Image source: The Motley Fool.
Gulfport Energy Corp (GPOR)
Q2 2020 Earnings Call
Aug 5, 2020, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Greetings, and welcome to Gulfport's Second Quarter 2020 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Jessica Antle.
Jessica R. Antle -- Director of Investor Relations
Thank you, and good morning. Welcome to Gulfport Energy Corporation's Second Quarter 2020 Earnings Conference Call. I am Jessica Antle, the Director of Investor Relations. Speakers on today's call include David Wood, Chief Executive Officer and President; and Quentin Hicks, Executive Vice President and Chief Financial Officer. I would like to remind everybody that during this conference call, the participants may make certain forward-looking statements relating to the company's financial condition, results of operations, clients, objectives, future performance and business. We caution you that the actual results could differ materially from those that are indicated in these forward-looking statements due to a variety of factors. Information concerning these factors can be found in the company's filings with the SEC. In addition, we may make reference to non-GAAP measures. Reconciliations to the comparable GAAP measures will be posted on our website. An updated Gulfport presentation was posted yesterday evening to our website in conjunction with the earnings announcement. Please review at your leisure.
At this time, I would like to turn the call over to David Wood, CEO of Gulfport Energy.
David M. Wood -- President, Chief Executive Officer and Director
Thank you, Jessica. Welcome, everyone, and thank you all for joining us this morning. As we closed a very difficult quarter for our industry, I want to thank the employees of Gulfport for their focus, dedication and perseverance during these unique times. The global pandemic and the resulting collapse in demand have appended many businesses. As economies around the world emerge from lockdowns, the path forward remains uncertain. The safety of our employee and contractors remains a top priority, and we continue to take the appropriate measures to provide a safe working environment for everyone. Our field staff continues to do a terrific job ensuring that our operations carry on without significant disruption, while most importantly, maintaining safe practices. Overall, I am proud of our team's ability to stay focused during this extraordinary time while continuing to execute on the key strategic initiatives we laid out for 2020. Although many lockdowns have been easing, the situation remains fluid and the visibility on the world's economic outlook remains extremely limited. Given the unpredictability regarding the pace of recovery for the global economy and specifically energy land, oil and gas producer activity in the second half of the year is uncertain, and we see this continue to weigh across all energy markets.
On the supply side, we witnessed a dramatic reduction in capital spending from our oil-weighted peers early in the year. However, with oil now having just crossed near $40 a barrel, we have started to see some activity return, and with it, the associated gas production come back to market. At the same time, we are experiencing 25-year pricing lows on natural gas. Several gas producers, including Gulfport, have curtailed or deferred near-term production and made interpreting the current natural gas supply and production declines extremely difficult. Lastly, the ever-evolving political environment continues to command headlines within the energy space for elevated risks in the future. Considering all of these uncertainties together, we remain cautious near-term on natural gas pricing, which impacts our financial position going forward. Quentin will address this in more detail during his prepared remarks.
Turning to second quarter performance. We reported approximately $47.1 million of adjusted net income and generated $145 million of adjusted EBITDA. Gulfport's operating cash flow, before the changes in working capital and inclusive of capitalized expenses, was $97.8 million, and we reported free cash flow of $43.8 million during the second quarter of 2020. As a result of the commodity price environment, during the second quarter, we made the strategic decision to defer near-term production to later periods in the year and early 2021 when natural gas prices are expected to be higher. In addition, due to very low NGL and oil pricing, we chose to shut in a portion of our operated low-margin liquids-weighted production during the second quarter, largely consisting of legacy vertical production in the SCOOP. We also experienced shut-ins across both the SCOOP and Utica from our nonoperating partners. These factors, as expected, led average daily production to decline slightly from the first quarter of 2020. As of mid-July, nearly all liquids-weighted volumes on both our operated assets and those of our nonoperated partners had returned to production. Based on current natural gas pricing, we plan to continue executing on our curtailment strategy, shaping our production profile to peak during the colder months of the year. This is in line with our updated guidance provided in June, and we would reaffirm our expectation for full year 2020 production to average 1.0 to 1.075 billion cubic feet equivalent per day. Our incurred capital expenditures came in well below forecast for the quarter, highlighted by continued efficiency gains and lower service costs.
On the drilling front, we continued to achieve some of the lowest average spud to rig release metrics since entering both the Utica shale and the SCOOP. In fact, the second quarter marked the third consecutive quarterly record for the SCOOP drilling [day.] These performance gains allowed the teams to high-grade our rig fleet and release equipment ahead of budget while remaining on target for our planned well spud for 2020. In addition, our frac efficiency continues to trend upward. And we are a basin leader in water reuse and recycling during frac operations, which has ultimately reduced total well costs and highlights our commitment to environmental stewardship. All of these efforts combined led to substantial savings during the first six months of 2020 and have provided the opportunity for us to better position Gulfport into 2021. We now plan to complete an incremental seven gross wells during 2020 in the Utica shale. This additional activity provides incremental production late this year, and we expect it will have minimal impact to full year 2020 production levels.
Efficient operations and continued improvements in drilling and completion costs allow us to add incremental activity and still be within our previously provided capex guidance range. Great credit to Donnie and his teams in making this all happen. Turning to specifics. In the Utica, in the first six months of 2020, we spud 12 gross wells, utilizing roughly 1.2 rigs and currently have one rig drilling ahead in the play. The wells released had an average drill lateral length of 9,500 feet. And when normalizing to an 8,000 foot lateral, we averaged a spud to rig release of 18.5 days, down 6% over full year 2019 results. We are a leader in the dry gas window of the play, and I'm pleased to say our Utica drilling program is in manufacturing mode. While there was little low-hanging fruit remaining, the team continues to gain efficiencies through the drill bit and deliver on expectations quarter after quarter.
Turning to completions in the Utica shale. We began the year active and completed 22 wells during the first six months of 2020. Our frac efficiency continues to trend upward, averaging over seven stages per day today, and market pricing for completion crews has trended well below the original budget. Incorporating both the drilling and completion activities during the first six months of 2020, we estimate that Gulfport's Utica well cost averaged $915 per foot of lateral, approximately 17% below our budget of $1,100 foot and $760 per foot of lateral when including B and C only. This improvement in our well cost is significant for our future development and highlights our drive to deliver a leading cost structure in the base. Switching over to the SCOOP. During the first six months of 2020, we spud six gross wells and currently have one rig drilling in the play. The wells released had an average lateral length of 9,400 feet. And when normalized to a 7,500-foot lateral, the wells averaged a spud to rig release of 37 days during the first six months of the year, a decrease of 32% when compared to our 2019 program average. As I mentioned, the second quarter marked a new record since entering the play. And when comparing 2020 results to past activity, Gulfport delivered one well with a spud to rig release of less than 40 days during 2019 and 0 in 2018 and 2017. And today, five of the six wells drilled during 2020 have been sub-40 days. As we highlighted last quarter, all of these improvements were achieved while we were adding a new rig, increasing measured depths and increasing lateral length. We included our planned frac and turn-in-line program for the SCOOP during the first quarter and have no further completion activity planned for 2020. Incorporating both the drilling and completion activities during the first six months of 2020, we estimate that Gulfport's SCOOP well cost averaged approximately $1,065 per foot of lateral, approximately 29% below our budget of $1,500 per foot and $995 per foot of lateral when including B and C only. We are determined to deliver consistent, repeatable results in the SCOOP, and our continued progress highlights our emphasis on identifying, implementing and realizing efficiencies in the play. In summary, our results continue to demonstrate value-enhancing progress toward improvements in efficiency gains, cost reductions and shortened cycle times. We are continuing our curtailment strategy, deferring production from midyear of 2020 when prices are low to late 2020 and into 2021 when prices are expected to be higher in the winter season. We believe these efforts will better position the company as we enter 2021, allowing for higher production in a better forward commodity price environment to maximize returns and cash flow.
With that, I will turn the call over to Quentin for his comments.
Quentin R. Hicks -- Chief Financial Officer
Thank you, Dave, and good morning, everyone. As Dave indicated, we reaffirm our full year 2020 capex guidance of $285 million to $310 million and expect to come in at the low end of that range. During the second quarter, Gulfport incurred $54 million in D&C and land capex. Roughly 65% of our anticipated 2020 capital budget had been incurred as of June 30. Our 2020 capital spending is coming in well below prior expectations due to efficient drilling and completion operation and some service cost reductions. During the second quarter, production averaged 1.03 billion cubic feet of gas equivalent per day, composed of 90% natural gas, 7% natural gas liquids and 3% oil. Looking to the third quarter, as Dave mentioned, we plan to continue our curtailment strategy, and we forecast our third quarter production will average 980 million to 1.03 billion cubic feet equivalent per day.
During the second quarter, our realized natural gas price before the effective hedges and including transportation costs settled at approximately $0.70 per Mcf below NYMEX prices, which was the low end of our guidance range of $0.70 to $0.80 per Mcf. As previously discussed, our 2020 guidance includes expected firm transport fees incurred during periods when our production falls below our firm transport commitments. We continue to work hard at reducing near-term firm transport commitments but are not reflecting these opportunities in our current guidance and reaffirm our full year basis differential guidance of $0.70 to $0.80 per Mcf. During the second quarter, before the effect of hedges, our realized oil price came in at $7.71 below WTI. We saw significant pricing swings in WTI during the quarter, and our realized oil differentials were negatively impacted by this volatility. Looking at the forward curve, we do not anticipate the same kind of volatility going forward. Through June, our year-to-date realized oil price before the effect of hedges came in at $3.71 below WTI. We continue to work with purchasers in the basin to optimize our oil sales and are still guiding toward a full year discount to WTI of $4.50 to $5, but we hope to do better. Turning to NGLs. Before the effect of hedges, our realized NGL price came in at approximately 37% of WTI in the quarter. We are trending in the right direction and reaffirm our guidance to be 30% to 35% of WTI for the full year 2020.
Our realized prices continue to be supported by our strong hedge position. And during the second quarter of 2020, we realized a hedge settlement gain of $1.33 per Mcfe or $124.5 million. As we noted in May, we chose to unwind our 2020 oil hedges ahead of the borrowing base redetermination in late April. We monetized roughly 5,000 barrels per day of oil hedges for over $40 million in cash. In the second half of 2020, we currently have 424 million cubic feet per day of gas hedged with swaps at an average price of $2.78 per MMBtu. In addition, we have a large hedge position covering our oil exposure for the remainder of the year. We continue to look for opportunities to add additional downside protection to support our cash flows, particularly in 2021 by actively managing our hedge book. For the first six months of 2020, our realized prices and hedge position resulted in an adjusted oil and gas revenues of $449.3 million, which is composed of approximately 76% natural gas and 24% liquids revenues.
In terms of cash expenses, our per unit operating expense, which includes LOE, production tax and midstream gathering and processing, totaled $0.85 per Mcfe during the second quarter. If you add recurring G&A of $0.16 per Mcfe to this figure, our per unit operating costs totaled $1.01 during the quarter or $0.01 below the high end of our full year guidance range. Second quarter LOE of approximately $0.17 per Mcfe was slightly higher than expectations because of higher costs related to our Utica non-op assets. We reaffirm our guidance range of $0.14 to $0.16 per Mcfe for the full year. We're currently trending toward the high end of the range, primarily due to higher non-op LOE. Production taxes for the quarter totaled $0.04 per Mcfe, at the low end of our expected range due to low pricing environment during the quarter. Midstream gathering and processing expense totaled approximately $0.60 per Mcfe in the second quarter, which was above the high end of our range. Due to our curtailment strategy, volumes in one of our gathering areas in the Utica shale have fallen below minimum volume commitment we have, which is driving this increase. We are in active ongoing discussions with this midstream provider surrounding optimization and are working toward a solution to hopefully alleviate this burden through the remainder of the year. We have had recent success surrounding optimization and cost reduction efforts. And when our midstream expenses combined with our lower expected differential, net-net, we forecast total costs associated with midstream are trending better than the midpoint of our guidance for the full year.
Recurring G&A expense, including both cash and capitalized portions, totaled $14.8 million during the second quarter, a 16% improvement from the first quarter of 2020. As Dave mentioned, we recently implemented several G&A initiatives to reduce our corporate cost structure. These are extremely challenging times, and we appreciate the resiliency and flexibility of our employees as we navigate through this environment. We currently expect recurring G&A for the full year to be at or below the low end of our full year guidance range of $69 million to $74 million. Moving to the balance sheet. We continue to explore a wide range of alternatives to best position Gulfport for the future. As part of that effort, we recently received an amendment from our bank group that allows us to issue up to $750 million of second lien debt to facilitate our ongoing liability management initiatives. The partnership we have with our bank group remains very important to us, and we are actively managing these relationships. However, given the historical low pricing environment we are seeing, banks remain extremely conservative, and many are looking to reduce their exposure to our industry. Accordingly, we remain very focused on improving our balance sheet and cost structure as we face a borrowing base redetermination and the necessary extension of our revolver this fall. Our liquidity as of June 30 totaled approximately $255 million. It is possible however that this liquidity could be reduced materially later this year due to a lower borrowing base if we do not significantly improve our leveraging cost profile. As a result, we have included language in our earnings release and 10-Q regarding the risks associated with our ability to continue as a going concern. We continue to work with our advisors to explore available opportunities to improve our balance sheet, and we'll provide an update on these efforts when we are able to do so.
I will now turn the call back over to Dave for closing remarks.
David M. Wood -- President, Chief Executive Officer and Director
Thank you, Quentin. In closing, I want to reiterate that we are laser-focused on controlling what is within our control: making the right steps to reduce costs, enhance operational efficiency and improve the company's financial condition. The macro energy environment is historically challenging and unpredictable, and we are doing everything in our power to mitigate the effect on our business. We will continue to take appropriate steps to strengthen the company's financial position and work to improve our balance sheet in a way that preserves value for all our stakeholders. This concludes our prepared remarks. Thank you again for joining us for our call today.
Operator
[Operator Closing Remarks]
Questions and Answers:
Duration: 20 minutes
Call participants:
Jessica R. Antle -- Director of Investor Relations
David M. Wood -- President, Chief Executive Officer and Director
Quentin R. Hicks -- Chief Financial Officer
