On Thursday shares of Gulfport Energy (NASDAQ: GPOR ) , one of the biggest exploration and production companies in the Utica Shale of eastern Ohio, dropped by a whopping 18% in the wake of the company's quarterly results. In short, shares dropped due to new guidance issued by management. Gulfport significantly reduced its own 2014 production guidance and announced a new strategy going forward. This article will look at Gulfport's change in strategy and it will also look at Gulfport's new valuation in light of Thursday's steep drop.
There are actually several reasons for Gulfport's drop on Thursday. However, the biggest reason is, by far, revised guidance: Management now expects to produce somewhere between 37,000-42,000 barrels of oil equivalent per day, revised downward from 50,000-60,000.
The rationale for this revision is that Gulfport has decided to go from a production-maximizing strategy to a value-maximizing one. In other words, Gulfport will take its time, establish best practices, experiment with well downspacing, and properly inventory its drilling opportunities.
Many analysts were rightly skeptical of this. One outright asked why they should believe management's estimates if management couldn't uphold its earlier promises. In fact, Gulfport was, in a sense, the last domino to fall. In the recent few months, operators such as PDC Energy Inc (NASDAQ: PDCE ) and Antero Resources Corp (NYSE: AR ) either issued conservative type curves or revised those type curves lower as capacity constraints and production data have dictated. Which is probably why analysts didn't appear to wholly buy management's "change of strategy" explanation.
And in fact, delays from Gulfport's midstream partner, MarkWest Energy Partners (NYSE: MWE ) have indeed caused curtailments. Gulfport expects dry gas and natural gas liquids production to continue suffering curtailments until MarkWest completes its Cadiz II gas plant expansion.
Gulfport now trades at 2.45 times book value, which is somewhat reasonable considering the company's reduced prospects. However, there are more reasonably priced oil and gas producers which are, frankly, drilling in locations better than the Utica Shale. Investors in the shale want one thing, growth, and Gulfport is drilling in the wrong place to get it.
Sure, there have been some bright spots in the Utica. But this shale has been, as CNBC's Jim Cramer put it, "spotty." The Utica has proven to be mostly dry gas or, at best, natural gas liquids, both of which currently fetch returns much lower than that of oil. The Utica's sweet spot oil window is quite small.
Those looking for more reliable production growth really need to look to the Permian and the Eagle Ford. For a newer and perhaps more speculative play, look to the nascent but oil-rich Tuscaloosa Marine Shale. As for the Utica, I believe that Gulfport's recent reduction in guidance is actually part of a larger trend.
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