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Ohio Utica Shale

Analysts offer look at changes imposed by Gulfport Energy

By Bob Downing Published: May 9, 2014

From New York-based Sterne Agee analysts on Gulfport Energy:

Price: $73.04
Price Target: $87.00

Analysts: Tim Rezvan, CFA (212) 338-4736 / Truman Hobbs (212) 338-4767
New CEO Guts '14 Guidance. Infrastructure Delays, Widespread Use of Managed Choke Program Cited. We Would Buy the Dip.

Our Call
With 1Q earnings, Gulfport sharply lowered '14 production growth guidance. Updated guidance (37-42 mboe/d, ~250% y/y growth) is well below prior guidance (55 mboe/d, 385% y/y growth). Drivers of the revision are: 1) delays on gas processing and gas gathering build-out, 2) use of a restricted choke flowback program across all Utica wells, and 3) a pause to build a well backlog to optimize service provider usage. We expect a sharp sell-off and would buy a dip that is unrelated to asset quality.

• 1Q Earnings Was a Non-Event After Prior Pre-Announcement. After pre-announcing 1Q production in April, Gulfport reported 1Q adjusted EPS of $0.20, in-line with our estimate and consensus. Adjusted EBITDA of $87.3 million was in-line with our estimate of $87.7 million, but below consensus of $91 million. Variance to our estimate was driven by higher cash and non-cash unit expense, offset by stronger commodity price realizations than expected. 1Q production averaged 27.1 mboe/d, in line with expectations after the April pre-announcement.

• CEO's First Act as Leader: Lower the Bar Dramatically. CEO Mike Moore reshaped the near-term growth trajectory, ratcheting down 2014 growth expectations to 250% y/y growth from 385% y/y growth. With 1Q production of 27 mboe/d, full-year production of 37-42 mboe/d sounds reasonable, given seven rigs running.

• Reasons for Guidance Cut. In cutting guidance, the company cited delays in the build-out of gas gathering lines from Markwest (MWE, $62.37, NR), impacting dry gas production growth, and stated that it was no longer certain that the Cadiz II cryogenic gas processing plant would be on-line on schedule in 3Q14. The company is also adopting a restricted choke program on all producing wells in the Utica, after initial success in the condensate window. Lastly, the company is trying to build an inventory of wells waiting on completion so it can optimize deployment of its services providers. We believe there is some credibility with all of these drivers, but note that the jarring form of delivery is sub-optimal. At a time when production growth from Ohio is starting its hyperbolic increase and the company appears on the cusp of demonstrating operational competency, a massive revision to growth expectations will sting investors.

• Prepare for a Bumpy Ride - We Would Be Greedy When Others Are Fearful. We will review our modeling work after Thursday's earnings call, but the sharp haircut to production clearly lowers the near-term earnings trajectory and will result in a reset to growth/earnings expectations across the Street. The question now posed to investors, one that will be answered by tracking GPOR's price action on Thursday, is this: Is the new CEO finally giving much-needed influence to corporate strategy and setting attainable hurdles? We argue the answer to this is yes. The pain from tomorrow's sell-off will be muted by execution toward this lower growth rate throughout 2014. The new management team is acutely aware that its mandate is to avoid the sins of the previous regime of overpromising and underdelivering growth. Tonight's release is a large, albeit painful way for management to wipe the slate clean and put its own imprint on a successful development strategy



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