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



GULFPORT ENERGY CORP. (NASDAQ: GPOR) Flash Note

RATING: BUY

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.