Utica Shale heavyweight Gulfport Energy Corp. is getting ready to come off the sidelines, offering a bullish assessment Thursday on the natural gas market that has it pivoting from what management thought would be a year of activity reductions to setting up for a six to eight-rig program in 2017.
Gulfport will not only retain its three rigs heading into the end of the year, but it recently signed on a fourth with plans to put it to work in September. Low rig counts in the Appalachian Basin and across the country, fading supplies and a dwindling inventory of drilled but uncompleted wells, along with record power burn and increasing exports have management viewing a tide that's turning in the company's favor.
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"We are seeing a structural change in demand, accompanied by record low activity levels and waning spare capacity," CEO Michael Moore said Thursday during the company's second quarter earnings call. "...When we combine the improvement in natural gas strip pricing with our high return assets in the Utica, we believe our financial position and anticipated 2017 cash flow profile warrants higher activity levels than we have today."
At the beginning of the year, Gulfport was in retreat, heading to its dry gas window, where low breakevens and prolific wells could better protect it from the price collapse (see Shale Daily, Feb. 18; May 6). It plans to stay there, but in a much bigger way if market fundamentals continue to firm. At the beginning of 2016, Gulfport was contemplating a reduction in activity, but it's now planning to build into a program designed to capture the momentum of forward gas prices.
"At a $3-plus strip, we believe we can easily ramp to a six-rig program," Moore said. "As we move through the remainder of 2016 we will continue to monitor the price environment and refine our views as we consider the appropriate level of activities for 2017 and beyond. We currently believe the lack of supply going into next year could certainly generate a scenario above where the strip sits today, and should natural gas prices move higher, and we are able to hedge out the curve, we would look to expand our rig count beyond the six-rig scenario."
At current estimates, a six-rig program could generate 20-25% year/year 2017 growth for Gulfport. With an eight-rig program, growth would be 25-30%. In both instances, the capital budget would increase, which Gulfport could absorb given its current balance sheet, management said, cautioning that its outlook could change.
"It all depends on the commodity price deck...When we were looking at our 2017 book-end, so to speak, we weren't just looking at 2017, we were looking at 2018," said CFO Aaron Gaydosik. "We felt like because of where the balance sheet is today, the cash on hand, the revolver access that we have, we can comfortably fund a six to eight-rig program, just depending on wherever the strip settles at the end of this year."
For the time being, though, Gulfport has more pressing issues to address. The company produced 664.7 MMcfe/d during the second quarter, of which 642.3 MMcfe/d came from the Utica. While overall production was up from the 473.9 MMcfe/d it produced in 2Q2015, it was down from the 692.2 MMcfe/d it produced in 1Q2016.
Gulfport idled a completion crew in the first quarter and later brought them back, pushing tie-ins to the end of the second quarter. More importantly, though, high gathering line pressures in its dry gas window curtailed some production. With another rig, the company plans to drill 17-18 more wells and turn to sales another 10-11 wells in the Utica, on top of the 19-21 it planned to drill and the 28-30 it planned to turn to sales at the beginning of the year.
Other operators have flooded the dry gas window, and Gulfport only recently started to ramp-up its production there. While its budget has increased from $425-475 million to $475-550 million on more second half activity, its year-end guidance of 695-730 MMcfe/d will not change because of those midstream issues.
"You’ve got to remember the development of the dry gas [Utica] area is a fairly new development, and we are really the first to develop it in a big way. The situation you have here is this, you have lots of new production coming on in a very tight geographical area and these are very high pressure wells, a very prolific region," Moore said. "So, you've got pipelines that have maximum operating pressures and we're seeing pressures of 1,100 to 1,300 psi, which are pretty incredible pressures.
"In oil and gas, compression is something you bring on as you need it. We're at the point when it's needed. Moore called the situation an "above the surface, mechanical challenge" and said "it's something you deal with in every play."
The company is currently working on adding pad-level compression and plans to phase in full-field compression later this year so the issue doesn't impair 2017 production.
Gulfport took a beating in the second quarter as gas prices climbed from the bottom. A non-cash derivative loss of $198.7 million affected revenue, the bottom line and average realized prices. For the second quarter, Gulfport reported an average realized price of negative 47 cents/Mcfe, compared to $2.60/Mcfe in the year-ago period.
Its revenue plummeted as a result to negative $28.2 million during the quarter from $112.3 million in 2Q2015. The company reported a net loss of $339.8 million (minus $2.71/share), compared to a net loss of $31.3 million (minus 32 cents) in the year-ago period. The second quarter loss also included a $170.6 million impairment of its oil and gas properties.