Gulfport Energy Corp (GPOR) 2022 Q1 法說會逐字稿

Hello and welcome to the Gulfport Energy Corporation first-quarter 2022 earnings conference call and webcast. (Operator Instructions) As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Jessica Antle, Director of Investor Relations.

Jessica, please go ahead.

Thank you, and good morning. Welcome to Gulfport Energy Corporation's first-quarter 2022 earnings conference call. I am Jessica Antle. Speakers on today's call include Tim Cutt, Chief Executive Officer; and Bill Buese, 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 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 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 Tim.

Thanks, Jessica, and good morning. And thank you for joining the call. I will begin this morning with a summary of the first-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 very strong quarter, delivering over 1 billion cubic feet equivalent of gas per day and $117 million of free cash flow. We exited the quarter with a leverage ratio of 0.7 and liquidity of $568 million. We began executing our share buyback program, and the Board has recently approved an additional $100 million taking the program to $200 million, which represents approximately 50% of expected free cash flow.

Turning to production. Our strong first-quarter production was driven by the continued outperformance of our 2021 development program, excellent uptime during the winter months, and the addition of five new SCOOP wells performing above expectations. Given the time of our development program, we expect production to decline in the second and third quarters before growing significantly during the fourth quarter. As previously mentioned, we have moved to a continuous drilling program in the Utica, which is expected to support modest year-on-year production growth and a more consistent production profile moving forward.

With the encouraging well results in the SCOOP, we will also consider adding additional activity in the second half of the year, next year, to help drive operational efficiencies and to retain critical crews and equipment. Overall, we expect to grow production year on year by more than 5% and stay above 1 billion cubic feet equivalent per day throughout 2023.

Turning to our development program. I'm pleased to report that our results in both the SCOOP and Utica continued to outperform historical wells. We remain focused on delivering peer-leading development costs per Mcfe, and our implementation of wider spacing and more intensive completion designs is yielding strong results.

On the back of these strong results, we see opportunities to increase our land position in the Utica, leading to a sustainable organic growth, which presents a path to additional production growth beyond what is currently contemplated. During the quarter, we turned in line five wells from the Nelda pad in the SCOOP. Building on the strong results we've experienced in the Utica, we used a similar design approach, optimizing the completion pump to well spacing and desired recoveries. This has resulted in higher flowing pressures, higher rates, and more sustained production than expected and even stronger than our recent 2021 turned-in-line wells.

These strong results support our overall development approach. And we are excited about what it means for our follow-up SCOOP SCR and O'Neal developments scheduled to come online later this year.

In the Utica, we did experience a casing failure while fracking a well on our Charlotte pad, the casing appears to have failed in the seam of the 5.5-inch welded pipe. We have run 4.5-inch liners in each of the three completed Charlotte wells, and out of an abundance of caution, we are in the process of running liners in three additional wells on the Clark pad that contains similar pipe from the same shipment.

When this happened, we released the frac crew and do not expect to get the crew back to complete the three remaining Clark wells for several months, which may put pressure on our ability to achieve the higher end of our production guidance range. We will understand the frac schedule much better by the time of our second-quarter call in August, and we'll provide further updates at that time. We would note that this impact is purely timing and should not impact the planned exit rate in 2022.

On capital, the repair work on the previously discussed casing remediation in the Utica has pushed us to the higher end of our original capital guidance range. In addition, we are experiencing inflationary pressures above our original assumptions of 10%. Fuel, sand, and pipe costs have moved up substantially and due to being on short-term contracts, we have seen increases in rig and frac rates.

As a result, we're now -- expected inflation to be 10% to -- 15% to 20%. Together, these items have resulted in updating the midpoint of our capital guidance to $400 million in the current environment. However, improvements and price have more than offset this impact, resulting in an increase of our forecasted free cash flow in 2022.

We continue to focus on improving our total-per-unit operating costs and are identifying improvement efficiencies across the company. We delivered a total operating cost of $1.26 per Mcfe, which represents a slight increase from 2021, primarily due to increased production taxes and a seasonal increase in LOE associated with winterizing our equipment, increased water hauling driven by recent turn-in-lines, and the addition of compression to help offset base declines.

In summary, we remain focused on cost-effective production, capital discipline, and delivering peer-leading development costs per Mcfe. We have implemented wider spacing and more intensive completion designs, which continued to deliver strong results.

Our low leverage along with significant free cash flow should allow us to organically grow the business, while returning significant capital to our shareholders. I'm pleased to be increasing our share repurchase program by $100 million, which has the company returning approximately 50% of 2022 expected free cash flow to shareholders.

I'll now turn the call over to Bill to discuss the financial results.

Thank you, Tim, and good morning, everyone. As Tim suggested in his remarks, we had another solid quarter on both the operational and financial fronts, larger driven by the continued outperformance of our 2021 development program and supported by a strong commodity price environment. I will now take a few minutes to provide a high-level overview of our first-quarter financial results and update on our improved liquidity position, spring redetermination process, and return-of-capital initiatives before opening the call up for Q&A.

For the three-month period ended March 31, 2022, we reported a net loss of $492 million and generated $235 million of adjusted EBITDA. A $664 million unrealized loss associated with our commodity derivative portfolio, driven by the large increase in commodity prices during the quarter, was the key driver of the net loss for the period. Net cash provided by operating activities totaled $254 million during the first quarter, and we generated free cash flow of $117 million for the same period. We used the majority of our free cash flow to repay borrowings on our credit facility and to fund our ongoing common share repurchase program.

On the derivative front, we entered into commodity derivative contracts during the first quarter to opportunistically hedge and lock in future free cash flow generation. As of May 2, we had natural gas swap and collar contracts totaling approximately 621 million cubic feet per day at an average floor price of $2.66 per Mcf for 2022, and natural gas swap and collar contracts totaling approximately 450 million cubic feet per day at an average floor price of $3.19 per Mcf for 2023. We also began layering in derivatives for 2024 and currently have natural gas swap contracts totaling approximately 35 million cubic feet per day at an average floor price of $3.77 per Mcf.

Finally, we continue to restructure a portion of our 2023 sold call positions to provide additional capacity to layer in incremental swap and collar contracts. All the contracts associated with the restructurings have been included in the derivative table in the 10-Q and were included in the updated numbers I shared earlier. Please see our Form 10-Q for additional details on our portfolio.

Turning to our balance sheet. At the end of the first quarter, total assets were approximately $2.2 billion, while total gross debt was approximately $575 million consisting of $25 million outstanding under our revolver and $550 million of outstanding senior notes. We also had $6 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 first quarter with approximately $568 million of total liquidity, made up of $6 million of cash and $562 million available under the revolver. We recently completed our spring borrowing base redetermination process. And effective May 2, we entered into the first amendment to the credit agreement, governing our credit facility. Our lenders approved an increase in our borrowing base from $850 million to $1 billion, while we chose to keep the elected lender commitments at $700 million. We believe the increased borrowing base reflects the strength of our assets, our improved balance sheet, and the current commodity market.

In addition, the amendment eased certain requirements and limitations related to hedging, amended the covenants governing certain restricted payments, and provides for the transition from a LIBOR to a SOFR benchmark. Overall, we think the redetermination and amendment were extremely positive outcomes for the company.

On the return-of-capital front, as indicated during our fourth-quarter earnings call, we began executing on our initial $100 million common share purchase program during the quarter. As of March 31, we have repurchased approximately 438,000 common shares at an average price of $80.16 for a total cost of $35.5 million. Subsequent to the end of the quarter, we continued to repurchase shares. And as of May 2, we had repurchased approximately 748,000 common shares in total at an average price of $84.26 for a total cost of $63 million. This left approximately $37 million under our original common share repurchase authorization.

As Tim just mentioned in his comments, the Board authorized an additional $100 million to be added to our common share purchase program. The increase provides for a total of $200 million of our common shares to be repurchased through December 31 of this year. The increased repurchase program represents approximately 50% of our free cash flow generation in 2022. And when combined with the shares already repurchased, approximately 10% of our outstanding common shares have executed at today's share price.

As with the case with the initial authorization, the timing and amount of any share repurchases continues to be subject to available liquidity, market conditions, applicable or legal requirements, and other factors. We will continue to evaluate all of our future return-of-capital options, including continuing to increase the size of our share purchase program, potentially addressing the preferred shares, and instituting a common share dividend.

In summary, we continued to generate significant free cash flow, which has allowed us to pay down the majority of our credit facility and to begin executing on our stock repurchase program. Our outlook for free cash flow continued to improve despite the growing inflationary effects that has led to an increased capital spend for 2022.

We continue to believe that our efficient asset base supports a low reinvestment rate that will allow us to continue returning capital to shareholders while maintaining a strong production portfolio, financial position, and leverage below one-time. With that, we will now open the call up for questions.

(Operator Instructions) Neal Dingmann, Truist.

Good morning, Tim. First question may be just on asset allocation specifically. You guys continue to run a nice balanced program. Just wondering as you continue -- or if the market continues to see service inflation and just pent-up demand, would you considering allocating, maybe initially to the Utica and then to the MidCon, in order to have a little bit more capital efficiency or -- I'm just wondering if you would consider that? Or will the program continue to be sort of balanced?

I mean I think the program will continue to be balanced. But I do see, as I said in my remarks, the opportunity to potentially go to a more continuous program in the SCOOP. Right now we have a -- looking in next year, we have drilling going on through midyear and then dropping that rig. We do see an opportunity with our inventory to carry that on.

I think in the current market, I think having a continuous rig in the Utica and in the SCOOP will help us a lot. Dropping rigs, picking those back up, moving multiple fracs units in and out, can become very problematic. So I think when we talk about organic growth is to keep kind of in that two-rig-type program.

Okay. And then just lastly, I was interested on your comment on maybe looking at a little bit of acreage. You definitely -- you all seem to have one of the bigger acreage positions, especially when you look at both your plays. Just your thoughts, is that more just bolting on what you have or -- why even considered more on addition -- maybe just talk about, again, either M&A or just maybe further expand on that comment [that you had talked] about acreage a little bit.

Yeah. I think we've been saying the open acreage, we see certainly additional acreage in the wet gas window. We see the ability to move that gas out of the basin. It is anything that we would pick up with this kind of prices, especially with the liquid prices being strong, would be extremely competitive in the portfolio. And so we're just looking at the most economic outcomes. So that's about as simple as it is, Neal.

And then I'll just throw one, a third one, just on the shareholder returns. Great job o, obviously, starting on the buybacks. But just thoughts on would you mix in dividends anytime soon and that it'll maybe stick to buybacks, given how cheap the stock continues to be.

I'll turn [it out to] Bill.

Yeah, Neal. As I said, we continue all -- we consider all alternatives. But for the time being and the way our stock is still trading compared to the NAV and just our proved reserves per share, I think we'll still focus on share repurchase for the short term. But everything's still on the table, Neal. We discuss it every Board meeting and frequently internally.

No, agree with you, Bill. Thanks. Glad to hear that. Thank you.

Thanks, Neal.

Zach Parham, JPMorgan.

Hi, guys. Thanks for taking my question. Maybe if you could just give us a little more color on the casing failure you experienced in the Utica. What do you think were the drivers of the issue and maybe a little more on, if you think this is something you could run into again in the future?

No, that's good question, Zach. I mean the good news is we went back, and we studied all of our pumping pressures and everything. Everything else is well within range of what we've been doing for the last number of years. This ERW pipe is a pipe that we've used for a number of years as well.

After we had the failure, we did an extensive logging suite on the well board. The pipe is in good shape. It's just failure in the seam itself. We don't understand full root cause there. It can be -- that can be manufacturing -- we haven't determined that yet. So, we just wanted to make sure that -- [add] an abundance caution for the wells that we had already installed the same pipe, we didn't repeat and have a similar situation.

Going forward, we are all going to use seamless pipe in all the vertical sections of our well to avoid any chance of this reoccurring. So we think we've done the right thing as prudent operator. We've already run 4.5-inch pipe inside of the three Charlotte wells. We're in the process of drilling those wells out now.

Those wells have been completed, and we are right at the end of that program -- right towards the end of that program when we had the issue. And then on Clark wells, we would already installed the 5.5-inch pipe; that, also, was ERW pipe. We've decided out of an abundance of caution to go ahead and run those liners inside of that pipe as well.

And once we have the fracker available, we'll go ahead and frac those wells. But it's just -- basically it's a timing issue for us. It costs a bit of money. Part of the dollars we're spending are associated with procuring the seamless pipe. But we think we've got a good plan going forward.

Got it. And then maybe shifting over to cash return -- been relatively aggressive with the buyback thus far and obviously, raise the buyback authorization. Can you talk a little bit about the pace of the buyback going forward? And how aggressive you plan to be? At the current pace you're going, you'll clearly finish that by within 2022. Is that the plan?

Yeah. I mean, as you know, with buybacks, Zach, we're always going to look at what's the best thing for the shareholder. Right now, we believe our share price is still significantly undervalued, and it's a fairly easy discussion about carrying that on. That's why the Board decided to do the next $100 million.

We'll look at that again as we work through the next phase. Once we finish out the first $100 million, we're moving to the second $100 million. And we're going to just look at it. Like Bill said, we've got all the tools available to us. We could move to a common dividend. We're always looking at the preferreds. And so it would be hard for me to say what kind of pace we're going to be on for the buybacks, because it really depends on where our share price is at the time.

Got it. Thanks, guys. And may I'll just sneak one more in. The initial SCOOP wells on the Nelda pad are outperforming. Just any thoughts on what the drivers are. I know you talked about running bigger fracs and wider spacing there. But just maybe, any additional color you have?

No, I think that's it. The wells we drilled last year were called our -- [on-azimuth] -- it's the orientation -- wells. We thought those would be the best wells in the SCOOP. So we completed these wells, thinking maybe we would have a little bit lower performance on those. We're actually outperforming the [on-azimuth wells]. It is -- I think it really is getting the spacing right and getting the size of the job right.

A little bit on how we flow the wells back, but these are the first wells we've seen sustain production. Typically in the SCOOP, you hit peak product and you start declining, whereas in the Utica you sustain production for a period of time. As you see in our chart in the deck, we could see sustained production for three, four months here.

So obviously, as we bring the SCR and O'Neal wells on, we'll be looking for hopefully similar performance. We haven't planned on that type of performance yet, but super pleased with our subsurface team, really dialing in and dialing in each of our fracs jobs to what that part of the reservoir in the Utica and the SCOOP is telling us.

Thanks, guys. That's it from me.

All right. Thank you.

Steven Dechert, KeyBanc.

Hey, guys. I just want to get some more color on why is well completions in the Utica were delayed. Thank you.

Yeah. It's associated with the issue that -- I answered the question on -- a little bit earlier -- on the issue we have on the Charlotte pad. So basically, our plan was originally to frac the Charlotte, bring those online, move that same frac unit over to the Clarks. We had to take a bit of a time out to run the in-liners on six wells.

We let that frac crew go, and we're in the process of procuring a frac crew bag. So that's it. So that's the timing difference. We've put that in the updated charts. Hopefully, we'll have that crew procured soon, and we get back to business on that. But that's the issue, and that's why it doesn't change anything about our run rate exiting the year. And we're still feeling really good about -- especially with the performance we're seeing on our 2023 potential performance.

Okay, thanks. That's it from me.

Thank you. We reached the end of our question-and-answer session. I would like to turn the floor back over to Tim for any further closing comments.

All right. Thank you very much. Thanks for your interest and joining the call. As always, if you have any questions, please reach out to our Investor Relations team. And that concludes our call. Thank you.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line and have a great day. We thank you for your participation today.