Gulfport Energy Corp (GPOR) 2021 Q4 法說會逐字稿

Greetings. Welcome to the Gulfport fourth-quarter 2021 conference call. (Operator Instructions) Please note this conference is being recorded. I will now turn the conference over to your host, Jessica Antle. Thank you. You may begin.

Thank you and good morning. Welcome to Gulfport Energy's fourth quarter and full year 2021 earnings conference call. I am Jessica Antle, Director of Investor Relations. 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 operation, 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 our earnings announcement. Please review at your leisure. At this time, I would like to turn the call over to Tim Cutt.

Thank you, Jessica. Good morning, and thank you for joining the call. I will begin this morning with a summary of the end of year 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 and delivered full-year results at the top end of guidance. We generated over $360 million of free cash flow, significantly increased liquidity, and achieved our target leverage of below one times.

We are now well positioned to begin executing on our previously announced $100 million share repurchase program and are evaluating additional return of capital opportunities. We were able to achieve this strong performance with approximately $290 million of CapEx spend in 2021, which was at the low end of guidance, and translated into an average production over 1 Bcf of gas equivalent per day, which was at the high end of guidance. This was driven by a strong contribution from both the Utica and SCOOP development programs.

Turning to our development program, I'm pleased to report that our results in both the SCOOP and Utica continue to outperform historical wells. We are focused on delivering peer-leading development cost per Mcf, and our implementation of wider spacing and more intensive completion designs is yielding strong results. On slide 10 of the IR deck, you'll find recent results from our 2021 Utica program.

The Angelo pad was brought online in late October and to date has averaged 245 million cubic feet equivalent per -- gross production per day. We are flowing these wells above the pad target rate of 230 million cubic feet equivalent per day, given the quality of the reservoir as well as the very favorable gas market.

I'm pleased to report that since bringing the Angelo pad online, it has produced approximately 32 Bcf. The single pad is expected to generate a PV-10 of greater than $150 million, with an IRR greater than 100% at current strip prices. Given the high production rates from the current pressures, we would expect the wells to begin to decline by the end of the first quarter.

The Shannon and Hendershot wells have also performed extremely well, and only recently began to decline following plateau periods of 8 to 10 months, and are expected to accumulate approximately 2.5 Bcf per 1,000 foot per well.

The Morris and Gehrig wells in our southern Monroe County acreage have also exceeded expectations, with the average production plateau expected to be over six months, outperforming historical wells in this area. You will see on page 11 on the IR deck that we have lower development costs per Mcfe of reserves developed in the Utica by almost 44% since 2019 from $1 per Mcfe to $0.55. Our target continues to be below $0.50 going forward using wider spacing and more intense fracs jobs.

The chart on the right hand side of the slide 11 shows the step change in well performance utilizing the new frac design. We are seeing similar positive results in the SCOOP. Slide 12 of the deck demonstrates that the three new pads in the SCOOP are performing better than anticipated. As compared to historical completions, the 2021 wells are delivering 25% more cumulative Mcf per lateral foot after 250 days of production. We continue to drive down development costs in the SCOOP.

And during 2021, we lowered development costs to $0.50 per Mcfe developed. 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 $1.20 per Mcfe, which represents a reduction of 16% year-on-year.

LOE for the year was brought on budget at $0.14 per Mcfe. For 2022, we do expect our LOE to trend slightly higher through adding additional compression to take full advantage of the current market conditions, along with inflation primarily related to water disposal.

We continued to focus on reducing corporate overhead in 2021 and came in below our full year G&A guidance at $40 million. We expect to maintain top quartile G&A costs of $0.12 per Mcfe or below for the full year of 2022. Our strong asset performance in 2021, combined with lower cost structure and substantially higher commodity price, led to significant additions in our year-end proved reserves.

At year end, we grew our SEC proved reserves by 51% to 3.9 Tcfe. Our total before-tax PV-10 value for 2021 was $4.3 billion. As a proxy for value, our total before-tax PV-10 is more than double our current enterprise value. Even more compelling, the $2.7 billion of PDP PV-10 value is more than 20% higher than our current enterprise value.

Looking at 2022, our development program is centered around the continuous rig program in the Utica to help drive efficiencies. Capital spend for the year is projected to be approximately $360 million. The increase from 2021 is driven by the incremental Utica activity I just mentioned along with about 10% inflationary effects. The plan is designed to TD 24 gross wells, and turned 17 gross wells to sales in the Utica; and to TD 8 gross wells, and turned 13 gross wells to sale in the SCOOP.

We anticipate this level of activity to deliver approximately 1 Bcfe per day in 2022, growing by approximately 5% in 2023. The program is expected to generate approximately $335 million of free cash flow in 2022. Similar to last year, the production buildup from our development program is back-end loaded.

We were -- where we ultimately land in the production guidance range will depend heavily on the actual timing of the development program delivery. As shown on slides 15 through 17, we expect production to decline during the first two quarters and grow in the back half of the year as new wells are turned to sales.

In summary, during 2022, we remain focused on cost effective production and capital discipline, supported by our much improved balance sheet. We are fully committed to safely executing in the field and improving our environmental, social, and governance performance. We have flattened our corporate structure, reduced overhead, and are focused on optimizing our development program to deliver the highest returns possible to our investors.

I'll now turn the call over to Bill to discuss our 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. I'll spend my time this morning providing a brief overview of our fourth quarter and annual financial results, recent updates to our derivative portfolio, and improved liquidity position, and provide an update on our return of capital initiatives before opening the call up for Q&A.

For the three-month period ending December 31, 2021, we reported net income of $558 million and generated $225 million of adjusted EBITDA. A $429 million unrealized gain associated with our commodity derivatives portfolio was a key driver of the net income during the quarter. For the 12 month period ending December 31, 2021, we reported net income of $138 million and generated $717 million of adjusted EBITDA.

Net cash provided by operating activities totaled $128 million during the fourth quarter, and we generated free cash flow of $134 million for the same period, which we primarily used to repay borrowings on the credit facility.

For the full year 2021, we generated roughly $360 million of free cash flow compared to $40 million for the full year 2020. To ensure our ability to fund our capital program and generate free cash flow going forward, we continue to enter into commodity derivative contracts during the fourth quarter. As of December 31, we had natural gas swap and collar contracts totaling approximately 617 million cubic feet per day at an average floor price of $2.69 per Mcf for 2022, and natural gas swap and collar contracts totaling approximately 180 million cubic feet per day at an average floor price of $3.10 per Mcf for 2023.

We also restructured several of our 2023 sold call options in late 2021 to provide additional capacity to layer in incremental derivative contracts for 2023 in the future. All of the contracts associated with the restructurings were included in the derivative updates I just provided.

Overall, we are pleased with the progress we have made on our derivative portfolio since emergence, and we will continue to add to and modify our portfolio in the future. Please see our Form 10-K for additional details on our derivative portfolio.

Turning to the balance sheet, at the end of the fourth quarter, total assets were approximately $2.2 billion, while total gross debt was approximately $714 million, consisting of $164 million outstanding on a revolver and $550 million of senior notes. We also had $3 million of cash on hand and $122 million of letters of credit outstanding at the end of the quarter.

On the liquidity front, we exited the fourth quarter with approximately $417 million of total liquidity, made up of the $3 million of cash and approximately $414 million of borrowing capacity under the revolver. As a reminder, our liquidity increased by $160 million during the fourth quarter through the October amendment to our credit facility. As of February 25, we had approximately $597 million of total liquidity, made up of $7 million of cash and $590 million of borrowing capacity under the revolver.

On the return of capital front, as suggested during our third-quarter earnings call, we continued to prioritize debt repayment during the fourth quarter, and, as a result, we successfully achieved our leverage metric goal of one times. Following the amendment to our credit facility, we were permitted to initiate a cash dividend payment on our preferred shares during the quarter, which eliminated the need to utilize the more dilutive option of paying a PIK dividend on a quarterly basis going forward.

This was another positive milestone in our return of capital process, as outlined on slide 5 of the IR deck. As a reminder, the Board approved a $100 million share repurchase program of the company's common stock in late October. The authorization remains in place and is valid through December 31, 2022.

If executed at today's share price, the authorization will represent approximately 7% of our outstanding common shares. While we utilize our free cash flow, as discussed above, in the fourth quarter, we are eager to begin executing the repurchase program going forward. In addition, the company will continue to evaluate all of its return of capital options, including increasing the size of the share repurchase program, potentially addressing the preferred shares and instituting a common share dividend.

In summary, our efficient asset base is delivering peer-leading free cash flow, and we believe that, with over 10 years of top-tier inventory, we are well-positioned to begin executing on our opportunistic share buyback program, while considering additional ways to return capital to shareholders as well.

Our business plan remains committed to developing our assets in a disciplined manner while delivering free cash flow of more than $300 million annually. We are confident that our ability to deliver a peer-leading free cash flow yield is greatly under-appreciated and that it provides an excellent opportunity for investors.

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

Thank you. (Operator Instructions) Neal Dingmann, Truist Securities.

Morning, all. Thanks for the details. But my first question, probably for you, Tim, is really on production growth specifically, given now that your -- what I am saying, your -- obviously balance sheet being very strong.

And secondly, just looking at what you're able to grow -- I look at that sort of stat you gave on the Angelo pad of over $150 million -- despite being production growth being somewhat tableau, I think there's been a number of companies that have been continuing to do it very nicely. So I guess my question is, why not boost production and create value if you're able to do more pads like this Angelo pad, Tim?

Thanks, Neal. That's a good question. And I think the good news, Neil, is we're on a projection to grow into 2023. We talk about 5% growth. Our plans for 2022 was really set when we came out of bankruptcy. When you think about the lead time in unitization and getting the permits in place, we knew what we were going to be generally doing in 2022 back at that point.

Going into 2023, though, we built up the back end in the Utica; it will cause some growth going into 2023. And we can continue to watch the market. I mean, if prices sustain, it may make sense to do a bit more. We still have more room to do more in the Utica, and quite a bit more in the SCOOP.

So I think the good news is we don't have to rush into a decision. We are growing in the next year, and we talked about kind of a steady growth through the five-year period. So it's just a matter of toggling that, and one or two pads can make a big difference in that growth profile. So I think as we work our way through the year, thinking about the specifics of 2023, that's probably the time we'd be really considering that.

Okay. No, I love to hear that. And then, secondly, just you mentioned on the SCOOP, you're obviously getting some great wells there. But I guess my question is -- obviously, I'm a huge fan of the Utica, have been there for a long time. And I'm just wondering, given now the environment we're in, does it make sense to look at potentially selling part or all of the SCOOP in order to boost the Utica or anything like that? I'm just wondering, now that you and Bill kind of got your hands around things, does it make sense? I guess when you look at from M&A, either from just bolt-ons or from even the selling side, anything you could talk about around that, too?

Yeah. At this point, we really like the SCOOP. We like what -- it's liquid rich. The economics that we talked about are very similar to the Utica. So we're not anxious to do anything. We're always open to M&A activity. And -- but at this point, Neal, when you look at the size and scale, we would have to have something lined up to come off the back end of that before we could seriously consider that.

Okay. And maybe I could sneak one last one in just on the topic du jour of shareholder return. I love the plan that you now have set out, and I know it's just very early for you guys on there.

Bill and I talked about this a little bit, but would it take another quarter to -- I know a lot of others, that have been now more established on their plan, have put out some form of -- I don't know if you want to call it formulaic, but as far as a number that they're wanting to pay out, a percentage. Would you all, down the line, go do something like that? Maybe that's for Bill.

I can start off here, and Bill can add in. But yeah, we believe, right now, the share repurchase is the best use of cash capital we have. We're talking about this extensively with our Board; it's the highest priority we have as far as moving forward. And you should anticipate, we'll come out with a more prescriptive return on capital program going forward.

Very good. Thank you. (multiple speakers)

Yeah, thanks, Neal.

Thanks, Neal.

Leo Mariani, KeyBanc.

Wanted just to follow up a little bit on the return of capital plans. You guys threw out kind of a handful of other alternatives there. You certainly talked about potentially a cash dividend, but also kind of retiring the preferred. Just wanted to get a sense of -- as you look at it, it sounds like you're eager to kind of get going on the buyback here.

Can you maybe give us a sense on that $100 million that's authorized? I know it's only authorized through the end of the year. Is that something you'd expect to complete here in 2022? And maybe just talk about some of the other alternatives, like in terms of taking out the preferred. What do you have to do to do that? Are there any kind of premiums or calls involved there?

Yeah. I'll start off on the buyback and then hand it to Bill to talk about the preferred. So on the buyback, Leo, we're ready to go. We're going to start buying as soon as we can. We would hope to get it all done this year. But yeah, we'll see how much liquidity there is to buy.

And so we're going to head down that path soon, and we'll see where we end up. We're not restricted to $100 million. We want to see the effect of this; we think it will be substantial. And then we can make decisions later on if we top that up. So yeah, that's something we're very committed to. But I'll turn it to Bill to talk about the preferred.

Yeah. And Leo, just to be clear, I mean, we don't -- I don't know that there's a preference at this point. The $100 million has been approved, as Tim said, but we're just talking about everything kind of equally going forward, and it could be a larger share repurchase. It could be the preferred or dividend. On the preferred front, there's a preferred share agreement; I'm sure you're familiar with it. I mean, it has some restrictions around it that would make it a one for all kind of redemption.

So we'd have to get kind of creative around that to some extent. But everything's on the table, Leo, I think is the key point. And we're well aware that we're going to generate more than $300 million of free cash this year, and we've only accounted for, call it, $100 million of it. So we don't plan on sitting on cash. We'll come out with a more robust plan here in May and give you guys some more color at that point.

Okay. That's helpful for sure. And I guess just in terms of the operational plans, obviously go into kind of more continuous in nature here in 2022. Maybe talk a little bit about some of the improvements that you expect to see, and maybe how that can kind of translate into, say, lower well costs over the course of the program. I know obviously there's inflation, but, if we were to back that out, maybe you guys have some internal targets on maybe improvements that will lead to kind of lower well costs.

I think, Leo, I talked about it on the last call. One of the most important things of going to more of a continuous program in the Utica in this environment is to make sure we can execute the program, right? When we drop rigs, pick them back up in a very, very tight market, supply market, service market, then we have those concerns. So that's probably job number two -- job number one that's going to that. Second to that is just the efficiency.

So when you have a discontinuous program, you have different crews. It is extraordinarily hard to get on staff and getting into a continuous improvement program. Right now, we're seeing probably 15% inflation. We've offset about 5% of that already through efficiencies. I would think if we're able to, going forward -- I'm not saying you can get it all done in 2022, but continue to offset inflation.

If you could offset another 10% of inflation, you've got a good start. My experience in continuous improvement programs, consistent programs, typically, you end up being surprised on the kind of ideas that people come up with, and the kind of things we can do. Again, we're in an inflationary market, so we -- I think we've put forward a plan that we can deliver against. And then every single day, we try and do better than that.

Okay, that's helpful. And then just lastly for you guys. On GP&T, I just noticed that, in the guide for 2022 on a per BOE basis, you guys are expecting that to fall here in 2022 versus 2021. Just wanted to get a sense of what's driving that.

Yeah. I mean, it's primarily bankruptcy noise, Leo.

The first quarter was a little higher than going forward -- first quarter of last year.

Okay. So just that kind of one quarter noise. Okay, thanks, guys.

Yeah, thank you.

Thanks, Leo.

Zach Parham, JP Morgan.

Hey, guys. Thanks for taking my question. I guess first, just on A&D. We've seen a number of natural gas-focused deals trade in the market recently. Can you talk a little bit about how you see Gulfport participating? Are you comfortable with your inventory depth or could bolt-ons be a use of that free cash flow you talked about earlier?

Yeah, Zach. It's a good question. I mean, this was something we talked about a lot. We've always been very open to A&D, M&A. When we think about the inventory, we are in a very solid position. We put in the deck that we have, over 10 years, greater than 70% type return wells. And so that allows us to do smart things. Of course, we're going to look at bolt-ons as they come by. The current price environment, some of that can be difficult. We don't want to overpay. That's for sure.

And the other thing to keep in mind, that a lot of the acreage in -- especially in the Utica, is unleased acreage. And so we are increasing our leasing. We're looking at that as also a way to build inventory. So it doesn't just have to be through an absolute transaction with another company. It can be through a bit more aggressive leasing strategy. The idea, though, is you really don't want to get too far ahead of your five-year window. So we're trying to balance all those things together. But you should have comfort that we're looking at bolt-on opportunities.

Got it. Thanks for that color. I guess just one follow-up on cash taxes. In the $335 million free cash flow guidance, are there any cash taxes factored in there? And if so, how much, and how do you see cash taxes trending over time?

Yeah, good question. That has become a hot topic, I guess, as prices have gone up. But we have $1.4 billion NOL we reported in our 10-K. We don't expect to pay material cash taxes the next four years. This year is very minimal. It does start creeping up a little bit, maybe $10 million each of the following three-year type thing. And then that's subject to change as our plan does as well.

But nothing material. But to the extent there are cash taxes, those would be offset in the free cash flow number. So the $335 million would -- does include any sort of cash tax bleed that we plan to incur this year, which is very minimal.

Got it. Thank you, guys.

Thank you.

Thank you.

We have reached the end of the question-and-answer session. And I will now turn the call back over to Tim Cutt for closing remarks.

All right. Thank you very much. We really appreciate your time and interest today. As always, if you have follow-up questions, don't hesitate to reach out to our Investor Relations team. This concludes the call. Thank you very much.

Bye.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.