Gulfport Energy Update - Nov 2

[dan_s]

As I have posted here many times, Gulfport is one of the most profitable companies in the Sweet 16. Their Q3 results smashed the First Call EPS estimates and, based on my forecast, they will do it again in Q4. Since they have 78% of the natural gas hedged at $3.01, I have a HIGH level of confidence in my forecast model for this one.

Two analysts have submitted updates to Reuters since the Q3 earnings release and both of them rate it a BUY with a $16.00 price target.

Looking forward to 2019. Gulfport should generate the following with a realized natural gas price of $2.50/mcf:
Revenues of $1.6 Billion (compares to First Call's estimate of $1.48 Billion)
Earnings per share of $1.79 (compares to First Call's estimate of $1.45)
Operating CFPS of $5.11 (compares to First Call's estimate of $4.78)

How does a company with a strong balance sheet, funding double digit production growth (~26% YOY in 2018) entirely with cash flow from operations and lots of running room trade at less than 2X operating CFPS? I can't explain it other than the Wall Street Gang hates "gassers".

My valuation for GPOR stays at $29.00, but IMHO it deserves a higher valuation.

Situations like this usually end up being resolved by a larger company taking them over. Large shareholders put pressure on the BOD to do something to get the value they see and deserve.

[cmm3rd]

Dan,

Is GPOR's debt (measured by whatever metric is used in the sector, perhaps as a percentage of EV or EBITDA) greater than that of its peers? Just trying to figure out why its valuation is apparently so much lower than that of RRC and AR.

Also, was the departure of their CEO a result of BOD's concern with share price performance?

Finally, what are some of the better energy analysts (or those to whom you have access, such as John White and RJ) saying about GPOR's prospects from here?

Thanks,

Scott

[cmm3rd]

Dan, you asked:
How does a company with a strong balance sheet, funding double digit production growth (~26% YOY in 2018) entirely with cash flow from operations and lots of running room trade at less than 2X operating CFPS? I can't explain it other than the Wall Street Gang hates "gassers".

Could any of the following (GPOR vs. COG, a gasser whose valuation is much higher) help explain GPOR's very low valuation?
1. net debt/ttm EBITDA = 2.1x vs. 0.9x
2. debt/market cap = 2.1/1.5 vs. 1.3/10.6
3. dividend= 0 vs. $0.28/1.1%

Above taken from chart in this article (know you dislike SA, but occasionally there are useful articles there): https://seekingalpha.com/article/422517 ... her-reward

Also, does WS agree with you that GPOR's balance sheet is actually "strong"?

The author argues that the market wants to see not just cash flow (which, as you point out, GPOR has a lot of), but free cash flow (the author says GPOR will be FCF neutral in 2019).

Is the market looking for FCF (not just production growth within CF)?

[dan_s]

In the last 3 months, 9 ranked analysts set 12-month price targets for GPOR. The average price target among the analysts is $13.67.
The most recently updated report submitted to Reuters on 11-27-2018 is from Neal Dingmann at SunTrust Robinson.
Neal is a very sharp energy sector analysts. He rates GPOR a BUY with a $15/share valuation.

On November 15th:
Subash Chandra at Guggenheim rated it a BUY with a $12.00 valuation.
Holly Stewart Scotiabank rated it a BUY with a $16.00 valuation.

Note that most of the reports used in the First Call valuation are dated way before the recent spike in natural gas prices.

CEO asked to leave because the Board found out that he was using the company plane for personal trips. Probably not the only reason, but that is what I heard.

Gulfport's balance sheet is very strong with Debt to Equity under 1.0. Most companies are happy with Debt to Equity of 2.0. Keep in mind that balance sheet ratios don't mean that much in this industry because oil & gas assets are always on the books at less than market value. If not, GAAP accounting rules require a mark-to-market writedown. There is zero reason for a "gasser" to be trading under book value these days.

At the end of 2017 Gulfport had 5.4 TCFE of net PROVED RESERVES (P1). A TCFE of proved reserves has a market value of at least $1 Billion and Gulfport's year-end reserve report may show over 7 TCFE of proved reserves. Plus, they have a lot more P2 reserves and P2 is very close to P1 in shale plays. SEC rules for defining P1 reserves is super conservative.

Here is your homework:
> Take a hard look at Column S on the forecast model.
> Download it to Excel and put in the natural gas price you believe they will get for their gas in 2019.
> Watch what higher gas price does for their Cash Flow from Operations on Row 52.