Gulfport Energy Corp Q2 FY2022 Earnings Call

Good day, ladies and gentlemen, and welcome to your Gulfport Energy Corporation Second Quarter 2022 Earnings Call. (Operator Instructions) At this time, it is my pleasure to turn the floor over to your host, Jessica Antle. Ma'am, the floor is yours.

Thank you, Melinda, and good morning. Welcome to Gulfport Energy Corporation's Second Quarter 2022 Earnings Conference Call. I am Jessica Antle, Director of Investor Relations. Speaker on today's call include Tim Cutt, Chief Executive Officer; and Bill Buese, Executive Vice President and Chief Financial Officer. 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 reference non-GAAP measures. Reconciliations to the comparable GAAP 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 Tim.

Thanks, Jessica, and good morning, and thank you for joining the call. I will begin this morning with a summary of the second quarter highlights followed by an operational update before turning the call to Bill to discuss the financials. As you saw from our release, we had a strong quarter, delivering 960 million cubic feet equivalent per day of production and $80 million of free cash flow. We exited the quarter with a conservative leverage ratio of 0.8x and liquidity of $469 million. We made significant progress in our share repurchase program and have repurchased $189 million year-to-date, decreasing our outstanding shares by 8% and representing approximately 50% of full-year 2022 expected free cash flow. In addition, the Board has recently approved an incremental $100 million of share repurchases, taking the program to $300 million in total. Turning to production, our strong second quarter results were driven by the continued outperformance of our 2021 development program, excellent uptime across our operations and the robust productivity from our SCOOP Nelda pad brought online in March of 2022. Given the timing of our development program, we expect production to decline slightly in the third quarter before growing significantly in the fourth quarter. Following the casing remediation discussed last quarter in the Utica, we have successfully brought on the Charlotte pad and are within days of turning to sales at Clark pad. The delays associated with these pads, along with the approximately 45-day knock-on effect to the timing of our subsequent completion program, have caused us to lower the high end of our 2022 production guidance range. This is strictly a timing issue. But for the timing shift, we would have expected to exceed the top end of our production guidance for 2022. We expect strong performance from the remaining Utica and SCOOP turn-in-lines in the back half of the year. Our strong first half production results and expectations for the remainder of the year are clearly demonstrated on Slide 8 of the IR deck. As previously discussed, we continue to expect to grow production in 2023 by more than 5% over 2022. Turning to our development program, during the second quarter, we turned in line 3 wells in the Utica and are projecting to bring 7 gross wells online in the Utica and 2 gross wells in the SCOOP during the third quarter. On Page 10 of our IR deck, you can see how strong the 5 Nelda development — 5-well development in the SCOOP continues to perform, which is now expected to remain on flat time production for over half of the year. The next page illustrates the significant improvement in development costs and well performance generated by these Nelda wells and our 2021 program compared to historical development driven by the team integrating learnings across both of our assets and focusing on optimizing value. We highlighted a similar slide for the Utica in early 2022, and those wells continue to perform well compared to historical development. To improve the efficiency of our drilling program and mitigate the risk of releasing and picking up rigs in a tight market, we are implementing a continuous rig program in the Utica and anticipate doing the same in the SCOOP in 2023. On the completion side, the market for frac units is also tight. To create a more continuous frac schedule, we are evaluating the opportunity to add a top-hole rig in the Utica during the fourth quarter of 2022, accelerating our drilling program entering 2023. We would plan to continue running the top-hole rig alongside our current rig for the first half of the year and expect this activity level could enable us to execute a continuous 8-month frac program in the Utica starting in January of 2023. In order to create the option for a top-hole rig program and stay ahead of our current continuous rig program, we have increased our 2022 land capital by $10 million. We are still evaluating all available options for 2023. And if we choose to proceed with this plan, we will discuss the costs and the benefits of this opportunity during our next call. On capital, we continue to experience inflationary pressure and now expect inflation to be up 20% to 25% this year, an increase from 15% to 20% discussed last quarter. This, along with the additional $10 million in land capital, takes the midpoint of our capital guidance to $425 million for 2022. Despite these impacts, our guidance for free cash flow remains unchanged. We continue to focus on improving our total per unit operating costs and are actively identifying efficiencies across the company. We continue to optimize the reuse of water in our frac operations in the Utica. And we released all winter maintenance rental equipment during the quarter, resulting in second-quarter LOE of $0.16 per Mcfe, down 16% from the first quarter of 2022. In summary, we remain focused on cost-effective production, capital discipline and delivering peer-leading development costs per Mcfe. We have implemented wider spacing and more intensive completion designs, which continue to deliver exceptional results. Our low leverage, along with significant free cash flow, will allow us to organically grow the business while returning significant capital to our shareholders. Our commitment to returning capital to shareholders is further demonstrated by the Board's $100 million increase to the share repurchase program. I'll now turn the call over to Bill to discuss the financial results.

Thanks, Tim, and good morning, everyone. As Tim just discussed, we delivered another strong quarter on both the operational and financial fronts. I will now spend the next few minutes providing a high-level overview of our second quarter financial results, liquidity position and return of capital initiatives before opening the call up for Q&A. We reported net income of $257 million and generated $205 million of adjusted EBITDA during the second quarter of '22. Net cash provided by operating activities totaled $130 million during the second quarter. And we generated free cash flow of $80 million for the same period. We utilized the vast majority of this free cash flow to fund our common share repurchase program during the quarter. On the derivative front, we focused our attention on layering on derivative contracts for 2024 during the second quarter. And we currently have natural gas swap contracts totaling approximately 55 million cubic feet per day at an average price of $3.98 per Mcf and natural gas collar contracts totaling approximately 60 million cubic feet per day at an average floor price of $3.50 per Mcf and an average ceiling price of $7.49 per Mcf. Please see our Form 10-Q for additional details on our derivative portfolio. Turning to our balance sheet. At the end of the second quarter, total assets were approximately $2.4 billion while total gross debt was approximately $674 million, consisting of $124 million outstanding under our credit facility and $550 million of outstanding senior notes. We also had $7 million of cash on hand and $113 million of letters of credit outstanding at the end of the quarter. On the liquidity front, we exited the second quarter with $469 million of total liquidity, consisting of the $7 million of cash and $462 million of borrowing capacity under our revolver. Moving on to our return of capital initiatives. We made significant progress executing on our common share repurchase program during the second quarter, during which we repurchased approximately 1.4 million common shares at an average price of $90.3 for the total cost of $127.5 million. Since the inception of our share repurchase program in March of '22, we have repurchased approximately 2.2 million common shares at an average price of $86.59 for a total cost of $189.3 million, which represents over 8% of our outstanding common shares. As Tim mentioned in his comments earlier, the Board authorized an additional $100 million to be added to our common share repurchase program. With this increase, we now have authorization to repurchase a total of $300 million of our common shares, which is expected to be fully funded with the free cash flow generated in 2022. We will continue to repurchase shares opportunistically. And as was the case with the earlier authorization, the timing and amount of any share repurchases continues to be subject to available liquidity, market conditions, credit agreement restrictions, legal requirements as well as any other applicable factors. We will continue to evaluate all return of capital options, including additional share repurchases and instituting a common dividend in future quarters. Moving on to guidance. For the reasons Tim mentioned in his comments earlier, we now forecast a capital investment range of $410 million to $440 million in 2022, which includes $35 million of capital for leasehold. Our updated 2022 total production guidance is 975 million to 1,000 million cubic feet equivalent per day, and we continue to expect 2023 production volumes to grow more than 5% over 2022. In addition to these updates to guidance, we have also updated guidance for our GP&T expense per Mcfe for the year, which is detailed in our IR deck on Slide 15. Despite these adjustments, we maintained our free cash flow guidance of $375 million to $425 million for the full year 2022. In summary, we continue generating significant free cash flow during the quarter, which allowed us to return a significant amount of capital to shareholders through our share repurchase program. We are confident that our strong asset base will continue to support our ability to generate positive free cash flow in future quarters at a wide range of commodity prices, allowing us to continue to return capital to shareholders, all while maintaining a strong financial position, including a leverage ratio below 1x. With that, we will now open the call up for questions.

We will now open the call up for questions, starting with our first question from Neal Dingmann with Truist Securities.

My first question relates to the overall free cash flow strategy. Given your progress in the restructuring and the success you've achieved, do you continue to believe that returning value to shareholders primarily through buybacks is more prudent than using the cash to expand at this point? Also, do you think you can achieve efficiencies with the one rig you require in the top area, and are there any plans to reallocate this capital regionally?

Yes. I’ll answer the first question regarding scale versus buybacks. The good news is that we can pursue both strategies. The Board has approved an additional $100 million for buybacks. In our third quarter, cash flow was a bit tighter as we completed several deferred projects, but we expect significant cash generation in the fourth quarter, which will carry into next year. We can manage both growth and returns to shareholders. To grow scale, we are adjusting our land budget and considering a second rig in the Utica, which we refer to as a top-hole rig. This rig will drill the entire vertical section of the well, after which we will use a larger rig for the curve and horizontal drilling. This setup allows us the flexibility for additional growth if market conditions are favorable. We aim to maintain a steady drilling program as well as a continuous fracking operation. Given the tight market for fracking rigs, securing a rig for continuous use is crucial. If we successfully implement our plan for the top-hole rig, we believe we can execute continuous fracking for 8 to 9 months next year, which would lead to growth and lay the groundwork for a more efficient program moving forward. What was the second part of your question?

Yes, I'm curious about the regional aspect. You mentioned the top-hole rig. Do you have any thoughts on having all activity in the Utica, or possibly in the SCOOP after those 8 or 9 months? Currently, it seems like there is a 75-25 split. I'm just wondering if that split will continue.

Yes. I mean, over the long term, it kind of has to be the split because that's how our inventory lays out. But in the near term, the results we're seeing in the SCOOP, we're quite encouraged. And that's why we haven't come out with definitive 2023 guidance yet. We want to see how we can maximize what's going on in the SCOOP. And so we believe going to a continuous rig is the right thing to do, but we also want to bring as many of these good wells online as quickly as we can. So that's what we're going to be doing over the next few months. When we come out next quarter, we'll provide guidance for ultimately what we're going to do in the Utica. We feel like we're getting on step in the Utica. And the program we've described should lead to efficiencies in the SCOOP just by the nature of where that is and the amount of inventory we have and the activity level. It's hard to think we'd get to a continuous fracking program there, but certainly moving to a more continuous drilling program could be very helpful.

There are no further questions. We turn back to Tim Cutt for closing remarks.

All right. Thank you very much. We appreciate the interest today. Neal, thanks for the questions. Of course, like always, if you have further questions, please reach out to Jessica and our Investor Relations team. Thank you very much, and that concludes the call.

Thank you. This concludes today's teleconference. We thank you for your participation. You may disconnect your lines at this time. Have a great day.