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Gulfport Energy Corp. (NASDAQ:GPOR)

Q3 2007 Earnings Call

November 8, 2007

Executives

John Kilgallon - Director of Investor Relations

Jim Palm - Chief Executive Officer

Mike Moore - Chief Financial Officer

Mike Liddell - Chairman of the Board

Analysts

Ron Mills - Johnson Rice

Neal Dingmann - Dahlman Rose

Scott- Analyst

Bo McKenzie - Pritchard Capital

Rose Dahlman - Midwood Capital

Rob Burt - CellPoint Capital

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2007 Gulfport Energy earnings conference call. My name is Samuel, and I'll be your operator for today. At this time, all participants are in a listen-only-mode. We will facilitate a question-and-answer session toward the end of this conference (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to today's host, Mr. John Kilgallon. Please proceed.

John Kilgallon

Thank you, Sam, and good morning. Welcome to the Gulfport Energy third quarter 2007 earnings conference call. I'm John Kilgallon, Director of Investor Relations. With me today are Jim Palm, Chief Executive Officer; Mike Moore, Chief Financial Officer; and Mike Liddell, Chairman of the Board.

During this conference call, representatives of the Company may make certain forward-looking statements relating to the Company's financial condition, results of operations, plans, objectives and future performance.

These generally can be identified by the fact that they do not relate strictly to historical or current facts. We caution that the actual results could differ materially from those indicated in our forward-looking statements due to a variety of factors. Information concerning these factors can be found in the Company's filings with the SEC.

In addition, we may make reference to other non-GAAP measures, this morning. If this occurs, the appropriate reconciliation to the GAAP measures will be posted on our website promptly.

Today, we'd like to walk you through an overview of our third quarter earnings and update you on our operations in West Cote Blanche Bay field as well as our exploratory activities in Hackberry and an update on our investment plans.

We'll start this morning with Mike Moore, our CFO, who'll provide an overview of the third quarter results. Mike?

Mike Moore

Thanks, John. In the third quarter 2007, the company reported net income of $12.7 million, or $0.33 per diluted share as compared to $0.26 per share in the second quarter of 2007 and $0.37 per share in the third quarter of 2006. In the third quarter of 2007, the company generated $21.3 million of the EBITDA and $20.9 million of operating cash flow before working capital changes.

Production volumes for the third quarter 2007 totaled approximately 440,000 barrels of oil equivalent, or BOEs, or approximately 4,790 BOEs per day, which is up 11% from approximately 396,000 BOEs in the second quarter of 2007 and up approximately 16% compared to the third quarter of 2006.

Total net crude oil production for the quarter was approximately 4,400 barrels of oil at an average realized price is $70.46 per barrel. Total net natural gas production for the quarter was approximately 218 million cubic feet at an average realized price of $6.88 per MCF. Measured (ph) third quarter realized price was $68.05 per barrel of oil equipment.

For the third quarter, leased operating expenses were approximately $4 million, or $9.10 per BOE. LOE had trended higher this year due to the increase in associated labor and maintenance related to adding three new compressors and a production barge in southern Louisiana. In addition, the total work down the field has increased, which also drives adequately cost.

G&A remained virtually unchanged for the quarter at approximately $1.2 million, or $2.71 per BOE. DD&A was $7.8 million, or $17.81 per BOE for that quarter. DD&A has risen over the past few quarters due to the mix of wells we've drilled this year.

For the third quarter 2007, total capital expenditures, including the activity in Canada, increased to $49.2 million on an accrual basis as a result of the added activity of having two rigs drilling at both West Cote and Hackberry.

CapEx attributed to our project in Canada totaled $5.2 million this quarter. We do expect lower CapEx is in the forth quarter due to the lower rig count in the both fields. Total estimated CapEx for the year is now expected to be in the range of $130 million to $140 million. However, this is a $10 million increase completely attributed to our Grizzly activities in Canada.

The company recently filed an S-3 Shelf Registration statement to reestablish a $100 million of availability. Our previous shelf had been drawn down to approximately $78 million as a result of our 1 million share offering in July '07, which was priced to $22 per share.

We expect that our cash flow and credit facility availability will fully fund our capital needs for the remainder of the year. The shelf filing then provides with added flexibility in the event the need for capital arises.

We currently have $36.5 million in outstanding debt on our revolving credit facility and term loans of $4.5 million associated with financing the gas compressors. As a reminder, our revolving credit facility has total availability of $60 million.

We expect total borrowing at yearend to be approximately $41 million. Recently the company added forward contracts for the second half for the 2008. We had 2,000 barrels a today at approximately $80 per barrel from July to December 2008, before transportation and quality premium adjustments.

Our hedging strategy remains the same. If we see prices that enable us to lock in profits in the future, we'll act on it. We have opportunities within our portfolio, and the hedges provide downside protection and assurance of some future cash flow levels.

A complete listing all the companies' forward sales contracts can be found on the schedules attached to our earnings press release from this morning. As at November 6, year-to-date production is approximately 1.4 million wells barrels of oil equivalent, which include volume from West Coast as well as Hackberry. Our original guidance range for full year 2007 was 1.7 million to 1.9 million barrels of oil equivalent.

We continue to remain focus on our production target and currently expect to be at or just slightly below the low end our range. Jim will elaborate further on our production and provide an update on our operation. Jim?

Jim Palm

Thanks, Mike. In the third quarter, we continued to grow our production base at West Cote and began bringing on new production from our exploratory efforts at Hackberry.

At West Cote, we've drilled six wells this quarter and all six wells are productive. Year-to-date, we have drilled 22 wells at West Cote, of which 18 are productive and 4 were non-commercial. We remain on track to drill our projected 26 wells at West Cote for the year.

We performed 12 recompletions in the third quarter at West Cote, bringing our year-to-date total to 49 recompletions. As Mike mentioned, we are behind on our production guidance of West Cote.

We've maintained an active drilling program at the field over the course of the year. However, this year' s program has not delivered the expected level of growth as planned.

The late wells drilled this year have had quality performance issues, and the number of dry holes is up this year as well. In addition, we've also battled a few infrastructure issues because of the substantial growth we've tried to achieve this year. We estimate we were deferred about 25,000 barrels of oil this quarter.

Until we see improved yields from our new wells, we will be maintained a one-rig program at West Cote going further. One rig should be capable of drilling 17 to 20 wells in a calendar year.

This deal continues to be a valuable core asset to the company, given its production is prominently heavy Louisiana sweet crude, which provides significant cash generation at current commodity prices.

Capital will be closely watched, going forward, to insure adequate return on dollar spent. We're also continuing to look at the MLP market. Given recent premiums paid for properties with similar cash flow characteristic, we believe, a portion of our West Cote field fits in that model.

Turning to Hackberry. Our exploratory efforts are provided meaningful production this quarter. Production from the Hackberry field this quarter totaled 70,000 barrels of oil equivalent net to Gulfport.

Let me briefly summarize our activities in the Hackberry field. To-date, we have drilled and tested 11 wells during this exploratory program, which is on pace for our projected 12 to 14 wells in 2007. We have seven wells that are currently producing and two wells there are awaiting recompletion or sidetrack and two wells that were dry holes. Let's get into a little more color around the producing wells.

Of the seven producers, two are outstanding wells. Those if you were on our field tour, you'll remember seeing those logs hanging in our office, these wells are averaging over 250 barrels a day net to Gulfport. And this is one of the sweet spots we were looking for where we're going to be drilling next year. Four other wells are solid producers, and those wells are averaging over 100 barrels a day net.

One well is pretty skinny. It's averaging less than 30 barrels a day net. In total, we're averaging over 900 barrels a day net at Hackberry. We just finished drilling our 12th well and the run logs. And it looks to be productive, and we are currently completing that well.

Throughout this year, we've evaluated our interpretation of the 3D seismic, electric logs, and our limited production history from the field. We've continued to stress that Hackberry is an exploratory program and in a learning process at this stage. Unlike any such program, we are finding out where the sweets spots are.

The two wells drilled from a single (inaudible) location continues to be the best performing well in the program. Following the success from these wells, we started the permitting process for several additions and the trend. We also expect our average drilling cost during the calendar year will be less than this year because the targeted depths on will not be as deep.

Overall, we remain encouraged with the upside potential of our Hackberry field. Our exploratory program is ongoing. We have further tested more production history to better understand the more efficient manner to develop this field. We are currently permitting 22 wells for future drilling locations.

We feel we've learned a lot this year. And we think our drilling performance will be more capital efficient during 2008. Our program next year will be success-based. It will center around to offset for best producers, and it will be more targeted with less capital.

Now, the Canada. For those new to Gulfport, Gulfport owns an approximate 25% in interest in Grizzly Oil Sands ULC. Grizzly has continued to increase its acreage position in the oil sands in Alberta and now has approximately 511,000 acres in the oil sands play.

The third-party assessment of only a third of the acreage is estimated at 11.9 billion barrels approximately of original oil in place over approximately 153, 000 acres. More specific details of the assessment can be found in our press release from this morning.

Based on this assessment, Grizzly estimates 4 billion barrels of recoverable resource. That means 1 billion barrels of recoverable resource net to forward. Grizzly is opportunity rich in this play.

Let's walk through the brief near-term development timeline. Grizzly intends to drill 80 to 124 holes this coming winter and then submit for approval a permit to begin inspection 1,000-barrel a day Side B facility at Alger Lake.

Construction would begin in 2009. The first team would be expect to by early 2011. First production followed by mid 2011. Customer projects would begin the permit process annually with the intend of bringing on incremental 10,000 barrel a day projects annually other then 2012.

We realized to meet such timeline there will be capital to raise, facilities to build, permits to get, however the beauty of this play is the resources base is enormous and it has 11 geologic risk.

Grizzly has announced that they are considering raising capital from third parties to fund its 2007, 2008 winter delineation drilling program and other capital requirement. We understand that Grizzly is seeking to raise approximately $150 Canadian or approximately 9.5 to 12.5% of the company.

However, the actual amount that will be raised and the percentage interest may not be determined at this time. I believe the Gulfport remains the only small cap U.S. independent with a stake in oil sands play.

And now let’s move back domestically and discuss Gulfport’s acreage in the Williston basin. Gulfport plans to increase activity on its acreage in the Bakken shale play in Montana, North Dakota in the Williston basin. Gulfport owns a 20% interest in a company known as Windsor Bakken, LLC, which is born in 2005. Company currently owns approximately 64,000 net acres, or 12,800 net acres to Gulfport.

We have been actively accumulating acreage and activity on the play has really picked up. We recently received 11 well proposals. EOG announced last week during their earnings call, the two well in Montreal County had initial production of 2000 barrels a day. One of the well we’re participating there with EOG is a direct offset well to these producers. EOG also said the Bakken was their highest rate of return play for their entire drilling program.

Our CapEx could grow materially in 2008 in this area based upon the rate at which we receive new well proposals and further announce success in the area.

In closing, in the third quarter we continue to grow our production organically and increased volumes by 11% versus second quarter of ’07. We’ll continue to scrutinize our capital spend of West Cote to ensure we are receiving an accurate return even with these current high prices.

At Hackberry, we made great strides in understanding in this field through our drilling program this year. We remain excited about our potential to grow this asset. Hackberry has the capability to be a very profitable field for us and we have a sizeable room (ph) ahead of us.

In Canada, activities are underway and preparation for a busy winter including Grizzly’s clear hole (ph) well program in 3D seismic shoot. And as I just mentioned, we recently allocated capital in 2007 to the Bakken oil shale play. We have a modest acreage footprint and are expanding our acreage even further.

We also continue to look at the M&A market for assets with compelling value as well as the MLP trades. As I mentioned, Gulfport assets including West Cote, could be better assets for MLPs and for Seacorps (ph) and we are concerning some MLP activity.

We remain very bullish on oil and remain oil focused. Our near term production from Louisiana provides substantial cash flow. We have broadened our activity base, included the Bakken play this year. And already have exposure to an estimated 1 billion barrels of recoverable resources net to go forward in Alberta. I believe this is an unmatched, all cap oil-focused portfolio and now I would like to turn the call back to John. John.

John Kilgallon

Thanks, Jim. Sam, at this point, we would like to turn the call over to the Q&A section, if you could please queue the questions?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Ron Mills with Johnson Rice. Please proceed.

Ron Mills - Johnson Rice

Good morning, guys. As it relates to the Bakken play, just out of curiosity, there is a lot obviously have been said about that play recently, can you give us an idea of where figure (inaudible) 12,000 net acres are located in terms of potential counties and beside the OEG, who are some of the other operator are who have proposed wells to you?

Jim Palm

You know, Ron, 35% of our equity is in Montreal County, 50% of the acreage is in Dunberg and McKenzie counties, which are nearby and the proposals we have to date are from EOG, Marathon, Headington and Continental primarily.

Ron Mills - Johnson Rice

Okay. And how quickly do you think you will get well drilled in and/or have data to talk about on this place.

Jim Palm

Well, we are trying to see what’s going to happen. The things are speeding up and we are participating in wells right now. We’ve already committed to about a $1 million so far and the last part of 2000. And Ron it’s really not out there. We are acquiring more acreage. You know we will get some guidance before the end of the year but I wouldn’t be surprised if next year we spend $1 million or more.

Ron Mills - Johnson Rice

Did you say $10 million?

Mike Moore

$10 million or more up there because we're already at a $1,000 net to go forward this year and the year is not over.

Ron Mills - Johnson Rice

Okay. Small clarification on the Grizzly, if they go out and raise money, you on 25% entity, which you receive proceeds from that would be at the actual company, corporate levels selling shares.

Mike Moore

We would not receive proceeds from them.

Ron Mills - Johnson Rice

And then finally in West Cote in Hackberry this you had three to four rigs operating throughout the majority of the year. You might have read into your comments that next year you plan on having one rig active in both plays for majority of the year and to the expense you get depending upon timing for permits for the additional land locations that you may end up with the second rig at Hackberry.

I’m just trying to get sense is the 2008 well count versus 2007

Mike Moore

This point of West Cote, one rig going will definitely be down for hope this year and Mike said that could change, but that’s the plan right now.

As far as Hackberry there’s going to be times (ph) two rigs going because we drawn both in Lake and on land. But I think for most part probably want one rig will get us there next year and one rig in time.

Ron Mills - Johnson Rice

And would you be able to drill if, are you still planning on drilling them, as similar number of wells in Hackberry next year.

Mike Moore

It’s got basic sense driven, but we like and hope we say and we going to plan, as we go along, but good things are happening.

Ron Mills - Johnson Rice

I just want one thing. You clearly, the two well, the best two wells that you talked about it at Hackberry what did you say those reproducing per well.

Mike Moore

That’s been about 250 barrels at day net to Gulfport and that’s per well.

Jim Palm

Okay and then the production that you talked, you made mention of that West Cote some of that was well performances. Can you give us little more color on the well performance and also what was not well performance related IE, its sounds like you had compressor, you added in new compressor and that took time.

Mike Moore

That’s right. First with regard to the well performance, we just didn’t grow to do well this year, as we have the last couple of wells, last couple of years and to talk about we had dry holes (ph) surely and we have some reported wells early so that challenges to meet our numbers this year.

But sure as regard to the compressors we had some runtime issues with the new compressor, but we also had some stand by over compressors that we had more runtime with and we, but we got programs to replace in those,

We had to slow down for over a while, while we put in fifth compressors that were ordered last year. The net affect to that was about 25,000 barrels of which heard. Because we couldn’t come up with the gas-to-gas light thing.

Ron Mills - Johnson Rice

Okay. Let me let some others listen of (inaudible) back on it and I will jump back.

Operator

Next question comes from Neal Dingmann with Dahlman Rose. Please proceed.

Neal Dingmann - Dahlman Rose

Good morning guys.

Mike Moore

Good morning, hi Neal.

Neal Dingmann - Dahlman Rose

Say Jim you say are there infrastructure West Cote would that just sort of temporary you see that you had there and I mean I think you should be or you said now going forward.

Mike Moore

Hello Neal. I am going to worry too much about, it was temporary the long operation that we got a couple of mechanics that we just hired that first one came on this week and they are work 7 and 7. So. It several pampers (ph) have been take care of things now we are going to have two full time mechanics, so we think we got the problem take care.

Neal Dingmann - Dahlman Rose

Okay. And then moving on the Hackberry, we are going to after few more wells where you then start include that guidance in and you want to seen few more wells behind that will be seen in your guidance today in corporate set.

Mike Moore

Yeah. We will give ’08 guidance some time before the end of the year.

Neal Dingmann - Dahlman Rose

Okay. And then on the Bakken you say besides maybe partner not, is there are acres available or is that pretty come to combine now out there on that piece?

Mike Moore

We are out there still pick up acres, still acres to available. But it’s all area, its competitive.

Neal Dingmann - Dahlman Rose

Sure, okay. And then on -- you didn’t mention anything new to report on that Thailand or the other forum play?

Mike Moore

Not really, things are going long this time, but nothing really. It’s driven long.

Neal Dingmann - Dahlman Rose

Okay. And then lastly, I assume it still on, you mentioned about maybe had in rigor next year I guess still rig availability that still pretty good down there?

Mike Moore

Yeah. No problem.

Neal Dingmann - Dahlman Rose

Okay. Okay, thanks guys that’s all for now.

Operator

Next question comes from Scott (inaudible). Please proceed.

Scott- Analyst

Hi guys. Just wanted if you guys can give me a little more color on the dry holes, you guys are run into this year?

Jim Palm

Yeah. For the most part its been released, - we have the drill some wells in Halo around West Cote where we don’t have producing well those state Nexus hold that agreed to drill two wells on high level like we usually do, actually had one producer and one dry hole out there.

Scott- Analyst

Okay. Will there any implications on year end reserves with the dry holes?

Jim Palm

No, I don’t know surely tell, we still got the rest of the year to drill.

Scott- Analyst

Okay. Now moving to Grizzly, can you guys comment on the possible impact of the proposed Alberta royalty increase?

Mike Moore

No. It hasn’t been as big a deal, as we though it might. We’re seen reports from the investment bankers up there. We’ve seen the way the small cap starts and responded, seems to be more of a non-issues and we thought it would be.

Scott- Analyst

Okay. And with respect to possibly, you know being some assets, what are the declines on assets that you guys are first thinking about doing that?

Mike Moore

We got lot to annualize before we really do that, and we’re looking at a whole (indiscernible) and whole field that it’s complicated but normal. We think there is some chance over its going to fit the modal pretty well, but we’ve got a lot of research still to do.

Scott- Analyst

Okay. Great. Thanks.

Operator

Next question comes from Bo McKenzie with Pritchard Capital. Please proceed.

Bo McKenzie - Pritchard Capital

Hi guys. You just give me the couple of my questions. Thanks.

Operator

Next, we have the question from Rose Dahlman with Midwood Capital. Please proceed.

Rose Dahlman - Midwood Capital

Hi, guys. Congratulation on your progress. Jim, I just wanted to make sure, I understood some math that you had, you said you would be selling your ballpark 10% of the Canadian Oil Sands for $1.5 billion. So that would mean -- sorry for $150 million. So the plan roughly $1.5 billion with the value.

You guys, with the little less than quarter-than-quarter, so it looks like there about the $350 million of value. The Gulfport 9 or $10 of share with the value in Canada, Montana math right?

Mike Moore

Well, I’ll tell you, what’s you're saying, it sounds like a sign but its not really our place to speculate about the Grizzly values, and forth. So we can’t to have hold up I’m talking about that.

Rose Dahlman - Midwood Capital

That’s Okay. I was just going of that you're going to raise a $150 million and that would be 9.5 to 12% of Grizzly, so I was just backing into sort of the implied value of Grizzly at about $1.5 billion?

Mike Moore

We didn’t get match their time stand good.

Rose Dahlman - Midwood Capital

Okay. And then maybe you can comment on - or maybe not but I know noted in some cases valuations up there been it has a dollar full recoverable, so in this case we have $4 billion recoverable. What needs to happen to these assets before sort of conversion, conversion on that valuation or before it begins to look like the property that transact with that valuation?

Mike Moore

Well, I think we’re just going to draw some more well, so we can evaluate the property better that’s all the engineering firms need, but we’ve just evaluated the tiny fraction of our acreage so far and those we drill wells will get more of this included.

Rose Dahlman - Midwood Capital

Okay. Very good. I appreciate to take my questions.

Operator

Next we have follow on questions from Ron Mills with Johnson Rice. Please proceed.

Ron Mills - Johnson Rice

Any ideas, guys? Next year in terms of on a lower rig count. What the capital budget would look like and more importantly, I guess how much do you think you will end up spending up in Canada?

Jim Palm

Ron, I’m not sure on Canada at this point, we going to drill 80 to 120 barrel up there. So those economic should be about the same, but beyond that I’m not sure for Canada. But also as it relates to, are you asking about our…

Ron Mills - Johnson Rice

With this year, you’re going to spend..?

Jim Palm

We’ll -- next for West Cote Lake as well.

Ron Mills - Johnson Rice

Exactly, its sounds like that will be down a little bit relative to this year.

Jim Palm

Right. Our cost will be down. Our cost for well have -- we’ll be about the same in West Cote next year, as they were this year will be strong as wells at this point. We’re still working on our capital budget. We don’t know for sure we’ll no more latter in the year.

Ron Mills - Johnson Rice

Okay. And then what are you, you sounds like you also issued some size make up in Canada. What’s that design to do?

Jim Palm

Ron, this will be specific on Algar Lake this year, 3D. And it helps you model your reservoir enough your plan, your horizontal wells. It’s just to really understand the reservoir there because we anticipate we don’t provide the facility there.

Ron Mills - Johnson Rice

And any latest update on what you all think the cost of the 10,000-barrel a day a facility would end up running?

Jim Palm

Yes. More or less in the $215 million range. Just to get ballpark number.

Ron Mills - Johnson Rice

Okay. Thank you guys.

Operator

(Operator Instructions) We have a question is from Rob Burt (ph) with CellPoint Capital. Please proceed.

Rob Burt - CellPoint Capital

Hi, guys. I heard before that you all mentioned putting part of West Cote into an MOP. How much West Cote production would you all be thinking about putting into an MOP?

Jim Palm

Rob, we are still just exploring idea, this is too early to tell, But and we might put in anyone, we’ll see.

Rob Burt - CellPoint Capital

Okay. Thanks.

Operator

Mr. Kilgallon, we have no further questions at this time. I’ll turn the call back over to you for any closing remark. You can hear me?

John Kilgallon

Thank you, Sam. The replay of this call will be available temporarily on the company’s website and can be accessed at gulfportenergy.com. Thank you for your interest and time in Gulfport this morning. This concludes our call.

Operator

Thank you ladies and gentlemen for your participation in today’s conference. This concludes the presentation, you may all disconnect. Have a great day.

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