Greetings, and welcome to the Gulfport Second Quarter 2021 Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jessica Antal.
Thank you, Jessica. You may begin.
Thank you, and good morning. Welcome to the Gulfport Energy Corporation's Q2 2021 earnings conference call. I am Jessica Antell, Director of Investor Relations. Speakers on today's call include Tim Cutts, Interim Chief Executive Officer and Bill Biese, Executive Vice President and Chief Financial Officer. I would like to remind everybody that during this conference call, the participants may make certain forward looking statements relating to the company's financial condition, results of operations, plans, objectives, future performance and business.
We caution you that the actual results could differ materially from those that are indicated in these forward looking statements due to a variety of factors. Information concerning these factors can be found in the company's filings with the SEC. In addition, we may reference non GAAP measures. Reconciliations to the comparable GAAP measures will be posted on our website. An updated Gulfport presentation was posted yesterday evening to our website in conjunction with the earnings announcement.
Please review at your leisure. At this time, I would like to turn the call over to Tim.
Thank you, Jessica, and good morning, and thank you very much for joining the call today. I'm here today with Bill Beasley, who I had the pleasure of working with recently at QB Resources. Am personally very excited to be here and look forward to sharing with you the significant value opportunity within Gulfport Energy. I would like to start by thanking our employees for their hard work during a challenging but successful restructuring process. Today, for the first time in a long time, we have a balance sheet that complements the value of our asset base with a right sized corporate overhead and top quartile operating costs.
We have the same high quality gas assets that you're familiar with. However, our 2021 program is delivering strong results above historical averages, reflecting our new development plan focused on free cash flow generation, capital discipline and value optimization. As a company, we have a new highly engaged Board of Directors and we've adopted a new business model focused on free cash flow generation and returns over production growth. We expect to use excess cash flow to continue to reduce our outstanding debt until we are able to begin returning capital to shareholders. I will begin with an update of our 2nd quarter operational results and an overview of the development plant performance in both the Utica and SCOOP.
Bill will then discuss Gulfport's financial performance and provide guidance for 2021. We have emerged from restructuring process with a renewed focus on sustainability and delivering on key metrics outlined in our corporate sustainability report. We are very proud of the progress made in reducing our greenhouse gas and methane emissions. We recently appointed Stephanie Timmermeyer, Vice President of and S to the executive team and she is already playing a key leadership role with regards to environmental stewardship, social responsibility and governance of the company. Stephanie will work closely with the executive team and Board to progress our important ESG initiatives.
Moving to our 2nd quarter operational results, as shown on Slide 6 of the IR deck, production averaged 989,000,000 cubic feet of gas equivalent per day during the Q2, which included a strong contribution from both the Utica and SCOOP development programs. We anticipate a slight drop in production during the Q3 as the SCOOP comes off its peak production. We expect the decline to reverse in the 4th quarter when the 6 well Angelo pad comes online in the Utica. Gulfport invested $68,000,000 of capital in the 2nd quarter. We continue to work towards lowering drilling and completion costs, while staying primarily focused on delivering pure leading cost per Mcf produced.
I will explain this further as I talk through our development strategy in a few minutes. Moving forward, we are targeting a maintenance level capital spend of approximately $300,000,000 per year, the annual number will fluctuate slightly depending on the exact timing of our drilling and completion activity. This level of spend is expected results in roughly 1 Bcf equivalent per day of production. Turning now to our development plan. I'm pleased to report that our results in both SCOOP and Utica are outperforming historical development results.
On Page 9 of the IR deck, you'll find recent results from our 2021 Utica program where production totaled 744,000,000 cubic feet equivalent per day during the quarter. The Shannon and Hendershot wells have been on line for approximately 5 months and remain on plateau. Based on the current pressure decline, these wells could stay on plateau for 8 to 10 months, which compares favorably to the historical averages of 6 months or less. In addition, our Morris pad has been online for over a month now, and we are seeing similar and encouraging early time data. We believe that this performance is a direct result of moving to wider spacing and slightly larger frac jobs.
We are currently completing the Angelo pad using silo frac technology and look forward to bringing this pad online during the Q4 as planned. On Slide 11, you will see the results of our most recent wells in the SCOOP. The wells are performing better than the historical Bellport wells, which we attribute to the wider spacing and longer laterals. The 2021 SCOOP program competes economically with the Utica with rates of return of approximately 80% at $2.75 gas $60 oil. Looking at the economics of our forward program in both Utica and the SCOOP, we have detailed on slide 12 the compelling returns we are seeing at the very price scenarios.
During the first half of the year, we've been able to substantially improve our operating cost structure with the largest gains in the area of transportation, gathering and processing and interest expense, largely aided by our restructuring process, which deleveraged our balance sheet and rightsized our midstream contracts. The $0.43 per Mcf or 23% year on year cost reduction significantly improves our margin expected to lead to sustainable free cash flow generation moving forward. Midstream volume commitments have been reduced to 900,000 dekatherm per day gross capacity, which is well below the planned deliverability for the foreseeable future. Despite this dramatic reduction in firm transportation commitments, our rightsized portfolio continues to provide diversified takeaway capacity and optionality to premium markets out of the basin. We remain keenly focused on reducing our corporate overhead and as a result, we recently flattened our organization structure by reducing the number of executives and more appropriately sizing the organization for our planned operations.
With these reductions, we are confident that we will achieve top quartile G and A costs of $0.12 per Mcf for the full year of 2022. Lastly, I applaud the team's work in the field focusing on per unit LOE, which is expected to average $0.14 per Mcfe for 2021 and for the continuous drive to bring these costs down even further. I'll now spend a few minutes describing Gulfport's development program. We agree that lowering drilling completion cost per foot is always important and are committed to lowering costs moving forward. We also believe that the most important outcome is to deliver the lowest cost molecule for each dollar spent, especially when looking at the 1st few years production.
As shown on Slide 19 of the IR deck, we are investing approximately $150 per foot to deliver more intense frac jobs that support wider space wells with the objectives of delivering superior economic outcome. The Utica is historically been developed on a 1,000 foot spacing and some operators have driven costs down by pumping smaller completions, which has started to impact the plateau periods and lead to steeper declines. We believe that the optimal design is to target wider spacing of at least 12 50 feet, which eliminates one well drilling unit in the example shown on Slide 20. At this spacing, we treat the wells with higher fluid intensity and proppant loading. We also believe that longer laterals of approximately 15,000 feet lower our D and C cost per foot and improve overall well economics and we have redesigned our development plan to reflect this going forward.
The cost to develop a 4 well wider space pad versus a 5 well tighter space pad is similar, but we believe that Gulfport's performance will demonstrate longer plateaus and higher cumulative production during the 1st few years online. Our 2021 Utica wells are demonstrating the benefit of this development approach, which will ultimately lead to greater free cash flow generation, superior EURs and IRRs and then as demonstrated on Slide 20 21. This approach will also improve the economic performance in areas of the field with lower original gas in place. We believe that the completion approach we have taken in 2021 and plan for 2022 will support our premise and we are encouraged by recent performance. In summary, we have emerged from our restructuring process with continuous improvement mindset focused on cost effective production and capital discipline, supported by a strong balance sheet.
We are fully committed to safely executing in the field and improving our environmental, social and governance performance. We flattened our corporate structure, reduced overhead and are focused on optimizing the development program to deliver strong free cash flow and the highest returns possible to our investor. I will now turn the call over to Bill to discuss our financial results and 2020 one guidance.
Thank you, Tim, and good morning, everyone. As Tim suggested in his remarks, a lot of hard work has gone into getting the company through the restructuring process. As we look to the future, we firmly believe that all the hard work has positioned us to offer a compelling opportunity for investors. Our efficient asset base supports a low reinvestment rate and the potential for strong return of capital to shareholders in the future. Our 2021 free cash flow yield is the best in our peer group and we believe that our ability to generate significant free cash going forward is underappreciated.
As Tim mentioned earlier, our business plan is committed to developing our assets in a disciplined manner, investing $300,000,000 of capital to deliver roughly 1,000,000,000 cubic feet per day of equivalent production, while targeting annual free cash flow of approximately $300,000,000 Finally, while our liquidity is already much improved, we expect it to continue to get even better as we execute on our business plan. Upon emergence on May 17, we adopted fresh start accounting, which resulted in the company becoming a new entity for financial reporting purposes. As a result, our operating results are now split between pre and post emergence periods. Fresh start accounting requires that we establish new fair value for the company's assets, liabilities and equity as of the date of emergence. Consequently, certain pre and post emergence financial and operational results will not be comparable.
The specific valuation approaches and key assumptions used to arrive at those values as well as the value of discrete assets and liabilities will be described in greater detail in our Q2 10 Q. Our recent restructuring also had a dramatic impact on our capital structure, which delevered our balance sheet by over $1,200,000,000 In the interest of time, I will not walk through all the details now, but they are reflected in the IR deck and 10 Q and I will be happy to answer any questions during today's Q and A session. Turning to our Q2 results, despite managing through our emergence from bankruptcy, our team continued its persistent focus on cost control across the organization, which helped drive strong financial results for the quarter. For the combined 3 month period ending June 30, 2021, we reported net income of $33,000,000 and generated $157,000,000 of adjusted EBITDA. Net cash provided by operating activities totaled $87,000,000 during the combined second quarter and we generated free cash flow of $74,000,000 for the same period.
As a reminder, we define free cash flow as adjusted EBITDA less incurred capital expenditures, interest expense and capitalized G and A. To ensure our ability to fund our capital program and generate free cash, we continue to enter into commodity derivative contracts during the quarter. For the remaining 6 months of 2021, we currently hold natural gas swap and collar contracts totaling approximately 800,000,000 cubic feet per day with an average floor price of $2.64 per Mcf. We also have natural gas swap and collar contracts totaling approximately 550,000,000 cubic feet per day at an average floor price of $2.65 per Mcf for 20.22. Please see our 10 Q for additional details on our derivative portfolio.
Turning briefly now to our balance sheet. At the end of the second quarter, total assets were approximately $2,100,000,000 and total shareholders' equity was approximately 453,000,000 dollars Total gross debt was $835,000,000 consisting of $105,000,000 outstanding under our revolver, dollars 180,000,000 outstanding under our term loan and $550,000,000 of outstanding senior notes. We also had $9,000,000 of cash on hand and $115,000,000 of letters of credit outstanding at the end of the quarter. On the liquidity front, we exited the 2nd quarter with approximately $150,000,000 of total liquidity made up of that $9,000,000 of cash and approximately $141,000,000 of borrowing capacity under our revolver. Moving on to guidance.
2021 total production guidance is 975,000,000 to 1,000,000 cubic feet equivalent per day. Our 2021 guidance for lease operating expense is $0.13 to $0.15 per Mcfe. Earlier, Tim discussed the significant improvement on the midstream front and as a result of these improvements, our guidance for gathering, processing and transportation expense or GP and T is $0.92 to $0.96 per Mcfe for 2021. Our guidance for recurring G and A expense is $45,000,000 to $47,000,000 It is important to note that we do not expect to incur any meaningful restructuring charges in the second half of twenty twenty one or in twenty twenty two. The midpoint of this reoccurring G and A guidance is 13% lower compared to 2020.
Finally, excluding acquisition and divestiture activity, our 2021 guidance for capital investment is $290,000,000 to $310,000,000 which includes approximately $20,000,000 of capital for leasehold. A little over 2 thirds of our 2021 budget will be allocated to the Utica. Please see our earnings release for a few additional details on our 2021 guidance. In summary, we believe that we are well positioned to execute our business plan. Our improved cost structure and focus on continuous improvement will enable us to deliver material and sustainable free cash flow.
We believe that our ability to deliver a peer leading free cash flow yield provides a unique opportunity for investors. In the near term, we plan to allocate the majority of our free cash towards paying down our revolver and term loan and look forward to returning capital to shareholders in the future. With that, we will now open the call up for questions.
Thank you. We'll now be conducting a question and answer session. Our first question comes from Neal Dingmann with Truist.
Nice first call, Tim and Bill. My first question, again, I like the slides. You've got some good ops slides in there today. And my question is, now that you've built sort of gone through the properties, gone through the details sort of post restructuring, Have you gone through enough to decide just any potential non core sales or how you're thinking about your locations or inventory? And again, why I'm asking that, it seems like in the market today, as you all probably might agree or disagree, but I think I agree that right now, a lot of people aren't getting paid or right now getting value for their full inventory.
So based on that, based on sort of a free cash flow sort of importance these days, Two questions, have you had enough time to go through and would you consider any sort of non core sales?
Thanks for the question, Neil. I appreciate that. So what we're doing what we've been doing over the last few months is just really looking at the standalone case for the business, looking really hard, use it in SCOOP, the inventory levels and what the value is for our shareholders on a standalone basis. We've also looked at the asset base. Obviously, you can see from the slides that SCOOP has some incredible opportunities in the near term and we're going to execute against those.
So certainly, we don't see anything within our core acreage that we would call non core. Just like every other company, we have small things, we have small things up in the Williston, we have some of our interest, we have some joint interest. Those kind of things will clearly clean up. But we don't see anything right now that we would say non core and some of the completions design we're applying, we're really testing in some of the areas that may have a little bit lower gas in place that I talked about and we want to prove and we really want to understand those areas before we consider doing any sort of divestment or trade.
Okay. Makes a lot of sense. And then just on capital allocation, it sounds like you have gone quite detailed through both Utica and the SCOOP. Given sort of pricing, is there one that sticks out you'll be focusing more and kind of in that same vein? Obviously, these days, just your thoughts on kind of target maybe more natural gas versus NGLs in either of the properties, is there anything in that sort of vein that you'll do?
Yes. So if you look at the Utica, we're targeting dry gas. So that's the program in the Utica. We do have the opportunity for actual oil production in the SCOOP, which obviously is helping the economics quite a bit. So we'll have some liquids production out of the SCOOP development.
If you look at we looked at we put our whole inventory in there, which is plus or minus 500 wells. When you look at the next 10 years, which I always focus on, about 70 plus percent of that drilling will be focused in the Utica.
Okay. And then one last one, if I could, just maybe for Tim. Tim, what are the remind me that I assume there's some restriction still. I'm just wondering how long those will go on as far as is there something that you're required to do as far as you talked about the capital allocation makes a lot of sense anyways, but I'm just wondering would you have to your debt is already down under, I think, dollars 300,000,000 Would you have to, at a certain point, just continue to pay that down? I'm just wondering on free cash flow allocation and hedges kind of maybe your thoughts or what's required or again I think I've talked to Jessica and you could deal the Board could change that.
Your thoughts on maybe hedges and free cash flow allocation if I don't know, by the end of the year or so?
Yes, I'll start on that. I think the number you quoted on the $300,000,000 on was a very hopeful number. So we're a bit higher than that. But we are really confident of being able to generate a Bcf, hopefully growing slightly with time as we get more efficient, spending about $300,000,000 and generating about $300,000,000 of cash flow that we are going to focus on paying down the debt with that. And we do have some restrictions on issuing dividends and those kind of things that you can talk to Jessica about a little more detail on the sidebar.
But we're running this as a normal company now. We're fully merged and we like the leverage. It will get better. And so there's nothing and on the hedge side on your question, we feel really good about our hedges for 2022. And we feel like we're fully hedged.
Obviously, there's some upside on the price with where we sit and we're looking at all the optionality we have going into 'twenty three with the gas curve and backwardation, we're not moving heavily into 'twenty three yet, but we're certainly studying that.
Got it. Got it. Yes, I guess, I was immediately forgetting the 550. So thanks, Tim.
Our next question comes from Leo Marini with KeyBanc.
Guys. Just a question on your Utica production here. If I'm reading the financials right, I think you guys brought 7 wells online in the Utica in the Q1. And I guess I was expecting that to have some benefit here on Q2 Utica production. But I guess your Utica production, if my math is right, was down about 9% in the Q2 versus the Q1.
Can you
kind of help us kind
of understand what was driving that?
Yes. I think, Leo, it's going to be really important as we implement a fairly small development program, it's going to be lumpy. And as we go through and we go quarter on quarter, we will start providing more and more details where just like in this quarter, we put the charts in there that show when our anticipated timing is for the new wells. So in the you're asking about the year to go, the SCOOP finishes its tilt program in the beginning of the year, so that's on decline. And you can see where we were bringing the wells on.
So the only wells that were really online and producing during that period was Shannon Hendershot and they were online for a good period of time. And then you'll see kind of the Morris came on just before the end of the quarter, you'll see the Gerig and then very importantly, you'll see the Angelo come on. So it's a little bit back end loaded. And so with a decline rate of north of 40%, you're going to see those kind of dips, but they're going to so it's going to be a little bit lumpy as you go through. But as we go forward, we're going to provide you guys enough detail looking forward, so you anticipate that a little bit better and not be surprised by it.
Okay. Were there any kind of midstream issues you might have experienced in the Utica in the second quarter that caused your production to be quite a bit lower than Q1? I know there were some midstream issues kind of in different parts of the Appalachia during
the quarter.
No. So again, in the Q1, we had all the weather issues like everybody else did. Coming into the Q2, it's more again, you need to look at what's coming actually coming online and then what the base decline is and if you do the math on that, I think you get pretty close, but we're Leo, we're happy to spend a little bit of time offline describing the dynamics of that with you.
Yes, that'd be great. It's hard to just have a hard time reconciling the numbers since your 10 Q has you bringing 7 wells online
in the Q1. So I'm
just trying to figure out where the benefit from those wells was. I didn't really see it in the numbers. So, okay. I guess just on the SCOOP here, obviously, it's a multi phase play as you guys described. You talked about having kind of 500 locations in inventory.
I think you said 70% was Utica. I guess that leaves the remainder here in SCOOP. Can you give us a sense of the different kind of remaining inventory in the SCOOP in terms of phase? Is more of that concentrated in kind of the condensate window? Or is little bit more of it kind of a rich gas?
Can you maybe just tell us more about kind of what's left to drill in the SCOOP and kind of the phase of that inventory and kind of what's the focus in the relative economics? Do you guys look to drill more oily or condensate rich wells and SCOOP here? I know the plan is done for the year, but as we get into next year, oil prices remain high, how do you see the economics in those different windows?
Yes, I think the so one thing you said early on was the 500 wells. What I said on the seventythirty was within our next 10 years of inventory. And so we'll have to describe it a little bit differently for the overall inventory. But in the near term of the SCOOP, especially next year, we're drilling wells that have good liquid rich content in that condensate window. And so we're going to see, if you look at one of the slides on the deck, you can see we show the economics of that.
Obviously, that's bolstered somewhat by that liquid rich nature. So we're going to take advantage of those liquid rich locations while the prices are high on the liquid side.
Okay. That's helpful.
All right. I guess just longer term, I guess kind of alluded to this, but and I know there's no formal long term guidance, but if I heard your prepared comments correctly, it sounded like you're basically saying kind of steady activity spend roughly $300,000,000 a year and kind of keep the production flattish, though you hinted that there could be a little bit of modest upside in the next couple of years. Clearly, the balance sheet is in pretty good shape at this point. I guess, is there no thought at all of maybe focusing more on gas activity this winter and next year if gas prices remain really high in 'twenty two? And is growth just something you don't even consider as a kind of a newly merged company here?
Yes. I think in the near term, it's really important to steady everything out and really we've developed a manufacturing process here that spits out DCF a day and spends puts a dollar in, gets a dollar out. I think that's a good starting point. Our goal always is going to be taking that $300,000,000 investment down and having that DCF a day inch up as we get more efficient and as we deliver longer plateaus, we hope to see that happen. So right now, I'd say, we would have to see much longer term sustainability on gas north of $3 to want to change that.
We want to hear from our investors that, that's something we'd like to see done because the main thing for us right now is not only paying down that debt, but getting to a point where we're spending off quite a bit of cash that we return to the shareholders. If we start investing more capital to move that up, our cash flow drops and we'll go through a period of time. So you may feel good while the price is at $3, $4 and then miss the window. And so we'd like more of a steady focus there. The $300,000,000 helps us to stop the decline that's happened over the last few years.
You'll see that build back up in the Q4. And again, like like on the earlier question, production will be a little bit lumpy, but average around that BCF and we hope to see that move up with efficiency, not necessarily more capital investment.
Okay, great. Thank you.
Thank you. This is the end of our Q and A session. I would like to turn the floor back over to Tim Cutt, Interim CEO of Gulfport Energy for closing
on next call. We're happy to engage with you guys. If you have further questions or others would like to ask questions, please don't hesitate to reach out to our Investor Relations team. And with that, that concludes the call. Thank you very much.