Seeking Alpha
What is your profession? ×
Long/short equity, value, REITs, macro
Profile| Send Message|
( followers)

Gulfport Energy Corp. (NASDAQ:GPOR) is an oil and gas E & P company with significant lease holdings in the continental U.S., Canada (Alberta oil sands), and Asia (Thailand). GPOR's stock has been going straight up since it bottomed at $15.91 on June 25, 2012. The stock closed at $41.39 on February 1, 2013. That's a 160% gain in about 7.5 months.

The trip upward has been largely spurred by GPOR's fantastic development results in the Utica Shale field. Its first nine wells in the Utica averaged a peak rate of 787 barrels of condensate per day, 10.85 MMcf of natural gas per day and 1,253 barrels of NGLs per day, or 3,849 Boepd per well assuming full ethane recovery. Usually anything over 1,000 Boepd is thought to be a great result. It is easy to see why investors are gaga over GPOR's results. With its latest acquisitions GPOR has 106,000 net acres in this prolific field.

These results are unquestionably the reason GPOR has allocated approximately $349 million (83%) of its approximately $420 million FY2013 CAPEX program to Utica development. Based strongly on Utica development, GPOR expects to grow production from approximately 7,036 Boepd at 2012E to approximately 21,233 Boepd by 2013E.

With a good part of growth based on the Utica development (83% of CAPEX for FY2013), a serious problem presents itself for GPOR. The company keeps citing its FY2011 production mix of approximately 94% crude oil and liquids. Actually for Q4 2011 that figure was 95% oil and liquids. Of that, 93% was oil, and 2% was NGLs. However, if you look at the averages above for the nine Utica wells, there was little oil produced. On average the percentages were approximately 20.4% condensates, 32.6% NGLs and 47% natural gas. In other words GPOR production from the Utica will be approximately 33% non-oil liquids and 47% natural gas going by the initial results. The 90%-95% oil production figure that GPOR keeps misleadingly emphasizing will drop considerably by 2013E. That percentage may continue to decline in 2014 with even more Utica development, which has been only approximately 20.4% condensates so far.

Even though there is no arguing that the Utica results are fantastic, you have to realize that the company will not be producing mostly oil. Instead much of production will be natural gas, which is at historic lows. This closed at $3.301 per MMBtu or approximately $19.15 per Boe on February 1, 2013. Another good part of production will be NGLs, for which Chesapeake Energy realized only $31.22 per barrel in Q3 2012 (without hedging). Plus I will posit a WTI price for GPOR's Utica condensates. WTI closed at $97.77 per barrel on the Nymex on Friday February 1, 2013. 0.204 * $97.77 per barrel (condensates -- oil) + 0.326 * $31.22 per barrel (NGLs) + 0.47 * $19.15 per Boe for natural gas equals $39.1233 per Boe for GPOR's Utica production. Please note that some companies have cited NGLs prices for 2012 of approximately $45 per barrel. However, some of these companies are blending U.S. prices with much higher foreign prices. Other companies with production only in the U.S. had hedges for their NGLs. These allowed them to realize much higher NGLs prices. I have not seen any hedges for NGLs mentioned yet by GPOR. Therefore I am tentatively giving GPOR's NGLs production CHK's pricing for Q3 2012 as a ballpark figure. It is only a ballpark figure!

If you use CHK's figure for NGLs prices, the resultant Boe price of $39.12 for GPOR's Utica production will be very low. Even if you increase the NGLs figure to $45/barrel, that will only increase the blended Boe price by about $4.5/barrel (or to about $44.60/barrel). GPOR's projected Cash Operating Costs for FY2013 are:

  • Lease Operating Expense -- $/Boe $5.00 - $6.00
  • Production Taxes -- % of Revenue 8.0% - 9.0%
  • General Administrative -- $/Boe $1.50-$2.50
  • Depreciation Depletion & Amortization -- $/Boe $33.00-$35.00

Leaving out the taxes for now, the total comes to $41.50/Boe (before taxes). Unfortunately the calculations for GPOR's Utica production revenue only runs from $39.12/Boe to a likely best of approximately $44.60/Boe. If NGLs prices fall further in FY2013 (as many are predicting), the actual result could be worse than the low figure for a Utica Boe. All this means that the great Utica results may pay off in the future, when the U.S. sees higher natural gas and NGLs prices. However, the Utica is more of a "break even" prospect on an operating basis at current prices. This means that it is an effective money sink for development money in the near term for GPOR.

I should mention that many experts expect natural gas prices to rise in the next five years. NGLs prices would likely follow natural gas prices upward. Such a scenario would make GPOR's Utica development much more profitable. This lack of Utica profitability is a good reason GPOR's PE is expected to rise from its current 27.52 to 31.36 for FY2013 (bad). Yes, GPOR has huge expansion plans that involve both the Utica and the Canadian oil sands plays; but it may be a long time before those plans come close to full realization.

How does GPOR compare with Chesapeake Energy (NYSE:CHK)? CHK is a much bigger company at a market cap of $13.10B and an enterprise value of $30.38B compared with GPOR's $2.31B and $2.44B respectively. CHK has a price/book ratio of 1.06 versus GPOR's 3.38. CHK has about 15 million net acres of development leaseholds in the U.S. versus GPOR's approximately 1 to 1.5 million in the U.S. and Canada. Plus much of GPOR's acreage is oil sands in Canada, which many environmentalists are clamoring about (much more so than about fracking, etc.). CHK has about 1.3 million net acres in the Utica versus GPOR's 106,000 net acres. Its remaining drilling carry from Total (a buyer of some of CHK's prior larger Utica acreage) was about $1.25B in Q3 2012. This is money that Total will be paying for CHK Utica development going forward.

CHK's Utica results have generally been much less than GPOR's with a roughly similar distribution of oil, NGLs, and natural gas. However, CHK paid much less per acre for its Utica acreage than GPOR. CHK also has 490,000 net acres in the Eagle Ford with 68% oil, 14% NGLs, and 18% natural gas. It has about 2 million net acres in the Mississippi Lime with 41% oil, 10% NGLs, and 49% natural gas (Q3 2012 distribution). I could go on with the Cleveland, Tonkawa, Niobrara, etc. The point is that many if not all of CHK's other "oil" plays produce a substantially higher percentage of oil than GPOR's Utica play.

Oil is much more profitable currently (and likely in the future). CHK's "oil plays" are what it has been putting emphasis on developing. CHK is just a much better bargain overall, especially if natural gas prices do increase in the next few years. CHK is the #2 largest natural gas producer in the U.S. Even without that, CHK is growing its oil production much faster than GPOR on an absolute basis. CHK has an end of 2013 PE of 16.94 compared with GPOR's of 31.36. CHK's PE is estimated to fall dramatically in 2013, while GPOR's is estimated to rise. Plus CHK has actual substance. It has over 700,000 Boepd of production, although a lot of this is natural gas. GPOR is still mostly "plans," which any investor knows can fall apart.

In sum GPOR's stock price has risen dramatically mostly due to the public adulation of its great Utica results. On a short-term basis, at least, these results are not as profitable for the company as the public has been led to believe. Further GPOR has continued to propagate the "myth-like" idea that its production will continue to be roughly 90% oil (see the figures far above a dose of reality). GPOR's near-term future production will not be close to this percentage by the end of 2013 with the current CAPEX plan, although GPOR's 800,000 net oil sands acres may eventually push GPOR's production back toward that percentage. I look askance at companies that intentionally mislead investors.

Further GPOR's average Utica figures seem likely to move lower over time, as most companies drill their best opportunities first. This is yet another way in which GPOR has "hyped" its results. GPOR reminds me too much of a penny stock. They usually have a lot of hype, but they also usually fall far short on substance. CHK has had problems, and it still does. However, it is a much better bet to be terrifically successful in the long term. Plus GPOR should be near its short-term top due to the "realities" about its Utica situation. If you are interested in hearing much more about CHK follow this link to a recent discussion of CHK's situation.

The five-year chart of GPOR provides some technical direction for this trade.

(click to enlarge)

The slow stochastic sub chart shows that GPOR is overbought. The main chart shows that GPOR is trending strongly upward. However, GPOR's 50-day SMA is now far above its 200-day SMA. This often means there will be an abrupt snap back toward the 200-day SMA in the near future. Since the profitability of GPOR's Utica results in the short term seems highly questionable, such a snap back for GPOR seems likely. The "Big Boyz" are still pushing the overall market up. The HFT/momentum traders will likely continue to push GPOR up as long as the overall market is going up. It does have 9.40% short interest, so it should be easy to short squeeze. It does have recent good news. However, an aggressive trader might make good money shorting GPOR, when the overall market starts to move downward.

S&P 500 EPS growth has been poor (-0.9% and +4.0% so for Q3 and Q4 2012 year over year respectively). The U.S. Q4 GDP growth was -0.1%. The sequestration cuts have only been kicked down the road until March 2013. The U.S. needs to eventually make these cuts in order to maintain its credibility in the world financial community. We already have some austerity with the disappearance of the payroll tax cut and some of the Bush-era capital gains cuts. We will have more soon. This will likely lead to a slow down or even a recession in the U.S. economy in 2013. Sequestration is likely to mean an overall market fall. GPOR should get hit hard. I wouldn't buy it at this time. I would take profits. If I was an aggressive trader, I would short it as the overall market falls soon.

The SPY is up approximately 11.5% since Nov. 15, 2012. It can't keep going up that quickly with little or no EPS growth. Further the coming austerity will likely mean EPS growth will soon turn negative. This could make oil and gas prices (and other commodity prices) drop. Such an occurrence would make matters much worse for oil and gas companies, particularly for over extended GPOR.

NOTE: Some of the fundamental financial data above is from Yahoo Finance.

Good Luck Trading.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in GPOR over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.