forward prices and basis marks expect the average toward the end to talk towards the wide end of our provided range.
In addition to reflect market impacts to realized prices to date and the company's expectations for the remainder of the year, we have revised our realized natural gas liquids guidance and anticipate realizing 35% to 40% of <unk> for the calendar year.
On the capital front, we incurred capital expenditures of $110 6 million related to drilling and completion activity and $18 7 million related to <unk> leasehold and land investment through.
Through the first half of the year. We have now spent approximately 61% of our expected base D&C capital for 2023, and approximately 62% of our expected maintenance leasehold and land capital for 2023, and we remain confident that we will deliver full year results within our initial guidance.
Our continued cycle time improvements and acceleration of planned activity has pulled capital forward and we estimate approximately 85% of the drilling fleet completion capital for the year will occur during the first three quarters of 2023.
Our operational efficiency improvements robust hedge position healthy balance sheet and strong cash margins provides significant flexibility as we consider the proper setup for 2024 and plan our activity as we enter what we believe will be a stronger commodity price environment.
With respect to the current hedge position. We are pleased to have downside protection covering approximately 55% of our remaining 2023 natural gas production at an average floor price of $3 48 per Mcf and roughly 480 million cubic feet per day of downside protection in 2002.
24 at an average floor price of $3 84 per Mcf.
We have also begun opportunistically layering in hedges for 2025, and currently have natural gas swap and color contracts totaling approximately 190 million cubic feet per day at an average price of $3 90 per mcf to the floor.
On the basis front, we have locked in around 40% of our 2023 natural gas basis basis exposure, providing pricing security at our largest sales points for the remainder of the year.
We believe there are better days ahead for natural gas and yet we remain committed to a disciplined approach to hedging our future cash flows with plans to layer in targeted amounts of incremental hedges, primarily in 2025 as opportunities present themselves.
Turning to the balance sheet, our financial position remains very strong with trailing 12 month leverage exiting the quarter at <unk> nine times, and our liquidity totaling $732 million.
Price of $5 3 million of cash plus $726 6 million of borrowing base availability, which takes into account our previously announced successful spring borrowing base Redetermination and our amendment to our credit facility.
Our liquidity today is more than sufficient to fund any development needs, we might have for the foreseeable future and provides tremendous flexibility from a financial perspective going forward as we are positioned to be opportunistic should situations arise that allow us to capture value for our stakeholders.
In the equity capital markets, we completed a secondary equity offering in June with the selling stockholders, reducing their ownership by approximately one 5 million shares and increasing gulfport public equity float by roughly 18%.
Further in connection with the transaction, we executed a $25 million concurrent buyback of Gulfport shares and in total <unk> repurchased approximately 442000 common shares at an average price of $93 67.
During the second quarter.
As of July 27th we had repurchased approximately three 8 million shares of common stock at an average share price of approximately $85 51.
Lowering our share count by 13% since the inception of our share repurchase program.
We currently have approximately 75 million of availability under our $400 million share repurchase program and our plan to deliver shareholder value remains the same we will continue to return substantially all of our full year 2023, adjusted free cash flow to shareholders through common share repurchases excluding the.
Discretionary acreage acquisitions that John mentioned earlier.
As we close out 2023, and look ahead to 2024, we forecast continued significant free cash flow generation and common share repurchases will remain a key part of our return of capital strategy given the unwritten recognize value. We believe remains in our equity.
Given this continuation of our existing plan with respect to shareholder returns, we anticipate expanding our current share repurchase authorization in the near future.
In summary, this is an exciting time to be part of Gulfport.
This year's program is delivering on all fronts and we look forward to continued progress both operationally and financially as we move forward.
Simply put the first half of 2023 has been a success. We now plan to deliver more production that promised at lower operating costs than projected while investing within our existing guidance and delivering premium free cash flow yield to our investors, while we fully recognize that the natural gas macro environment has been volatile the last few months we believe.
Gulfport current valuation possesses substantial upside, especially in light of our strong results in our operational execution capabilities. We believe this current landscape provides a significant investment opportunity for those willing to recognize both the potential for multiple expansion as well as an improving outlook for natural gas and the upside that these.
Could deliver to our investors.
With that I will turn the call back over to the operator to open up the call for questions.
Thank you we will now conduct a question and answer session.
I would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys. Once again Thats star one to ask a question at this time one moment, while we poll for our first question.
Our first question comes from Thomas <unk>. Please proceed.
Hey, good morning team.
Marcellus Derisking when you get those results just trying to get an idea of what we should be looking for you.
Expected to make a decision of whether or not to pursue a program there or is this more about how many locations that maybe you think you could bring on board.
Yes, Bert this is John I appreciate the question and your participation today, we're pretty excited about is we've mentioned at the last couple of quarters.
The potential that the Marcellus development brings so we're actually close to now drilling on our second well and as I noted looking forward to starting up production here in early Q4 as I would bucket the opportunity set as we look at it there are very attractive wells just right across the river to the south.
Brand also some early pilot logs and some some sidewall cores and what I'll tell you is that early results are as expected. So as I would bucket the opportunity said from our perspective, we're looking to delineate the liquids content to the south and to the northwest to better get a handle on how economic these.
And whats the pressures are and our production profile might look like to better help us in our midstream discussion. So it would be more of a assessing.
The productivity of the formation and outlined better where we might want to initially prioritized subsequent development. So hopefully that answers your question.
That does Thats, great and then the follow up is just on the prepared commentary you kind of describe the remaining share repurchases as the amount of free cash flow you have for the year. So obviously <unk>.
Lower gas price environment. So maybe you pulled some of that forward. So just want to make sure. We understand is it a.
A similar program going forward or are you looking at more of a.
Your forward calculation for the year of free cash flow and then you just kind of using those buybacks or should we expect.
A ratable amount of opportunistic share repurchases as they come along.
Yes.
Michael that's a great question so.
Describe this throughout the year as being kind of a full year program. So we look at our 2023.
Full year available free cash flow, we kind of look at that every month that where that fits in what we think might be coming in certainly commodity prices play into that and then we assess the amount of share repurchases that we feel like we can make.
Once we take into account any of the acreage opportunities that John described this morning, so that can vary from quarter to quarter and certainly we've been active buyers throughout the year. We think the equity is extremely attractive at current levels and have felt that way consistently and so with our with our healthy balance sheet with our liquidity on the revolver, we don't really need to chase.
Quarterly changes in the in the free cash flow, we look at it on that full year basis, and so as we look out to the second half of the year, we're still assessing it in that fashion and plan to make additional repurchases as we have the available free cash flow.
I think thats, a great way to go about it thanks guys.
Our next question comes from Tim <unk> with Keybanc capital. Please proceed.
Hey, good morning, everybody. Thank you for taking my questions.
As we look out to 2024, if we ignore the sold calls you'd look to be roughly 50% hedged.
Just curious given where balance sheet is in the sort of operational momentum.
Is that a good level, where you want to be or would you opportunistically pushing much higher to like the 2023 level. If you saw the strip to improve just curious on your thoughts there.
Yes, Tim this is Michael another another really good question I think we feel good about where we're at and certainly the hedge position we have in place is significantly in the market.
And the positive Mark given where the strip sits right now for 2024, you mentioned the balance sheet I think that gives us the flexibility to vary a little bit whether we want to be a little higher a little lower I would call where we're at somewhere in the middle of our typical range of our typical strategy for our hedge book, So I think where the strip sits currently I think we feel pretty comfortable with.
Our existing book, if the strip where to move significantly higher we could certainly layer in a little bit.
We probably don't have a ton of room left to add to 2024, but I think I think for the most part we're really comfortable with where that sits and I mentioned in my prepared comments, we're really focused on 2025, and we have a pretty optimistic and bullish view on 2025. So we've been using some structures that allow us to keep the upside there. So I think I think most of our focus will be on 2025, but if.
We saw some improvement in the strip for 24, there's probably a little bit of room, where we can do some additional work there.
Okay I appreciate the color.
Question follow up.
Maybe more for John .
The deck Youre talking about increasing capex in Oklahoma next year.
Yes sort of minimal capex this year, so an increase.
Just trying to understand how material that can be.
Just a couple more wells there is as you've learned more about the asset itself.
Chance, we could see a full time rig running out there just curious kind of overview on on the scoop.
Been in the seat for a few months.
Now Tim Thanks for participating the call I appreciate the question.
We're pretty excited about the scoop coming in quite frankly, it's highly economic and the.
Economic certainly warrant capital allocation as we talked about it in prior quarters due to the HCP nature. We did take some funds from that with regards to our capital program in 'twenty, three and really wanted to reinvest that in the Marcellus delineation, which we've done but now as we turn to 'twenty four again with the with the really good results.
We are going to be allocating more of our historic capital allocation to the Oklahoma Scoop area and you can think about that in the neighborhood of that 25% to 30% of the capital range plus or minus moving forward. So we'll put out our guidance.
And January four or early February for the full year, but I can tell you we're pretty excited about kind of getting back to a normal cadence of this highly economic part of our portfolio. So I appreciate the question.
Okay. Thank you.
Yes.
Thank you at this time I will turn the call back to Mr. John Reinhart CEO for final remarks.
Yes. Thank you for taking the time to join our call today, our message has been a consistent one run a healthy company by maintaining a healthy and attractive balance sheet with moderate growth minimal levels of commitment and generate substantial free cash flow that is directed towards shareholder value accretion. This allows the company to have many levers to be off.
<unk> tactically and strategically for further value enhancement in the future should you have any questions. Please don't hesitate to reach out to our Investor relations team in the future. Thanks again for joining our call and have a great day.
Okay.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.
Okay.
Sure.
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