A couple of weeks ago, I wrote a bearish article about Gulfport Energy (GPOR), explaining why this grossly overvalued stock was primed for a sell off. The stock was at $67.5 back then.
Since then, several things have changed. The company has released some news, updating the investors about its operations. Meanwhile, the stock reversed direction and dropped down to ~$59 a few days ago (intraday drop), confirming my bearish call. This is a 12% drop in two weeks. My article is here.
I believe all longs and potential new buyers have to check that article out to get an idea about the fundamental and substantial reasons behind this bearish call. They are more than one. Meanwhile, I closed my short position as disclosed, locking in my gains.
The stock is currently at approximately $61.5. I'll toss some more "tinder into the fire" in the next paragraphs, explaining why a vicious plunge is about to come.
Some fellow SA contributors have been saying that the investors should buy Gulfport on the dips. Sorry, this is not an investment advice. Just because it worked once or twice, it does not mean that it will work for ever. This reminds me of a casino, and I am not a gambler when it comes to investing my hard-earned money. I do not spot the next big winner of the stock market by throwing darts either.
The Corporate Update
Based on the latest corporate update, Gulfport produced 12,976 boepd in Q3 2013. For the third quarter of 2013, net production was 590,187 barrels of oil, 2,981,632 thousand cubic feet of natural gas and 4,480,667 gallons of natural gas liquids.
Taking into account that 1 barrel = 42 gallons, Gulfport's production translates into approximately 7,750 barrels of oil and natural gas liquids per day (6,557 barrels of oil per day and 1,185 barrels of natural gas liquids per day) which is almost 60% of the total daily production.
Gulfport also anticipates exiting 2013 with production in the range of 27,000 to 32,000 boepd. Gulfport's previously anticipated 2013 exit rate has been adversely impacted by delays associated with drilling. For my calculations below, I ll use the average exit production which is estimated at 29,500 boepd.
Some Important Factors That Determine Gulfport's Valuation
Before proceeding with my calculations, I have to note the following parameters that play a crucial role for Gulfport's valuation:
1) Gulfport produced 12,976 boepd (60% oil and natural gas liquids) in Q3 2013. So it is clear that the oil and natural gas liquids portion of Gulfport's total production is steeply declining. In Q2 2013, Gulfport produced 8,959 boepd with 71% oil and liquids.
So there is no question that the new production coming from Utica, contains a lot of natural gas with a sizeable amount of natural gas liquids. Gulfport's production in Utica is very poor in crude oil.
This fact does not surprise me because I have already analyzed it in my previous article about Gulfport, as linked above. The Utica shale is not an oily formation. The Utica shale is a natural gas weighted formation with a considerable natural gas liquids portion. The Utica shale is inferior to Bakken or Eagle Ford.
I do not really care about what some "analysts" have been claiming in terms of Gulfport and the supposedly sweet spot of the Utica shale. Gulfport's production and its oil portion, the reserves and the EBITDA matter to me because I am a fundamentalist investor for 25 years now. I do not buy any hype, I never did.
This allegation that Gulfport owns the sweet spot is also highly questionable. The high 24-hour IPs in a few wells that Gulfport has been touting since early 2013, are full of flush production and are not indicative of the IRR of the well. Gulfport has not provided the IP-30 and IP-60 for the majority of its wells. This should concern all those who claim that Gulfport owns the sweet spot of the Utica shale, assuming that these folks are objective and do not have any interests associated with this allegation.
2) Now let's assume that Gulfport truly owns the highly publicized sweet spot of Utica. So what if this sweet spot is full of natural gas and natural gas liquids? The companies that own Haynesville's or Marcellus' sweet spot are not considered privileged, and do not enjoy a huge premium compared to their neighboring operators. So why should Gulfport trade with the current huge premium compared to its neighbors?
3) In this analysis below, I compare Gulfport to other oil and liquids weighted companies that operate exclusively in proven oily regions of the U.S. like the Williston Basin. Due to the fact that Gulfport has been targeting Utica with the majority of its CapEx, I estimate that the oil and liquids portion of Gulfport's total production will deteriorate and will most likely drop down to 50-55% by 2014. I assign a high probability to this scenario because Utica is not oily.
By 2014, Gulfport's metrics will have to be compared to companies with a balanced commodity mix in their total production. Thus, Gulfport's metrics will be comparable to Enerplus' (ERF), Swift Energy's (SFY), SM Energy's (SM) metrics. In other words, Gulfport's metrics (per boepd, per boe, EV/EBITDA) will have to drop even further to come in line with its "new" peers'.
4) To find Gulfport's real operating EBITDA is tricky. Actually, this is the trickiest point in Gulfport's balance sheet although many investors have overlooked it.
In Q1 and Q2 2013, Gulfport recorded a significant gain in connection with its equity interest in Diamondback Energy (FANG). There is also an income tax expense associated with this taxable income. However, this amount has nothing to do with Gulfport's real operating EBITDA.
An investor must exclude the effects of this taxable income and income tax expense during the first six months of 2013, because they mask the real operating EBITDA. So excluding the effects of this income and associated non-cash income tax expense:
A) Gulfport totaled EBITDA of approximately $90 million for the first six months of 2013.
B) Based on the latest production figures, Gulfport's EBITDA for 2013 will be approximately $250 million (rich estimate).
5) In my previous article about Gulfport, I also elaborated on how I calculated Gulfport's Enterprise Value. So I'll not repeat it here. In short, I deducted Gulfport's stakes in Grizzly and Diamondback Energy which have a total market value at approximately $320 million currently (rich estimate).
Excluding Gulfport's stakes in Diamondback Energy and Grizzly, Gulfport's enterprise value is approximately $4.45 billion ($4.77 billion - $320 million) currently. This enterprise value will be used for my calculations below.
The Drop Has Not Ended Yet
After taking into account all the latest deals, the placements, the updated production and reserves of the companies mentioned below, I'll evaluate Gulfport based on the following metrics:
1) Per Current Daily Production: Let's check out the table below:
EV ($ million)
12,976 (60% oil/liquids)
43,000 (~90% oil)
140,000 (71% oil)
35,400 (~90% oil)
92,750 (87% oil/liquids)
2) Per Exit Daily Production for 2013: Let's check out the table below:
EV ($ million)
* Oasis Petroleum has not provided any exit production yet. So my worst case scenario is that it will remain flat compared to Q3 2013.
3) Per Proved Reserves: Let's check out the table below:
EV ($ million)
4) Per Estimated EBITDA for 2013: Let's check out the table below:
EV ($ million)
2013 EBITDA ($ million)
The numbers above speak volumes. Warren Buffett has said that "what the wise man does in the beginning, the fool does in end". So I will not touch Gulfport Energy with a ten foot pole at the current levels. I believe that the fundamentals will prevail as always, and a brutal take down will come soon. All of the peers above are more oil-weighted than Gulfport, while they carry much lower ratios than Gulfport.
Furthermore, Gulfport's oil portion as part of the total production is also going to decline during the coming quarters because Utica's production is not oil weighted. So why should I buy Gulfport instead of Kodiak Oil, Whiting Petroleum, Oasis Petroleum or Continental Resources which carry lower ratios and will remain heavily oil-weighted during the coming quarters as they operate in proven oily Basins?
I believe now a potential buyer understands why the insiders (i.e. Wexford Capital) have been unloading their shares for months. Are the wise folks abandoning ship while the fools are getting on board? Yes, I believe so. Do they get money to "inflate" Diamondback Energy which is already grossly overvalued and closely affiliated with Gulfport? Who knows?