Gulfport Energy(GPOR) - 2019 Q4 - Annual Report

PART I Business Gulfport Energy is an independent natural gas-weighted exploration and production company focused on the Utica Shale and SCOOP formations, aiming to generate sustainable free cash flow and reduce leverage - Gulfport is an independent natural gas-weighted E&P company with primary operations in the Utica (Ohio) and SCOOP (Oklahoma) basins[19] - The corporate strategy focuses on generating sustainable free cash flow, reducing leverage, and improving operational efficiencies[19][23] Proved Reserves and Value (as of Dec 31, 2019) | Metric | Value | | :--- | :--- | | Proved Reserves (Tcfe) | 4.5 | | Standardized Measure ($ billion) | 1.7 | | PV-10 ($ billion) | 1.7 | 2020 Outlook | Metric | Value | | :--- | :--- | | Capital Expenditure Budget | $285 million - $310 million | | Expected Production | 1,100 - 1,150 MMcfe per day | | Average Operated Rigs (Utica) | ~1 | | Average Operated Rigs (SCOOP) | ~1.5 | Operating Areas The company's primary operating areas are the Utica Shale in Eastern Ohio and the SCOOP Woodford and Springer formations in Central Oklahoma - Utica (Eastern Ohio): The company holds approximately 205,000 net reservoir acres, primarily in Belmont, Harrison, Jefferson, and Monroe Counties. Production in Q4 2019 was about 1,090 MMcfe per day[28] - SCOOP (Oklahoma): The company has approximately 76,000 net reservoir acres targeting the Woodford and Springer formations, primarily in Garvin, Grady, and Stephens Counties. Production in Q4 2019 was about 255 MMcfe per day[29] Drilling Activity and Acreage This section details the company's drilling operations and acreage holdings as of year-end 2019 2019 Operated Drilling Activity | Area | Gross Wells Drilled | Net Wells Drilled | Gross Wells Turned to Sales | Net Wells Turned to Sales | | :--- | :--- | :--- | :--- | :--- | | Utica Shale | 16 | 14.6 | 47 | 41.6 | | SCOOP | 10 | 8.6 | 14 | 12.6 | | Total | 26 | 23.2 | 61 | 54.2 | Acreage Summary (as of Dec 31, 2019) | Metric | Gross Acres | Net Acres | | :--- | :--- | :--- | | Developed Acreage | 160,181 | 122,059 | | Undeveloped Acreage | 142,904 | 126,774 | Oil, Natural Gas and NGL Reserves This section provides a summary of the company's proved oil, natural gas, and NGL reserves as of December 31, 2019 Total Proved Reserves by Type (as of Dec 31, 2019) | Category | Natural Oil (MMbbl) | Gas (Bcf) | NGL (MMbbl) | Total (Bcfe) | | :--- | :--- | :--- | :--- | :--- | | Proved developed | 8 | 1,757 | 30 | 1,984 | | Proved undeveloped | 10 | 2,291 | 32 | 2,544 | | Total proved | 18 | 4,048 | 62 | 4,528 | - Proved reserves decreased from 4,743 Bcfe at year-end 2018 to 4,528 Bcfe at year-end 2019. The decrease was driven by production (502 Bcfe) and downward revisions (734 Bcfe), partially offset by extensions and discoveries (1,097 Bcfe)[47] - Downward revisions were primarily caused by changes in the development plan pushing some PUDs beyond the 5-year rule (347.2 Bcfe) and lower commodity prices (296.4 Bcfe)[50][51] - Proved Undeveloped Reserves (PUDs) totaled 2,544 Bcfe, representing 56% of total proved reserves. All PUDs are scheduled to be drilled within five years of their initial booking[54][61] Production, Prices and Production Costs This section details the company's production volumes, average sales prices, and production costs for 2019 compared to 2018 Production and Average Sales Price (2019 vs 2018) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Total Production (MMcfe) | 501,742 | 496,505 | | Avg. Sales Price w/o derivatives ($/Mcfe) | $2.27 | $2.98 | | Avg. Sales Price w/ derivatives ($/Mcfe) | $2.51 | $2.86 | Average Production Costs (2019 vs 2018) | Metric | 2019 ($/Mcfe) | 2018 ($/Mcfe) | | :--- | :--- | :--- | | Production costs | $0.17 | $0.18 | | Production taxes | $0.06 | $0.07 | | Midstream gathering and processing | $0.58 | $0.58 | | Total | $0.81 | $0.83 | Regulation - Environment, Health and Safety The company's operations are subject to extensive federal, state, and local environmental, health, and safety regulations - The company's operations are subject to extensive federal, state, and local laws and regulations covering environmental, health, and safety aspects, including drilling permits, hydraulic fracturing, water use, air emissions, and well abandonment[83][84] - Potential regulatory changes concerning hydraulic fracturing, conservation, and federal land use could impose further restrictions and increase compliance costs, potentially reducing the amount of hydrocarbons the company can produce commercially[86][87] Risk Factors The company faces significant risks from volatile commodity prices, substantial debt, operational uncertainties, extensive environmental regulations, and a material weakness in internal financial controls - Commodity Price Risk: Revenues and profitability are highly dependent on volatile natural gas, oil, and NGL prices. A prolonged period of low prices could materially harm the business and lead to write-downs of asset values[99][100] - Financial and Debt Risk: The company has significant indebtedness of approximately $2.0 billion as of December 31, 2019. This leverage could make it difficult to satisfy obligations, obtain additional financing, and could place it at a competitive disadvantage[104][105] - Reserve and Operational Risk: A significant portion (56.2%) of total proved reserves are undeveloped (PUDs), which require substantial capital to recover. There is a risk that these reserves may not be ultimately developed or produced[133] - Regulatory and Environmental Risk: The business is subject to extensive regulation. Initiatives related to hydraulic fracturing, seismic activity, climate change, and endangered species could lead to operational delays, increased costs, or potential bans on activities[162][166][168][173] - Internal Control Risk: A material weakness was identified in internal controls over the accounting for transfers of unevaluated capitalized costs to the amortization base, which could adversely affect the accuracy and timeliness of financial reporting[209] Unresolved Staff Comments The company has no unresolved staff comments from the SEC - None[223] Properties Property information is detailed in Item 1 (Business) and Note 19 of the consolidated financial statements - Information regarding properties is included in Item 1 and Note 19 of the consolidated financial statements[224] Legal Proceedings Gulfport is involved in legal proceedings including environmental complaints, a derivative action, royalty underpayment lawsuits, and an SEC investigation into former management - The company is a defendant in two complaints filed by the State of Louisiana concerning alleged violations of the State and Local Coastal Resources Management Act[226] - A stockholder of Mammoth Energy filed a derivative action against Mammoth's board and significant stockholders, including Gulfport, alleging breach of fiduciary duties[229] - Two separate lawsuits were filed in Oklahoma by royalty holders alleging underpayment of royalties[230][231] - The SEC has an ongoing investigation regarding alleged improper personal use of company assets by former management and potential violations of the Sarbanes-Oxley Act[232] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[237] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under "GPOR", initiated a $400 million share repurchase program in 2019 (later suspended), and has never paid dividends - The company's common stock trades on the Nasdaq under the symbol "GPOR"[239] - A $400 million stock repurchase program was approved in January 2019. In 2019, 3.8 million shares were repurchased for $30.0 million. The program was suspended in Q4 2019 with $370.0 million remaining[241] - The company has never paid dividends on its common stock and does not anticipate doing so in the foreseeable future[242] Selected Financial Data The company reported a significant $2.0 billion net loss in 2019, primarily due to a $2.04 billion impairment of oil and natural gas properties, contrasting with $430.6 million net income in 2018 Selected Financial Data (2019 vs. 2018) | Metric (in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Revenues | $1,346,008 | $1,355,044 | | Impairment of oil and natural gas properties | $2,039,770 | $0 | | (Loss) Income from Operations | $(1,703,693) | $398,959 | | Net (Loss) Income | $(2,002,358) | $430,560 | | Net (Loss) Income Per Share—Diluted | $(12.49) | $2.45 | | Total assets | $3,882,819 | $6,051,036 | | Total debt | $1,978,651 | $2,087,416 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2019, Gulfport divested non-core assets, increased production by 1%, reported a $2.0 billion net loss due to impairment, reduced unit operating expenses, and plans significantly lower 2020 capital expenditures - Key activities in 2019 included divesting non-core assets in Louisiana and the Utica shale, and repurchasing $190.1 million of senior notes at a discount[250][256] - Production increased 1% to 501,742 MMcfe in 2019, while unit lease operating expense decreased 10% to $0.17 per Mcfe[256] - A net loss of $2.0 billion was reported for 2019, compared to net income of $430.6 million in 2018, primarily due to a $2.0 billion non-cash impairment charge on oil and gas properties[288] - The 2020 capital expenditure budget is estimated at $265-$285 million for drilling and completions, a 51% reduction from 2019, which is expected to lead to an 18% decrease in production volumes[275] Liquidity and Capital Resources The company's liquidity is primarily derived from operating cash flow and its revolving credit facility, with a net working capital deficit at year-end 2019 - Primary sources of liquidity are operating cash flow, borrowings under the revolving credit facility, and security issuances. As of Dec 31, 2019, the company had a cash balance of $6.1 million and a net working capital deficit of $145.3 million[252][254] Debt and Liquidity Summary (as of Dec 31, 2019) | Metric | Value | | :--- | :--- | | Total Principal Debt ($ billion) | 2.0 | | Revolver Borrowing Base ($ billion) | 1.2 | | Revolver Borrowings Outstanding ($ million) | 120.0 | | Letters of Credit ($ million) | 243.6 | | Available Revolver Capacity ($ million) | 636.4 | - During 2019, the company repurchased $190.1 million in aggregate principal of its senior notes for $138.8 million, recognizing a $48.6 million gain on debt extinguishment[265] Results of Operations This section provides a comparative analysis of the company's operational results for 2019 versus 2018, highlighting key revenue and expense drivers Comparison of Operations (2019 vs. 2018) | Metric (in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Natural Gas, Oil & NGL Sales | $1,137,648 | $1,478,523 | | Lease Operating Expenses | $82,998 | $91,640 | | DD&A | $550,108 | $486,664 | | Impairment of Oil & Gas Properties | $2,039,770 | $0 | | Net (Loss) Income | $(2,002,358) | $430,560 | - The 23% decrease in total revenues (before derivatives) was driven by lower market prices for natural gas (-21%), oil (-15%), and NGLs (-33%), along with decreased oil and NGL sales volumes[289][290] - Total lease operating expenses decreased by 9% to $83.0 million, primarily due to the divestiture of higher-cost Louisiana properties[293] - Depreciation, Depletion, and Amortization (DD&A) expense increased by 13% to $550.1 million due to a larger base of amortizable properties and a decrease in total proved reserves volume[297] Critical Accounting Policies and Estimates This section outlines the company's critical accounting policies and estimates, particularly concerning oil and natural gas properties, reserves, and income taxes - Oil and Natural Gas Properties: The company uses the full cost method of accounting, capitalizing all costs associated with acquisition, exploration, and development. A quarterly ceiling test is performed, which resulted in a $2.0 billion impairment in 2019 due to declining commodity prices[310][313] - Oil, Natural Gas and NGL Reserves: Estimates of reserves are critical as they impact depletion and impairment calculations. These estimates are subject to revision based on production data, prices, and costs[314] - Income Taxes: The company uses the asset and liability method. A valuation allowance of $647.6 million was established against net deferred tax assets as of Dec 31, 2019, as it is more likely than not that some portion will not be realized[315] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is commodity price volatility, managed through derivatives with a $73.3 million net asset fair value, and it faces interest rate risk from its $120.0 million outstanding revolving credit facility - The company's main market risk is commodity price volatility. It uses derivative instruments, primarily swaps and options, to manage this risk and increase revenue certainty[323][324] Open Derivative Positions (as of Dec 31, 2019) | Commodity | Type | Period | Daily Volume (MMBtu) | Weighted Avg. Price ($/MMBtu) | Fair Value (in thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | Natural Gas | Swaps | 2020 | 548,000 | $2.88 | $121,934 | | Natural Gas | Sold Calls | 2022-2023 | 628,000 | $2.90 | $(53,135) | | Oil | Swaps | 2020 | 6,000 Bbls | $59.82/Bbl | $2,952 | | NGL | Swaps | 2020 | 500 Bbls | $21.63/Bbl | $461 | - The company faces interest rate risk from its revolving credit facility. At Dec 31, 2019, $120.0 million was outstanding at a weighted average rate of 3.30%. A 1% increase in the average interest rate would increase annual interest expense by approximately $1.2 million[334] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2019, with Grant Thornton LLP issuing an unqualified opinion on financials but an adverse opinion on internal controls due to a material weakness - The independent auditor, Grant Thornton LLP, issued an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting as of December 31, 2019, due to a material weakness[340][582] - The material weakness identified relates to ineffective design and maintenance of controls over the completeness and accuracy of accounting for transfers of unevaluated capitalized costs into the amortization base[583] Consolidated Balance Sheets This section presents the company's consolidated balance sheets as of December 31, 2019, and 2018, detailing assets, liabilities, and stockholders' equity Balance Sheet Summary (as of Dec 31, 2019 vs 2018) | Account (in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Total current assets | $305,877 | $316,363 | | Property and equipment, net | $3,463,794 | $5,479,405 | | Total assets | $3,882,819 | $6,051,036 | | Total current liabilities | $451,198 | $539,432 | | Long-term debt, net | $1,978,020 | $2,086,765 | | Total liabilities | $2,568,227 | $2,723,268 | | Total stockholders' equity | $1,314,592 | $3,327,768 | Consolidated Statements of Operations This section presents the company's consolidated statements of operations for the year ended December 31, 2019, detailing revenues, expenses, and net income or loss Statement of Operations Summary (Year ended Dec 31, 2019) | Account (in thousands) | 2019 | | :--- | :--- | | Total Revenues | $1,346,008 | | Total Costs and expenses | $3,049,701 | | (Loss) Income from Operations | $(1,703,693) | | Net (Loss) Income | $(2,002,358) | | Net (Loss) Income Per Share - Diluted | $(12.49) | Consolidated Statements of Cash Flows This section presents the company's consolidated statements of cash flows for the years ended December 31, 2019, and 2018, detailing cash flows from operating, investing, and financing activities Cash Flow Summary (Year ended Dec 31, 2019 vs 2018) | Account (in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $723,993 | $786,271 | | Net cash used in investing activities | $(674,771) | $(676,874) | | Net cash used in financing activities | $(95,459) | $(156,657) | | Net decrease in cash | $(46,237) | $(47,260) | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no disagreements with its accountants regarding accounting principles, financial disclosure, or auditing scope - None[569] Controls and Procedures Due to a material weakness in internal controls over financial reporting, management concluded disclosure controls were ineffective as of December 31, 2019, and a remediation plan is underway - Management concluded that disclosure controls and procedures were not effective as of December 31, 2019, due to a material weakness in internal control over financial reporting[570] - The material weakness identified was the failure to effectively design and maintain controls over the completeness and accuracy of accounting for transfers of unevaluated capitalized costs into the amortization base[577] - A remediation plan is underway to address the weakness by redesigning controls, enhancing processes, and providing additional training[572] Other Information This item is not applicable - Not applicable[590] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2020 Proxy Statement - Information is incorporated by reference from the 2020 Proxy Statement[592] Executive Compensation Executive compensation information is incorporated by reference from the 2020 Proxy Statement - Information is incorporated by reference from the 2020 Proxy Statement[593] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the 2020 Proxy Statement - Information is incorporated by reference from the 2020 Proxy Statement[594] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2020 Proxy Statement - Information is incorporated by reference from the 2020 Proxy Statement[595] Principal Accounting Fees and Services Principal accounting fees and services information is incorporated by reference from the 2020 Proxy Statement - Information is incorporated by reference from the 2020 Proxy Statement[596] PART IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including corporate documents and certifications - This item lists all financial statements, schedules, and exhibits filed with the Form 10-K, including consents of experts and certifications[599][602] Form 10-K Summary The company has elected not to provide a summary of the Form 10-K - None[608]