Energy Prospectus

GPOR continues to deliver outstanding operating results, but we all know the natural gas market sucks right now. Based on what I hear from RRC, I do expect better Marcellus/Utica gas prices next year thanks to more takeaway capacity in the region early in 2016. I will work on GPOR's forecast tomorrow. My eyes are giving out on me this afternoon, so I need to walk away from the computer for awhile. - Dan


Gulfport Energy Corp: Reduced 2016 Outlook
Drew Venker, CFA – Morgan Stanley
November 5, 2015 3:19 AM GMT

Gulfport reported a 9% production beat driven by outperforming dry Utica wells, but lowered its 2016 outlook in light of lower gas realizations and curtailments. Slightly negative update.
Strong well productivity drives beat but hurts realizations. Gulfport reported 3Q15 production of 647 MMcfe/d (+37% QoQ), 9% ahead of consensus and 8% above the midpoint of 3Q15 guidance. The beat was attributed to outperforming wells in its dry gas area, which based on our modeling and the 15.4 net completions during the quarter implies 15% outperformance vs. GPOR's 19 Bcf EUR (weighted average of all 3 dry gas areas). Given the significantly higher volumes, Gulfport was producing above FT capacity and selling a higher percentage of gas into local markets in 3Q, which lead to realizations 8% below our estimate ($2.07/Mcf vs. MS of $2.25/Mcf).

Curtailing 4Q15-1Q16 volumes to preserve realizations despite accelerating completions. Despite maintaining FY15 production guidance, the company has elected to curtail 100 MMcf/d in order to match FT capacity in 4Q and avoid selling gas into local markets which are pricing around $1.00/MMBtu in November (M2 and Dominion South). The curtailments will begin in November and likely last until the Rice gathering system becomes operational in February 2016, providing access to pipelines moving gas to Midwest markets. In conjunction with the announced curtailments, Gulfport accelerated 10 net completions due to operational efficiencies and shifting wells from 1Q16 into 4Q16 to avoid $500,000/well in incremental costs associated with completing wells in the colder winter months. The increased completions results in $86 million higher D&C capex in 2015 to $667-677 million; however, it also results in similar savings in 2016. While we concede that the update is somewhat confusing, we believe it is the prudent move to preserve margins when possible while maintaining full-year guidance.
2016 activity reduced in light of lower pricing.

Gulfport's 3rd quarter production was way over my forecast. This company has increased production from 11,250 boepd in 2013 to over 100,000 boepd now. It is an amazing growth story. - Dan

Production and Realized Prices
Gulfport’s net daily production for the third quarter of 2015 averaged approximately 647.1 MMcfe per day. For the third quarter of 2015, Gulfport’s net daily production mix was comprised of approximately 81% natural gas, 12% natural gas liquids and 7% oil. Subsequent to the third quarter of 2015, estimated October 2015 net production averaged approximately 706.3 MMcfe per day.

Gulfport’s realized prices for the third quarter of 2015 were $3.72 per Mcf of natural gas, $0.19 per gallon of NGL and $57.02 per barrel of oil, resulting in a total equivalent price of $3.87 per Mcfe. Gulfport's realized prices for the third quarter of 2015 include an aggregate non-cash unrealized hedge gain of $62.2 million. Before the impact of derivatives, realized prices for the third quarter of 2015, including transportation costs, were $2.07 per Mcf of natural gas, $0.19 per gallon of NGL and $40.53 per barrel of oil, for a total equivalent price of $2.33 per Mcfe.

I have updated my forecast model for GPOR and it will be posted to the EPG website later today.

I have lowered my valuation to $50.10/share, compared to First Call's price target of $46.00.

The lowered valuation is because of the terrible prices they are getting for their NGLs. In 2014, GPOR sold NGLs for $48.12/bbl. In the 3rd quarter they only got $7.98/bbl for NGLs.

If you look at a lot of other analysts forecast models (like I do), you will notice a wide gap in the forecasts for 2016. For example, the earnings per share forecasts submitted to First Call (Reuters) for Gulfport for 2016 range from $-2.05 to $0.51. That is quite a spread, and very confusing for a lot of investors. Here is why that happens:
> Each Wall Street firm has their own commodity price deck for next year and their analysts are required (by the firm) to assume those oil & gas prices in their forecasts.
> A lot of analysts do not seem to understand that the huge non-cash impairment charges taken this year will significantly lower DD&A rates in the future. For example, the big impairment charge GPOR took in Q3 lowered their DD&A rate by over $3.00/boe going forward. That makes a big difference in reported earnings going forward.

GPOR is choking back a lot of production today because of crappy gas and NGL prices. IMO it is a very wise move. Marcellus/Utica gas and NGL prices should get a nice boost in early 2016 when several large midstream projects come on-line. IMO now is a great time to accumulate GPOR. It is an amazing growth story and it has top shelf management.