From analysts Tim Rezvan and Truman Hobbs of Sterne Agee:
Utica Shale Growing Pains - Infrastructure Issues Bite 3Q Production. Trimming 3Q Estimates.
We trim 3Q production and earnings estimates following this morning's negative pre-announcement. We expect shares to come under pressure today. GPOR shares have rallied 24% in the last month and closed yesterday within $1 of their 52-week high, so a short-term pullback does not concern us. Despite the cut in 3Q production guidance, our long-term thesis on the stock is unchanged.
• Details. Gulfport released updated 3Q production guidance this morning and cut guidance to 12.25-12.75 boe/d, versus prior guidance of 14-15 boe/d and our estimate of 14.7 mboe/d. The company cited permitting and infrastructure delays from Markwest (MWE, $68.36, NR) from the Irons 1-4H well, which was supposed to be on-line in mid-August, as well as downtime from simultaneous operations, which likely refers to shutting in producing wells while completing other wells on the same pad. We have been unable to speak with the company yet this morning for further details.
• Each Well Matters - Irons 1-4H Delay is the Biggest Driver of Reduced Production Guidance. In its early stages of growth in the Utica Shale, each well is of paramount importance, given the strong initial production rates. The Irons well, drilled in Eastern Belmont County, is toward the dry gas window of the play, where we estimate IP rates will average over 6 mmcfe/d (1 mboe/d) over the first year of production. A delay in turning one well to production in the gas window in the third quarter impacts total company production by 1+ mboe/d, 8% of total 3Q13E production. This well was the easternmost well drilled by Gulfport to date, and was most exposed to a delay in infrastructure. Optics appear negative from a ~2 mboe/d reduction in guidance, but the gassier wells in eastern Ohio are simply so strong that shifts in the date when they are turned to sales can have large impacts. We believe the Irons well was likely the biggest driver of downtime, while well shut-ins from nearby completions was another contributing factor.
• Trimming 3Q Estimates, Maintaining 4Q13/2014/2015 For Now. Despite the 3Q shortfall, Gulfport maintained full-year production guidance of ~15 mboe/d, which implies 4Q production of ~32 mboe/d to get to the midpoint of full-year production guidance, or ~27 mboe/d to get the low end of 2013 guidance. While we trim 3Q production to 12.5 mboe/d from 14.7 mboe/d, our current 4Q production estimate of 31 mboe/d is unchanged. 3Q EPS declines by a penny to $0.12 and 3Q EBITDA declines by $7 million to $56 million.
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