Welcome to the second installment of a series detailing my thought and research process when investigating an unfamiliar oil stock. As you'll see, a lot of these considerations are universal to fundamental investment research, so you don't need to be an oil addict to learn something here.
Research recap
In Part 1, we met Gulfport Energy (Nasdaq: GPOR) and studied its share structure, capitalization, and liquidity situation. You may find it strange that we haven't yet considered the specifics of this oil company's business. Here's one of my biases, Fools: If a company's dishing out excessive option grants, ballooning its share count, or employing excessive financial leverage, I don't generally care how good the rest of the story sounds.
You need to try and gauge how you'll be treated as a minority shareholder, because management basically gets free reign with your money. To get further acquainted with Gulfport, let's take a look at the current shareholder base, the board of directors, and management. I know I promised we'd get to Gulfport's assets and operations next. Those matter a great deal, but this probing of personalities is important -- and too often overlooked.
Who are the holders?
One of the reasons we pulled up the proxy at the outset of our research process was to discern whether anybody holds more than 5% of Gulfport shares, as well as how much stock is collectively held by management and the Board.
Topping the major stockholders table is Charles Davidson, at nearly 36% of the share count. We see that Davidson is Chairman and CIO of Wexford Capital. Wexford runs some hedge funds and a series of private equity funds out of Greenwich, CT. Alongside DLB Oil & Gas (which Davidson chaired, and was bought by Chesapeake Energy (NYSE: CHK)), Wexford brought Gulfport, then known as WRT Energy, out of bankruptcy in 1997.
Related party transactions between Gulfport and other Wexford affiliates abound. Reimbursements paid by these affiliates to Gulfport under administrative service contracts totaled over $1 million in 2008, and over $10 million in each of the prior two years. These reimbursements were booked as a negative G&A expense, which would have the effect of boosting Gulfport's reported income. That's interesting.
Nothing particularly stands out among the other institutional holders of the stock. Officers and Board members held 2.8% of Gulfport shares as of April 1, which beats Acergy SA's (Nasdaq: ACGY) abysmal ownership culture, but comes up well short of the stakes seen at Rexx Energy (Nasdaq: REXX) or ATP Oil & Gas (Nasdaq: ATPG).
Eye on the insiders
While it's on the small side at just five members, Gulfport's Board has arguably improved in recent years. A glance at past proxies tells us that two of Chairman Mike Liddell's family members previously served as Directors. Now, Liddell (the former CEO of both Gulfport and DLB) is joined by CEO James Palm and three independent directors.
I should note, though, that the latter three gentlemen are all connected to Wexford affiliates in some way. Two were Director nominees of Diamondback Energy Services at the time of its most recent prospectus filing (the IPO was pulled earlier this year), and the third is a Director of Bronco Drilling (Nasdaq: BRNC), another Wexford spinoff. You longtime readers know what I think of Bronco's Board.
The folks at Nasdaq OMX Group (Nasdaq: NDAQ) apparently don't care about these sorts of interlocking Board relationships in judging "independence." I wouldn't take that word too seriously in this instance.
As for management, Palm is a formerly independent Oklahoma oilman who joined the company in late 2005. CFO Michael Moore (not to be confused with the guy who thinks capitalism is evil) has served in that post since 2000. Moore also used to work at DLB, as did Gulfport's top two geophysicists.
Overall impressions
After this initial pass through the public filings, the picture that begins to emerge regarding the personalities involved is one of a pretty closely-knit group that has held a tight grip on Gulfport since the firm's rebirth. Davidson and his investment firm have assembled quite the collection of energy businesses, and I'm not crazy about the extensive overlaps here, both commercially and in terms of directors and other personnel.
My concerns could probably be set aside at this point if I were able to conclude that Gulfport has both generated outsized returns for investors in the past and, just as important, set the company up for success in the future.
The former question is answered pretty easily. A decade ago, shares traded hands at approximately $1, split-adjusted. That's a 700% return in ten years, or about 22% compounded annually. Not too shabby.
The matter of future wealth creation is one that we will tackle head-on as we turn to the company's assets and current operations in the next installment. Stay tuned.
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