Gulfport shares have massively
underperformed the broader market and Gulfport’s peer group over
the last one, three and five years
Believes Gulfport has excellent opportunity
to drive shareholder value by implementing $500 million share
repurchase program – potentially driving more than 100% gain in
stock price
Calls for strict moratorium on further share
issuances, given that equity issuances over past five years have
been extremely value destructive
Concerned that current directors lack
relevant experience and are not aligned with stockholders – and
believe addition of meaningful stockholder representation would
greatly enhance Board’s perspective
Firefly Value Partners, LP (“Firefly” or “we”), which manages
funds that, together with affiliates, collectively beneficially own
8.1% of the outstanding common stock of Gulfport Energy (“Gulfport”
or the “Company”) (Nasdaq: GPOR), today issued a public letter to
the Gulfport Board of Directors (“the Board”). In the letter,
Firefly highlights Gulfport’s lack of urgency in addressing
persistent stock price underperformance; failure to commit to steps
that could maximize stockholder value; and the current Board’s lack
of necessary skills, experience and alignment with stockholders to
effectively steer Gulfport’s strategy and drive long-term
stockholder value. Firefly calls for steps including a $500 million
share repurchase program and a moratorium on value-destructive
share issuances.
This press release features multimedia. View
the full release here:
https://www.businesswire.com/news/home/20190117005383/en/
GPOR share price (Graphic: Business
Wire)
The full text of the letter is below.
January 17, 2019
Board of DirectorsGulfport Energy Corporation3001 Quail Springs
ParkwayOklahoma City, OK 73134
Dear Members of the Board,
Firefly Value Partners, LP (“Firefly” or “we”) manages funds
that, together with affiliates, collectively beneficially own 8.1%
of the outstanding common stock of Gulfport Energy (“Gulfport” or
the “Company”).
Founded in 2006, Firefly is an investment partnership focused on
fundamental primary research and business analysis, which enables
us to invest with a long-term time horizon in a concentrated
portfolio of deeply undervalued companies. We have substantial
experience in the natural gas industry, particularly with low-cost
Appalachian natural gas producers. Over the past six years, we have
invested in industry-related public equities and private mineral
rights.
We have maintained a significant investment in Gulfport since
2013. As a large, long-term Gulfport stockholder, we have a strong
interest in seeing Gulfport’s leadership create value for all
stockholders. To date, we have been patient with decisions made by
the Board and management, and we appreciate the time that
Gulfport’s Chairman and new CEO recently spent with us to discuss
our views on the Company. However, as we previously communicated to
you, we have been discouraged by the Board’s lack of urgency in
addressing the Company’s prolonged stock price underperformance and
its unwillingness to commit to actions that we believe would
maximize value for stockholders.
At this point, we are concerned that the current Board does not
possess the necessary skills, experience, or alignment with the
Company’s stockholders to effectively steer Gulfport’s strategy and
maximize long-term shareholder value.
Gulfport Has Dramatically Underperformed the Broader Market
and Its Peers
Gulfport is one of the largest and lowest-cost producers of
natural gas in the United States. Most of Gulfport’s production
comes from its leasehold in two areas: the Utica shale in
Southeastern Ohio and the SCOOP play in Oklahoma. During Q3 2018,
Gulfport produced over 1.4 billion cubic feet of gas equivalent per
day, with approximately 80% coming from the Utica shale.1 In
addition to substantial current production, Gulfport has over a
decade of low-cost, high-return drilling inventory. Since our
initial investment in 2013, Gulfport has operated a solid drilling
program, delivering increasingly productive wells, minimizing
costs, and efficiently developing the Company’s asset base.
However, despite the Company’s apparent strong operational
performance, Gulfport shares have massively underperformed the
broader market and the shares of Gulfport’s peer group over the
last one, three, and five years:
Stock Price Performance2
1 Year 3 Year 5
Year S&P 500 Index -6% +39% +41% 2018 Proxy Statement Peer
Group -30% +34% -62%
Gulfport -35% -63%
-84%
Underperformance vs. S&P 500
-29% -102% -125%
Underperformance vs. Peer Group -5%
-97% -22%
Gulfport’s Poor Capital Allocation Decisions Have Destroyed
Substantial Value
We believe Gulfport’s share price underperformance is the direct
result of poor capital allocation decisions. Gulfport has issued
large amounts of equity five times over the last five years—each
time at lower prices than before!3
From November 2013 to the present, Gulfport has increased its
shares outstanding from roughly 78 million to 173 million, in large
part to finance acquisitions. These share issuances have been
extremely dilutive, reducing stockholders’ share of valuable
acreage and future cash flows. Even though Gulfport has issued
approximately $2.9 billion of equity since 2013, its current market
capitalization is only $1.5 billion.4 This is stockholder value
destruction in the starkest possible terms.
We Are Concerned that the Board Is Unwilling or Unable to
Take Necessary Actions
Despite Gulfport’s long-term underperformance, based on our
dialogue with Chairman David Houston, we are concerned that the
Board will not commit to actions we believe are necessary to
maximize stockholder value.
The current Board does not seem up to the task of fixing the
Company’s capital allocation strategy and regaining investors’
trust. Certain of the Company’s directors appear to lack the
relevant experience needed to navigate Gulfport’s business and the
expectations of its investors. Other directors have served for so
long that their willingness to drive change at Gulfport may be
compromised. Additionally, Gulfport’s directors own just $2.4M of
stock combined—roughly 0.16% of the Company. And almost all of that
stock was acquired as compensation for Board service. This paltry
level of investment creates a misalignment with the interests of
the Company’s long-term stockholders.
Thus far, our efforts to engage privately with the Board have
left us questioning whether the Board’s composition must change
before Gulfport will take actions necessary to maximize stockholder
value. We believe that adding meaningful stockholder representation
would greatly enhance the Board’s perspective.
Gulfport Is Deeply Undervalued
As we have discussed with the Board and detailed below, we
believe that Gulfport shares are trading at a massive discount to
their intrinsic value and may be worth more than $30 per share over
time. We arrive at this value by discounting the future cash flows
generated through Gulfport’s measured development of its Utica and
SCOOP Woodford assets over their lifetime, using strip commodity
pricing, at industry standard discount rates. With development of
the SCOOP Sycamore or higher commodity prices, we believe that
Gulfport’s intrinsic value per share is substantially higher.
Discounted cash flow analysis aside, several common valuation
metrics illustrate that Gulfport shares are trading at a large
discount to intrinsic value. Gulfport shares trade at under four
times trailing earnings and under four times EV/EBITDA.5 In our
opinion, no matter how one looks at it, Gulfport’s shares are
significantly undervalued.
How Has the Company Responded?
Unfortunately, Gulfport has done little to date to take
advantage of this tremendous discount to fair value. The Board
authorized $200M in share repurchases in early 2018, but after
buying back $110M in shares through July, the Company inexplicably
stopped repurchases through the end of Q3 2018.6 Even if Gulfport
resumes repurchases under the Board’s previously-announced
authorization, in our opinion that will not be nearly enough. Over
the last five months, Gulfport’s share price has declined more than
20%. With significant cash on hand, positive free cash flow, and
non-core assets to sell, Gulfport has been missing a meaningful
opportunity to repurchase additional shares at a discount.
Gulfport’s Current Opportunity: Enhance Stockholder Value
Through Share Repurchases
Because the market continues to price Gulfport shares at what we
consider a severe discount to intrinsic value, the Board has an
incredible opportunity to enhance value for stockholders by
implementing a significant share buyback. We are convinced that the
Board should implement a $500 million share repurchase program over
the next year. Our calculations suggest that, on a net asset value
per share basis, a $500 million share repurchase would increase
Gulfport’s value per share by at least $9. As commodity prices
rise, the impact of share repurchases is even greater:
Gulfport Net Asset Value Per
Share7
Henry Hub NaturalGas
Price
Status Quo $500M Buyback
Value Created Forward Strip $22 $31 $9
$3.25/MMBtu $33 $47 $14
Given that Gulfport currently trades below $9 per share, our
analysis indicates that a $500 million share repurchase would
create value exceeding 100% of the current share price.
In our view, buying back shares is the Company’s optimal use of
capital. Let us compare two capital allocation options:
(1) Accelerated Drilling: Gulfport spends an
incremental $500 million in capex to pull drilling forward into
2019; and
(2) Share Buyback: Gulfport moderately slows
drilling in the near-term and uses $500 million to buy back shares
at today’s price.
Our projections show that Gulfport is far better off buying back
shares:
Gulfport Capital Allocation
Options
Use of Capital
'19 - '23Cumulative
Prod.Per Share (Mcf)
'19 - '23CumulativeEBITDA
PerShare
Year-End '23Undrilled
CoreWells Per MillionShares
Accelerated Drilling 20.7 $30 2.7 Share Buyback 25.9
$37 4.9
As the table above illustrates, a $500 million share buyback
would increase production and EBITDA per share over the next five
years much more than an accelerated drilling program would—while
preserving Gulfport’s most valuable asset: its inventory of
undrilled wells.
Not only do we consider a buyback Gulfport’s highest-returning
potential use of capital, but a large buyback would also signal to
the market that the Company is committed to improving its capital
allocation.
Cash Sources for Share
Repurchase
In our view, Gulfport can easily fund a $500 million share
repurchase over the next 12 months using cash on hand, accelerated
non-core asset sales, and free cash flow generated by the
business.
As of September 30, 2018, Gulfport had $124 million in cash on
its balance sheet. Gulfport is also set to generate significant
free cash flow. We expect Gulfport to generate more than $125
million of free cash flow in Q4 2018.8 In 2019, we believe that
Gulfport can generate another $50 million of free cash flow while
still growing production modestly.9 We recommend that Gulfport plan
its 2019 capital budget to maximize free cash flow generation to
take advantage of Gulfport’s depressed share price.
Besides cash on hand and cash from operations, Gulfport has a
portfolio of non-core assets that it should monetize. Gulfport’s
largest non-core asset is a 22% stake in publicly traded oilfield
service company Mammoth Energy Services Inc. (NASDAQ: TUSK). At
current market prices, this stake is worth roughly $215M.10 In
addition to its Mammoth Energy stake, Gulfport can sell non-core
assets in Southern Louisiana, the Niobrara, the Bakken, and
internationally.
The sources of cash we’ve listed above total well over $500
million:
Source of Cash
Amount($M)
Cash on hand $124 Q4 2018 estimated free cash flow $125 2019
estimated free cash flow $50 Sale of Mammoth Energy Stake $215
Additional asset sales $50
Total $564
Importantly, a $500 million buyback program would neither stress
Gulfport’s balance sheet nor cause the Company to incur additional
debt.
Moratorium on Share Issuances
Finally, considering the value-destructive equity issuances of
the past five years, we believe Gulfport should adopt a strict
moratorium on further share issuances to send a clear message to
investors that the Company is on a new path. This is especially
important, as the Company recently underwent a CEO transition. The
Board should reassure stockholders that it considers long-term
capital allocation a top priority for Gulfport. We believe that a
strict moratorium on further share issuances would show
stockholders that the Board has learned from Gulfport’s mistakes
and will not repeat them.
Action Plan
In summary, we propose an action plan that we believe allows
Gulfport to create at least $9 per share of value for stockholders
(over 100% of the current market capitalization) over the next 12
months. Executing this plan will show investors that Gulfport’s
value-destructive capital allocation strategy is behind it and set
Gulfport on a path to maximizing value to stockholders. The plan is
simple:
- Repurchase $500 million in shares over
the next 12 months using cash on hand, all free cash flow generated
in Q4 2018, and proceeds from the accelerated divestiture of
non-core assets. Commit to generating free cash flow in 2019, and
using this free cash flow to repurchase shares.
- Announce a strict moratorium on further
share issuances and any other dilutive actions, including
acquisitions, until Gulfport’s market value reaches its intrinsic
value.
As discussed above, the Board’s past capital allocation
decisions—particularly acquisitions, share issuances, and stalled
share repurchases—have destroyed significant stockholder value. We
have engaged the Board in a private, constructive dialogue
regarding a plan to maximize value for all Gulfport stockholders.
Based on that dialogue, we are not encouraged that the Board will
act in stockholders’ best interests without additional pressure
from other large, long-term stockholders—or a change in the Board’s
composition.
We intend to continue our efforts to engage the Board in
discussions regarding our plan described above, and to communicate
our views on Gulfport to our fellow stockholders and the investment
community as appropriate. We urge the Board to take advantage of a
significant opportunity for the Company and execute on our
plan.
Sincerely,
Firefly Value Partners, LP
About Firefly Value Partners, LP
Founded in 2006, Firefly is an investment partnership focused on
fundamental primary research and business analysis. Firefly invests
with a long-term time horizon in a concentrated portfolio of deeply
undervalued companies.
________________________1 Gulfport SEC filings.2 Performance of
GPOR common stock through January 15, 2019. 2018 Proxy Statement
Peer Group – AR; NFX; COG; SWN; RRC; PDCE; WPX; XEC; OAS; CNX; WLL;
RICE (through closing of merger with EQT on November 13, 2017);
QEP; SM; EGN (through closing of merger with FANG on November 29,
2018); LPI.3 Gulfport SEC filings.4 Based on closing price as of
January 15, 2019.5 Source: Capital IQ as of January 15, 2019.6
Gulfport SEC filings.7 Assumes forward strip pricing net of basis
differentials as of January 15, 2019 and NGL realized price 40% of
WTI. 10% discount rate on future free cash flow.8 Source: Company
guidance and Firefly analysis.9 Source: Firefly analysis.10 Based
on closing price on January 15, 2019.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20190117005383/en/
Investors:John Ferguson / Joe MillsSaratoga Proxy
Consulting LLC212-257-1311jferguson@saratogaproxy.com /
jmills@saratogaproxy.comMedia:Dan Zacchei / Joe
GermaniSloane & Company212-486-9500dzacchei@sloanepr.com /
jgermani@sloanepr.com
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