GPOR - Gulfport Energy Now Appears To Be Fairly Valued

2023-09-14 06:10:13 ET

Summary

• Gulfport Energy is now projected to generate $144 million in 2H 2023 free cash flow.
• It only benefits modestly from increased oil prices since oil is a small part of its total production and is also mostly hedged for 2H 2023.
• Natural gas prices have not moved significantly compared to when I looked at Gulfport in early August.
• At $120 per share, I believe Gulfport is fairly valued for a long-term $80 WTI oil and $3.75 NYMEX gas environment.

I have moved to a neutral outlook on Gulfport Energy ( GPOR ) stock now that its stock has reached $120 per share. I had previously been bullish on Gulfport for quite some time and had noted that its results were pretty strong . However since Gulfport's share price has gone up 15% since I last looked at it in early August, it doesn't look like it is undervalued any more.

Gulfport's production is 90% natural gas, and the natural gas strip hasn't moved much since early August. Gulfport's projected 2H 2023 free cash flow has increased slightly to $144 million as it does benefit a bit from the upward movement in oil prices.

At $120 per share it looks roughly fairly priced for a long-term $80 WTI oil and $3.75 NYMEX gas scenario, which is also close to what 2024 and 2025 strip prices are at currently.

Updated 2H 2023 Outlook

Oil prices have increased to the mid-$80s (for WTI oil) for 2H 2023 strip. However, oil only accounts for approximately 2% of Gulfport's production and it has 2H 2023 swaps covering an estimated 73% of that oil production. Thus the increase in oil prices only has a minor impact on Gulfport's projected 2H 2023 free cash flow. A $10 increase in 2H 2023 oil prices would increase Gulfport's 2H 2023 free cash flow by around $2 million after hedges.

If Gulfport's realized price for NGLs improves in conjunction with oil prices (as a fixed percentage of WTI), then a $10 increase in 2H 2023 oil prices may boost its 2H 2023 free cash flow by another $6 million net of hedges.

Around 90% of Gulfport's production is natural gas, and the natural gas strip for 2H 2023 is now back very close to what it was in early August.

At current 2H 2023 strip, Gulfport is expected to end up with $579 million in revenues before hedges, while its hedges for that period have an estimated $62 million in positive value.

Gulfport is now projected to end up with $144 million in free cash flow during the second half of the year. This is a $9 million increase from my previous estimates.

Notes On Hedges

Gulfport's oil hedges are reduced in 2024, with around 24% of its oil production hedged with collars that have a ceiling of $80. Thus it does have more exposure to oil price upside in 2024, although oil production is only a small percentage of Gulfport's total production.

Gulfport has a larger amount of natural gas hedges, but these hedges currently have a decent amount of positive value (approximately $65 million for 2024) at current strip prices for 2024.

Gulfport's 2025 hedges have around $6 million in positive value at current strip due to the 2025 natural gas strip averaging close to $4 now.

Notes On Valuation

At long-term (after 2023) $75 WTI oil and $3.75 NYMEX gas, I estimate Gulfport's value at $114 to $115 per share. I am currently maintaining my long-term commodity prices at that level.

However if one took a modestly more favorable view on oil prices and used $80 WTI oil and $3.75 NYMEX gas as long-term commodity prices instead, that would boost Gulfport's estimated value to approximately $119 per share.

For comparison, the current strip for 2024 and 2025 is approximately $79 WTI oil and $3.70 NYMEX gas.

Stronger oil prices will tend to have a slightly negative effect on natural gas prices due to increased oil development leading to more associated gas production (particularly in the Permian). The associated gas production in the Permian is constrained by takeaway capacity, but more takeaway capacity continues to be added there.

Conclusion

Gulfport is now projected to generate $144 million in 2H 2023 free cash flow. Natural gas prices have remained mostly unchanged since I last looked at Gulfport, while oil prices have gone up by close to 10%. Gulfport's hedges and relatively small amount of oil production means that it isn't seeing a large benefit from stronger oil prices though.

I am now neutral on Gulfport at its current price as it now appears roughly fairly priced for a long-term $80 WTI oil and $3.75 NYMEX gas environment.

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