Gulfport Energy, one of the biggest drillers in the Ohio Utica Shale (210,000 acres) with record production in the Utica last year, announced last week (as part of its first quarter update) it has sold a “small footprint” of Marcellus drilling rights on some of their Utica acreage in southeastern Ohio for $30 million. Gulfport concentrates its drilling in the Ohio Utica and the Oklahoma SCOOP plays. Piecing together the company’s plans for this year, we’re calling 2019 the “Year of the DUC” for Gulfport.
Gulfport isn’t interested in the Marcellus in Appalachia, only the Utica. Hence the sale of Marcellus rights.
What other asset sales may be coming along? Gulfport also owns 11,000 acres along the oily Louisiana Gulf Coast. Keep a sharp eye out for a potential sale there too.
Although Gulfport is on track to spend up to $600 million on drilling this year, they spent a tad more than they wanted to in the first quarter. The company drilled 6 and completed 25 Utica wells. They drilled 4 and completed 7 SCOOP wells. CEO Dave Wood says the company plans to hook 30 wells up to sales in 2Q19.
Production was down in 1Q19, every so slightly, compared with a year ago. Gulfport produced 1.264 billion cubic feet equivalent per day (Bcfe/d) in 1Q19, compared to 1.287 Bcfe/d in 1Q18. The Utica produces the lion’s share of Gulfport’s production: 993.6 million cubic feet equivalent per day (MMcfe/d). The SCOOP produced 259.3 MMcfe/d.
For all of 2019, Gulfport says they will drill 12-14 Utica wells and 8-10 SCOOP wells, total. Gulfport will turn-to-sales 42-48 Utica wells and 15-17 SCOOP wells in 2019, meaning they will pull from their DUC inventory to do so. Hence our label, “Year of the DUC,” for Gulfport.
Gulfport’s full, official 1Q19 update, with financials:
Gulfport CEO Dave Wood delivered the following prepared remarks on the company conference call with analysts, saying the company is “off to a strong start” in 2019:
Gulfport is off to a strong start in 2019 beginning of the year active in our core asset areas and remaining on track to deliver on our previously announced 2019 capital budget, 2019 capital budget, operational outlook and commitment to free cash flow generation.
For the first quarter of 2019 as announced alongside earnings yesterday evening, we’ve reported approximately $53.2 million of adjusted net income on $315.8 million of adjusted oil and natural gas revenues and generated $206.8 million of adjusted EBITDA. Production averaged 1.26 billion cubic feet of gas equivalent per day for the first quarter coming in as expected, following a muted level of activity during the fourth quarter of 2018 and on a debt-adjusted per sure basis increasing approximately 2% over the fourth quarter of 2018.
As I mentioned, we started the year active on the ground, running on average 3.4 horizontal drilling rigs and 4.4 completion crews in total across our Utica Shale and SCOOP assets during the first quarter of 2019. This robust level of activity capitalized on our existing DUC inventory and will lead to an active turn-in-line schedule in the coming months as we expect to turn-to-sales in excess of 30 wells progressively throughout the second quarter of 2019.
We forecast that this activity will result in strong quarter-over-quarter production growth and positioning us well as we continue to execute on our 2019 program and reaffirm our expectation that Gulfport’s total net production will average in the range of 1.36 billion to 1.4 billion cubic feet of gas equivalent per day for the full year of 2019.
I reiterate my comments from our February call that Gulfport remains committed to building an organization that is focused on capital discipline, cash flow generation and a clearly communicated business plan. We remain disciplined to our 2019 capital program and reaffirm our previously announced 2019 capital spend which will be funded entirely within cash flow and provide free cash flow generation in excess of $100 million.
As planned, the 2019 capital program is heavily weighted to the first half of the year and Gulfport invested $255 million in D&C capital and $20 million in land capital during the first quarter of 2019. We estimate the bulk of the capital budget will be invested during the first half of the year with spend decreasing in the third and fourth quarter, and as a result, provide meaningful free cash flow generation during that time.
On the strategic front, we continue to simplify the portfolio through certain noncore asset monetizations and I am pleased to provide further details on a few of those divestitures today. We recently entered into an agreement to monetize a small footprint of Marcellus formation rights overlying a portion of our acreage in the Utica Shale. This transaction included assets that Gulfport did not have any future capital allocated to nor do we include them in our long-term development plans for the Utica Shale.
We currently expect the transaction to close during the second half of 2019. And consistent with our previous comments on our ongoing stock repurchase program, and taking into consideration the anticipated proceeds from this transaction, we repurchased approximately $30 million of Gulfport shares in the open market during the first quarter of 2019, reducing shares outstanding by approximately 2%.
Separate from this transaction, we are getting ready to launch a process to divest of certain water infrastructure assets Gulfport holds across our SCOOP position including water handling and water recycling facilities. As a stand-alone entity, these assets would currently generate $10 million to $12 million in EBITDA per year with substantial expected growth. And we believe their meaningful value is not recognized in our stock price today.
We plan to provide further details on the monetization process when appropriate. As we consider the use of proceeds from this transaction, it is important to note that these assets were not identified as a requirement of the noncore assets to fund our ongoing share repurchase program.
We currently plan to allocate $50 million of the expected proceeds from this transaction towards debt reduction. Again, I reiterate that this transaction was not identified as a requirement of the noncore assets to fund our ongoing share repurchase program and we continue to plan to execute on our previously announced $400 million stock repurchase program to be funded through organically generated free cash flow during 2019 and the anticipated monetizations of other noncore assets of which we are actively pursuing today.
Turning to our specific core areas, we started the year strong in the field and remain intently focused on cost discipline and delivering more with every dollar invested. We had a strong quarter on track with both the operational and capital budget and doing so while continuing an unwavering commitment to efficient and safe operations. In the Utica, we spud six gross wells utilizing roughly 1.5 operated rigs during the quarter.
Our 2019 program focuses on maximizing lateral lengths and realizing economies of scale with our per foot metrics. And we experience a solid quarter of progress at the drill bit. The wells in the first quarter had an average drilled lateral length of 10,600 feet and when normalizing to an 8,000-foot lateral, we averaged the spud to rig release of 17.7 days down 9% over the full year 2018 results and the best quarter Gulfport has experienced to-date in the plant.
I applaud the team as we have exceeded many of our previous drilling records during the quarter, drilling our longest lateral to-date for Gulfport in the Utica at 16,385 feet and beating our previous vertical peak per day record. Overall, we had a strong quarter on the drilling front and we remain focused on continuous improvement and efficient safe operations.
Turning to completions in the Utica Shale, we began the year very active, running three completions crews throughout the quarter and completing a heavy portion of the DUC backlog we carried into 2019. As of March 31, we had completed 1,069 stages in total during 2019 which includes 25 wells completed and six wells in progress at the end of the quarter representing 50% of our completion schedule for this year. This robust level of activity weights a heavy number of turn-in-lines for the second and third quarters. And as a result, we expect to see strong production growth out of the Utica during the middle of the year.
In the SCOOP, we entered the year with strong momentum from the fourth quarter of 2018 and spud three gross Woodford wells and one lower Sycamore well utilizing two operated rigs during the quarter. The wells released had an average lateral length of 8,000 feet and when normalized to a 7,500-foot lateral, the wells averaged a spud to rig release of 63.2 days during the first quarter, in line with our 2018 program average.
When isolating the wells set to adjust the Woodford Formation, the average spud to rig release totaled 47.4 days during the first quarter and our drill days on the lower Sycamore well were improved by over 40% when compared to our Serenity well which was spud in 2017 and also targeted the lower Sycamore Formation. These results exemplify our focus on identifying areas of improvements and striving for consistent repeatable results out of the play.
On the completion front, we averaged 1.3 completion crews during the quarter and completed a 195 stages in total which include seven wells completed and two wells in progress at the end of the quarter. Similar to the Utica, our activity to-date will lead to have a number of turn-in-lines weighted to the middle of 2019.
In summary, our 2019 program is off to a strong start and we continue to focus on controlling what is within our control and maximizing results with the core assets we have in the portfolio today. We are committed to disciplined capital allocation and we’ll operate within cash flow as we have discussed shifting the target from top line production growth to leading bottom line debt-adjusted per share growth rates. We strongly believe this strategy is right not only for today but for the future of Gulfport.*
A copy of the slide deck used during the conference call:
During the Q&A portion of the conference call, a number of exchanges of interest to the Utica…
First, how will Gulfport produce an average of 1.4 Bcf/d this year, when they could only muster 1.26 Bcf/d in 1Q19, given a limited budget? That is, how will you pull a rabbit out of your hat?
Dave, could you help me a little bit, I think, I know talking to you and Paul, you’ve gone through this, but I just want to make sure I understand this better. Could you help me better reconcile how you’re going to balance achieving the 1.4 Bcf per day production average this year, after hitting the 1.26 in 1Q? And again I guess what I’m balancing where I’m going with that, you basically have about $310 million left to spend the remainder of the year in order to stay within the low side of your CapEx.
So I’m wondering how you balance this while also may be repurchasing up to $370 million worth of your shares. I guess my question would be maybe try to walk through, I assume it’s the DUC count and the proceeds from the noncore that gets you there. And I just want to make sure I understand how you’re thinking about basically achieving that on the production side and the repurchase side for the remainder of the year?
Yes, Neal, good morning. So, our program for repurchasing was to use free cash flow from this year and also sale of noncore assets we announced in the call of those noncore assets, we’ve done a small one and used the proceeds for that to do the first of the buybacks.
The intent was to conclude those sales through the 24-month period from the time we announced it. So some of it will take place this year and some will take place next year. The free cash flow generation is really the second half of this year. So it from — purchases from that will be heavily weighted into the second half.
There is nothing in that that causes me concern in terms of timing our progress. It’s not necessarily the easiest thing to do to monetize some of these things, but they are actively being worked. So I feel good about trajectory and timing of the share repurchase.
In terms of the second one, on production, we took a hard look at where we are today for the rest of the year. Feel good about the spend levels and feel good about the overall year targets. So the spend early in the first quarter was faster but that was me within the teams here to try and get the stuff on as soon as possible. So Donnie and his teams did a great job in beating that schedule. So I feel pretty good about where we are.*
Are you paying big bucks to extend leases on acreage where you haven’t been able to drill yet? (Paul Heerwagen is Gulfport’s SVP of Corporate Development.)
Okay. And then just one last one if I could, just on holding leases in the Utica. I’m just wondering, I know you have, I think some leases that come due, I think this year maybe more so next year. Is — one, have you kind of already been working on holding those? And I’m just wondering is there much cost in, I don’t know either been able to hold those, I guess, going forward?
Hi, Neal. Paul. The budget we have this year for land spend is mostly — is almost entirely associated with lease extensions associated with the exercising five-year kickers on leases coming to primary terms here. As you recall, those were higher spends in prior years. And it’s sort of tapering off now as we have more and more of the acreage held and also we paid incentives over the last several years. So, it’s 40 this year and we would expect it to continue to taper down next year.*
How many Utica wells are coming online, and when, in 2019? (Donnie Moore is Gulfport’s COO.)
Good morning. Just may be a follow-up on part of Neal’s questions. When we think about kind of completion cadence Utica versus SCOOP, the one we look at the remaining completions and particularly the second quarter when you say 30-plus are turn-to-line. How are those split between Utica and the SCOOP? And then the remaining whatever that would be, call it, 20 completions that would be left, are those going to be fairly evenly split during the third and fourth quarter? Or are they going to be more weighted to one particular time?
Hey, Ron, good morning. This is Donnie. Yes, if you look at that first quarter heavily weighted toward the Utica over 30 wells completed, roughly 25-plus of those were in the Utica during the first quarter. Second quarter is still pretty heavily weighted toward the Utica, we’ve got two completion crews running there today. And then the rest of the year it kind of trickles down and it’s fairly split between the two.
Okay. And is that also — and that would also imply then that from a turn-in-line standpoint really a lot of the growth here particularly in the second quarter, is it fair to assume will be more gassy and then you end up adding more the liquids production in the third quarter and fourth quarter? Just trying to think about our quarterly production cadence?
Yes, that’s absolutely right, Ron. Most of our turn-in-lines at second quarter will be more the dry gas Utica wells. So we’re excited about getting those online. A lot of activity in the first quarter to set us up for this.*
Gulfport goes DUC hunting:
Okay. I guess with respect to the DUCs there in Utica, you obviously described a pretty aggressive sort of completion schedule you’ve had there of late. Just trying to get a sense of how many DUCs in the Utica you guys plan to reduce the total by? In 2019, how many you think you’ll have by the end of the year? Just trying to get a sense if you kind of deplete that whole DUC backlog this year?
Yes. Usually an ongoing business will kind of — like ours will have some DUCs at the end of the year. And for me it is kind of, call it, low 20s. And so we have about 40 DUCs to take care of this year and that’s the game plan. So that’s how we’ll look at the end of the year, I think something in the low 20s.*
Is Gulfport thinking about either selling itself, or buying someone else?
So, since it hasn’t come up yet and it does seem to be the topic of the season. I was just wondering if you could share your views on just M&A and what role you see yourself playing over the next several years? Just any color would be helpful.
Yes. So it is very topical. And we don’t comment as a policy on M&A and what we’re doing. I think on a broad sense based on consolidation and M&A is probably going to happen more in the future as we are at the bottom of the market. And so our role and what we play in that I think is yet to be determined, that will be the way I would answer that.*//
*Seeking Alpha (May 3, 2019) – Gulfport Energy Corporation (GPOR) CEO David Wood on Q1 2019 Results – Earnings Call Transcript
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