Gulfport Energy (GPOR) is an independent oil and natural gas exploration and production company. Principal properties are in the Louisiana Gulf Coast, northern Colorado, Ohio's Utica Shale and the Canadian oil sands in Alberta.
In a 60-day timeframe, since December, 2012, Gulfport launched not just one, but two common stock offerings. In some instances, such dilution would be met with shareholder uncertainty. Rather, Gulfport's share price stretched to 52-week highs six times.
In the third-quarter earnings release on November 6, 2012, Gulfport updated and reduced guidance for 2012 production to 2.7 to 2.8 million barrels of oil equivalent (BOE) from 2.9 to 3.1 million BOE. Diamondback (FANG) held its initial public offering in October. Gulfport contributed all of its Permian Basin assets to Diamondback in exchange for 35% of Diamondback's common stock. Part of the reduction in 2012's guidance was a result of transferring Permian Basin assets to Diamondback. Another part of the reduction was a result of Gulfport's evacuated production in the Louisiana Gulf during Hurricane Isaac. At that point, for 2013, Gulfport projected production of 6.5 to 6.8 million BOE.
Forty days later, on December 17th, Gulfport announced a public offering of 9 million additional shares of its common stock. The proceeds were to be used for the acquisition of an additional 30,000 acres in the Utica Shale in Ohio. Less than a week later, the transaction was updated to allow purchase of an additional 7,000 acres. At the close of the transaction, Gulfport actually acquired 37,000 acres and issued 11.75 million shares. Projections for 2013 increased over 13% to 7.4 to 7.7 million BOE. Guidance for 2012 fell to 2.55 to 2.6 million BOE.
Less than two months later, February 11th, Gulfport announced another public offering of 7.75 million shares of common stock. Again, the proceeds were to acquire more acreage in the Utica Shale. The 22,000 added acres increased Gulfport's working interests in the Utica Shale to nearly 94%.
The number of shares outstanding in the third quarter 2012 report was 55.7 million. After the second common stock offering, the number of available shares is 76.2 million. So, the acquisition of 59,000 acres in the Utica Shale increased the outstanding share count approximately 34%.
On February 26th, Gulfport released fourth-quarter results. Production for 2012 totaled 2.57 million BOE or 7,029 BOE per day. Projections for 2013 increased to 7.8 million to 8.1 million BOE equivalent to 21,370 to 22,192 BOE per day. In the same time frame that share count increased more than 30%, 2013 production projections increased 20% over the November numbers. The November projections for 2013 had already forecast at least a 150% increase over 2012.
The following table provides a sense of Gulfport's current and future operational status:
Ohio Utica Shale
Canadian Oil Sands
Production is forecast for mid 2013
1Based on 21.4% ownership of Diamondback stock.
The Utica Shale production is based on 14 spudded (started) wells, three of which progressed to operational rigs. This production started in the third quarter with 17,764 BOE making the 2012 total only 87,431 BOE. Drilling 50 additional wells is planned for 2013. Most of these wells are for holding acreage (to protect leaseholds). Locations have been identified for yet another 140-150 wells. Gulfport's engineering efforts are finding more wells than it expected that will be able to be drilled relative to spacing requirements. By year-end 2013, Gulfport expects to have five to six rigs operational adding one well every two to three months.
A significant portion of Gulfport's 2013 production growth will be contributed by the Utica Shale. At this point, due to infrastructure limitations, Gulfport's production for the 2013 first quarter will remain flat. By mid-April, MarkWest Energy (MWE) is expected to ready more gathering and compression assets eliminating existing bottlenecks and enabling better connectivity for transportation. That connectivity will significantly ramp up production numbers in the second quarter. Gulfport management emphasized even with the slower pace of the first quarter, the 2013 model and results are profoundly conservative.
The average price per BOE in 2012 was $96.63 equating to revenues of $248+ million. Based on 2012 averages, 2013 revenues can be predicted for at least $753 million. Average prices in 2011, 2010 and 2009 were $98.13, $64.61 and $51.01 respectively. At the lowest average price of 2009, 2013 revenues would equate to nearly $400 million. The Energy Information Administration expects oil prices to decrease about 2% in 2013. Based on that decrease, Gulfport revenues in 2013 would come in around $738 million. Even utilizing the low-end estimate, 2013 revenues should increase at least 60%.
Extrapolating the increase in share count, the low-end increase in revenue and latest profit margin of 27.5%, shareholders may still reasonably expect earnings per share to increase compared to the 2012 rate of $1.21. Maintaining the rate at a flat pace would only require revenue of $335.3 million. At the low-end estimate based on 2009 average prices of $400 million, EPS would ring in at $1.44. At the high-end estimate, EPS would increase to $2.72.
According to Yahoo! Finance, analyst's average revenue estimate in 2013 is $473.5 million (which now appears to be leaning toward the low side). At a 27.5% profit margin, EPS would equate to at least $1.70. Yet, 2013 EPS estimates for Gulfport in the past 90 days have decreased from 1.81 to 1.53 to 1.38 to 1.15 down all the way to 1.09.
Investors interested in establishing a position in Gulfport should watch for that EPS trend to reverse. With the current year P/E over 30 because of the lowered EPS estimate, it is at least 50% ahead of the industry. As new EPS estimates are set, a P/E ratio between the industry average of 20% and 28%, which represents the midpoint of the five-year growth estimate of a staggering 56%, would be a more conservative factor for determining a reasonable buy price.
Existing shareholders are standing behind a double-barreled, even a triple-barreled Gulfport. And, tall they should stand.
Disclosure: I am long GPOR.
Additional disclosure: I belong to an investment club that owns shares in GPOR. I may recommend consideration of MWE at the March meeting.