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Appalachia to Oklahoma: Gulfport Energy makes $1.85B play for diversification


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Appalachia to Oklahoma: Gulfport Energy makes $1.85B play for diversification

With its $1.85 billion takeout of one of the top shale producers in Oklahoma, the Utica Shale driller Gulfport Energy Corp. joins the list of gas drillers diversifying out of Appalachia to shales closer to gas and liquids demand on the Gulf Coast.

Gulfport said after Dec. 14's market close that it is buying 85,000 acres in the South Central Oklahoma Oil Province, or SCOOP, basin from the energy private equity firm Quantum Energy Partners LLC's Vitruvian II Woodford LLC, using a combination of debt and equity.

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Gulfport did not explicitly say it is impatient with the progress of pipeline developments to take gas and liquids out of glutted markets in Ohio and Pennsylvania, but it pointed out on the second page of its corporate presentation that the SCOOP has significantly better basis costs than Appalachia, where costs of $1/MMBtu above hub prices are common.

Gulfport's new Oklahoma acreage, with four operating rigs and 183 MMcfe/d of current production that is 67% gas and 33% crude and liquids, is "positioned near expanding natural gas and NGL demand centers — premium pricing and low basis differentials," Gulfport's presentation said.

While independents such as Chesapeake Energy Corp. and Southwestern Energy Co. came to Appalachia with a wide range of holdings, pure-play Appalachian drillers have started backstopping their production away from the Northeast's crowded pipes. Marcellus pioneer Range Resources Corp. spent $4.4 billion to buy into Louisiana's Terryville field earlier in the year, while the northeast Pennsylvania driller Cabot Oil & Gas Corp. is quietly growing production in Texas' Eagle Ford Shale.

According to FBR Capital Markets & Co. analyst Joseph Allman, Vitruvian is the top driller in the SCOOP, measured by revenue per well. "Vitruvian ranks No. 1, generating 89% more revenue on an absolute basis than the median STACK/SCOOP/Cana Woodford operator," he said. "Looking at production only, its average well produces 109% above the median, including 24% more oil and 217% more gas."

For the first three months of a well's first year, Vitruvian has gross revenues of $2.5 million per well, more than such veteran shale drillers as Devon Energy Corp. and Continental Resources Inc., and almost double Exxon Mobil Corp.'s $1.3 million per well for the same period, according to FBR's research.

"A positive but full-price addition of high-quality acreage where expected returns are in line with the Utica core (~75% [internal rate of return])," Capital One Securities Inc. analysts told clients.

"[Gulfport's] move into the SCOOP provides the company with a chance to participate in a play that is experiencing a positive rate of change," the analysts said. "The Utica [where Gulfport has a 213,000 acre position in southeast Ohio] will continue to generate strong returns, but buying into acreage with stacked pay potential offers upside not available in Ohio currently."

Analysts at Tudor Pickering Holt & Co. also liked the move to diversify. "We think the deal helps differentiate [Gulfport's] business model and improves our view on their medium term prospects vs. some of their northeast dry gas peers, which we think will be challenged longer-term given our view on the downward bias risk we see in gas prices," the analysts said.

Investors' immediate reactions were much less positive. Gulfport shares lost 14.4% on Dec. 15, to $23.01, weighed down by dilution concerns.

Gulfport said it will sell 29 million new shares on top of 18.8 million shares sold in a private placement, a new 29% slice of the company, to raise $1.34 billion, according to Tudor Pickering Holt's estimate. In addition, Gulfport announced a $600 million placement of senior debt due in 2025 to help pay for the purchase.

Gulfport plans to keep four rigs operating in Oklahoma, but the new effort will not slacken Gulfport's pace in the Utica, where it plans to expand from four to six rigs by the end of 2016.