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Ohio Utica Shale

Analyst says Gulfport grows production, disappoints investors

By Bob Downing Published: February 27, 2014

From analyst Tim Rezvan of New York-based Sterne Agee today on Gulfport Resources financial, operations report:


Price: $59.93
Price Target: $84.00

Our Call
We expect a mixed reaction to earnings that highlight Gulfport's unique ability to simultaneously grow production 28% q/q and disappoint investors. 4Q earnings offered fodder for bulls and bears: earnings missed on expenses (-), full-year production/spending/expense guidance is unchanged (+), a March production spike is needed to hit 1Q14 guidance (-), a search firm was hired for the CEO search (+) and for Board expansion (+), and a large bolt-on acquisition was announced at a full price.

• 4Q Earnings Come in Light. 4Q adjusted EBITDA of $53 million lagged us at $60 million and consensus of $62 million. 4Q adjusted EPS of $0.05 lagged us at $0.16 and consensus of $0.18. Higher than estimated interest expense and cash/non-cash G&A led to the shortfall to our estimates.

• No Change to Full-Year Production Guidance, But 1Q14 Production Guidance Depends on a Big March Spike. Full-year production guidance is unchanged. The company reported January production of 21.7 mboe/d and February production of 25.8 mboe/d. This implies March production of 35.6 mboe/d is needed to hit 1Q14 production guidance of ~27.8 mboe/d. With seven rigs running, the ramp seems feasible, but it represents a large hurdle when we don't expect much contribution from prolific dry gas wells until 2H14.

• Expense and Spending Guidance Unchanged, and 4Q Results Show Strong Traction on Expense Reduction. Cash unit costs decreased 37% y/y to $18.22/boe and LOE continued to trend down, averaging $5.45/boe for the quarter, 46% below the year-ago level. With seven rigs drilling a pad-focused development program, we expect further efficiencies and believe full-year cash unit costs of less than $10/boe is reasonable.

• Announcement on CEO Search and Board Additions is Important Positive Catalyst. The company hired a search firm to help with the CEO search and to find seasoned executives to expand the Board. The small, relatively unseasoned Gulfport Board has been a real issue for investors for several years, a large enough one to keep some long-only money on the sidelines. We are supportive of initiatives to bring in strong independent voices that can address the perceived Board deficiency.

• Large Bolt-on Acquisition Announced. The company announced a deal to acquire 8.2K net acres from Rhino Resources LP for $185 million. The position has 1 mboe/d of net production. The acreage is essentially working interests in existing Gulfport-operated properties, so the acquisition is an easy bolt-on, albeit at a full price. Wexford Capital owns 39.8% of the LP units in Rhino and its founder Charles Davidson owns 2.9% of the LP units. While the acquisition makes sense, the timing/price (a year after Gulfport took out Wexford working interests in its wells at $10K/acre) raises questions about the Wexford-Gulfport relationship.




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