Gulfport Energy: On Track To Eliminate Its Net Debt In 2023 Despite Massive Hedging Losses
Summary
- Gulfport's year-end 2022 net debt is projected to end up near $200 million at current strip prices.
- It may have close to $800 million in realized hedging losses in 2H 2021 and 2022.
- Gulfport's cash flow potential should improve after 2022 when its hedges roll off.
- Gulfport's common shares have some further upside in a $3.25+ long-term natural gas environment.
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Gulfport Energy (NYSE:GPOR) appears capable of reducing its net debt to around $200 million by the end of 2022 at current strip prices, despite the potential for it to incur close to $800 million in realized hedging losses in the second half of 2021 and 2022.
Gulfport's value is tied to long-term natural gas prices. A long-term $65 WTI oil and $3.25 NYMEX gas, it has an estimated value of $81 to $98. This increases to $95 to $112 at long-term $70 WTI oil and $3.50 NYMEX gas.
2H 2021 Outlook
Gulfport is projected to generate $977 million in oil and gas revenues before hedges in the second half of 2021 at current strip prices (including $5+ NYMEX natural gas). Gulfport has approximately 89% of its 2H 2021 natural gas production hedged with a swap/ceiling price of $2.92, so it may end up with $350 million in realized hedging losses (including its oil and NGL hedges) in the second half of the year.
Source: Gulfport Energy
| Type | Units | $/Unit | $ Million |
| Natural Gas [MCF] | 165,600,000 | $5.00 | $828 |
| NGLs (Barrels) | 1,968,800 | $41.00 | $81 |
| Oil (Barrels) | 920,000 | $74.00 | $68 |
| Hedge Value | -$350 | ||
| Total Revenue | $627 |
Source: Author's Work
Despite its negative value hedges, Gulfport still looks capable of generating around $185 million in positive cash flow during the second half of 2021.
| Expenses | $ Million |
| Transportation, Gathering, Processing and Compression | $172 |
| LOE | $26 |
| Taxes Other Than Income | $33 |
| G&A | $23 |
| Interest and Preferred Dividends | $28 |
| Capex | $160 |
| Total Expenses | $442 |
Source: Author's Work
Gulfport had $826 million in net debt at the end of Q2 2021, and this positive cash flow would reduce its projected net debt to $641 million by the end of 2021.
2022 Outlook
Gulfport has discussed being able to keep production at approximately 1 Bcfe per day with around $300 million in capital expenditures. This is roughly in-line with my previous expectations.
At current strip prices for 2022 ($77 to $78 WTI oil and $4.55 NYMEX gas), Gulfport is projected to generate $1.74 billion in revenues before hedges if it averages 1 Bcfe per day in production.
Gulfport's 2022 hedges have negative $448 million in estimated value, so its revenues after hedges would end up at $1.292 billion. The negative value of its hedges comes mostly from its natural gas hedges. For 2022, Gulfport has 701 Mcfe per day in natural gas hedges (about 77% of its projected natural gas production) with an average ceiling/swap price of $2.90.
| Type | Units | $/Unit | $ Million |
| Natural Gas [MCF] | 331,785,000 | $4.40 | $1,460 |
| NGLs (Barrels) | 3,905,500 | $37.00 | $145 |
| Oil (Barrels) | 1,825,000 | $74.00 | $135 |
| Hedge Value | -$448 | ||
| Total Revenue | $1,292 |
Source: Author's Work
Gulfport would then be projected to generate $439 million in positive cash flow in 2022 at current strip prices.
| Expenses | $ Million |
| Transportation, Gathering, Processing and Compression | $344 |
| LOE | $51 |
| Taxes Other Than Income | $60 |
| G&A | $46 |
| Interest and Preferred Dividends | $52 |
| Capex | $300 |
| Total Expenses | $853 |
Source: Author's Work
Gulfport's net debt would likely be reduced to $202 million by the end of 2022 in this scenario involving current strip prices and a maintenance capex budget.
Valuation
Gulfport's estimated valuation is quite sensitive to natural gas prices. At long-term $65 WTI oil and $3.25 NYMEX gas, Gulfport's estimated valuation range is now approximately $81 to $98. The lower end of that range uses its projected year-end 2021 net debt, and the higher end of that range uses its projected year-end 2022 net debt.
At long-term $70 WTI oil and $3.50 NYMEX gas, Gulfport's estimated value increases to approximately $95 to $112. A $0.25 change in long-term natural gas prices affects Gulfport's estimated value by around $11 per share by itself.
Conclusion
Gulfport looks capable of reducing its net debt to around $200 million by the end of 2022 at current strip prices despite the potential for nearly $800 million in hedging losses between Q3 2021 and the end of 2022.
After 2022, Gulfport doesn't have hedges, so it would likely be capable of generating a lot of positive cash flow in a scenario where natural gas remains fairly strong. For example, at $65 WTI oil and $3.25 natural gas in 2023, Gulfport should be able to generate over $400 million in positive cash flow.
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