Thursday, May 8, 2014

Further explanation re Gulfports quarterly guidance

Someone, remarkably, as a response to the last post argued that Gulfport's quarter looked quite good and wondered what I was seeing that made me so bearish on the stock.

General observation: it has been widely observed that the single best measure of an oil and gas company management is their finding and development costs. Warren Buffett has made this observation many times.

Here - from fairly recently - 26 February this year - is their guidance for production and capital expenditures for this year.


2014 Guidance
Gulfport continues to estimate full year 2014 production to be in the range of 50,000 BOEPD to 60,000 BOEPD. Capital expenditures for exploration and production activities in 2014 are estimated to be in the range of $675 million to $725 million. Additionally, Gulfport anticipates spending approximately $225 million to $275 million on leasehold acquisitions in the Utica Shale during 2014.


GULFPORT ENERGY CORPORATION
COMPANY GUIDANCE

  Year Ending
  12/31/2014
Forecasted Production (BOE per day)
  
Utica
  44,500 - 54,500
South Louisiana
  ~5,500
  

Average Daily Oil Equivalent
  50,000 - 60,000
Total Equivalent - MMBOE
  18.25 - 21.90
Projected Cash Operating Costs per BOE
  
Lease Operating Expense - $/BOE
  $2.00 - $3.00
Transportation, Processing & Marketing - $/BOE
  $2.50 - $3.50
Production Taxes - % of Revenue
  4% - 6%
General and Administrative - $/BOE
  $1.25 - $2.25
Interest - $MM/Quarter
  $4.0 - $4.5
Depreciation, Depletion and Amortization per BOE
  $21.00 - $24.00
Budgeted Capital Expenditures - In Millions:
  
Utica
  $594 - $634
Southern Louisiana
  $66 - $71
Grizzly
  $15 - $20
  

Total Budgeted E&P Capital Expenditures
  $675 - $725
Budgeted Leasehold Expenditures - In Millions:
  $225 - $275


Quick summary: they intended to spend $675 to $725 million in capital expenditures and by year end their flow rates would be 50-60 thousand barrels per day.

From yesterday here is their guidance:

2014 Guidance
Gulfport currently estimates full year 2014 average daily production to be in the range of 37,000 BOEPD to 42,000 BOEPD. Capital expenditures for exploration and production activities in 2014 are estimated to be in the range of $715 million to $767 million. Additionally, Gulfport anticipates spending approximately $375 million to $425 million on leasehold acquisitions in the Utica Shale during 2014.
GULFPORT ENERGY CORPORATION
COMPANY GUIDANCE

  Year Ending
  12/31/2014
Forecasted Production (BOE per day)
  
Utica
  31,500 - 36,500
South Louisiana
  ~5,500
  

Average Daily Oil Equivalent
  37,000 - 42,000
Total Equivalent - MMBOE
  13.51 - 15.33
Projected Cash Operating Costs per BOE
  
Lease Operating Expense - $/BOE
  $3.50 - $4.50
Transportation, Processing & Marketing - $/BOE
  $3.50 - $4.00
Production Taxes - % of Revenue
  4% - 6%
General and Administrative - $/BOE
  $1.50 - $2.50
Interest - $MM/Quarter
  $4.0 - $4.5
Depreciation, Depletion and Amortization per BOE
  $21.00 - $24.00
Budgeted Capital Expenditures - In Millions:
  
Utica
  $634 - $676
Southern Louisiana
  $66 - $71
Grizzly
  $15 - $20
  

Total Budgeted E&P Capital Expenditures
  $715 - $767
Budgeted Leasehold Expenditures - In Millions:
  $375 - $425


We now intend to spend more - $715 to $767 million - that is more - and we intend to produce only 37-42 thousand barrels per day - substantially less.

They also plan to spend more on buying additional leasehold. Historically they have purchased all this leasehold from related parties.

So far the company has had many capital raises based on considerably more bullish guidance.

A considerable amount of the money raised has wound up in the hands of Gulfport's related parties as per the related party statement quoted below.

Are you comfortable?




John


===========================
Related Party Transactions and Relationships
We contract with Athena Construction, L.L.C., or Athena, to provide barge services in our West Cote Blanche Bay and Hackberry fields located along the Louisiana Gulf Coast. During 2013, we paid Athena $5.2 million and owed an additional $1.0 million for such services at December 31, 2013.
Caliber Development Company, LLC, or Caliber, provides building maintenance services for our headquarters in Oklahoma City, Oklahoma. We also lease office space from Caliber. During 2013, we paid Caliber $175,000 and owed $43,000 as of December 31, 2013.
We own a 24.9999% interest in Grizzly Oil Sands ULC, or Grizzly, a Canadian unlimited liability company, through our wholly owned subsidiary Grizzly Holdings, Inc. The remaining interests in Grizzly are owned by Grizzly Oils Sands Inc. As of December 31, 2013, Grizzly had approximately 830,000 acres under lease in the Athabasca and Peace River oil sands regions located in the Alberta Province near Fort McMurray. On October 5, 2012, we entered into an agreement with Grizzly in which we committed to make monthly payments from October 2012 to May 2013 in the aggregate amount of approximately $8.5 million to fund our proportionate share of the construction and development costs of the Algar Lake facility. We also agreed to fund our proportionate share of any unfunded cost overruns in excess of $2.0 million. During 2013, we paid an aggregate of $33.9 million under this agreement and in cash calls.
We have a 25% ownership interest in Muskie Proppant LLC, or Muskie (formerly known as Muskie Holdings LLC). Muskie processes and sells sand for use in hydraulic fracturing by the oil and natural gas industry and holds certain assets, real estate and rights in a lease covering land in Wisconsin that is prospective for mining oil and natural gas fracture grade sand. During the year ended December 31, 2013, we paid $2.2 million in cash calls, increasing our total net investment in Muskie to $7.5 million. We also entered into a loan agreement with Muskie effective July 1, 2013, under which we have loaned Muskie $0.9 million. Interest accrues at the prime rate plus 2.5%. The loan has a maturity date of July 31, 2014. At December 31, 2013, the outstanding balance of the loan was $0.9 million.
During 2011, we invested in Bison Drilling and Field Services LLC, or Bison. Bison owns and operates drilling rigs. During the year ended December 31, 2013, we paid $2.3 million in cash calls. We entered into a loan agreement with Bison effective May 15, 2012, under which Bison may borrow funds from us. Interest accrues at LIBOR plus 0.28% or 8%, whichever is lower, and is to be paid on a paid-in-kind basis by increasing the outstanding balance of the loan. The loan has a maturity date of January 31, 2015. We loaned Bison $1.6 million during the first nine months of 2012, all of which was repaid by Bison during the third quarter of 2012. We have made no loans to Bison since that time.
During the first quarter of 2012, we, Windsor Ohio LLC, or Windsor Ohio, and Rhino Energy LLC formed Timber Wolf Terminals LLC, or Timber Wolf. We currently have a 50% interest in Timber Wolf and paid $0.1 million in cash calls during 2013. Timber Wolf was formed to operate a crude/condensate terminal and a sand transloading facility in Ohio.
During the first quarter of 2012, we purchased a 22.5% ownership interest in Windsor Midstream LLC, or Midstream, at a cost of $7.0 million. Midstream owns a 28.4% interest in Coronado Midstream LLC (formerly known as MidMar Gas LLC), a gas processing plant in West Texas. During the year ended December 31, 2013, we paid an immaterial amount in net cash calls.
During the second quarter of 2012, we and Windsor Ohio formed Blackhawk Midstream LLC, or Blackhawk. We are the manager of Blackhawk and have a 50% ownership interest. Blackhawk coordinates gathering, compression, processing and marketing activities for us in connection with the development of our Utica Shale acreage. During the year ended December 31, 2013, we paid $0.7 million in cash calls to Blackhawk. On January 28, 2014, Blackhawk closed on the sale of its equity interest in Ohio Gathering Company, LLC and Ohio Condensate Company, LLC for a purchase price of $190.0 million, of which $14.3 million was placed in escrow. We received $84.8 million in net proceeds from this transaction.
Panther Drilling Systems, LLC, or Panther, performs directional drilling services for the Company. During the year ended December 31, 2013, we were billed $12.6 million for these services and, at December 31, 2013, we owed Panther approximately $1.8 million.
Redback Directional Services, LLC, or Redback, provides coil tubing and flow back services for the Company. Redback billed us $0.1 million for these services during the year ended December 31, 2013, and no amounts were owed to Redback at December 31, 2013.
Effective April 1, 2010, we entered into an area of mutual interest agreement with Windsor Niobrara LLC, or Windsor Niobrara, to jointly acquire oil and gas leases in Northwest Colorado for the purpose of exploring, exploiting and producing oil and gas from the Niobrara Formation. The agreement provides that each party must offer the other party the right to participate in such acquisitions on a 50/50 basis. The parties also agreed, subject to certain exceptions, to share third-party costs and expenses in proportion to their respective participating interests and pay certain other fees as provided in the agreement. In connection with this agreement, we and Windsor Niobrara also entered into a development agreement, effective as of April 1, 2010, pursuant to which we and Windsor Niobrara agreed to jointly develop the contract area, and we agreed to act as the operator under the terms of a joint operating agreement. As operator, we are responsible for daily operations, monthly operation billings and monthly revenue disbursements for these properties. For the year ended December 31, 2013, we billed Windsor Niobrara $0.9 million and, at December 31, 2013, Windsor Niobrara owed us an immaterial amount for these services.
Windsor Ohio participated with us in the acquisition of certain leasehold interests in acreage located in the Utica Shale in Ohio. We are the operator of this acreage in the Utica Shale. As operator, we are responsible for daily operations, monthly operation billings and monthly revenue disbursements for these properties. For the year ended December 31, 2013, we billed Windsor Ohio approximately $73.4 million for these services. At December 31, 2013, Windsor Ohio owed us approximately $1.6 million for these services.
In February 2013, we entered into a purchase and sale agreement with Windsor Ohio pursuant to which Windsor Ohio agreed to sell to us approximately 22,000 net acres representing 100% of its right, title and interest in and to certain leasehold interests in the Utica Shale in Eastern Ohio for approximately $220.4 million, subject to certain adjustments. This transaction, which closed on February 15, 2013, excluded Windsor Ohio’s interest in 14 existing wells and 16 proposed future wells together with certain acreage surrounding those wells. Through this transaction, we acquired an additional approximately 16.2% interest in our Utica Shale leases, increasing our working interest in the acreage to 93.8%. All of the acreage included in this transaction was nonproducing at the time of the acquisition and we are the operator of all of this acreage, subject to existing development and operating agreements between the parties. Pending the completion of title review after the closing, approximately $33.6 million of the purchase price was placed in an escrow account. In May 2013, the escrow accounts for both this acquisition and a prior acquisition with Windsor Ohio that was completed in December 2012 were terminated, and an aggregate of $10.0 million was returned to us. The $77.5 million balance of the escrow accounts was disbursed to Windsor Ohio based on the results of title review. The transaction was approved by a special committee of our board of directors, which engaged independent counsel and financial advisors to assist with its review.
Mr. Mike Liddell, our former Chairman of the Board and one of our named executive officers during 2013, is the operating member and/or an officer of each of Windsor Niobrara, Windsor Ohio, Windsor Midstream, Athena, Panther, Redback, Timber Wolf, Bison and Caliber and holds a 10% participation interest in Windsor Ohio and a direct or indirect contingent participation or profits interest ranging from 2.5% to 10.0% in Windsor Niobrara, Athena, Redback, Caliber, Windsor Midsteam, Muskie, Bison, Panther and Grizzly Oil Sands Inc., none of which interests are dilutive to the interests, if any, that we hold in such entities.


Gulfport Energy's (GPOR) guidance

Dear Investor (sucker):

We will be producing far less oil…but only after spending far more of your dollars (that you kindly provided for us in that last stock offering that we consummated on the original unrealistic but safe-harbor-protected assumptions.) 

Sorry to disappoint, but thanks a billion (or two).

Sincerely





Ye Oklahoma City Boys

Link: First Quarter results

Tuesday, May 6, 2014

Just how weak are Bill Ackman's examples?

Bill Ackman's ad nauseum attack on Herbalife has become a parody of itself. It has been widely acknowledge that Bill Ackman has had problems finding victims. He got the Nevada Attorney General interested but she told consumer activists that she was not going ahead without victims.

Ackman's websites however are truly strained. Here is a section from his profile of distributor Michael Burton. I am quoting verbatim:


The Burtons’ businesses do considerable damage to consumers.  Consumer complaints regarding Global Home Business Systems, for example, are particularly revealing:


End quote:

Please read these links. In the first one the person has been ripped off for $9.95 - and not $9.95 he paid to Herbalife. The $9.95 was paid to Burton.

In the second link it was $50 - but there is considerably less documentation.

This constitutes, and I am quoting Ackman's site again: "considerable damage to consumers".

Seriously - this is the strength of material on which he has bet his reputation and the existence of Pershing Square. I have a staff member who I recruited from America and whom Verizon Wireless charged $15 for data consumed after he had left the country. On this basis I encourage a billion dollar bet against Verizon...

By contrast, every distributor in Ackman's documentary lost serious amounts of money - but the money lost was not lost to Herbalife. It was lost to distributors Herbalife has now sacked. It seems -- that at least with respect to the material in the documentary Ackman is fighting yesteryear's battles.





John

Thursday, April 24, 2014

Passed out and fully plastered: a comment on free drugs in America

I have never really looked at Allergan but was horrified to find a rewards program for using Botox (a toxin derived from botulism and which makes your skin taught by killing anything that causes wrinkles). Yes, take your Botox injections and earn 200 points... trade your points for free drugs. Downstream cosmetic surgeons can also sign you up for the "Brilliant Distinctions" program and presumably they earn referral fees.

Along with free Fentanyl - something more widespread than the I originally thought, you can be passed out and fully plastered in America. Your chance to look like Chairman Mao under the glass, glazed eyes, skin stretched taut.





John

Saturday, April 19, 2014

The Better Business Bureau does not agree with Bill Ackman on Herbalife

Here is a screenshot of the page from the Better Business Bureau on Herbalife:


Yes, that is an A+ rating.

The alert is for pending government investigations (something that has been in the press lately).

The text is as follows:


BBB Accreditation
A BBB Accredited Business since 04/19/1990

BBB has determined that Herbalife International of America, Inc. meets BBB accreditation standards, which include a commitment to make a good faith effort to resolve any consumer complaints. BBB Accredited Businesses pay a fee for accreditation review/monitoring and for support of BBB services to the public.

BBB accreditation does not mean that the business' products or services have been evaluated or endorsed by BBB, or that BBB has made a determination as to the business' product quality or competency in performing services.

Reason for Rating

BBB rating is based on 16 factors. Get the details about the factors considered.

Factors that raised Herbalife International of America, Inc.'s rating include:

Length of time business has been operating.
Complaint volume filed with BBB for business of this size.
Response to 8 complaint(s) filed against business.
Resolution of complaint(s) filed against business.
BBB has sufficient background information on this business.
- See more at: http://www.bbb.org/sanjose/business-reviews/multi-level-selling-companies/herbalife-international-of-america-in-los-angeles-ca-20585#sthash.yOlIBr6k.dpuf


I have seldom seen a position where the New York intelligentsia and the facts on the ground disagree so strongly.




John

Friday, April 18, 2014

What if anything is civil insider trading?

The SEC today laid civil insider trading charges against a BP executive who (they allege) had information about the magnitude of the Deepwater Horizon oil spill before that information was public.

They allege that:

On April 29 and 30, 2010, while in possession of this material, nonpublic information, and in breach of duties owed to BP and its shareholders, Seilhan caused to be sold his and his family’s entire $1 million portfolio of BP securities. Specifically, Defendant caused to be sold his and his family’s holdings in the BP Stock Fund, a fund consisting almost entirely of BP American Depository Shares (“ADSs”), held in Defendant’s and his family’s retirement accounts at BP. In addition, Defendant exercised three different sets of options to purchase BP ADSs and immediately sold the underlying shares. 

This was nine to ten days after the explosion and Deepwater Horizon was already on the front page.

The main argument for the story was that when he sold the "official" leakage rate was about 5,000 barrels of oil per day. This was adjusted upwards eventually to over 50,000 barrels per day and the defendant knew that the real flow rate was higher than the publicly stated flow rate.

Here is what the WSJ story said a day before the share sales:
Vast swaths of reddish brown were visible Monday afternoon from a Coast Guard helicopter hovering 400 feet above the drilling site, where the small armada of ships hired by BP worked to collect the oil. A few miles away, a C-130 airplane released chemicals to disperse the long column of oil. A lighter sheen seemed to stretch to the horizon. 
Wildlife is already starting to be affected, and three sperm whales have been spotted in the area that is covered by an oily sheen. 
Cleanup crews from Louisiana to Florida are setting up booms intended to block as much oil as possible from coming ashore, said Steve Benz, chief executive of Marine Spill Response Corp., an industry-funded nonprofit company that cleans up spills. The crews are also preparing to clean up any oil that does come ashore.
Investors are growing worried about the rising costs associated with shutting off the well and cleaning up the spill. BP's American depository shares fell 3.3% to $57.91 in 4 p.m. Monday New York Stock Exchange composite trading, as other large oil companies rose in value.
The public information seemed at the time more-than-a-bit dire. Here is a picture from the WSJ of the size of the oil spill the day before the BP executive sold his shares:



The spill stretched about 100 miles and I suspect simple maths might have told you the spill was fairly large.

The share sales happened nine and ten days after the oil spill - and when - and I remember it at the time - BP completely dominated the financial blogosphere.

I am struggling here to see what the case might be. This is a civil case. If it were a criminal case I would have a very hard time convicting. The executive was - like many executives - overweight his company's shares and saw his career and financial wealth dissolving. He waited until the WSJ had a fairly accurate picture of the problem and then sold his shares.

As far as I can see civil insider trading is when the case is too weak for Preet Bharara and the SEC doesn't want to seem useless. In other words it is when the government ruins someones life without enough evidence for a criminal conviction.

This is - or at least should be - a criminal case. Or it should be dropped. I would go for dropped but the SEC might have better information than me. But in that case they should be convincing Mr Bharara and I would be all-in-favour of the Attorney trying the case.




John

It should be noted the case was settled. I was not the only person who viewed the case as weak and the government as heavy-handed.

That said - its probably a good policy if you are an employee of Goldman Sachs to sell ONLY on the day after earnings are announced. There is a strong case for being purer than the driven snow. After all, the government employee who is going to prosecute you makes MUCH less money than any mid-level Goldman Sachs employee.

J

Thursday, April 10, 2014

Dissenting proxies

I have absolutely no idea of the issues involved at Harvard Illinois Bancorp - but they led to one of the funnier dissenting proxies I have ever seen.

I will save you the bother of reading. The introduction is as follows:

Dear Fellow Shareholder,

Below is a picture taken at last year’s annual shareholder meeting of our Bank’s Chairman.  None of the other board members bothered to wake him up.



Photo taken at annual meeting on May 23, 2013 at 2:54 pm.



If you, like me, believe it’s time to bring a fresh influence to our Bank’s board of directors, please vote the GREEN proxy card for Mark Saladin.


Priceless.




John

Tuesday, April 1, 2014

Charlotte: an old meeting with Bank of America

I finally got out of the hotel and walked around the street of Charlotte a little. Still sick, just less sick than this morning.

The sun was out. The weather was perfect. The blossom pink on the trees and everything so clean.

--

Last time I was here was I think in 2002 and it was a brief visit. I met with the investor relations departments of Duke Energy, First Union (!) and Bank of America. It was the BofA visit that defined the trip.

I spent half an hour trying to tease out what an ugly credit cycle looked like for them and in exasperation they gave up. They said (and you can probably work out the date by the numbers which seem so small now)...
We have 36 billion dollars in revenue. 18 billion in costs and 4 billion in credit costs. Surely it is more important to watch where the 36 and the 18 go than to focus on the 4. 
The world in Charlotte is so clean.




John

American Airlines vs Herbalife

I am sick in bed in a hotel in Charlotte.

Very sick. Fever.

I had a flight booked tomorrow from Miami to Boston - but there is not a chance in the world I can make that flight.

So I tried to cancel.

I logged in to American Airlines website. It didn't work.

It turns out that if you booked on an Australian website you need to log into the Australian website even when you are in America.

Logged into the Australian website and found my flight. Got up the ticket but there was no refund option.

So I googled American Airlines refunds. American Airlines has a separate website for refunds (I guess they are hoping that some people can't find it and they can deceive them out of a fare).

Alas I could not log in with my Australian booking number.

So I googled refunds, American Airlines Australia. There is a site and I could find my booking but there was no option to refund.

But they did link a phone number.

Got put through to a voice recognition phone centre that could not recognize me.

After about ten minutes I get an operator who can't do the refund - but they did eventually transfer me to an international operator who could do the refund. Slowly.

It was done.

I assure you that it is harder to get a refund from American Airlines than it is as a Herbalife distributor.

And the process is far more deceptive.

I am waiting until some hedge fund manager comes out with a billion dollar short on American Airlines. Meanwhile I am going to write to the Federal Trade Commission about American Airlines unfair behaviour.

Alas I will have to deal with this rather severe limitation on the FTC's power:

(n) Standard of proof; public policy considerations 
The Commission shall have no authority under this section or section 57a of this title to declare unlawful an act or practice on the grounds that such act or practice is unfair unless the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition. In determining whether an act or practice is unfair, the Commission may consider established public policies as evidence to be considered with all other evidence. Such public policy considerations may not serve as a primary basis for such determination.

You see the practice of American Airlines - which makes it ridiculously difficult to claim a refund which you are entitled to seems unfair. I guess if it is "reasonable" then the Commission has no power to declare it unlawful on the grounds that it is unfair.

The process at Herbalife is much easier. It is reasonably easy to get a full refund and the refund includes postage. The section above somewhat it seems limits the FTC's power in the Herbalife case.




John

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The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.