(The following statement was released by the rating agency)Overview
-- U.S. oil and gas exploration and production (E&P) company GulfportEnergy Corp.
plans to issue $250 million of senior unsecured notes.
-- We are assigning our 'B-' corporate credit rating to the company. Weare assigning a 'CCC+' issue level rating and '5' recovery rating toGulfport's proposed $250 million senior unsecured notes due 2020.
-- The outlook is negative, which reflects the high risk that the companywill be unable to meet its aggressive production forecasts, given bothGulfport's and the industry's relatively little production history in theUtica shale.
Rating ActionOn 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' recoveryrating 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 andproduction base; limited reserve and production diversification; aggressivecapital spending plans; very short reserve life; and the volatility andcapital intensive nature of the oil and gas industry. Our ratings also reflectGulfport's liquids-rich production base and relatively low leverage.
The company's "vulnerable" business risk profile reflects Gulfport's verysmall reserve base of 6.5 million barrels of oil equivalent (MMBoe) (pro formafor the company's contribution of its Permian assets to Diamondback EnergyCorp.), which positions it as one of the smallest E&P companies in its ratingcategory. However, 80% of this reserve base is proved developed and 91% isliquids, which are currently yielding higher price realizations than naturalgas.
While the vast majority of the company's reserves are located in the GulfCoast, Gulfport's growth and future prospects rest with its meaningful acreageposition in the still largely untested Utica Shale. In general, given theinfancy of the Utica's development, the industry as a whole does not have muchproduction history in this shale. Preliminary drilling data from several wellsthe company has drilled have yielded solid results with good liquids content.However, these results are based on initial peak rates. Therefore, futureproduction rates, estimated ultimate recoveries (EURs), decline curves andpercentage of liquids content are still unknown. Also, we believe the companywill have to spend approximately $1.6 billion over the next four years to holdits acreage position in the Utica, which will require significant capitalspending. Moreover, if Gulfport's Utica shale strategy proves unsuccessful,the company has a very short reserve life of approximately two years based on6.5 million barrels (MMBbl) of proved reserves and estimated production of3.1MMBoe in fiscal 2012.
The company's cost structure is relatively good compared with peers, and weexpect production costs (lease operating expenses and general administrativecosts) to be about $12/bbl in fiscal 2012. We expect the company's coststructure to improve as it ramps up production in the Utica.
Gulfport has a solid production history in the Gulf Coast and receivesfavorable Louisiana Light Sweet (LLS) pricing for its Gulf Coast production.Besides the company's proved reserves in the Gulf Coast and large acreageposition in the Utica, the company also has equity interests in the CanadianOil Sands and the Permian Basin (after the Diamondback Energy Inc. IPOcloses). Gulfport has assets (although not part of the company's provedreserves) in the Canadian oil sands through its 24.9% interest in Grizzly OilSands ULC (Grizzly). In addition, the company will have an equity interest inDiamondback Energy, after Gulfport completes its contribution of its Permianassets to Diamondback Energy Inc.
We view Gulfport's financial risk as highly levered. At the end of fiscal2012, Gulfport will have approximately $260 million of total debt (includingadjustments for asset retirement obligations obligations). While the company'sleverage credit metrics (we expect total debt to last-12-month EBITDA toaverage 1.3x for fiscal 2012) are relatively healthy, its EBITDA generation iscurrently very small, and the company will have significant free cash flowdeficits.
Standard & Poor's uses a price assumption for Brent oil (Brent) of $100 perbarrel (bbl) in 2012, $90/bbl in 2013, and $80/bbl thereafter. Gulfportreceives LLS pricing for its Gulf Coast production, which trades closely toBrent. Our assumption for Henry Hub natural gas is $2.50 per thousand cubicfeet (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 onits gas due to the liquids rich nature of its Utica assets. We assume thatUtica well development will be largely successful and expect full-year 2013production to average approximately 21K boepd, 63% of which will be naturalgas. Incorporating Gulfport's current hedges, we forecast 2013 EBITDA ofapproximately $285 million. We expect capital spending of approximately $375million in fiscal 2013, which will outstrip cash flow generation byapproximately $90 million and result in a healthy total debt-to-EBITDA of 1x.
We characterize Gulfport's liquidity as adequate. Our assessment incorporatesthe following expectations and assumptions:
-- The company will have approximately $170 million of cash pro forma forthe proposed note issuance and the contribution of its Permian assets toDiamondback as of June 30, 2012;
-- The company will have an undrawn $45 million revolving credit facilityat close of the note issuance;
-- We project that funds from operations (FFO) will be approximately $260million 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 thenegative cash flow we expect in 2013. However, the company could spend more ifit decides to more aggressively develop its Utica acreage;
-- The company does not have any material debt maturities until itsrevolver matures in 2015; and
-- The company's revolver has covenants including a debt-to-EBITDA testof 2.0x and an interest coverage test of 3.0x, which we expect the company tobe in compliance with in the near term.
Recovery analysisFor the full recovery analysis, please see the recovery report on Gulfport tobe published on RatingsDirect following the release of this report.
The negative outlook reflects the future prospects for the company's Uticashale strategy. Both Gulfport and the industry in general have relativelylittle production history in the Utica, given the infancy of the shale'sdevelopment. We would consider a negative rating action if the company isunsuccessful in its Utica shale development and is unable to book a meaningfullevel of reserves that would extend its reserve life. If it fails to do so, webelieve the company could face liquidity as well as production sustainabilityissues, given the company's already short reserve life.
We would revise the outlook to stable if the company books a significantamount of reserves through successful Utica development and results in ameaningful reserve life extension.
Related Criteria And Research
-- Standard & Poor's Raises Its U.S. Natural Gas Price Assumptions; OilPrice Assumptions Are Unchanged, July 24, 2012
-- Standard & Poor's Raises Its Oil Price Assumptions; Natural Gas PriceAssumptions Unchanged, March 22, 2012
-- Key Credit Factors: Global Criteria For Rating The Oil And GasExploration And Production Industry, Jan. 20, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008Ratings ListNew Rating; Outlook ActionGulfport Energy Corp.Corporate Credit Rating B-/Negative/--New RatingGulfport Energy Corp.Senior UnsecuredUS$250 mil nts due 2020 CCC+Recovery Rating 5
Complete ratings information is available to subscribers of RatingsDirect onthe Global Credit Portal at
. All ratings affectedby this rating action can be found on Standard & Poor's public Web site at. Use the Ratings search box located in the leftcolumn.(New York Ratings Team)