Gulfport Energy(GPOR) - 2020 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (Unaudited) Presents unaudited consolidated financial statements for Q2 and H1 2020, highlighting a going concern warning, property impairments, and debt structure Consolidated Balance Sheets Total assets decreased to $2.58 billion as of June 30, 2020, driven by property impairments, causing stockholders' equity to fall to $231.3 million Consolidated Balance Sheet Summary (in thousands) | Account | June 30, 2020 (Unaudited) | December 31, 2019 | | :--- | :--- | :--- | | Total Current Assets | $151,901 | $305,877 | | Property and equipment, net | $2,370,366 | $3,463,794 | | Total Assets | $2,580,257 | $3,882,819 | | Total Current Liabilities | $328,120 | $451,198 | | Long-term debt, net | $1,910,318 | $1,978,020 | | Total Liabilities | $2,348,917 | $2,568,227 | | Total Stockholders' Equity | $231,340 | $1,314,592 | | Total Liabilities and Stockholders' Equity | $2,580,257 | $3,882,819 | Consolidated Statements of Operations Reports a Q2 2020 net loss of $561.1 million, driven by a $532.9 million impairment charge and a 63% decline in revenue Statement of Operations Highlights (in thousands, except per share data) | Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $132,410 | $458,994 | $379,287 | $779,572 | | Impairment of oil and natural gas properties | $532,880 | $0 | $1,086,225 | $0 | | (Loss) Income from Operations | ($555,750) | $218,456 | ($1,035,837) | $311,467 | | Net (Loss) Income | ($561,068) | $234,956 | ($1,078,606) | $297,198 | | Diluted EPS | ($3.51) | $1.47 | ($6.75) | $1.84 | Consolidated Statements of Cash Flows Net operating cash flow for H1 2020 decreased to $247.2 million due to lower commodity prices, with reduced capital expenditures lowering investing cash use Cash Flow Summary (in thousands) | Activity | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $247,222 | $399,769 | | Net cash used in investing activities | ($230,090) | ($510,225) | | Net cash (used in) provided by financing activities | ($20,375) | $78,936 | | Net decrease in cash | ($3,243) | ($31,520) | | Cash at end of period | $2,817 | $20,777 | Notes to Consolidated Financial Statements Provides critical context including a going concern warning, COVID-19 impacts, a $1.1 billion impairment charge, and details on debt and derivatives - Going Concern Warning: Management concluded there is substantial doubt about the Company's ability to continue as a going concern due to decreased commodity prices, reduced ability to access capital markets, and risk that its revolving credit facility may not be refinanced before it becomes a current liability at year-end 2020[28][30] - COVID-19 Impact: The pandemic has led to decreased demand for oil and gas, significantly impairing the Company's ability to access capital; in response, Gulfport shut-in some production, reduced salaries, and implemented furloughs to preserve liquidity[23][25][27] - Property Impairment: The Company recorded a significant impairment of its oil and natural gas properties of $532.9 million for Q2 2020 and $1.1 billion for the first six months of 2020, primarily due to reduced commodity prices[35] - Debt Repurchases: The Company repurchased $73.3 million in aggregate principal of its senior notes for $22.8 million during the first six months of 2020, recognizing a $49.6 million gain on debt extinguishment[59] - Subsequent Event - Credit Facility Amendment: On July 27, 2020, the Company amended its credit agreement to, among other things, permit the issuance of up to $750 million in second lien debt, subject to certain conditions[52][159] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Discusses severe challenges from the COVID-19 pandemic, including a going concern warning, production decreases, a quarterly net loss, and strained liquidity Overview and COVID-19 Impact Details significant headwinds from the COVID-19 pandemic, leading to a going concern warning and cost-saving actions to preserve liquidity - The company's ability to access capital markets and refinance existing debt has been significantly impaired by the COVID-19 pandemic and low commodity prices, leading to a substantial doubt about its ability to continue as a going concern[182][234] - In response to market conditions, the company shut-in a portion of its low-margin, liquids-weighted production in Q2 2020 and implemented tiered salary reductions and furloughs[178][181] - The company expects it will be unable to meet its minimum volume obligations under existing firm transportation contracts due to reduced production, which will result in significant fees[183][302] Production and Drilling Activity Q2 2020 net production decreased 24% YoY to 1,027.1 MMcfe/day due to reduced development and voluntary shut-ins Average Daily Production by Area (Q2 2020 vs Q2 2019) | Area | Q2 2020 (Mcfe/day) | Q2 2019 (Mcfe/day) | % Change | | :--- | :--- | :--- | :--- | | Utica Shale | 792,106 | 1,050,724 | (25)% | | SCOOP | 234,396 | 298,343 | (21)% | | Total | 1,027,065 | 1,358,989 | (24)% | - In the first half of 2020, Gulfport spud 12 gross (11.1 net) wells in the Utica Shale and 6 gross (5.2 net) wells in the SCOOP[189][191] Results of Operations Financial results deteriorated in H1 2020, with a Q2 net loss of $561.1 million driven by a large non-cash impairment charge Key Operational Metrics per Mcfe (Q2 2020 vs Q2 2019) | Metric ($/Mcfe) | Q2 2020 | Q2 2019 | | :--- | :--- | :--- | | Avg. sales price (w/o derivatives) | $1.13 | $2.33 | | Lease operating expenses | $0.17 | $0.18 | | Midstream gathering & processing | $0.64 | $0.58 | | DD&A | $0.69 | $1.01 | - A non-cash impairment charge of $532.9 million in Q2 2020 and $1.1 billion for the first six months of 2020 was the primary driver of the net loss, resulting from a significant decline in commodity prices[194][206][228] - The decrease in loss from equity method investments was primarily due to a $125.4 million impairment charge on the Mammoth Energy investment taken in Q2 2019, which was not repeated in 2020 as the investment value was written down to zero in Q1 2020[47][208] Liquidity and Capital Resources Liquidity is severely constrained with $2.8 million in cash, a working capital deficit, and substantial doubt about its going concern status - As of June 30, 2020, the company had $2.8 million in cash, a net working capital deficit of $176.2 million, and $252.9 million of borrowing capacity under its revolving credit facility[236] - The 2020 capital expenditure budget for drilling and completion is estimated at $265.0 million to $285.0 million, a reduction of more than 50% from 2019 levels[246] - Net cash from operating activities for the first six months of 2020 was $247.2 million, down from $399.8 million in the prior-year period, due to lower realized prices and production volumes[248] Item 3. Quantitative and Qualitative Disclosures About Market Risk Exposed to significant market risk from commodity prices and interest rates, mitigated through derivative instruments like swaps and collars Open Derivative Positions as of June 30, 2020 | Year | Type | Commodity | Daily Volume | Avg. Price/Spread | | :--- | :--- | :--- | :--- | :--- | | 2020 | Swaps | Natural Gas (NYMEX) | 357,000 MMBtu | $2.86 | | 2021 | Collars | Natural Gas (NYMEX) | 250,000 MMBtu | $2.46 / $2.81 | | 2022 | Sold Calls | Natural Gas (NYMEX) | 628,000 MMBtu | $2.90 | | 2023 | Sold Calls | Natural Gas (NYMEX) | 628,000 MMBtu | $2.90 | | 2020 | Swaps | Oil (WTI) | 3,000 Bbls | $35.49 | | 2020 | Swaps | NGL (C3) | 1,500 Bbls | $20.27 | - The company is exposed to interest rate risk on its revolving credit facility, which had $123.0 million in borrowings outstanding at a weighted average rate of 2.44% as of June 30, 2020[269] - In August 2020, the company entered into additional natural gas fixed price swaps for Q4 2020, covering 100,000 MMBtu/day at an average price of $2.38 per MMBtu[162][266] Item 4. Controls and Procedures Disclosure controls and procedures were deemed not effective as of June 30, 2020, due to a previously disclosed material weakness - The CEO and CFO concluded that disclosure controls and procedures were not effective as of June 30, 2020[271] - The ineffectiveness is due to a material weakness identified in Q4 2019 concerning the accounting for unevaluated oil and gas property costs[271][272] - Management is actively implementing a remediation plan to address the material weakness[272] PART II OTHER INFORMATION Item 1. Legal Proceedings Involved in multiple legal proceedings, including environmental lawsuits, shareholder actions, a contract dispute, and an SEC investigation - Gulfport is a defendant in lawsuits filed by the State of Louisiana concerning alleged environmental damage to the coastal zone[83][277] - The company is involved in a contract dispute with Stingray Pressure Pumping (a subsidiary of Mammoth Energy), with Stingray seeking approximately $28 million in damages as of June 2020[89][284] - The SEC has an ongoing investigation into actions by former company management, including alleged improper use of company assets[92][287] Item 1A. Risk Factors Highlights severe financial stability threats, including credit facility refinancing risk, COVID-19 impacts, and penalties from unmet contract obligations - There is a substantial risk that the company will be unable to refinance its revolving credit facility, which matures in December 2021, on reasonable terms, contributing to the 'going concern' uncertainty[296] - The COVID-19 outbreak poses numerous risks, including reduced revenue from lower demand, operational disruptions, and difficulty accessing capital markets[297] - The company expects to be unable to meet its delivery obligations under firm transportation contracts due to reduced production, which will result in significant fees and may materially harm operations[302] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Repurchased 27,294 shares in Q2 2020 to satisfy tax withholding on vested employee stock units, while the formal buyback program remains suspended Issuer Repurchases of Equity Securities (Q2 2020) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2020 | 18,338 | $0.72 | | May 2020 | 0 | $0.00 | | June 2020 | 8,956 | $1.69 | | Total | 27,294 | $1.04 | - The shares were repurchased to satisfy tax withholding requirements upon the vesting of restricted stock unit awards[305] - The company's formal stock repurchase program was suspended in Q4 2019, and a May 2020 credit facility amendment prohibits further repurchases under it[306] Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported during the period - Not applicable; no defaults were reported[307] Item 4. Mine Safety Disclosures This section is not applicable to the company's operations - Not applicable[308] Item 5. Other Information The Board authorized a redesigned incentive compensation program for its workforce in response to unprecedented industry disruption - On August 4, 2020, the Board authorized a redesigned incentive compensation program to retain and motivate employees amid industry disruption[310] - Executives participating must forfeit previous 2020 incentive awards; the new compensation is subject to repayment clauses based on continued employment and the achievement of new performance metrics[310] Item 6. Exhibits Lists all exhibits filed with the Form 10-Q, including credit agreement amendments and executive certifications - Lists key documents filed with the report, including the Fifteenth and Sixteenth Amendments to the Credit Agreement[313][316] - Includes certifications from the CEO and CFO pursuant to Rule 13a-14(a) and Section 1350 of the U.S. Code[316]