From analyst Tim Rezvan of New York-based Sterne Agee on Gulfport Energy:
GULFPORT ENERGY CORP. (NASDAQ: GPOR) RATING: BUY
Price Target: $86.00
Analysts: Tim Rezvan, CFA / Truman Hobbs
Cutting Estimates Through 2015 as Growth Gets Pushed to the Right Again. Maintain Buy Rating and $86 PT on SOTP Value.
Execution issues at the well pad are the latest wrinkle driving deferred production growth. Our revised production outlook calls for "only" 282% production growth in 2014 to 48.2 mboe/d, down from our previous estimate of 69.1 mboe/d, and represents 189% y/y EBITDA growth with a manageable estimated CF outspend of ~$120 million. With the shortfall driven by operational missteps that should be addressed going forward, our $86 SOTP PT remains intact.
• Execution Issues at the Wellbore Drive Lower Production Growth Outlook. The company had drilling mud seep into up-hole formations on five different well pads where intermediate casing string was eliminated. Diagnosing and solving the problem has caused a delay of at least one month in getting the wells hooked to sales. As a result, the company no longer believes it will have 20-24 wells hooked to sales in the fourth quarter. Exit-rate production guidance was reduced ~10 mboe/d to 27-32 mboe/d.
• Revised Production Outlook. With fewer well hook-ups planned by year-end (we assume only 12 well hook-ups in 4Q), we are cutting production estimates. We assume six wells come on line per month in 2013 versus 7-8 before. On top of that, we are also hair-cutting aggregate production from the Utica Shale by 25% to account for unforeseen delays that we struggle to account for otherwise in our models. 4Q13E production declines to 21.5 mboe/d from 31 mboe/d, 2014E production declines to 48.2 mboe/d from 69.1 mboe/d, and 2015E production declines to 88 mboe/d from 101 mboe/d. We are also revising up our natural gas skew in 2014/2015, reflecting stronger returns in the wet gas window, leading the company to move rigs east in the Utica Shale. Assuming ethane rejection indefinitely, we now estimate natural gas will be 66% of 2014E production (up from 63%) and 71% of 2015E production (up from 64%).
• Cutting Estimates. In conjunction with lower production assumptions, we are cutting estimates. EBITDA declines for 4Q13/2014/2015 to $82/$667/$1,073 million from $116/$987/$1,374 million and EPS estimates decline to $0.16/$1.30/$1.34 from $0.22/$2.39/$2.98.
• SOTP Value Remains Intact - No Change to $86 PT. Our PT reflects full development mode value for the company's Utica Shale assets. We believe the latest deferral in growth is not material to the overall value of the resource.
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The Ohio Environmental Council, a statewide eco-group based in Columbus.
Earthjustice, a national eco-group.
People's Oil and Gas Collaborative-Ohio, a grass-roots group in Northeast Ohio.
Concerned Citizens of Medina County, a grass-roots group.
No Frack Ohio, a Columbus-based grass-roots group.
Fracking: Gas Drilling's Environmental Threat by ProPublica, an online journalism site.
Pipeline, blog from Pittsburgh Post-Gazette on Marcellus shale drilling.
Allegheny Front, environmental public radio for Western Pennsylvania.