Gulfport Energy: On Track To Eliminate Its Net Debt In 2023 Despite Massive Hedging Losses

Oct. 27, 2021 12:42 AM ETGulfport Energy Corporation (GPOR)7 Comments3 Likes

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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