QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
☐
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-19514
Gulfport Energy Corporation
(Exact Name of Registrant As Specified in Its Charter)
Delaware
73-1521290
(State or Other Jurisdiction of Incorporation or Organization)
(IRS Employer Identification Number)
3001 Quail Springs Parkway
Oklahoma City,
Oklahoma
73134
(Address of Principal Executive Offices)
(Zip Code)
(405) 252-4600
(Registrant Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, par value $0.01 per share
GPOR
Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). Yesý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated filerý Accelerated filer ¨
Non-accelerated filer ¨ Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
As of October 25, 2019, 159,709,221 shares of the registrant’s common stock were outstanding.
Oil and natural gas properties, full-cost accounting, $2,814,334 and $2,873,037 excluded from amortization in 2019 and 2018, respectively
10,551,713
10,026,836
Other property and equipment
96,233
92,667
Accumulated depletion, depreciation, amortization and impairment
(5,063,413
)
(4,640,098
)
Property and equipment, net
5,584,533
5,479,405
Other assets:
Equity investments
73,962
236,121
Long-term derivative instruments
23,419
—
Deferred tax asset
205,853
—
Inventories
7,022
5,344
Operating lease assets
13,920
—
Operating lease assets - related parties
48,449
—
Other assets
11,653
13,803
Total other assets
384,278
255,268
Total assets
$
6,273,148
$
6,051,036
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities
$
439,019
$
518,380
Short-term derivative instruments
429
20,401
Current portion of operating lease liabilities
12,848
—
Current portion of operating lease liabilities - related parties
21,017
—
Current maturities of long-term debt
622
651
Total current liabilities
473,935
539,432
Long-term derivative instruments
72,040
13,992
Asset retirement obligation—long-term
59,819
79,952
Uncertain tax position liability
3,127
3,127
Non-current operating lease liabilities
1,072
—
Non-current operating lease liabilities - related parties
27,432
—
Long-term debt, net of current maturities
2,076,569
2,086,765
Total liabilities
2,713,994
2,723,268
Commitments and contingencies (Note 8)
Preferred stock, $0.01 par value; 5,000,000 shares authorized (30,000 authorized as redeemable 12% cumulative preferred stock, Series A), and none issued and outstanding
—
—
Stockholders’ equity:
Common stock - $0.01 par value, 200,000,000 shares authorized, 159,709,221 issued and outstanding at September 30, 2019 and 162,986,045 at December 31, 2018
1,597
1,630
Paid-in capital
4,205,158
4,227,532
Accumulated other comprehensive loss
(50,679
)
(56,026
)
Accumulated deficit
(596,922
)
(845,368
)
Total stockholders’ equity
3,559,154
3,327,768
Total liabilities and stockholders’ equity
$
6,273,148
$
6,051,036
See accompanying notes to consolidated financial statements.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These consolidated financial statements have been prepared by Gulfport Energy Corporation (the “Company” or “Gulfport”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), and reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods reported in all material respects, on a basis consistent with the annual audited consolidated financial statements. All such adjustments are of a normal, recurring nature. Certain information, accounting policies, and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles ("GAAP") have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the summary of significant accounting policies and notes included in the Company’s most recent annual report on Form 10-K. Results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results expected for the full year.
Statements of Cash Flows
During the third quarter of 2019, the Company identified that certain activities were misclassified between cash flows from operating activities and cash flows from investing activities. These activities had been included in accounts payable, accrued liabilities and other and presented as cash flows from operating activities while they should have been presented as additions to oil and natural gas properties in cash flows from investing activities. The Company corrected the previously presented statements of cash flows for these additions and in doing so, for the nine months ended September 30, 2018, the consolidated statements of cash flows and the condensed consolidating statements of cash flows were adjusted to increase net cash flows provided by operating activities by $21.8 million with a corresponding increase in net cash flows used in investing activities. The Company has evaluated the effect of the incorrect presentation, both qualitatively and quantitatively, and concluded that it did not have a material impact on any previously filed annual or quarterly consolidated financial statements.
Recently Issued Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842). The standard supersedes the previous lease guidance by requiring lessees to recognize a right-to-use asset and lease liability on the balance sheet for all leases with lease terms of greater than one year while maintaining substantially similar classifications for financing and operating leases. Subsequent to ASU 2016-02, the FASB issued several related ASU’s to clarify the application of the lease standard. The Company adopted the new standard as of January 1, 2019 on a prospective basis using the simplified transition method permitted by ASU 2018-11, Leases (Topic 842): Targeted Improvements. The comparative information has not been restated and continues to be reported under the historic accounting standards in effect for those periods. See Note 13 for further discussion of the lease standard.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, this ASU eliminates the probable initial recognition threshold in current GAAP and instead, requires an entity to reflect its current estimate of all expected credit losses. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposure, reinsurance receivables and any other financial assets not excluded from the scope that have the contractual right to receive cash. Additionally, in May 2019, the FASB issued ASU No. 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief. The amendments in this update allow preparers to irrevocably elect the fair value option, on an instrument-by-instrument basis, for eligible financial assets measured at amortized cost basis upon adoption of 2016-13. The guidance is effective for periods after December 15, 2019, with early adoption permitted. The Company is in the process of designing processes and controls needed to comply with the requirements of the new standard. Although the standard will have an impact, the Company does not currently anticipate the ASU to have a material effect on its consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which removes, modifies, and adds certain disclosure requirements on fair value measurements. The amendment will be effective for reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company does not anticipate the new standard to have a material effect on its consolidated financial statements and related disclosures.
In August 2018, the FASB also issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the accounting for costs associated with implementing a cloud computing arrangement in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtain internal-use software. The amendment will be effective for reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company does not anticipate the new standard to have a material effect on its consolidated financial statements and related disclosures.
In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606, which provides guidance on how to assess whether certain transactions between participants in a collaborative arrangement should be accounted for within the ASU No. 2014-09 revenue recognition standard discussed above. The amendment will be effective for reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company does not anticipate the new standard to have a material effect on its consolidated financial statements and related disclosures.
In July 2019, the FASB issued ASU No. 2019-07, Codification Updates to SEC Sections, Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates. This ASU amends various SEC sections within the FASB Codification to align with the updated requirements of certain SEC final rules and includes miscellaneous updates to agree the language in the Codification to the electronic Code of Federal Regulations. ASU No. 2019-07 is effective upon issuance, and the Company has adopted the changes with no material impacts.
2.
PROPERTY AND EQUIPMENT
The major categories of property and equipment and related accumulated depletion, depreciation, amortization and impairment as of September 30, 2019 and December 31, 2018 are as follows:
September 30, 2019
December 31, 2018
(In thousands)
Oil and natural gas properties
$
10,551,713
$
10,026,836
Other depreciable property and equipment
90,712
87,146
Land
5,521
5,521
Total property and equipment
10,647,946
10,119,503
Accumulated depletion, depreciation, amortization and impairment
(5,063,413
)
(4,640,098
)
Property and equipment, net
$
5,584,533
$
5,479,405
Under the full cost method of accounting, the Company is required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the Company's oil and natural gas properties. At September 30, 2019, the net book value of the Company's oil and gas properties, less related deferred income taxes, was above the calculated ceiling as a result of reduced commodity prices for the period leading up to September 30, 2019. As a result, the Company was required to record an impairment of its oil and natural gas properties under the full cost method of accounting in the amount of $35.6 million for the three and nine months ended September 30, 2019. No impairment was required for oil and natural gas properties for the three and nine months ended September 30, 2018. Additional impairments of oil and natural gas properties are expected to occur in upcoming quarters should commodity prices continue below the average of the previous 12 months. However, the amount of any future impairments is difficult to predict as it depends on changes in commodity prices, production rates, proved reserves, evaluation of costs excluded from amortization, future development costs and production costs.
Included in oil and natural gas properties at September 30, 2019 is the cumulative capitalization of $229.6 million in general and administrative costs incurred and capitalized to the full cost pool. General and administrative costs capitalized to
the full cost pool represent management’s estimate of costs incurred directly related to exploration and development activities such as geological and other administrative costs associated with overseeing exploration and development activities. All general and administrative costs not directly associated with exploration and development activities were charged to expense as they were incurred. Capitalized general and administrative costs were approximately $9.8 million and $26.3 million for the three and nine months ended September 30, 2019, respectively, and $10.6 million and $28.8 million for the three and nine months ended September 30, 2018, respectively.
The average depletion rate per Mcfe, which is a function of capitalized costs, future development costs and the related underlying reserves in the periods presented, was $1.01 and $0.94 per Mcfe for the nine months ended September 30, 2019 and 2018, respectively.
The following table summarizes the Company’s non-producing properties excluded from amortization by area at September 30, 2019:
September 30, 2019
(In thousands)
Utica
$
1,464,803
MidContinent
1,349,191
Other
340
$
2,814,334
At December 31, 2018, approximately $2.9 billion of non-producing leasehold costs was not subject to amortization.
The Company evaluates the costs excluded from its amortization calculation at least annually. Subject to industry conditions and the level of the Company’s activities, the inclusion of most of the above referenced costs into the Company’s amortization calculation typically occurs within three to five years. However, the majority of the Company’s non-producing leases in the Utica Shale have five-year extension terms which could extend this time frame beyond five years.
Divestitures
In December of 2018, the Company entered into an agreement to sell its non-core assets located in the West Cote Blanche Bay ("WCBB") and Hackberry fields of Louisiana to an undisclosed third party for a purchase price of approximately $19.7 million. The sale closed on July 3, 2019, subject to customary post-closing terms and conditions, with an effective date of August 15, 2018. The Company received approximately $9.2 million in cash and retained contingent overriding royalty interests. In addition, the Company could also receive contingent payments based on commodity prices exceeding specified thresholds over the two years following the closing date. See Note 9 for further discussion of the contingent consideration arrangement, which was determined to be an embedded derivative. The buyer assumed all plugging and abandonment liabilities associated with these assets which totaled approximately $30.0 million at the divestiture date.
A reconciliation of the Company’s asset retirement obligation for the nine months ended September 30, 2019 and 2018 is as follows:
September 30, 2019
September 30, 2018
(In thousands)
Asset retirement obligation, beginning of period
$
79,952
$
75,100
Liabilities incurred
5,769
1,468
Liabilities settled
(117
)
(719
)
Liabilities removed due to divestitures
(30,035
)
—
Accretion expense
3,173
3,056
Revisions in estimated cash flows
1,077
(374
)
Asset retirement obligation as of end of period
59,819
78,531
Less current portion
—
120
Asset retirement obligation, long-term
$
59,819
$
78,411
3.
EQUITY INVESTMENTS
Investments accounted for by the equity method consist of the following as of September 30, 2019 and December 31, 2018:
Carrying value
Loss (income) from equity method investments
Approximate ownership %
September 30, 2019
December 31, 2018
Three months ended September 30,
Nine months ended September 30,
2019
2018
2019
2018
(In thousands)
Investment in Tatex Thailand II, LLC
23.5
%
$
—
$
—
$
—
$
(137
)
$
(2,085
)
$
(241
)
Investment in Grizzly Oil Sands ULC
24.9999
%
49,546
44,259
41
275
380
833
Investment in Timber Wolf Terminals LLC(1)
—
%
—
—
—
—
—
536
Investment in Windsor Midstream LLC
22.5
%
39
39
—
—
—
(9
)
Investment in Mammoth Energy Services, Inc.
21.8
%
24,377
191,823
43,041
(12,996
)
166,096
(35,708
)
Investment in Strike Force Midstream LLC(2)
—
%
—
—
—
—
—
(693
)
$
73,962
$
236,121
$
43,082
$
(12,858
)
$
164,391
$
(35,282
)
(1)
On June 5, 2018, the Company received its final distribution from Timber Wolf Terminals LLC ("Timber Wolf"). See below under Timber Wolf Terminals LLC for information regarding the subsequent dissolution of Timber Wolf.
(2)
On May 1, 2018, the Company sold its 25% interest in Strike Force Midstream LLC ("Strike Force") to EQT Midstream Partners, LP. See below under Strike Force Midstream LLC for information regarding this transaction.
The tables below summarize financial information for the Company’s equity investments as of September 30, 2019 and December 31, 2018.
The Company has an indirect ownership interest in Tatex Thailand II, LLC ("Tatex II"). Tatex II held an 8.5% interest in APICO, LLC (“APICO”), an international oil and gas exploration company, before selling its interest in June 2019. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering approximately 108,000 acres which includes the Phu Horm Field. The Company received $2.1 million in distributions from Tatex II during the nine months ended September 30, 2019, of which $1.9 million related to proceeds from the sale of its interest in APICO.
Grizzly Oil Sands ULC
The Company, through its wholly owned subsidiary Grizzly Holdings Inc. (“Grizzly Holdings”), owns an approximate 24.9999% interest in Grizzly Oil Sands ULC (“Grizzly”), a Canadian unlimited liability company. The remaining interest in Grizzly is owned by Grizzly Oil Sands Inc. (“Oil Sands”). As of September 30, 2019, Grizzly had approximately 830,000 acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. The Company reviewed its investment in Grizzly for impairment at Septem