Description
Investment Thesis – Undervalued relative to peers despite strong performance, with production growing at 14% CAGR through 2020 and cash flow yield of ~5% (after capex), and potential to become catalyst driven
Upside – GPOR offers a utility type asset with infrastructure returns and long reserve life. Meanwhile shares trade at a discount to peers and historical levels despite 14% production CAGR, while spending within CF @strip. GPOR currently trading at ~4.2x ’18 EBITDAX vs. ~6.7x for peers and its own 5yr historical average EV/EBITDAX multiple of 7.7x. Further, the recently announced JV sale will provide more firepower for repurchases, which are incremental to the 5% of shares OS that GPOR already bought back earlier this year.
Production efficiency is another key to the story. GPOR’s Mgmt team was highly regarded prior to the SCOOP acquisition, and they are demonstrating their reputation with recent drilling results. Initially the SCOOP acquisition was a negative, as it was overpriced, however this is already priced in, as it led to shares dropping from ~$30 to $10-11. Recent well production growth has been impressive. GPOR’s Utica wells are now close to 5x more productive than 6-7 years ago, while Cash costs have fallen 40% over the last 3yrs. SCOOP laterals are up 26% YoY (and should continue to increase) and GPOR’s total production is expected to be up ~20% in 2018 thanks to SCOOP productivity. Meanwhile SCOOP also provides GPOR with some diversification benefits as has it has a higher concentration of liquids and also reduces their exposure to Appalachia pricing.
Downside – High oil prices can weigh on gassy E&Ps indirectly, as it can lead to increased servicer costs as well as lower realized prices due to increased associated gas production. SCOOP oversupply could be an issue in the next few years as the basin is expected to grow production ~40% from 2017 to 2020, and only one pipeline (Midship) is expected to alleviate some of this.
Company Overview– Gulfport is a gassy focused E&P with principal properties located in the Utica Shale (primarily in Eastern Ohio) and the SCOOP (Woodford and SCOOP Springer plays in Oklahoma). GPOR also has a relatively small amount of acreage in Southern Louisiana, along with some small minority interests in a variety of other formations. The other notable assets are GPOR’s stake in TUSK and its JV stake in the recently sold midstream asset (StrikeForce).
Reserves & Production – GPOR has ~215k net acres in Utica, with proved reserves of 3.9 Net Tcfe and another ~92.5k net acres in SCOOP with proved reserves of 1.5 Net Tcfe. Liquids are ~10% of these reserves. GPOR also has ~11k net acres in Southern Louisiana that contribute ~1% of total net production (99% of which is oil).
Total proved reserves at YE’17 of 5.4 Tcfe or ~900m BOE (equating to 4.9 BOE/sh), with 35% of proved developed, representing PV-10 value of $2.88b. At 2018 production levels of 80m BOE, this equates to a reserve life of over 11yrs. Given expectations of production of 87mmboe in ’19 and 97mmboe in ’20, and assuming production grows ~10% annually, GPOR’s proved reserves should last until 2025. GPOR’s unproven reserves are estimated by analysts to be at least as much as the proved reserves, and potentially double to triple this size. Gulfport’s Consensus NAV is $16 (per CapIQ)
Currently the Utica Shale assets account for 80% of total production, while SCOOP production is ~20%. GPOR plans to spend of bulk of its capex on Utica in 2018, but will begin to shift more spending toward SCOOP in the future as the production mix (more oil and liquids) and rate of return there make it more competitive.
The company’s infrastructure feeds 30% of production in-basin Utica, ~27% to the Midwest, ~27% to Gulf Coast, ~10% to the Mid-Con and ~5% to Canada.
Situation –
- GPOR trades below both its peer average and its own historical levels
- GPOR trades at 4.2x ’18 EBITDAX while its’ Gassy peers average 6.7x
- Prior to the Vitruvian SCOOP acquisition, GPOR traded at ~8-10x EV/EBITDA on a NTM basis and 6-8x its 2yr Fwd EV/EBITDA
- GPOR’s 5yr historical average NTM EV/EBITDA is 7.7x, while its historical average 2yr Fwd EV/EBITDA multiple is 5.7x over the past 5yrs
- Meanwhile short interest is ~10% of GPOR’s float
- GPOR acquired the SCOOP assets from Vitruvian for $1.85b (73% cash & 27% stock) in a deal announced Dec 2016 and completed Feb 2017. Meanwhile the rest of the gassy E&P sector saw re-rating during 2017, GPOR was hit especially hard due to the increased debt and dilution associated with the SCOOP acquisition.
- Gulfport’s market cap fell by over $2b since the SCOOP acquisition was announced, from ~$3.7b in Dec 2016 to as low as $1.5b earlier this year before rebounding to ~$1.8b currently.
- SCOOP provides some diversification, helping to increase GPOR’s exposure to non-Appalachian pricing, however the basin was not as visible on most investors’ minds.
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In terms of efficiency, GPOR’s Utica wells are close to 5x more productive than 6-7yrs ago as Utica lateral lengths are expected to hit ~8,000 feet in 2018, with new wells expected to average closer to 11.2k feet. SCOOP lateral lengths for TILs is to increase from 6,800 ft in 2017 to 8,600 ft in 2018, while new wells drilled will have an average lateral length of 8,900 feet, and should mean even longer laterals for TILs in 2019.
- Mgmt cited outperformance of SCOOP wells in the company's decision to raise FY18 production guidance by ~4%.
- Per-unit cash costs declined from $2.93/mcfe in 2014 to $1.77/mcfe in 2017
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Net debt of $2.12b represents net leverage of 2.3x ’18 cons EBITDA ($924m) and ~1.7x net of asset sales and shares in TUSK
- Mgmt will likely continue to return capital via share repurchases as they have already demonstrated a willingness to do so
- Gulfport already repurchased $100m of its stock during Q1’18 (reducing share count by ~5%) and expanded the program for up to an additional $100m during 2018.
- Mgmt explicitly commented that they intend to opportunistically repurchase shares and will utilize available liquidity along with FCF and proceeds from divestments
- GPOR is ~80% hedged for 2018 ($3.05/Mmbtu) and ~60% hedge for 2019 ($2.84/Mmbtu)
Catalysts
- Buybacks – GPOR can repurchase +5% of shares O/S per year at current levels
- Activist invovlement
- Sale of Company
Supply – Demand of Nat Gas Market – Investors are concerned that supply growth out of Haynesville and Appalachia along with associated gas from the Permian will outpace demand growth. Despite these concerns, overall US gas inventories currently remain well below both their year ago levels and their 5-year averages. According to Jefferies’ analyst, if Nat Gas production continues at its current increased rate of +7.2bcf/d higher than last year, the current supply and demand situation still points to inventories being ~10% lower level than last year at the end of this year’s refill season (late October) thanks to higher usage from domestic electric generation and LNG plants.
- Natural gas production continues to climb, with May production averaging nearly 80 Bcf/d for the first time on record, up ~1.6 Bcf/d YTD and up ~7.2 Bcf/d YoY.
- Production growth has been driven by the Haynesville (which is up over 1 Bcf/d and at its highest level since early 2013), The Permian (+0.6 Bcf/d YTD) and Appalachia (+0.3 Bcf/d YTD), partly offset by aggregate declines of ~0.4 Bcf/d in the rest of the US.
- Demand from greater electricity and LNG are offsetting some of this production growth.
- Gas power burn has averaged 24.1 Bcf/d in 2018, up ~2.4 Bcf/d YoY, and LNG demand was estimated at 3.2 Bcf/d in May, down from 3.5 Bcf/d in April but expected to accelerate to ~4.5 Bcf/d as Cove Point ramps (having exported its first cargo earlier in May) which is well above the 2-3 Bcf/d LNG demand level seen last year.
- Gas inventories now -31.4% their year ago levels and -22.5% below their 5yr average.
- East Coast inventories levels are closer to normal (-21% below their year ago levels and -24% below their 5yr average), while South Central and Midwest inventories are both -32% their year ago levels.
- Recall last year’s refill season ended with inventories ~4-5% below their prior year’s (2016) level
- Longer term exports through LNG, and large increases in chemical plants designed to rely on US ethylene gas supply will grow demand for Natural gas
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst