Gulfport Energy (GPOR): On track to eliminate net debt by 2023 despite hedging losses
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Gulfport Energy (GPOR) appears capable of reducing its net debt to approximately $200 million by the end of 2022 at current strip prices, despite the possibility that it could incur nearly $800 million in hedging losses realized at the second half of 2021 and 2022.
Gulfport’s value is tied to long-term natural gas prices. A long-term WTI oil at $65 and NYMEX gas at $3.25, it has an estimated value of $81 to $98. This goes from $95 to $112 long-term at $70 WTI oil and $3.50 NYMEX gas.
Outlook 2H 2021
Gulfport is expected to generate $977 million in oil and gas revenue before hedges in the second half of 2021 at current strip prices (including $5+ NYMEX natural gas). Gulfport has about 89% of its 2H 2021 natural gas production hedged with a swap/cap price of $2.92, so it could end up with $350 million in realized hedging losses (including its hedges oil and NGLs) in the second half of the year.
Source: Gulfport Energy
| Type | Units | $/unit | millions of dollars |
| Natural gas [MCF] | 165,600,000 | $5.00 | $828 |
| NGL (barrels) | 1,968,800 | $41.00 | $81 |
| Oil (Barrels) | 920,000 | $74.00 | $68 |
| Coverage value | -350$ | ||
| Total income | $627 |
Source: Author’s work
Despite its negative value hedges, Gulfport still appears capable of generating around $185 million in positive cash flow in the second half of 2021.
| Expenses | millions of dollars |
| Transport, collection, processing and compression | $172 |
| LoE | $26 |
| Taxes other than income | $33 |
| GEORGIA | $23 |
| Preferred interest and dividends | $28 |
| Capex | $160 |
| Total expenses |
$442 |
Source: Author’s work
Gulfport had net debt of $826 million at the end of the second quarter of 2021, and this positive cash flow would reduce its projected net debt to $641 million by the end of 2021.
Outlook 2022
Gulfport has discussed the possibility of maintaining production at around 1 Bcfe per day with around $300 million in capital expenditure. This pretty much matches my previous expectations.
At current strip prices for 2022 ($77 to $78 WTI oil and $4.55 NYMEX gas), Gulfport is expected to generate $1.74 billion in revenue before hedging if it produces an average of 1 Gcfe per day of production.
Gulfport’s 2022 hedges have a negative estimated value of $448 million, so its post-hedging revenue would be $1.292 billion. The negative value of its hedges comes mainly from its natural gas hedges. For 2022, Gulfport has 701 Mcfe per day in natural gas hedges (approximately 77% of its projected natural gas production) with an average cap/swap price of $2.90.
| Type | Units | $/unit | millions of dollars |
| Natural gas [MCF] | 331,785,000 | $4.40 | $1,460 |
| NGL (barrels) | 3,905,500 | $37.00 | $145 |
| Oil (Barrels) | 1,825,000 | $74.00 | $135 |
| Coverage value | -$448 | ||
| Total income | $1,292 |
Source: Author’s work
Gulfport is then expected to generate $439 million in cash flow positive in 2022 at current strip prices.
| Expenses | millions of dollars |
| Transport, collection, processing and compression | $344 |
| LoE | $51 |
| Taxes other than income | $60 |
| GEORGIA | $46 |
| Preferred interest and dividends | $52 |
| Capex | $300 |
| Total expenses |
$853 |
Source: Author’s work
Gulfport’s net debt would likely be reduced to $202 million by the end of 2022 under this scenario involving current strip prices and a maintenance capital budget.
Evaluation
Gulfport’s estimated valuation is very sensitive to natural gas prices. At $65 long-term WTI oil and $3.25 NYMEX gas, Gulfport’s estimated valuation range is now around $81-$98. The lower end of this range uses its projected net debt at the end of 2021, and the upper end of this range uses its projected net debt at the end of 2022.
With long-term WTI oil at $70 and NYMEX gas at $3.50, Gulfport’s estimated value drops from around $95 to $112. A $0.25 change in long-term natural gas prices affects Gulfport’s estimated value by about $11 per share alone.
Conclusion
Gulfport appears capable of reducing its net debt to approximately $200 million by the end of 2022 at current strip prices despite the potential for nearly $800 million in hedging losses between the third quarter of 2021 and the end of 2022 .
After 2022, Gulfport has no hedge, so it would likely be able to generate a lot of positive cash flow in a scenario where natural gas remains quite strong. For example, at $65 WTI oil and $3.25 natural gas in 2023, Gulfport should be able to generate over $400 million in positive cash flow.
