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Utica driller Gulfport's shares spike after earnings beat, buyback talk

Fueled by management's confidence in a buyback, shale gas driller Gulfport Energy Corp. stock surged 18% on Feb. 22 after fourth-quarter and full-year 2017 results exceeded analysts' expectations.

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Executives said they may increase the size of a planned $100 million buyback program in 2018 as they reduce spending by about 37% in the new year while increasing oil, gas and liquids production roughly 17%.

Gulfport shares, which reached as high as $9.91 in intraday trading, were at $9.73 at 2:30 p.m. ET on Feb. 22, a 15.7% rise. The gains come after a weekslong decline that started when Gulfport released its 2018 guidance Jan. 29.

Gulfport nearly doubled its adjusted fourth-quarter 2017 income to $81.7 million, or 45 cents per share, compared to the same period in 2016. The S&P Global Market Intelligence analyst consensus of normalized earnings was 39 cents per share. For the full year, Gulfport more than doubled its adjusted income to $254 million, with the $1.41-per-share figure beating analysts' expectations of $1.35.

"No surprises with Q4 production and realizations pre-released, and 2018 outlook on production and capex reiterated at 1,250-1,300 MMcf/d for $770-835 million within cash flow," analysts at energy investment bank Tudor Pickering Holt & Co. said after results were announced late Feb. 21.

"Our 2018 budget positions us to be able to generate free cash flow while also providing strong production growth," Gulfport CEO Michael Moore told analysts on a Feb. 22 earnings conference call. "We firmly believe that with today's commodity prices, managing the business to align total capital expenditures within cash flow is the prudent business decision, and based on current strip pricing, we forecast our 2018 capital program will be funded entirely within cash flow while growing production approximately 15% to 19% year over year."

Moore confirmed that the company will be buying back at least $100 million of its stock in 2018, possibly more. He said Gulfport can fund the stock buyback from free cash under its 2018 budget but it may be able to buy more after majority owner EQT Corp. sells its Strike Force Midstream Holdings LLC gathering system in the Utica Shale, in which Gulfport owns an interest, to EQT Midstream Partners LP later in 2018 as part of EQT's reorganization announced Feb. 21.

"We pressed management for details on the sale of Strike Force. They gave no color, but acknowledged that comments by EQT Corp. suggest a 2Q/3Q drop to EQT Midstream," Mizuho Americas LLC analyst Tim Rezvan said before the call. "We estimate net proceeds of $200 million to Gulfport and view the drop as a critical funding component for the $100 million repurchase program, as well as a possible driver of a larger repurchase program."

"It's clear that we now have confirmation that it should be a 2018 event," Moore said. "It would seem that buying back more stock would make a lot of sense for us."

"We believe [Gulfport] may pull levers to further improve its liquidity," Williams Capital Group LP analyst Gabriele Sorbara told his clients in a Feb. 22 note. Gulfport is Sorbara's top natural gas pick. "First, [Gulfport] expects to start the process of selling down its 25.1% equity interest in [Mammoth Energy Services Inc.], which is currently valued at ~$224.5 million or $1.23/share. Second, a drop down of the Strike Force joint venture (75% EQT/25% [Gulfport]) may occur in 1H18. Lastly, [Gulfport] also has 10,816 net operated acres and 2.4 million [barrels of oil equivalent] of proved reserves in southern Louisiana, which could be a sale candidate as the oil price environment improves."

Moore made it clear that Gulfport intends to use as much spare cash as it can to fund the buyback program. "We plan to be aggressive at repurchasing our shares and expect to complete this trend before then if market conditions permit," Moore said. "At today's share price, should we receive proceeds earlier, a greater-than-anticipated [amount] from the sale of certain equity investments [Mammoth], we would certainly consider expanding the size of the repurchase program beyond where it sits today."