Recently, I took a look at three reasons to buy shares of Gulfport Energy (NASDAQ:GPOR). Most of the company's production is oil which has provided it with a great balance sheet which will help the company develop its many potential production growth opportunities. Unfortunately, there are no perfect investments, which is why it's important to consider what would make Gulfport a sell.
Relationship with Wexford Capital
Gulport has a very close relationship with hedge fund and private equity manager Wexford Capital. The relationship is so close that the two have partnered on nearly every transaction Gulfport has closed in recent years. Typically, Wexford is the seller of a partial stake of an asset which Gulfport is purchasing. So far, the relationship has been very beneficial for Gulfport, and it's helped to fuel the company's growth.
What is of concern is that Wexford has steadily been reducing its ownership interest in Gulfport. In December 2011, Wexford owned 13.3% of Gulfport's outstanding shares, yet, as of last September Wexford owned less than 1% of Gulfport. So, while the interests might be aligned, the alignment has shifted over the years. This is one area investors need to watch very closely.
Utica just isn't oily
In its most recent investor presentation Gulfport called the Utica "one of the most promising up-and-coming oil-levered plays in North America." However, the Utica isn't turning out to be the top-tier oil-levered play that many top producers had hoped. Instead, the Utica is very gassy which has caused both Chesapeake Energy (NYSE:CHK) and Devon Energy (NYSE:DVN) to scale back on the play. Devon is currently looking to completely exit the play while Chesapeake is paring back its position.
What has become pretty clear is that the Utica isn't the "biggest thing to hit the state since the plow" nor will it develop into a $500 billion powerhouse that former Chesapeake CEO Aubrey McClendon predicted. That's pretty evident when considering that Devon's five wells produced no natural gas and only one well produced a small amount of oil. That being said, one of Gulfport's top wells, the Boy Scout 1H, did produce 37,235 barrels of oil along with 122 million cubic feet of natural gas in its first 32 days. Gulfport might have found the sweet spot, but it would appear to be a very small spot leaving little margin for error.
Getting more aggressive in the Utica
Because the Utica appears to be hit or miss, investors really need to watch Gulfport's capital spending in the play. The company is spending $499 million of its planned $570 million-$590 million capital budget for the year. In essence, it's really putting all of its eggs in one basket which has become less of a sure thing as the industry has invested capital into the play. Again, Gulfport appears to have found the best spot in the play; however, if the sweet spot turns out to be smaller than estimated, then the company could end up wasting a lot of precious capital.
Foolish bottom line
While I like Gulfport a lot, I have enough concerns to keep me on the sideline. In addition to the above concerns, investors have bid up the shares by nearly 150% over the past year due to enthusiasm over its position in the Utica. While the company's position in the play seems to justify that enthusiasm, I'm not willing to pay up for the company's stock in hopes that its big bet pays off.
Fool contributor Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of Devon Energy and has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.