My thinking has changed with Gulfport Energy. Initially when I got into Gulfport I did it because of the low PE and the share buyback plan. But the buybacks have slowed, and a different situation has come into focus.
When the buybacks slowed I was disappointed, but after watching Gulfport’s CEO for a few quarters, I’m okay with it. Instead of using the cash flow for buybacks, right now he’s focused on buying back bonds at a discount, and I agree that’s a good idea. They are lowering their debt and are able to do it at a discount. And they can still do share buybacks through 2020 if they want to.
Instead of focusing on share buybacks, now I’m focused on David Wood. I’m continuing to stay in Gulfport now, and might add to my position outside the ADI portfolio, because I love the job David Wood is doing and I want to ride this thing out and see what he does.
The third quarter’s earnings call transcript is a good read. Here’s what I learned:
Early in 2020 when they publish their guidance for the year, Wood said they’ll also be discussing their long-term outlook and they’ll be providing “a two-year outlook, based on certain commodity price scenarios.” I love this. I think a plan lowers Mr. Market’s worries about uncertainty and helps attract more shareholders. Multi-year plans have worked well for Fiat Chrysler and I’m looking forward to seeing Wood’s two-year plan for Gulfport.
They’ve added to their hedges for 2020 and have what looks like 30 to 40% of their production hedged at $2.88 for 2020. It sounds like they expect to add more hedging in the fourth quarter.
Wood is focused on cash flow and allocating capital for the highest possible returns, and if that comes at the expense of top line production growth, so be it. Reading his comments on prioritizing returns and not production reminds me of Buffett’s talk in his annual letters about pricing insurance correctly and not writing unprofitable coverage, even if that means premium volume drops.
From what I can gather, it looks like Wood expects natural gas to be between $2.60 and $2.90 for the next few years. And at that level it sounds like they’re cash flow neutral at $2.60 and cash flow positive up from there. And it sounds like in this low commodity price environment they’ll be using positive cash flow to fund share repurchases or debt retirement. And then if natural gas prices go up and the cash flow starts coming in good, they’ll use that cash flow to drill more of their inventory and grow production and cash in at the higher price level.
The water assets in the SCOOP sound close to being a done deal and I think we’ll get confirmation on that sale being finalized or close to that in the fourth quarter.
I absolutely love this one. They have a non-operating interest in some wells in the Utica and it sounds like the operator is overspending the budget and Gulfport is having to pony up unexpected additional money to fund those wells. And it sounds like they are selling their interest in that Utica acreage that someone else operates. An analyst asked Wood how big a deal those assets were and he gave an answer that to me sounded like “not a big deal monetarily, but I just don’t like it.” I just love this. As a business owner I know how frustrating it can be when small things don’t go right and distract and frustrate me, so I love that as a manager and owner at Gulfport he’s cleaning house and not letting issues like this cost overrun fester and grow. He’s fixing the problem and not letting it continue to be be a distraction.
They are focused on getting costs down to improve cash flow, including general and administrative expenses.
They’re also moving their drilling program from something that was essentially drill and spend a lot of money two quarters of the year and enjoy more cash flow the other two quarters, to a more even capital spend throughout the year. They said there were efficiences in a more even model that will improve returns.
All in all I just really enjoyed reading his third quarter commentary, and I am looking forward to the two-year plan coming early next year. The low PE and the share buybacks attracted me initially, but now I’ve really gotten to like what David Wood is doing and I was to ride this low price environment out with him and see what he does with Gulfport. It looks like he’s going to continue to ride out the low price environment where he expects natural gas to run between $2.60 and $2.90 by using the modest cash flow to buy back shares and pay off debt at a discount. And then if prices rise back up at some point he’ll use the additional cash flow to grow production at more attractive returns than he’s currently getting at $2.60 to $2.90 gas.
My perspective is that I’ll sit with an investment in Gulfport where I hopefully bought in for a cheap price and at a time with low natural gas prices. And I’ll sit back and watch David Wood steer us through this environment while keeping our cash flow neutral to modest. And he’ll buy back some shares and pay off some debt. And then we’ll be in great shape to drill more of our large inventory in Ohio and Oklahoma if natural gas prices rise.
I’m impressed with Wood’s management, I’m looking forward to his two-year plan, and I want to stick around and see what he does.