2023-11-20 03:13:49 ET
Summary
- Gulfport Energy competes with other Anadarko/Oklahoma and Utica producers as well as Marcellus companies.
- Appalachian natural gas faces disadvantages in competing with other prolific basins in the US.
- GPOR has a low beta, strong governance ranking, and interesting Utica play optionality.
Gulfport Energy ( GPOR ) is a rare non-Permian US natural gas producer. It faces sector challenges like low demand/high supply, basin-specific challenges in the Anadarko (Oklahoma) and Appalachia, and recovery challenges after going into bankruptcy in November 2020 and emerging from bankruptcy in May 2021. Gulfport still does not pay a dividend at a time when regular dividends and return of capital are de rigueur for many energy companies.
The company operates on 73,000 acres in Oklahoma (SCOOP formation) and 188,000 net acres in eastern Ohio (Utica formation). Most of its 1.06 BCFe/day (billion cubic feet equivalent per day) production and reserves are natural gas.
Investors should also be aware of considering any gas producer's stock at the onset of winter when psychological, weather, and storage issues can push gas prices seasonally higher.
I do not recommend Gulfport Energy to dividend hunters. Gulfport does not pay dividends, although it does have a share repurchase program.
Based on potential liquids upside from its Utica operations and slightly closer proximity to Midcontinent markets for both heating and electricity compared to Marcellus gas in Pennsylvania, counterbalanced with a tough gas market for the next several months and likely lower year-end 2023 PV-10 gas reserve values, I recommend the company as a hold for long-term energy investors looking for capital appreciation.
The Utica Play and EOG Resources' Example
Discussion of Gulfport's Utica prospects - the area with most of its acreage, production, and reserves - are incomplete without considering how competitor EOG Resources ( EOG ) has already delineated the region. A page from EOG's 3Q23 investor presentation, reproduced below, shows a Utica map with areas from right to left (pink to dark green) of dry gas, wet gas, volatile (low-density) oil, and black oil, similar to the striations in the south Texas Eagle Ford play. EOG's Utica-type curve for Timberwolf, shown on the right-hand side of the illustration, has a 90-day mix that is 55% oil, 25% natural gas liquids, and 20% gas. Since oil and even NGLs are much more valuable on a barrel-equivalent basis than natural gas, it is easy to understand the excitement around the Utica play.
EOG 3Q23 Investor Presentation
Nonetheless, Gulfport's production, including Oklahoma, is 90% natural gas. While the company mentions liquids optionality for the Utica in its 3Q23 investor presentation, it is not emphasizing the uplift in the same way EOG is, or even as Range Resources ( RRC ) does for the Marcellus.
Gulfport Energy Third Quarter 2023 Results
In the third quarter of 2023 , Gulfport Energy's net income was $608 million, including a gain on derivatives of $39 million. From the $608 million total, $90 million of preferred stock payouts were made, with thus $518 million attributable to common shares ($27.37/diluted share) and $160 million of adjusted EBITDA.
Investors should note 3Q23 net income contains a $555 million deferred tax benefit: income before taxes was $53 million for the quarter.
For the quarter, net cash from operations was $156 million, and adjusted free cash flow was $49 million.
Gulfport produced 1.06 BCF-equivalent (BCFe)/day, divided as 77% (812 MMCFe/day) from the Utica and 23% from the South Central Oklahoma Oil Province (SCOOP)/Anadarko. Production comprised 90% natural gas, with the rest mainly natural gas liquids.
Per-unit operating costs were $1.12/MCFe, while capital expenditures were $109.2 million, including $19.4 million for acreage acquisitions.
Macro and US Gas Production, Demand, and Prices
For natural gas, three overarching policy themes are the methane emissions fines (described below in governance), the Biden administration's hostility to US-produced hydrocarbons including most recently President Biden's agreement with Chinese President Xi to further decelerate US fossil fuels, and the growth, starting in late 2024, of even more US LNG export from the current 14 BCF/D now. With gas supply already at all-time highs north of 100 BCF/D, the importance of US LNG export demand is clear.
The November 17, 2023, natural gas futures price for December 2023 delivery was $2.96/MMBTU at Henry Hub, Louisiana.
Total US dry natural gas production for the week ending November 15, 2023, was 105.3 BCF/D, a new record high.
Appalachian gas volumes (the green-colored Marcellus and the rust-colored Utica) are estimated to be 35.8 BCF/day in December 2023, or more than a third of current US gas production.
Note growth in Permian shale gas volumes (yellow), much of it associated, to an estimated 24.9 BCF/day.
For the week ending November 15, 2023, US natural gas demand totaled 111.3 BCF/D, with the difference from supply made up by tapping storage. Demand varies considerably throughout the year depending on weather - for heating in the winter and for air conditioning load (electricity) in the summer.
EIA & Starks Energy Economics, LLC
Despite the North American Electric Reliability Council (NERC) forecast of greater electricity outage risks (page 5 of the Winter Reliability Assessment) , despite gas being the largest primary fuel input to electricity generation, despite the winter price spike, despite the use of gas in industrial and petrochemical production, and despite current high and future higher levels of LNG export demand, the EIA projects Henry Hub gas prices merely averaging between $3/MMBTU and $4/MMBTU through the end of 2024 in its 5-95 confidence interval, shown below.
Reasons include the quick drill times in the Marcellus for natural gas, the zero-marginal cost associated with gas from the Permian, and the ongoing regulatory and policy limits on natural gas consumption and pipeline transportation on the US East Coast.
As the EIA's spot price chart for New York and the mid-Atlantic frequently illustrates, East Coast (but less so the Midwest) prices are typically below those for Henry Hub. For example, a recent chart shows a Louisiana gas price of $2.91/MCF, a mid-Atlantic gas price of $2.09/MCF, but a Midwest price of $2.56/MCF. Thus, a more valuable option for Gulfport may be to sell its Utica gas in Midwestern markets, west of Ohio, rather than those to the east.
EIA
Reserves
Gulfport Energy's year-end 2022 total proved reserves were 4.05 trillion cubic feet equivalent (TCFe), of which 89% was natural gas , 8% was natural gas liquids and 3% was oil.
Approximately three-fourths of reserves are in the Utica (Ohio) and one-fourth are in the SCOOP or Anadarko.
Proved developed producing reserves , a smaller slice of the total, were 2.27 TCFe, with about the same mix although slightly more natural gas liquids (9%) and less oil (2%).
The present worth of future net revenues discounted at 10% of the proved reserves was $9.5 billion; the same calculation for proved developed producing reserves only results in a reserve value of $5.7 billion.
It is important to notice that since most of Gulfport Energy's reserves are natural gas and natural gas was valued at an unusually high $6.21/MCF last year but only about half that this year, Gulfport's reserve value at year-end 2023 is likely to be much lower .
Competitors
Despite its name, Gulfport Energy is headquartered in central, landlocked Oklahoma City, Oklahoma.
It competes with other Anadarko/Oklahoma producers including Crescent Energy ( CRGY ), Marathon Oil ( MRO ), and Ovintiv ( OVV ).
In the Utica, it competes with EOG, as mentioned, along with Southwestern Energy ( SWN ), and National Fuel Gas ( NFG ).
Adjacent and in some places overlaying the Utica formation is even more developed competition from Marcellus companies like Range Resources, Chesapeake ( CHK ), and EQT ( EQT ).
In all these basins, Gulfport also competes with private companies.
Appalachian natural gas is at a disadvantage due to pipeline constraints and regulatory/policy intransigence to building more when compared to natural gas in Louisiana, Texas, and Oklahoma for meeting Gulf Coast and industrial, power, Mexican export, and LNG export demand.
So, looking through a wider lens, Utica/Appalachian and Anadarko gas competes with natural gas from prolific basins throughout the US and is disadvantaged for Gulf Coast markets to the Haynesville in Louisiana.
Like gas in every US basin, Anadarko and Appalachian natural gas is disadvantaged in competing with Permian associated gas.
As the large US Permian basin matures, more of its production will be gas and associated gas - rather than oil. But the associated gas, produced with oil, has already put downward pressure on prices: at times the price is even negative. More recently, on November 15, 2023, when Henry Hub was $2.87/MMBTU, Waha (west Texas Permian) natural gas was priced at less than half at $1.39/MMBTU.
Governance
On November 1, 2023, Institutional Shareholder Services ranked Gulfport Energy's overall governance as a very good 2, with sub-scores of audit (2), board (6), shareholder rights (1), and compensation (4). On the ISS scale, 1 represents lower governance risk and 10 represents higher governance risk.
Insiders own a very small 0.45% of the stock. On October 31, 2023, shorted stock as a percentage of float was 8.0%.
Gulfport's beta is a low 0.56. This is unexpectedly low - less than average market volatility - particularly for an independent gas producer and reflects, in large part, its hedging program.
On September 29, 2023, the six largest institutional stockholders, some of which represent index fund investments that match the overall market, were Silver Point Capital, LP (34.2%), Mackay Shields (7.7%), Wellington Management (5.5%), JP Morgan Chase (4.3%), BlackRock (4.2%), and Vanguard (3.4%).
Silver Point Capital is a hedge fund focused on credit and special situations while Mackay Shields is a fixed-income hedge fund manager, part of New York Life.
Wellington, JP Morgan Chase, and BlackRock are signatories to the Net Zero Asset Managers initiative, a group that as of September 30, 2023, manages $64 trillion in assets worldwide and which limits hydrocarbon investment via its commitment to achieve net zero alignment by 2050 or sooner.
Investors should be aware of new methane emissions fines - though unhelpfully without accompanying final detailed, field-tested regulatory guidelines - are due to start January 1, 2024.
Financial and Stock Highlights
With Gulfport's November 17, 2023, closing stock price of $129.09/share, market capitalization is $2.4 billion.
Given a 52-week price range of $60.15-$134.84/share, the closing price is 96% of the 52-week high and 85% of the one-year target price of $152.67/share.
Trailing twelve months' ((TTM)) returns on assets and equity are exceptional at 32.4% and 181%, respectively.
Trailing twelve months' EPS is an unusually high $87.98 for a tiny current price/earnings ratio of 1.5. Projected 2023 and 2024 EPS are $16.02 and $26.72, respectively, for a forward price/earnings ratio range of 4.8-8.1.
With only 18.63 million shares outstanding, trading is relatively thin at an average volume of 165,000 shares/day.
TTM operating cash flow was $756 million and levered free cash flow was -$116 million.
On September 30, 2023, the company had $1.11 billion in liabilities and $3.14 billion in assets making the company's liability-to-asset ratio 35%.
Of the liabilities, current liabilities are $374 million. Derivative liabilities are $105 million, split about equally between short-term and long-term and less than a quarter of what they were on December 31, 2022. Long-term debt is $644 million.
Balance sheet equity of $1.98 billion is mostly divided into mezzanine equity of $45 million, stockholder equity of $379 million, and retained earnings of $1.6 billion.
Analysts' average estimates for 2023 and 2024 EPS are $16.02 and $26.72, respectively, giving a forward P/E range of 8.1-4.8.
A plot of the company's stock price relative to the Henry Hub gas price shows it has diverged upward since early 2023, similar to Southwestern Energy.
Gulfport Energy does not pay a dividend. However, it has a share repurchase program in place and expects to continue to opportunistically buy back shares. It recently expanded repurchase authorization by 63% to $650 million.
The company's mean analyst rating is a 2.1, or "buy," from 27 analysts. At least one analyst considers the company significantly undervalued.
Notes on Valuation
The company's book value per share of $105.88, less than its market price, suggests somewhat positive investor sentiment.
The ratio of debt to EBITDA is a healthy 0.37.
With an enterprise value (EV) of $3.1 billion, Gulfport's EV/EBITDA ratio is a very affordable 1.7, far less than the preferred maximum of 10 or less and so well into bargain territory.
So overall, Gulfport Energy has:
*market capitalization of $2.4 billion,
*enterprise value of $3.1 billion,
*a balance sheet asset value of $3.1 billion,
*reserves with a PV-10 value of $9.5 billion at year-end 2022 (likely to be lower at year-end 2023) .
Positive and Negative Risks
Investors should consider their natural gas price and demand expectations in Appalachia (with its limited takeaway capacity) and the Anadarko/Oklahoma as the factors most likely to affect Gulfport Energy.
Drilling costs have come down, a positive. Interest rates appear likely to stay at current levels, which affects both debt and equity costs.
Other risks are political and regulatory - particularly with the Biden administration, some bankers, and several states on the East Coast - taking a race-to-zero-hydrocarbons posture.
However, since hydrocarbons have been providing profitable returns, some formerly "never-again" and ESG-only investors have returned to traditional energy stocks.
Recommendations for Gulfport Energy
Due to the absence of a dividend, I do not recommend Gulfport to dividend-hunters. It does, however, have a share repurchase program.
The company gets very good governance ratings. It has outsized trailing metrics, due in part to a big, deferred tax benefit that kicked in during 3Q23.
Investors should be aware that with relatively few shares outstanding and Silver Point Capital and Mackay Shields holding a combined 41.7% equity stake, liquidity is tighter than it could be. Moreover, the company pays higher-tier (preferred) dividends but not common share dividends.
Despite full-enough storage, there is typically a winter premium on natural gas and natural gas companies; potential investors should adjust their timing accordingly.
Finally, Gulfport Energy and all companies with natural gas reserves, saw out-sized PV-10 values at year-end 2022. With the lower (normalized) natural gas prices in 2023, expect gas reserve values to be lower.
The winning optionality for Gulfport Energy is its growing production from east Ohio's Utica play. The Utica play coincides in places with the Marcellus play (same acres/different zones); moreover, some parts of the play contain more valuable liquids. Then, too, the Utica play is slightly closer than Pennsylvania's Marcellus to gas markets in the Midwest that are hungrier than those on the East Coast and Northeast:: both Midwestern gas-heat utilities and gas back-up/gas generation for the PJM and MISO electric grid areas.
I recommend Gulfport Energy as a hold.
For further details see:
Gulfport Energy's New Utica Play Has Familiar Oversupply Problem