Gulfport, New York

I t's 7:45 a.m., April 16, 2012. Sheraton New York Hotel, Times Square. The IPAA's 18th annual OGIS New York investment symposium has begun with an investor networking breakfast. More than 90 E&P companies are booked for on- and offsite meetings with investors and analysts around presentations they will make to some of the more than 1,700 registered attendees in the three-day event.

Among them, Jim Palm, Gulfport Energy Corp. chief executive officer, and team have a full schedule, with six investor meetings today and plans to ring the closing bell at Nasdaq's broadcast studio a few blocks away. There, joined by investment-banking partners as the ceremony is broadcast live on Nasdaq's flat-screen façade outside, tourists and costumed Disney characters wave and smile in return.

Meanwhile, in Ohio, a rig is being moved to drill a second Utica-play location for Gulfport, whose presentation Tuesday morning has been highly anticipated by OGIS attendees. The Oklahoma City-based small cap is one of just a few public E&P companies with a meaningful position in the new, liquids-rich shale play.

Mike Moore, Gulfport Energy Corp. executive vice president and chief financial officer, copresents for the company at IPAA’s OGIS New York conference

Tuesday morning, Palm and executive vice president and chief financial officer Mike Moore fit in six more investor meetings. Then, he and Moore are off to make Gulfport's 20-minute presentation in the main symposium hall at 11:45 a.m. The producer's story draws some 85% of capacity seating in the room—nearly what iconic Chesapeake Energy Corp. chairman and chief executive Aubrey McClendon would draw the following morning.

Upon concluding prepared remarks, Palm and Moore move on to a break-out session in the hotel basement. All seating is consumed by analysts and investors who've elected to hear more about Gulfport's Utica leasehold during the boxed-lunch hour. Other OGIS attendees have gone on to the main dining room where Marathon Oil Corp. executive vice president and chief financial officer Janet Clark will deliver the large cap's outlook.

Gulfport has been public since the 1990s and listed on Nasdaq since 2006. Of the crowd it drew that Tuesday in both the main hall and break-out, Palm says, Well, I'd say it was pretty nicely attended. I guess being oily helps.

And, being in the oily Utica helps too.

Jim Palm, chief executive officer (second from left), rings the Nasdaq closing bell with exchange officials, and company staff and investment bankers.
PHOTO COURTESY OF THE NASDAQ OMX GROUP INC.

Utica, Permian, Grizzly

A week earlier in Ohio, Gulfport had reached total depth on its first Utica well, Wagner No. 1, and spudded a second rig to drill its Groh No. 1 farther southwest. While Palm and Moore were presenting company financials, a rig was moving to drill its Boy Scout No. 1 in the farther western, oily window.

Palm wasn't surprised by the number of Utica questions he received in New York. "Everybody is trying to figure out the best way to frac the wells, the best way to produce them. They're trying to figure out where the gas window is and the liquids window is."

The play gained Gulfport geologists' attention in 2010, but it was well known amongst land-men at the time that Chesapeake was already aggressively leasing acreage in eastern Ohio for Utica pay. "We and everyone else thought they had already picked up most of the acreage."

Yet, a group of landmen brought Gulfport a 40,000-acre block. "We really liked the wet-gas and oil side of it, so we took 27,000 acres of that." In the following several months, it gathered more leases. "Until last August, the only company we ran into in our area, which we call the 'sweet spot,' was Chesapeake."

Then, Hess Corp. bought Marquette Exploration LLC's position for $8,800 an acre "and the floodgates opened." Shell Oil Co., Exxon-Mobil Corp. and others were buying into the play. "We ended up spending $2,850 per acre on average before August. Overnight, the price to the average landowner went up to close to $6,000 an acre."

Gulfport plans to drill 20 gross wells in the Utica this year and expects average estimated ultimate recovery of about 500,000 barrels of oil equivalent (BOE) per well. The company's leases have five-year terms with an option to extend for an additional five years.

"We're going to drill north, south, east, west. We may drill one or more in the gas window to define where the windows are—where the oil, wet gas and dry gas are."

While Palm was meeting with investors in New York, drilling of the first horizontal well on Gulfport's acreage in the Permian Basin's Wolfcamp formation was proceeding. In his break-out session at OGIS, one question—the only one that was not about the Utica—was about the Permian. Gulfport began putting together a leasehold there around Midland in 2007, starting with about 4,000 acres; it now holds some 15,300 net. This first horizontal well is about 10 miles south of where Pioneer Natural Resources Co. had an initial rate of some 800 barrels a day from horizontal Wolfcamp.

Gulfport owns an interest in Bison Drilling Co., which is drilling for it in the Permian and has four rigs, all at work in West Texas. And, it has participated in the formation of a company that owns mines in Minnesota and Wisconsin to assure a supply of frac sand for its plays. "We try to get vertically integrated where we can," Palm says. "We're moving to being the lowest-cost producer."

More than 90% of the company's 3 million BOE of production in 2011 was oil, primarily from conventional formations in South Louisiana where it has legacy positions in West Cote Blanche Bay and Hackberry fields. And, more oil is on the way to Gulfport's bottom line from its 200,000 net acres in the Grizzly oil-sands project in Alberta.

At the end of Palm's break-out remarks, one analyst asked why he didn't address Grizzly in more detail in his presentation. Palm had 17 slides about Grizzly, but his 20 minutes had expired. "We just didn't get to it," he replied.

But, Palm did before the day's end. By late Tuesday afternoon, the Gulfport team completes six more one-on-one meetings with buy-side investors before heading to Bloomberg TV offices for a live interview. There, Palm is asked about the Utica, of course, but also about Grizzly.

Will the central U.S. portion of the Keystone XL pipeline from the oil sands to the Gulf Coast be completed? Palm tells Investor," I think it will. And the Canadians are taking that oil to the West Coast too. But, I think they were going to do that whether Keystone had been approved last fall or not. I don't think they want to have just one market, which is pretty smart."

Either market is good for Gulfport. The Canadian West Coast is a shorter distance from Alberta, so transportation costs are less, but the U.S. Gulf Coast's refineries are already geared to handle heavy oil, he notes.

Gulfport’s legacy South Louisiana, oil-producing assets alone are funding the company’s $220-million capex budget for 2012, including programs in the Utica and Niobrara shales, the Permian Basin, and the Grizzly oil sands in Alberta.

Going forward

At OGIS New York next year, Palm expects Gulfport's Canadian oil profile to pop, as first production will have commenced. "Many people don't understand how big the oil sands are," he says. In terms of recoverable reserves, Canada is No. 2 to Saudi Arabia. "It is huge. And, if this were years ago and someone said, 'We're fixing to divide up Saudi Arabia. Would you like a piece of it?' don't you wish you could have been there and taken a chunk of it?

"That's where we were in 2006 when we went in there. We took a chunk of the oil sands. And, we spent only $168 an acre for it."

Gulfport's chunk alone includes 16.75 million net barrels of proved reserves, 11.75 million probable and 771 million contingent. "The market hasn't appreciated these assets yet, and I understand this: We went in there in 2006 and we won't have first production until 2013. The small-cap oil and gas stock market doesn't invest on a seven-year time frame. As we move toward first production, we'll start getting value for it in our share price.

"Where they can see the oil in hand already coming out of the ground, they understand it very well. Grizzly is still down the road a ways, so it doesn't have as good an understanding."

After the Bloomberg interview, Palm rejoins the IPAA conference attendees in a reception, visiting with fellow producers, such as Gary Evans, founder, chairman and chief executive of Magnum Hunter Resources Corp., and with analysts. Among the latter, Neal Dingmann, managing director and E&P and oilfield-services analyst for SunTrust Robinson Humphrey, has covered Gulfport since mid-2005, when the company's market cap was $206 million.

Although trading over the counter at the time, the stock price had soared to $6.45. At press time, as the market cap was $1.3 billion, Dingmann assigned "Top Pick" status to Gulf-port shares. "With solid baseline oil production, active drilling, multiple catalysts and a strong balance sheet, the company to us appears undervalued," Dingmann says.

There is more to the Gulfport story, Palm notes, such as that its legacy South

Louisiana, oil-producing assets alone are funding the company's $220-million capex budget this year. This oil is priced as Louisiana

Light Sweet (LLS), he adds, which is like that of Brent rather than the lower-priced WTI.

Also, it is beginning to drill its Niobrara acreage in the Rockies, and it has low-cost exposure to the high-priced Asian natural gas market via concessions onshore Thailand.

"That is a kind of lottery ticket," Palm says of the Thai asset. Gulfport's portion of the bill for each well there is some $1.8 million or about as much as the price of a South Louisiana well; meanwhile, neighboring wells have come online at as much as 100 million cubic feet per day and gas in the Pacific Rim can sell for $9 or more. "It has big upside potential and not much downside risk," Palm says.

Of its approximately $220-million capex budget for 2012, $74 million is planned for the Utica, $41 million for Grizzly, $69 million for South Louisiana and the balance for Permian, Niobrara and Thailand.

"We should easily generate that much cash flow. We're going to make about 3 million BOE this year. It costs us about $20 to lift a barrel in South Louisiana and if oil is $100, it covers that $220-million budget just fine.

"I don't think there are too many companies around that are able to drill their annual budget out of cash flow."

Dingmann says, "With 95% of production oil weighted and some 85% of this receiving premium LLS pricing, Gulfport should generate over $250 million of cash flow this year and over $330 million next year." He has a $45 target on the stock price.

After OGIS

In 2011, more than 90% of Gulfport’s 3 million barrels of oil equivalent of production was oil, with more on the way from the Grizzly oil sands.

After a breakfast meeting with buysiders Wednesday morning, Palm heads back to Oklahoma. The company's stock price rocketed in the past year—since Palm had last presented at OGIS New York and rang the bell at Nasdaq—to as much as $37 a share. At press time, it had settled at about $25, still up from about $14 two years ago and $1.56 in the spring of 2009.

At press time, Gulfport announced plans to sell some of its Permian leasehold to Diamondback Energy Inc. for stock and cash, releasing the news a day before its first-quarter-earnings call. Dingmann says, "Though (the Permian is) not defined as a material play for Gulfport, given the nonoperated status, the (deal for the) 18,000-plus acres appears to have solid value when compared to recent industry metrics."

Biju Perincheril, E&P analyst for Jefferies & Co., estimates the deal value is between $145- and $175 million. "First, the company will realize an immediate cash inflow that can be used to accelerate development of its Utica properties. Second, it can still participate in potential upside from horizontal drilling or other developments on these properties via its stake in Diamondback.

"Finally, the transaction will discontinue nonop spending in the Permian, allowing the company to have fuller control of its capital budget."

How horizontal drilling has changed the landscape of oil and gas prospects across the U.S. has been a surprise, Palm admits. "Really, you don't have to go back 20 years. In a way, this has all really developed within the past 10 years."

Gulfport's new horizontal-play exposure is somewhat easier than its legacy South Louisiana roots, he adds. "We love South Louisiana, but it's very complicated to do the 3-D analysis and directional drilling. We like the Utica. It's easier for everyone to model. Everyone can understand it better."