GPOR - NYSE

Hello, and welcome to the Gulfport Energy Corporation’s First Quarter 2023 Earnings Call and Webcast. [Operator Instructions] A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Jessica Antle, Director of Investor Relations. Please go ahead, Jessica.

Thank you, Kevin, and good morning. Welcome to Gulfport Energy Corporation’s first quarter 2023 earnings conference call. I am Jessica Antle, Director of Investor Relations. Speakers on today’s call include John Reinhart, President and Chief Executive Officer; Michael Hodges, Executive Vice President and Chief Financial Officer. In addition, Matthew Rucker, Senior Vice President of Operations will be available for the Q&A portion of today's call. I would like to remind everybody that during this conference call, the participants may make certain forward-looking statements relating to the company’s financial conditions, results of operations, plans, objectives, future performance, and business. We caution you that actual results could differ materially from those that are indicated in these 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 non-GAAP measures. Reconciliations to those GAAP comparable measures will be posted on our website. An updated Gulfport presentation was posted yesterday evening to our website in conjunction with the earnings announcement. Please review at your leisure. At this time, I would like to turn the call over to John Reinhart, President and CEO.

Thank you, Jessica, and thank you to everyone for listening to our call. I'm pleased to provide highlights today on the company's performance in the first quarter, which includes production, adjusted EBITDA and adjusted free cash flow exceeding analyst estimates, capital cost deflation realizations, strong well productivity and operational cycle times outpacing expectations, all of which facilitate high confidence in our 2023 program. To open, I would first like to welcome Michael and Matthew to the Gulfport team. Michael brings over 20 years of experience as a seasoned financial leader with deep expertise in the oil and gas industry, and much of his career is spent with companies operating in the Appalachian and Anadarko basins. Matthew also possesses a substantial knowledge of the Appalachian Basin and holds a decade of experience focused on operational excellence and low-cost leadership, which plays an integral role as we continue our efforts to improve capital efficiencies and enhance margins. I've had the pleasure of working with both Michael and Matthew. And when combined with the many talented operational and support individuals at Gulfport, creates a team that is extremely experienced in both operating basins, holds a proven track record of operational execution and is known for identifying and executing on opportunities for improvement that maximize value. The company will remain focused on actions that facilitate the sustainable development of our quality inventory, enhance margins and optimize efficiencies within our capital programs, all while maintaining an attractive balance sheet and utilizing our top-quartile free cash flow yield to enhance shareholder returns and position the company for success. Returning to our first quarter highlights. The company generated $63.1 million of adjusted free cash flow during the quarter, allowing us to continue returning capital to our shareholders, while improving our already strong financial position as evidenced by our debt reduction of $145 million and the decrease of our financial leverage ratio to 0.7 times. Our average daily production for the quarter totaled 1.057 billion cubic feet equivalent per day ahead of analyst expectations driven by the continued outperformance of our 2022 development programs well productivity and strong base production. During the first quarter, the company drilled and rig released eight gross wells, seven of which were in the Utica. On the completion side, we completed five gross wells during the quarter all within the Utica. Cycle time efficiency improvements were realized on the operational planning, drilling and completion front during the first quarter, which resulted in the team accelerating our first Utica pad turn in line two weeks ahead of schedule. This was our three-well Barber Ridge pad located in Monroe County, which began flowing in early April with encouraging results compared to historic wells in the same area. Optimized completions and a pressure managed production approach has contributed to strong pad production rates with minimal average initial pressure drawdown. The company's development approach continues to yield repeatable, consistent results, and we forecast these Monroe County wells to be in line on an EUR per foot of lateral basis with our top-tier development in other areas of the play. In terms of activity, we are currently running one drilling rig in Ohio and remain on track to spud Gulfport's first two Marcellus wells in Belmont County, Ohio, during the third quarter of 2023. We look forward to discussing more about this development later in the year, which has the potential to unlock approximately 40 to 50 wells of incremental inventory additions for the company. In the SCOOP, we recently concluded our drilling program for 2023 and plan to return to a more historic level of activity in Oklahoma in 2024. The company currently has active frac crews in both asset areas and expect to turn in line over 50% of our forecasted 2023 activity in the second quarter of this year. Strong well productivity, base production performance and expected continuation of cycle time improvements in 2023 leave us confident in realizing our expected production for the full year and we are reiterating our 2023 guidance range of 1.0 million to 1.04 billion cubic feet equivalent per day and currently forecast the company to average towards the high end of the range for the full year. The company is beginning to realize modest service cost reductions in our 2023 capital program, primarily relating to savings in the mid single-digit range on certain high spin completion services. And combined with the expected operational efficiency improvements, facilitates confidence in our full year guidance range for capital expenditure of $425 million to $475 million. The team will continue to focus on operational improvements that are expected to translate into further savings in 2023 and we will provide updates in future quarters. In our Investor deck on Slide 10, we have included a more detailed outlook on our expected 2023 capital and production cadence. Production costs for the first quarter were $1.24 per million cubic feet equivalent, below the midpoint of our full year guidance range of $1.21 and to $1.29 per million cubic feet equivalent. Lease operating expenditures for the quarter were primarily driven by non-operated charges and higher than forecasted water volumes and associated disposal costs, driven by our strong production. The teams continue to aggressively work opportunities to optimize and reduce our per unit operating cost to improve on both LOE and midstream costs during the year. During the quarter, the company maintained our top quartile G&A spend with our reoccurring cash G&A, totaling $0.10 per million cubic feet equivalent. As previously discussed, the company is executing on accretive leasehold opportunities that increase our resource depth and provide optionality to our future development plans. We are actively pursuing these opportunities, and we'll provide an update to our efforts as we progress throughout the year. In closing, the current commodity environment reinforces the importance of responsible, efficient and sustainable development of our assets and the focus of the team to enhance margins, optimize efficiencies and protect the financial strength of the company. Our intention is to return substantially all of our adjusted free cash flow to our shareholders through common share repurchases after accounting for opportunistic acquisitions of accretive leasehold opportunities to further support the company's development in the years ahead. Our strong first quarter results, both financially and operationally positions the company to deliver attractive results while providing strategic optionality throughout 2023 and beyond. Now I'll turn the call over to Michael to discuss our financial results.

Thank you, John, and good morning, everyone. During the first quarter, the company continued to achieve strong results in almost every area of the business. Net cash provided by operating activities totaled $304 million during the first quarter, funding capital expenditures, total debt reduction of $145 million and the repurchase of $32.9 million of common stock. We reported adjusted EBITDA of $230 million during the quarter. And as John mentioned, generated adjusted free cash flow of $63 million for the same period, above analyst expectations and up sequentially, despite significantly lower prices quarter-over-quarter. The power of our business to generate EBITDA and free cash flow remains impressive, as we have now generated $763 million and $188 million of adjusted EBITDA and adjusted free cash flow, respectively, over the past 12 months, and we are on track to deliver similar cash results in 2023, despite what is shaping up to be a much softer natural gas price environment. Our all-in realized price during the first quarter was $3.71 per Mcfe, before the impact of cash settled derivatives and firm transportation. While our cash hedging gain for the quarter was minimal, despite the volatility in gas prices, our hedging position for the remainder of 2023 should provide ample downside protection should prices remain at current levels. Our natural gas price differential before hedges was negative $0.11 per Mcfe compared to the average daily NYMEX settled price during the quarter, which was better than analyst expectations and below the low end of our full year guidance range. Driven by seasonality and strip pricing increasing as we progress through the year, we reaffirm our natural gas differential guidance before hedges to average $0.20 to $0.35 per Mcf below NYMEX for the full year. On the capital front, we incurred capital expenditures of $127.2 million related to drilling and completion activity and $19.8 million related to leasehold and land investment. The trajectory of our drilling and completion capital as it relates to our full year 2023 capital budget will be weighted to the front half of the year as we expect approximately 60% to 65% of the drilling and completion capital for the year to occur during the first two quarters of 2023, and we are well-positioned to remain within our capital expenditure guidance for the remainder of the year. While we maintain the flexibility in our capital program to toggle activity levels as industry conditions change, our robust hedge position, healthy balance sheet and strong cash margins give us confidence that our capital program is rightsized for the current macro price environment. With respect to the current hedge position, we are pleased to have downside protection covering approximately 50% and of our remaining 2023 natural gas production at an average floor price of $3.45 per Mcf and roughly 415 million cubic feet per day of downside protection in 2024 at an average floor price of $3.90 per Mcf. We have also begun opportunistically layering in hedges for 2025 and currently have natural gas swap contracts totaling approximately 70 million cubic feet per day at an average price of $4.08 per Mcf. On the basis front, we have locked in around 40% of our 2023 natural gas basis exposure providing pricing security at our largest sales points for the remainder of the year. We believe there are better days ahead for natural gas, and yet we remain committed to a disciplined approach to hedging our future cash flows with plans to layer in targeted amounts of incremental hedges, primarily in 2024 and 2025 as opportunities present themselves. Perhaps most importantly on the financial side of our business, we recently concluded our spring borrowing base redetermination and amended our revolving credit facility. The amendment resulted in, among other things, an increase to our borrowing base from $1.0 billion to $1.1 billion and an increase in elected commitments from $700 million to $900 million. In addition, the company added two financial institutions to the bank group bringing the total financial institutions participating in the company's revolving credit facility to 16. Lastly, we extended the maturity of the credit facility by more than 18 months to May 1, 2027, pushing the earliest maturity of any outstanding debt for the company to 2026. Pro forma for the amendment at the end of the first quarter, Gulfport's liquidity increased by $200 million and totaled $829.1 million, consisting of $3.5 million in cash and $825.6 million of borrowing capacity under our revolver. We are very pleased to announce the results of this successful redetermination, which was driven by the underlying value of our high-quality resource base despite the current natural gas price environment. We greatly appreciate the support of our bank group as we position the company to opportunistically deliver value to our stakeholders. As I mentioned previously, we reduced our outstanding debt by $145 million during the quarter and ended the quarter with no borrowings on our revolving credit facility. Consistent with our natural gas peers, we realized a positive working capital impact of approximately $75 million as the benefit of high commodity prices at the end of 2022 converted into cash during the first quarter. John mentioned our financial leverage of 0.7 times at the end of the quarter, and we expect to remain less than one times levered as we move through 2023, even with strip prices at their current depressed levels. We have tremendous flexibility from a financial perspective going forward, and we are positioned to be opportunistic should situations arise that allow us to capture value for our stakeholders. Finally, we continued to execute our common stock repurchase program during the first quarter, during which we repurchased approximately 459,000 common shares at an average price of $71.61. As of April 26, we had cumulatively repurchased approximately 3.4 million shares of our common stock at an average share price of approximately $84.38, lowering our share count by 14%. We currently have approximately $112 million of availability under our $400 million program and plan to continue to return substantially all of our free cash flow in 2023, excluding accretive leasehold acquisitions to shareholders through common stock repurchases. In summary, this is an exciting time to be part of Gulfport. This year's program is off to a solid start, and our first quarter results highlight the company's ability to outperform expectations and we look forward to continued progress both operationally and financially as we move forward. With that, I will turn the call back over to the operator to open up the call for questions.

Good morning, guys. Thanks for the time. My first question, maybe Michael for you, is just on hedges, given the materially improved balance sheet you all have? And then obviously, the potential outlook for the positive gas prices, I think everybody is thinking about for late next year and certainly in 2025. I'm just wondering, can you talk about plans you and John might have to add more hedges in the out years. And is there certain levels, if you see certain price levels where you would come in?

Yes. I think that's a great question, Neal. I think we've just started on our 2025 program, as I mentioned. In general, I think as we get closer to that time period, we want to grow that hedge book to something in the 30% to 50% range as we look out a couple of years. So like I mentioned on the call here, we're just about approaching 10% of 2025 right now. And I think we feel good about something with a four handle in front of it. So we've used different structures to date, some collars and some swaps. We'll probably look to include some colors in our blend just so that we retain some of that upside. But I think as long as we're feeling pretty good about where the price is, and again, I think so far, that's been $4-ish and above, then I think you'll see us continue to add so that by the time we get a little bit closer to that time period, we went inside of the range that I gave that 30% to 50%.

Great point, okay. And then, just secondly, my question maybe for John, just on future Appalachian pad development. I'm just wondering, could you speak to any plans for I think when we spoke last, you talked about, I think, a two or three-well pad size. I'm just wondering could you talk about maybe plans for change in the pad size at all for -- to maybe help more -- get more efficiencies? And then secondly, I think in the slides you talked about stack Marcellus opportunities. I'm just wondering when you look at these pads, is that -- do you intend to incorporate that on any of these upcoming pads? So I guess my two questions is just on pad size and if you would incorporate Marcellus and any of these upcoming pads?

Yes. I appreciate it. Thanks for the question. With regards to pad sizes, we do have a pretty holistic approach and review when it comes to our development plans and operations and cycle time is certainly a big part of that. As we look forward for this year, it's a blend of some four wells, three wells and two-well pads. But I would say, as we look at the returns with regards to capital employed and the return on a pad level perspective, that midpoint of about three wells per pad initially and incoming back in subsequent years to round out the unit is a size that we're very familiar with. But keep in mind, too, there's always exceptions to that just depending on the land situation. So we may add the four, or may go down to two just depending on how much running room we have in the area. With regards to the Marcellus, we're pretty excited about this overall in the company. We're just now I think the beginning of Q3 is when we're looking to spud this first two-well pad, and it is on a current existing Utica pad. So as we look at our development moving forward in current PDP locations and pad locations, throughout that area that we feel like is potentially prospective to Marcellus, we absolutely will take advantage of the current existing pads and any future pads in that eastern area of Belmont in Northern Monroe that's close to the river there where we feel like it's -- we're pretty bullish on Marcellus. So we certainly consider those whenever we consider Marcellus and Utica development. And the cadence and pace of which one, we would drill first certainly depends on the delineation efforts of the Marcellus this year. So we're looking forward to getting those results in at the end of the year and assessing them. So I appreciate the question.

Look forward to activity. Thanks guys.

Thanks.

Thank you. Next question today is coming from Tim Rezvan from KeyBanc Capital Markets. Your line is now live.

Good morning, everybody. Thank you for taking my questions. I'm not sure if I counted accurately, but I thought I heard the word opportunistic three times in regards to leasing opportunities. It looks like you spent $20 million in the first quarter, you have a budget for, I believe, $50 million to $75 million. And just curious, with the balance sheet where it is, how do you manage – what's the governor, I guess, on those acquisitions, because we don't expect much EBITDA with that. Do you think about leverage at one-time an upper bound, or would you go over it for the right package? Just trying to understand what's out there. It sounds like you have a real appetite, and just trying to understand as we can think about the uplift to inventory?

Yeah. No, I appreciate the question, Tim. First of all, I'll start out by saying that we're really pleased with the asset base of the company, whether it's the condensate window in the SCOOP, or the condensate window in Ohio, dry gas in Ohio and now the Marcellus, all these areas provide a flow of toggles and optionality in the future. So as we look at adding the quantity of inventory, this is a very good use of cash for us. And certainly, any accretive acquisitions that we would be picking up, we wouldn't be putting it at the back of the line with regards to the queue in drilling, it would be more front loaded just because of the quality and the tier of acreage that we'd be buying. As we move forward throughout this year, those efforts are already starting to be underway. We do certainly like the word opportunistic I suppose. I didn't catch that, but thanks for pointing it out. But it is a very important tenet as we go through this year with regards to bolstering our inventory position in high-quality areas. So as we get more spend with regards to the land and more definitive actionable closed acreage, probably midyear, we'll be talked a little bit of more about bifurcating that free cash flow use for some of these acquisitions versus the blocking and tackling of the $50 million to $75 million that we're currently undergoing. We are actually pursuing both the blocking and tackling, filling in units, extending lateral links for near-term opportunities, as well as these accretive opportunities and look forward to kind of discussing, again, that free cash flow use in particular and how much of that and quantifying it as we move into the second quarter call. So that answers your question. Mike, if you have any more comments.

Yeah, Tim, this is Michael. I just -- I might add to that, you mentioned the balance sheet. I mean, I think this is really kind of when we talk about flexibility that we have. I think this is where it's kind of exciting, right? So the leverage, as you mentioned, is in a good place. I think we're in the right zip code for leverage. That could move up or down a little bit depending on what happens to the strip and EBITDA and the denominator of that calculation. But I think we look at all the various opportunities internally, whether it's bolt-on acreage, whether it's returning cash to our shareholders or a number of other ways that we can use our free cash flow, and it's a consistent discussion with our Board to identify the highest and best uses of our excess cash flow. So right now, that's the accretive acquisitions of leasehold that John talked about and some -- and share repurchases. But certainly, as we go forward, we'll continue to assess that. But as you mentioned, I think the balance sheet is really what gives us the flexibility to kind of play in different areas, and we'll continue to be kind of dynamic in the way that we think about that.

Okay. Okay. Yeah. That makes sense. And I guess we'll have to stay tuned next quarter. And as my follow-up, I just wanted to dig in a little more. You talked about really strong early results from that three-well pad in Monroe County and how it's possibly early stage is outperforming that 2022 kind of average in terms of 2.1 Bcf of EUR per 1,000 feet. Can you just refresh my memory, like what wells or how many wells are in that 2022 data set? And are those kind of directly around that Monroe pad or do you still like that's like an ideal kind of apples-to-apples comparison, this pad versus 2022 vintage?

Yeah, sure. This is Matt. I appreciate the question. We do have approximately, I think, it's six wells in the area, the more scary pads, nearby in that Central Monroe area, strong results from last year kind of trailing into this year. That's kind of the 2.1 Bcf per 1,000-foot benchmark. And so as John mentioned, these three wells that we just turned in line, very strong results, high initial pressures, very low drawdowns. We're very excited about the productivity of these wells still very early on, but initial indications look to be slightly better than what those wells were. So I think for us, it's just getting those wells online and then looking forward to those results that does bolster our inventory set in that area, which is quite expensive and probably hasn't had as much attention in the market as we believe it should have. And so we're pretty excited about those results and look forward to sharing more as we get more data throughout the year.

Okay. Thanks. I appreciate the comments, everybody.

Thank you.

Thank you. We reach the end of our question-and-answer session. I'd like to turn the floor back over to John for any further or closing comments.

Yeah, I'd like to close out by just reiterating the company is positioned well for value. As we look out in for the gas fundamentals and the macro improvement over the next 18 months is a very positive thing. Our strong balance sheet is something we're leaning in on low debt, the quality of our assets and quite frankly, the ability for the company to generate sustainable free cash flow at a variety of commodity prices. This cash flow that is targeted to the value of the company and enhancing that with regards to shareholder returns and quality adds for inventory. So we appreciate everybody's participation on the call. We're excited about the quarter and the year-to-date results, and we look forward to our next call to update you on substantial amount of turn a line that we have planned. Thank you very much.