TEXT-S&P: Gulfport Energy rated 'B-', proposed notes rated 'CCC+'
(The following statement was released by the rating agency) Overview
-- U.S. oil and gas exploration and production (E&P) company Gulfport Energy Corp.
plans to issue $250 million of senior unsecured notes.
-- We are assigning our 'B-' corporate credit rating to the company. We are assigning a 'CCC+' issue level rating and '5' recovery rating to Gulfport's proposed $250 million senior unsecured notes due 2020.
-- The outlook is negative, which reflects the high risk that the company will be unable to meet its aggressive production forecasts, given both Gulfport's and the industry's relatively little production history in the Utica shale.
Rating Action On Oct. 11, 2012, Standard & Poor's Ratings Services assigned its 'B-' corporate credit rating to Oklahoma City -based Gulfport Energy Corp. (Gulfport). The outlook is negative.
At the same time, we assigned a 'CCC+' issue rating to Gulfport's proposed $250 million senior unsecured notes due 2020. We assigned a '5' recovery rating to the notes, indicating our expectation of modest (10% to 30%) recovery in the event of a payment default.
The ratings on Gulfport reflect the company's very small reserve and production base; limited reserve and production diversification; aggressive capital spending plans; very short reserve life; and the volatility and capital intensive nature of the oil and gas industry. Our ratings also reflect Gulfport's liquids-rich production base and relatively low leverage.
The company's "vulnerable" business risk profile reflects Gulfport's very small reserve base of 6.5 million barrels of oil equivalent (MMBoe) (pro forma for the company's contribution of its Permian assets to Diamondback Energy Corp.), which positions it as one of the smallest E&P companies in its rating category. However, 80% of this reserve base is proved developed and 91% is liquids, which are currently yielding higher price realizations than natural gas.
While the vast majority of the company's reserves are located in the Gulf Coast, Gulfport's growth and future prospects rest with its meaningful acreage position in the still largely untested Utica Shale. In general, given the infancy of the Utica's development, the industry as a whole does not have much production history in this shale. Preliminary drilling data from several wells the company has drilled have yielded solid results with good liquids content. However, these results are based on initial peak rates. Therefore, future production rates, estimated ultimate recoveries (EURs), decline curves and percentage of liquids content are still unknown. Also, we believe the company will have to spend approximately $1.6 billion over the next four years to hold its acreage position in the Utica, which will require significant capital spending. Moreover, if Gulfport's Utica shale strategy proves unsuccessful, the company has a very short reserve life of approximately two years based on 6.5 million barrels (MMBbl) of proved reserves and estimated production of 3.1MMBoe in fiscal 2012.
The company's cost structure is relatively good compared with peers, and we expect production costs (lease operating expenses and general administrative costs) to be about $12/bbl in fiscal 2012. We expect the company's cost structure to improve as it ramps up production in the Utica.
Gulfport has a solid production history in the Gulf Coast and receives favorable Louisiana Light Sweet (LLS) pricing for its Gulf Coast production. Besides the company's proved reserves in the Gulf Coast and large acreage position in the Utica, the company also has equity interests in the Canadian Oil Sands and the Permian Basin (after the Diamondback Energy Inc. IPO closes). Gulfport has assets (although not part of the company's proved reserves) in the Canadian oil sands through its 24.9% interest in Grizzly Oil Sands ULC (Grizzly). In addition, the company will have an equity interest in Diamondback Energy, after Gulfport completes its contribution of its Permian assets to Diamondback Energy Inc.
We view Gulfport's financial risk as highly levered. At the end of fiscal 2012, Gulfport will have approximately $260 million of total debt (including adjustments for asset retirement obligations obligations). While the company's leverage credit metrics (we expect total debt to last-12-month EBITDA to average 1.3x for fiscal 2012) are relatively healthy, its EBITDA generation is currently very small, and the company will have significant free cash flow deficits.
Standard & Poor's uses a price assumption for Brent oil (Brent) of $100 per barrel (bbl) in 2012, $90/bbl in 2013, and $80/bbl thereafter. Gulfport receives LLS pricing for its Gulf Coast production, which trades closely to Brent. Our assumption for Henry Hub natural gas is $2.50 per thousand cubic feet (Mcf) for the rest of 2012, $3.00/Mcf in 2013, and $3.50/Mcf thereafter. We also assume that the company will receive approximately a 30% premium on its gas due to the liquids rich nature of its Utica assets. We assume that Utica well development will be largely successful and expect full-year 2013 production to average approximately 21K boepd, 63% of which will be natural gas. Incorporating Gulfport's current hedges, we forecast 2013 EBITDA of approximately $285 million. We expect capital spending of approximately $375 million in fiscal 2013, which will outstrip cash flow generation by approximately $90 million and result in a healthy total debt-to-EBITDA of 1x.
We characterize Gulfport's liquidity as adequate. Our assessment incorporates the following expectations and assumptions:
-- The company will have approximately $170 million of cash pro forma for the proposed note issuance and the contribution of its Permian assets to Diamondback as of June 30, 2012;
-- The company will have an undrawn $45 million revolving credit facility at close of the note issuance;
-- We project that funds from operations (FFO) will be approximately $260 million in fiscal 2013;
-- We expect the company's capital spending budget will be approximately $375 million for fiscal 2013. Available liquidity is sufficient to cover the negative cash flow we expect in 2013. However, the company could spend more if it decides to more aggressively develop its Utica acreage;
-- The company does not have any material debt maturities until its revolver matures in 2015; and
-- The company's revolver has covenants including a debt-to-EBITDA test of 2.0x and an interest coverage test of 3.0x, which we expect the company to be in compliance with in the near term.
Recovery analysis For the full recovery analysis, please see the recovery report on Gulfport to be published on RatingsDirect following the release of this report.
The negative outlook reflects the future prospects for the company's Utica shale strategy. Both Gulfport and the industry in general have relatively little production history in the Utica, given the infancy of the shale's development. We would consider a negative rating action if the company is unsuccessful in its Utica shale development and is unable to book a meaningful level of reserves that would extend its reserve life. If it fails to do so, we believe the company could face liquidity as well as production sustainability issues, given the company's already short reserve life.
We would revise the outlook to stable if the company books a significant amount of reserves through successful Utica development and results in a meaningful reserve life extension.
Related Criteria And Research
-- Standard & Poor's Raises Its U.S. Natural Gas Price Assumptions; Oil Price Assumptions Are Unchanged, July 24, 2012
-- Standard & Poor's Raises Its Oil Price Assumptions; Natural Gas Price Assumptions Unchanged, March 22, 2012
-- Key Credit Factors: Global Criteria For Rating The Oil And Gas Exploration And Production Industry, Jan. 20, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List New Rating; Outlook Action Gulfport Energy Corp. Corporate Credit Rating B-/Negative/-- New Rating Gulfport Energy Corp. Senior Unsecured US$250 mil nts due 2020 CCC+ Recovery Rating 5
Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at
. All ratings affected by this rating action can be found on Standard & Poor's public Web site at . Use the Ratings search box located in the left column. (New York Ratings Team)