GPOR-03.31.2015-10Q
Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2015 OR
¨
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to                     
Commission File Number 000-19514
 
Gulfport Energy Corporation
(Exact Name of Registrant As Specified in Its Charter)
 
Delaware
 
73-1521290
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer
Identification Number)
14313 North May Avenue, Suite 100
Oklahoma City, Oklahoma
 
73134
(Address of Principal Executive Offices)
 
(Zip Code)
(405) 848-8807
(Registrant Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share
 
The NASDAQ Stock Market LLC


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated filer  ý    Accelerated filer   ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý

As of May 1, 2015, 96,656,652 shares of the registrant’s common stock were outstanding.



Table of Contents


GULFPORT ENERGY CORPORATION
TABLE OF CONTENTS
 
 
 
Page
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 

 

1




GULFPORT ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
March 31, 2015
 
December 31, 2014
 
(In thousands, except share data)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
74,740

 
$
142,340

Accounts receivable—oil and gas
79,680

 
103,858

Accounts receivable—related parties
33

 
46

Prepaid expenses and other current assets
15,777

 
3,714

Short-term derivative instruments
93,030

 
78,391

Total current assets
263,260

 
328,349

Property and equipment:
 
 
 
Oil and natural gas properties, full-cost accounting, $1,546,804 and $1,465,538 excluded from amortization in 2015 and 2014, respectively
4,177,962

 
3,923,154

Other property and equipment
19,051

 
18,344

Accumulated depletion, depreciation, amortization and impairment
(1,140,168
)
 
(1,050,879
)
Property and equipment, net
3,056,845

 
2,890,619

Other assets:
 
 
 
Equity investments
374,971

 
369,581

Derivative instruments
41,956

 
24,448

Other assets
18,566

 
19,396

Total other assets
435,493

 
413,425

Total assets
$
3,755,598

 
$
3,632,393

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
400,096

 
$
371,410

Asset retirement obligation—current
75

 
75

Deferred tax liability
29,622

 
27,070

Short-term derivative instruments
823

 

Current maturities of long-term debt
1,781

 
168

Total current liabilities
432,397

 
398,723

Asset retirement obligation—long-term
18,656

 
17,863

Deferred tax liability
215,122

 
203,195

Long-term debt, net of current maturities
779,130

 
716,316

Total liabilities
1,445,305

 
1,336,097

Commitments and contingencies (Note 8)

 

Preferred stock, $.01 par value; 5,000,000 authorized, 30,000 authorized as redeemable 12% cumulative preferred stock, Series A; 0 issued and outstanding

 

Stockholders’ equity:
 
 
 
Common stock - $.01 par value, 200,000,000 authorized, 85,715,819 issued and outstanding in 2015 and 85,655,438 in 2014
857

 
856

Paid-in capital
1,832,063

 
1,828,602

Accumulated other comprehensive loss
(41,659
)
 
(26,675
)
Retained earnings
519,032

 
493,513

Total stockholders’ equity
2,310,293

 
2,296,296

Total liabilities and stockholders’ equity
$
3,755,598

 
$
3,632,393

See accompanying notes to consolidated financial statements.

2

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GULFPORT ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) 
 
Three months ended March 31,
 
2015
 
2014
 
(In thousands, except share data)
Revenues:
 
 
 
Gas sales
$
118,570

 
$
18,349

Oil and condensate sales
35,500

 
73,377

Natural gas liquid sales
22,007

 
26,136

Other income
240

 
167

 
176,317

 
118,029

Costs and expenses:

 
 
Lease operating expenses
16,980

 
11,629

Production taxes
4,285

 
6,957

Midstream gathering and processing
25,381

 
7,769

Depreciation, depletion and amortization
89,909

 
56,877

General and administrative
10,799

 
9,511

Accretion expense
190

 
188

Gain on sale of assets

 
(11
)
 
147,544

 
92,920

INCOME FROM OPERATIONS
28,773

 
25,109

OTHER (INCOME) EXPENSE:

 
 
Interest expense
8,759

 
3,885

Interest income
(9
)
 
(106
)
Litigation settlement

 
18,000

Income from equity method investments
(19,975
)
 
(128,475
)
 
(11,225
)
 
(106,696
)
INCOME BEFORE INCOME TAXES
39,998

 
131,805

INCOME TAX EXPENSE
14,479

 
49,247

NET INCOME
$
25,519

 
$
82,558

NET INCOME PER COMMON SHARE:
 
 
 
Basic
$
0.30

 
$
0.97

Diluted
$
0.30

 
$
0.96

Weighted average common shares outstanding—Basic
85,679,606

 
85,259,407

Weighted average common shares outstanding—Diluted
86,120,030

 
85,738,626


See accompanying notes to consolidated financial statements.


3

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GULFPORT ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
Three months ended March 31,
 
2015
 
2014
 
(In thousands)
Net income
$
25,519

 
$
82,558

Foreign currency translation adjustment
(14,984
)
 
(7,278
)
Other comprehensive loss
(14,984
)
 
(7,278
)
Comprehensive income
$
10,535

 
$
75,280






See accompanying notes to consolidated financial statements.


4

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GULFPORT ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
 
 
 
 
 
 

Paid-in
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
Total
Stockholders’
Equity
 
Common Stock
 
 
 
 
 
Shares
 
Amount
 
 
 
 
 
(In thousands, except share data)
Balance at January 1, 2015
85,655,438

 
$
856

 
$
1,828,602

 
$
(26,675
)
 
$
493,513

 
$
2,296,296

Net income

 

 

 

 
25,519

 
25,519

Other Comprehensive Loss

 

 

 
(14,984
)
 

 
(14,984
)
Stock Compensation

 

 
3,462

 

 

 
3,462

Issuance of Restricted Stock
60,381

 
1

 
(1
)
 

 

 

Issuance of Common Stock through exercise of options

 

 

 

 

 

Balance at March 31, 2015
85,715,819

 
$
857

 
$
1,832,063

 
$
(41,659
)
 
$
519,032

 
$
2,310,293

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2014
85,177,532

 
$
851

 
$
1,813,058

 
$
(9,781
)
 
$
246,110

 
$
2,050,238

Net income

 

 

 

 
82,558

 
82,558

Other Comprehensive Loss

 

 

 
(7,278
)
 

 
(7,278
)
Stock Compensation

 

 
4,307

 

 

 
4,307

Issuance of Restricted Stock
63,951

 

 

 

 

 

Issuance of Common Stock through exercise of options
182,908

 
2

 
613

 

 

 
615

Balance at March 31, 2014
85,424,391

 
$
853

 
$
1,817,978

 
$
(17,059
)
 
$
328,668

 
$
2,130,440

 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.

5

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GULFPORT ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three months ended March 31,
 
2015
 
2014
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
25,519

 
$
82,558

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Accretion of discount—Asset Retirement Obligation
190

 
188

Depletion, depreciation and amortization
89,909

 
56,877

Stock-based compensation expense
2,077

 
2,584

Gain from equity investments
(12,759
)
 
(43,688
)
Interest income - note receivable

 
(13
)
Unrealized (gain) loss on derivative instruments
(31,324
)
 
8,665

Deferred income tax expense
14,479

 
33,564

Amortization of loan commitment fees
617

 
294

Amortization of note discount and premium
(528
)
 
78

Changes in operating assets and liabilities:
 
 
 
Decrease (increase) in accounts receivable
24,178

 
(27,944
)
Decrease in accounts receivable—related party
13

 
2,047

Increase in prepaid expenses
(12,063
)
 
(771
)
(Decrease) increase in accounts payable and accrued liabilities
(290
)
 
43,406

Settlement of asset retirement obligation
(981
)
 
(1,695
)
Net cash provided by operating activities
99,037

 
156,150

Cash flows from investing activities:
 
 
 
Deductions to cash held in escrow
8

 
8

Additions to other property and equipment
(632
)
 
(1,002
)
Additions to oil and gas properties
(226,905
)
 
(420,431
)
Proceeds from sale of oil and gas properties
1,314

 

Contributions to equity method investments
(6,093
)
 
(23,687
)
Distributions from equity method investments
817

 

Net cash used in investing activities
(231,491
)
 
(445,112
)
Cash flows from financing activities:
 
 
 
Principal payments on borrowings
(50,045
)
 
(42
)
Borrowings on line of credit
115,000

 

Debt issuance costs and loan commitment fees
(101
)
 
(185
)
Proceeds from issuance of common stock, net of offering costs and exercise of stock options

 
615

Net cash provided by financing activities
64,854

 
388

Net decrease in cash and cash equivalents
(67,600
)
 
(288,574
)
Cash and cash equivalents at beginning of period
142,340

 
458,956

Cash and cash equivalents at end of period
$
74,740

 
$
170,382

Supplemental disclosure of cash flow information:
 
 
 
Interest payments
$
240

 
$
18

Income tax payments
$
29,750

 
$
13,000

Supplemental disclosure of non-cash transactions:
 
 
 
Capitalized stock based compensation
$
1,385

 
$
1,723

Asset retirement obligation capitalized
$
1,584

 
$
1,869

Interest capitalized
$
3,694

 
$
2,318

Foreign currency translation loss on investment in Grizzly Oil Sands ULC
$
(14,984
)
 
$
(7,278
)
 See accompanying notes to consolidated financial statements.

6

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GULFPORT ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
These consolidated financial statements have been prepared by Gulfport Energy Corporation (the “Company” or “Gulfport”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"), and reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods, on a basis consistent with the annual audited consolidated financial statements. All such adjustments are of a normal recurring nature. Certain information, accounting policies, and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the summary of significant accounting policies and notes thereto included in the Company's most recent annual report on Form 10-K. Results for the three month period ended March 31, 2015 are not necessarily indicative of the results expected for the full year.

1.
ACQUISITIONS

In February 2014, the Company entered into a definitive agreement with Rhino Exploration LLC ("Rhino") to acquire additional oil and natural gas properties consisting of approximately 8,000 net acres in the Utica Shale, as well as Rhino's interest in all of the producing wells on this acreage (the "Rhino Acquisition"). The Company purchased approximately $182.0 million ($179.5 million net of purchase price adjustments) of these assets in 2014.

The Rhino Acquisition qualified as a business combination for accounting purposes and, as such, the Company estimated the fair value of the acquired properties as of the March 20, 2014 acquisition date. The fair value of the assets and liabilities acquired was estimated using assumptions that represent Level 3 inputs. See Note 10 - "Fair Value Measurements" for additional discussion of the measurement inputs.

The Company estimated that the consideration paid in the Rhino Acquisition for these properties approximated the fair value that would be paid by a typical market participant. As a result, no goodwill or bargain purchase gain was recognized in conjunction with the purchase.

The following table summarizes the consideration paid in the Rhino Acquisition to acquire the properties and the fair value amount of the assets acquired as of March 20, 2014.
 
 
(In thousands)
Consideration paid
 
 
     Cash, net of purchase price adjustments
 
$
179,527

Fair value of identifiable assets acquired
 
 
     Oil and natural gas properties
 
 
       Proved
 
$
31,961

       Unproved
 
6,263

       Unevaluated
 
141,303

Fair value of net identifiable assets acquired
 
$
179,527


2.
PROPERTY AND EQUIPMENT
The major categories of property and equipment and related accumulated depletion, depreciation, amortization and impairment as of March 31, 2015 and December 31, 2014 are as follows:
 

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March 31, 2015
 
December 31, 2014
 
(In thousands)
Oil and natural gas properties
$
4,177,962

 
$
3,923,154

Office furniture and fixtures
11,133

 
10,752

Building
5,724

 
5,398

Land
2,194

 
2,194

Total property and equipment
4,197,013

 
3,941,498

Accumulated depletion, depreciation, amortization and impairment
(1,140,168
)
 
(1,050,879
)
Property and equipment, net
$
3,056,845

 
$
2,890,619

Included in oil and natural gas properties at March 31, 2015 is the cumulative capitalization of $79.9 million in general and administrative costs incurred and capitalized to the full cost pool. General and administrative costs capitalized to the full cost pool represent management’s estimate of costs incurred directly related to exploration and development activities such as geological and other administrative costs associated with overseeing the exploration and development activities. All general and administrative costs not directly associated with exploration and development activities were charged to expense as they were incurred. Capitalized general and administrative costs were approximately $7.2 million and $6.3 million for the three months ended March 31, 2015 and 2014, respectively.
The following table summarizes the Company’s non-producing properties excluded from amortization by area at March 31, 2015:
 
March 31, 2015
 
(In thousands)
Colorado
$
5,088

Bakken
96

Southern Louisiana
283

Ohio
1,541,292

Other
45

 
$
1,546,804

At December 31, 2014, approximately $1.5 billion of non-producing leasehold costs was not subject to amortization.
The Company evaluates the costs excluded from its amortization calculation at least annually. Subject to industry conditions and the level of the Company’s activities, the inclusion of most of the above referenced costs into the Company’s amortization calculation is expected to occur within three to five years.

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A reconciliation of the Company's asset retirement obligation for the three months ended March 31, 2015 and 2014 is as follows:
 
 
 
March 31, 2015
 
March 31, 2014
 
(In thousands)
Asset retirement obligation, beginning of period
$
17,938

 
$
15,083

Liabilities incurred
1,584

 
1,869

Liabilities settled
(981
)
 
(1,695
)
Accretion expense
190

 
188

Asset retirement obligation as of end of period
18,731

 
15,445

Less current portion
75

 
795

Asset retirement obligation, long-term
$
18,656

 
$
14,650

On May 7, 2012, the Company entered into a contribution agreement with Diamondback Energy Inc. ("Diamondback"). Under the terms of the contribution agreement, the Company agreed to contribute to Diamondback, prior to the closing of the Diamondback initial public offering (“Diamondback IPO”), all its oil and natural gas interests in the Permian Basin (the "Contribution"). The Contribution was completed on October 11, 2012. At the closing of the Contribution, Diamondback issued to the Company (i) 7,914,036 shares of Diamondback common stock and (ii) a promissory note for $63.6 million, which was repaid to the Company at the closing of the Diamondback IPO on October 17, 2012. This aggregate consideration was subject to a post-closing cash adjustment based on changes in the working capital, long-term debt and certain other items of Diamondback O&G LLC, formerly Windsor Permian LLC ("Diamondback O&G"), as of the date of the Contribution. In January 2013, the Company received an additional payment from Diamondback of approximately $18.6 million as a result of this post-closing adjustment. Diamondback O&G is a wholly-owned subsidiary of Diamondback. Under the contribution agreement, the Company is generally responsible for all liabilities and obligations with respect to the contributed properties arising prior to the Contribution and Diamondback is responsible for such liabilities and obligations with respect to the contributed properties arising after the Contribution.
Immediately upon completion of the Contribution, the Company owned a 35% equity interest in Diamondback, rather than leasehold interests in the Company’s Permian Basin acreage. Upon completion of the Diamondback IPO in October 2012, Gulfport owned approximately 21.4% of Diamondback's outstanding common stock. Following the Contribution, the Company has accounted for its interest in Diamondback as an equity investment. In November 2014, the Company sold all of the remaining shares of Diamondback common stock that it received in the Contribution and, as of March 31, 2015, Gulfport did not own any shares of Diamondback's common stock. See Note 3, "Equity Investments - Diamondback Energy, Inc."


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3.
EQUITY INVESTMENTS
Investments accounted for by the equity method consist of the following as of March 31, 2015 and December 31, 2014:
 
 
 
 
Carrying Value
 
(Income) loss from equity method investments

 
Approximate Ownership %
 
March 31, 2015
 
December 31, 2014
 
Three months ended March 31,
 
 
 
 
2015
2014
 
 
 
(In thousands)
Investment in Tatex Thailand II, LLC
23.5
%
 
$

 
$

 
$

$

Investment in Tatex Thailand III, LLC
17.9
%
 

 

 

49

Investment in Grizzly Oil Sands ULC
24.9999
%
 
167,186

 
180,218

 
4,142

2,001

Investment in Bison Drilling and Field Services LLC
%
 

 

 

1,933

Investment in Muskie Proppant LLC
%
 

 

 

534

Investment in Timber Wolf Terminals LLC
50.0
%
 
1,007

 
1,013

 
6


Investment in Windsor Midstream LLC
22.5
%
 
32,292

 
13,505

 
(18,787
)
(168
)
Investment in Stingray Pressure Pumping LLC
%
 

 

 

513

Investment in Stingray Cementing LLC
50.0
%
 
2,254

 
2,647

 
67

95

Investment in Blackhawk Midstream LLC
48.5
%
 

 

 
(7,217
)
(84,787
)
Investment in Stingray Logistics LLC
%
 

 

 

81

Investment in Diamondback Energy, Inc.
%
 

 

 

(48,767
)
Investment in Stingray Energy Services LLC
50.0
%
 
6,167

 
5,718

 
10

41

Investment in Sturgeon Acquisitions LLC
25.0
%
 
22,258

 
22,507

 
(568
)

Investment in Mammoth Energy Partners LP
30.5
%
 
143,807

 
143,973

 
2,372


 
 
 
$
374,971


$
369,581


$
(19,975
)
$
(128,475
)
The tables below summarize financial information for the Company's equity investments as of March 31, 2015 and December 31, 2014.
Summarized balance sheet information:
 
March 31, 2015
 
December 31, 2014
 
 
 
(In thousands)
Current assets
$
151,752

 
$
181,060

Noncurrent assets
$
1,419,656

 
$
1,306,891

Current liabilities
$
55,369

 
$
114,506

Noncurrent liabilities
$
213,050

 
$
230,062

Summarized results of operations:    
 
Three months ended March 31,
 
2015
 
2014
 
(In thousands)
Gross revenue
$
133,556

 
$
158,281

Net income
$
90,668

 
$
181,505

Tatex Thailand II, LLC

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The Company has an indirect ownership interest in Tatex Thailand II, LLC (“Tatex”). Tatex holds 85,122 of the 1,000,000 outstanding shares of APICO, LLC (“APICO”), an international oil and gas exploration company. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering approximately 243,000 acres which includes the Phu Horm Field.
Tatex Thailand III, LLC
The Company has an ownership interest in Tatex Thailand III, LLC ("Tatex III"). Tatex III previously owned a concession covering approximately 245,000 acres in Southeast Asia. As of December 31, 2014, the Company reviewed its investment in Tatex III and made the decision to allow the concession to expire in 2015. As such, the Company fully impaired the asset as of December 31, 2014. The concession expired in January 2015.
Grizzly Oil Sands ULC
The Company, through its wholly owned subsidiary Grizzly Holdings Inc. ("Grizzly Holdings"), owns an interest in Grizzly Oil Sands ULC ("Grizzly"), a Canadian unlimited liability company. The remaining interest in Grizzly is owned by Grizzly Oil Sands Inc. ("Oil Sands"). As of March 31, 2015, Grizzly had approximately 830,000 acres under lease in the Athabasca and Peace River oil sands regions of Alberta, Canada. Initiation of steam injection at its first project, Algar Lake Phase 1, commenced in January 2014 and first bitumen production was achieved during the second quarter of 2014. In April 2015, Grizzly determined to cease bitumen production at its Algar Lake facility due to the current level of commodity prices. Grizzly intends to monitor market conditions as it assesses future plans for the facility. The Company reviewed its investment in Grizzly at March 31, 2015 and determined no impairment was needed. During the three months ended March 31, 2015, Gulfport paid $6.1 million in cash calls. Grizzly’s functional currency is the Canadian dollar. The Company's investment in Grizzly was decreased by $15.0 million and $7.3 million as a result of a foreign currency translation loss for the three months ended March 31, 2015 and 2014, respectively.
Bison Drilling and Field Services LLC
During 2011, the Company invested in Bison Drilling and Field Services LLC (“Bison”). Bison owns and operates drilling rigs. The Company contributed its investment in Bison to Mammoth Energy Partners LP ("Mammoth") during the fourth quarter of 2014. See below under "-Mammoth Energy Partners LP" for a discussion of the contribution.
Muskie Proppant LLC
During 2011, the Company invested in Muskie Proppant LLC (“Muskie”). Muskie processes and sells sand for use in hydraulic fracturing by the oil and natural gas industry and holds certain rights in a lease covering land in Wisconsin for mining oil and natural gas fracture grade sand. The income from equity method investments presented in the table above reflects any intercompany profit eliminations. The Company contributed its investment in Muskie to Mammoth during the fourth quarter of 2014. See below under "-Mammoth Energy Partners LP" for a discussion of the contribution.
Timber Wolf Terminals LLC
During 2012, the Company invested in Timber Wolf Terminals LLC (“Timber Wolf”). Timber Wolf will operate a crude/condensate terminal and a sand transloading facility in Ohio. During the three months ended March 31, 2015, Gulfport did not pay any cash calls related to Timber Wolf.
Windsor Midstream LLC

During 2012, the Company purchased an ownership interest in Windsor Midstream LLC (“Midstream”). Midstream owned a 28.4% interest in Coronado Midstream LLC ("Coronado"), a gas processing plant in West Texas. During the three months ended March 31, 2015, Gulfport did not pay any cash calls to Midstream.

In March 2015, Coronado was sold to Enlink Midstream Partners, LP ("EnLink") for proceeds of approximately $600 million, consisting of cash and units representing a limited partnership interest in Enlink. Based on preliminary information available at the time of the sale, Midstream recorded an approximately $85.5 million gain on the sale of its investment in Coronado, which amount is subject to change.

Stingray Pressure Pumping LLC


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During 2012, the Company invested in Stingray Pressure Pumping LLC ("Stingray Pressure"). Stingray Pressure provides well completion services. The income from equity method investments presented in the table above reflects any intercompany profit eliminations. The Company contributed its investment in Stingray Pressure to Mammoth during the fourth quarter of 2014. See below under "-Mammoth Energy Partners LP" for a discussion of the contribution.

Stingray Cementing LLC

During 2012, the Company invested in Stingray Cementing LLC ("Stingray Cementing"). Stingray Cementing provides well cementing services. During the three months ended March 31, 2015, the Company did not pay any cash calls related to Stingray Cementing. The income from equity method investments presented in the table above reflects any intercompany profit eliminations.

Blackhawk Midstream LLC

During 2012, the Company invested in Blackhawk Midstream LLC ("Blackhawk"). Blackhawk coordinates gathering, compression, processing and marketing activities for the Company in connection with the development of its Utica Shale acreage. On January 28, 2014, Blackhawk closed on the sale of its equity interests 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. Gulfport received $84.8 million in net proceeds from this transaction in the first quarter of 2014, which is included in income from equity method investments in the consolidated statements of operations. During the first quarter of 2015, the Company received net proceeds of approximately $7.2 million from the release of escrow from the Blackhawk sale, which is included in income from equity method investments in the consolidated statements of operations.

Stingray Logistics LLC

During 2012, the Company invested in Stingray Logistics LLC ("Stingray Logistics"). Stingray Logistics provides well services. The Company contributed its investment in Stingray Logistics to Mammoth during the fourth quarter of 2014. See below under "-Mammoth Energy Partners LP" for a discussion of the contribution.

Diamondback Energy, Inc.

As noted above in Note 2, on October 11, 2012, following the closing of the Diamondback IPO, the Company owned 7,914,036 shares of Diamondback's outstanding common stock for an initial investment in Diamondback valued at $138.5 million. In 2013, the Company sold an aggregate of 4,534,536 shares of its Diamondback common stock and received aggregate net proceeds of approximately $192.7 million. In June and September of 2014, the Company sold 1,000,000 and 1,437,500 shares of its Diamondback common stock, respectively, and received aggregate net proceeds of approximately $197.6 million. On November 12, 2014, the Company sold its remaining 942,000 shares of Diamondback common stock for net proceeds of approximately $60.8 million. As of March 31, 2015, the Company did not own any shares of Diamondback common stock.

The Company accounted for its interest in Diamondback as an equity method investment and had elected the fair value option of accounting for this investment. While the Company's ownership interest in Diamondback was below 20% prior to the Company's sale of its remaining Diamondback common stock in November 2014, the Company had appointed a member of Diamondback's Board. The individual appointed by the Company continues to serve on Diamondback's Board and the Company had influence through this board seat. The Company recognized an aggregate gain of approximately $48.8 million on its investment in Diamondback for three months ended March 31, 2014, which is included in income from equity method investments in the consolidated statements of operations.
Stingray Energy Services LLC

During 2013, the Company invested in Stingray Energy Services LLC ("Stingray Energy"). Stingray Energy provides rental tools for land-based oil and natural gas drilling, completion and workover activities as well as the transfer of fresh water to wellsites. During the three months ended March 31, 2015, the Company did not pay any cash calls to Stingray Energy. The income from equity method investments presented in the table above reflects any intercompany profit eliminations.

Sturgeon Acquisitions LLC


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During 2014, the Company invested $20.7 million and received an ownership interest of 25% in Sturgeon Acquisitions LLC ("Sturgeon"). Sturgeon owns and operates sand mines that produce hydraulic fracturing grade sand. During the three months ended March 31, 2015, Gulfport received $0.8 million in distributions from Sturgeon.
Mammoth Energy Partners LP
In the fourth quarter of 2014, the Company contributed its investments in Stingray Pressure, Stingray Logistics, Bison and Muskie to Mammoth for a 30.5% interest in this newly formed limited partnership. Mammoth has filed a registration statement on Form S-1 with the SEC in connection with its proposed initial public offering. Mammoth intends to pursue this offering in 2015 subject to market conditions.
The Company accounted for the contribution as a sale of financial assets under ASC 860. The Company estimated the fair market value of its investment in Mammoth as of the contribution date using an average of the market approach and the income approach, based on an independently prepared valuation of the contributed assets. The fair market value was reduced by a discount factor for lack of marketability due to the Company's minority interest, resulting in a fair value of $143.5 million for the Company's 30.5% interest. The fair value of the assets and liabilities acquired was estimated using assumptions that represent Level 3 inputs. See "Note 10 - Fair Value Measurements" for additional discussion of the measurement inputs.

4.
OTHER ASSETS
Prepaid expenses and other current assets consist of the following at March 31, 2015: prepaid taxes of $12.1 million, prepaid insurance of $2.3 million and prepaid other expense of $1.4 million.

Other assets consist of the following as of March 31, 2015 and December 31, 2014:
 
 
 
March 31, 2015
 
December 31, 2014
 
(In thousands)
Plugging and abandonment escrow account on the WCBB properties (Note 8)
$
3,089

 
$
3,097

Certificates of Deposit securing letter of credit
275

 
275

Prepaid drilling costs
269

 
483

Loan commitment fees
14,771

 
15,390

Deposits
34

 
34

Other
128

 
117

 
$
18,566

 
$
19,396


5.
LONG-TERM DEBT
Long-term debt consisted of the following items as of March 31, 2015 and December 31, 2014:
 
 
 
March 31, 2015
 
December 31, 2014
 
(In thousands)
Revolving credit agreement (1)
$
165,000

 
$
100,000

Building loans (2)
1,781

 
1,826

7.75% senior unsecured notes due 2020 (3)
600,000

 
600,000

Unamortized original issue (discount) premium, net (4)
14,130

 
14,658

Less: current maturities of long term debt
(1,781
)
 
(168
)
Debt reflected as long term (5)
$
779,130

 
$
716,316


The Company capitalized approximately $3.7 million and $2.3 million in interest expense to oil and natural gas properties during the three months ended March 31, 2015 and 2014, respectively.
(1) On December 27, 2013, the Company entered into an Amended and Restated Credit Agreement with The Bank of Nova Scotia, as administrative agent, sole lead arranger and sole bookrunner, Amegy Bank National Association, as syndication

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agent, KeyBank National Association, as documentation agent, and other lenders (The "Amended and Restated Credit Agreement") that provides for a maximum facility amount of $1.5 billion. The Amended and Restated Credit Agreement matures on June 6, 2018. The Company’s wholly-owned subsidiaries have guaranteed the obligations of the Company under the Amended and Restated Credit Agreement.

On April 23, 2014, the Company entered into a first amendment to the Amended and Restated Credit Agreement. The first amendment increased the letter of credit sublimit from $20.0 million to $70.0 million and provided for an increase in the borrowing base availability from $150.0 million to $275.0 million. The first amendment also made certain changes to the lenders and their respective lending commitments thereunder.

On November 26, 2014, the Company entered into a second amendment to the Amended and Restated Credit Agreement. The second amendment changed the definition of EBITDAX to exclude proceeds from the disposition of equity method investments and changed the ratio of funded debt to EBITDAX to be the ratio of net funded debt to EBITDAX. Net funded debt is funded debt less the amount of cash and short-term investments the Company has at the end of the relevant fiscal quarter. The second amendment increases the ratio from 2.00 to 1.00 to 3.50 to 1.00 for the period December 31, 2014 through June 30, 2015 and then decreases the ratio to 3.25 to 1.00 for the periods thereafter. Further, the second amendment increased the letter of credit sublimit from $70.0 million to $125.0 million and provided for an increase in the borrowing base availability from $275.0 million to $450.0 million. As of March 31, 2015, $165.0 million was outstanding under the Amended and Restated Credit Agreement. At March 31, 2015, the total availability for future borrowings under the Amended and Restated Credit Agreement, after giving effect to an aggregate of $68.2 million of letters of credit, was $216.8 million.

On April 10, 2015, the Company entered into a third amendment to the Amended and Restated Credit Agreement. The third amendment increased the borrowing base from $450.0 million to $575.0 million and increased the Company's basket for unsecured debt issuances to $1.2 billion. The third amendment also made certain changes to the lenders and their respective lending commitments thereunder.

Advances under the Amended and Restated Credit Agreement may be in the form of either base rate loans or eurodollar loans. The interest rate for base rate loans is equal to (1) the applicable rate, which ranges from 0.50% to 1.50%, plus (2) the highest of: (a) the federal funds rate plus 0.50%, (b) the rate of interest in effect for such day as publicly announced from time to time by agent as its “prime rate,” and (c) the eurodollar rate for an interest period of one month plus 1.00%. The interest rate for eurodollar loans is equal to (1) the applicable rate, which ranges from 1.50% to 2.50%, plus (2) the London interbank offered rate that appears on pages LIBOR01 or LIBOR02 of the Reuters screen that displays such rate for deposits in U.S. dollars, or, if such rate is not available, the rate as administered by ICE Benchmark Administration (or any other person that takes over administration of such rate) per annum equal to the offered rate on such other page or service that displays on average London interbank offered rate as determined by ICE Benchmark Administration (or any other person that takes over administration of such rate) for deposits in U.S. dollars, or, if such rate is not available, the average quotations for three major New York money center banks of whom the agent shall inquire as the “London Interbank Offered Rate” for deposits in U.S. dollars. At March 31, 2015, amounts borrowed under the Amended and Restated Credit Agreement bore interest at the Eurodollar rate (2.18%).
The Amended and Restated Credit Agreement contains customary negative covenants including, but not limited to, restrictions on the Company’s and its subsidiaries’ ability to:
incur indebtedness;
grant liens;
pay dividends and make other restricted payments;
make investments;
make fundamental changes;
enter into swap contracts and forward sales contracts;
dispose of assets;
change the nature of their business; and
enter into transactions with affiliates.

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The negative covenants are subject to certain exceptions as specified in the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement also contains certain affirmative covenants, including, but not limited to the following financial covenants:
(i) the ratio of net funded debt to EBITDAX (net income, excluding (i) any non-cash revenue or expense associated with swap contracts resulting from ASC 815 and (ii) any cash or noncash revenue or expense attributable to minority investments plus without duplication and, in the case of expenses, to the extent deducted from revenues in determining net income, the sum of (a) the aggregate amount of consolidated interest expense for such period, (b) the aggregate amount of income, franchise, capital or similar tax expense (other than ad valorem taxes) for such period, (c) all amounts attributable to depletion, depreciation, amortization and asset or goodwill impairment or writedown for such period, (d) all other non-cash charges, (e) exploration costs deducted in determining net income under successful efforts accounting, (f) actual cash distributions received from minority investments, (g) to the extent actually reimbursed by insurance, expenses with respect to liability on casualty events or business interruption, and (h) all reasonable transaction expenses related to dispositions and acquisitions of assets, investments and debt and equity offerings (provided that expenses related to any unsuccessful disposition will be limited to $3.0 million in the aggregate) for a twelve-month period may not be greater than 3.50 to 1.00; for the period December 31, 2014 through June 30, 2015 and 3.25 to 1.00 for the twelve-month period ending September 30, 2015 and periods thereafter; and
(ii) the ratio of EBITDAX to interest expense for a twelve-month period may not be less than 3.00 to 1.00.
The Company was in compliance with all covenants at March 31, 2015.
(2) In March 2011, the Company entered into a new building loan agreement for the office building it occupies in Oklahoma City, Oklahoma. The new loan agreement refinanced the $2.4 million outstanding under the previous building loan agreement. The new agreement matures in February 2016 and bears interest at the rate of 5.82% per annum. The new building loan requires monthly interest and principal payments of approximately $22,000 and is collateralized by the Oklahoma City office building and associated land.
(3) On October 17, 2012, the Company issued $250.0 million in aggregate principal amount of senior unsecured notes due 2020 (the "October Notes") to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act (the "October Notes Offering") under an indenture among the Company, its subsidiary guarantors and Wells Fargo Bank, National Association, as the trustee (the "senior note indenture"). On December 21, 2012, the Company issued an additional $50.0 million in aggregate principal amount of senior unsecured notes due 2020 (the "December Notes") to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act ("the December Notes Offering"). The December Notes were issued as additional securities under the senior note indenture. The Company used a portion of the net proceeds from the October Notes Offering to repay all amounts outstanding at such time under its revolving credit facility. The Company used the remaining net proceeds of the October Notes Offering and the net proceeds of the December Notes Offering for general corporate purposes, which included funding a portion of its 2013 capital development plan. The October Notes and the December Notes were exchanged for substantially identical notes in the same aggregate principal amount that were registered under the Securities Act in October 2013 (the "Exchange Notes").
On August 18, 2014, the Company issued an additional $300.0 million in aggregate principal amount of senior unsecured notes due 2020 (the "August Notes") to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act ("the August Notes Offering"). The August Notes were issued as additional securities under the senior note indenture. The Company used a portion of the net proceeds from the August Notes Offering to repay all amounts outstanding at such time under its revolving credit facility. The Company intends to use the remaining net proceeds of the August Notes Offering for general corporate purposes, including funding a portion of its 2014 and 2015 capital development plans. The October Notes Offering, December Notes Offering and the August Notes Offering are collectively referred to as the "Notes Offerings" and the Exchange Notes, and the August Notes are collectively referred to as the "Old Notes".
In connection with the issuance of the August Notes, the Company and the subsidiary guarantors entered into a registration rights agreement with the initial purchasers on August 18, 2014, pursuant to which the Company and the subsidiary guarantors have agreed to file a registration statement with respect to an offer to exchange the August Notes for a new issue of substantially identical debt securities registered under the Securities Act. The registration statement relating to the exchange offer for the August Notes was filed on November 6, 2014, as amended on February 3, 2015, and declared effective by the SEC on February 4, 2015. The exchange offer for the August Notes was completed in March 2015.

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Under the senior note indenture relating to the Old Notes, interest on the Old Notes accrues at a rate of 7.75% per annum on the outstanding principal amount from October 17, 2012, payable semi-annually on May 1 and November 1 of each year, commencing on May 1, 2013. The Old Notes are the Company's senior unsecured obligations and rank equally in the right of payment with all of the Company's other senior indebtedness and senior in right of payment to any future subordinated indebtedness. All of the Company's existing and future restricted subsidiaries that guarantee the Company's secured revolving credit facility or certain other debt guarantee the Old Notes; provided, however, that the Old Notes are not guaranteed by Grizzly Holdings, Inc. and will not be guaranteed by any of the Company's future unrestricted subsidiaries. The Company may redeem some or all of the Old Notes at any time on or after November 1, 2016, at the redemption prices listed in the senior note indenture. Prior to November 1, 2016, the Company may redeem the Old Notes at a price equal to 100% of the principal amount plus a “make-whole” premium. In addition, prior to November 1, 2015, the Company may redeem up to 35% of the aggregate principal amount of the Old Notes with the net proceeds of certain equity offerings, provided that at least 65% of the aggregate principal amount of the Old Notes initially issued remains outstanding immediately after such redemption.
(4) The October Notes were issued at a price of 98.534% resulting in a gross discount of $3.7 million and an effective rate of 8.000%. The December Notes were issued at a price of 101.000% resulting in a gross premium of $0.5 million and an effective rate of 7.531%. The August Notes were issued at a price of 106.000% resulting in a gross premium of $18.0 million and an effective rate of 6.561%. The premium and discount are being amortized using the effective interest method.
(5) Does not reflect the Company's issuance of $350.0 million in aggregate principal amount of 6.625% Senior Notes due 2023 on April 21, 2015. See Note 14 - "Subsequent Events" below.
6.
STOCK-BASED COMPENSATION
During the three months ended March 31, 2015 and 2014, the Company’s stock-based compensation cost was $3.5 million and $4.3 million, respectively, of which the Company capitalized $1.4 million and $1.7 million, respectively, relating to its exploration and development efforts.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. Expected volatilities are based on the historical volatility of the market price of Gulfport’s common stock over a period of time ending on the grant date. Based upon the historical experience of the Company, the expected term of options granted is equal to the vesting period plus one year. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The 2013 Restated Stock Incentive Plan (which amended and restated the 2005 Plan) provides that all options must have an exercise price not less than the fair value of the Company’s common stock on the date of the grant.
No stock options were issued during the three months ended March 31, 2015 and 2014.
The Company has not declared dividends and does not intend to do so in the foreseeable future, and thus did not use a dividend yield. In each case, the actual value that will be realized, if any, depends on the future performance of the common stock and overall stock market conditions. There is no assurance that the value an optionee actually realizes will be at or near the value estimated using the Black-Scholes model.
A summary of the status of stock options and related activity for the three months ended March 31, 2015 is presented below:
 
 
Shares
 
Weighted
Average
Exercise Price
per Share
 
Weighted
Average
Remaining
Contractual Term
 
Aggregate
Intrinsic
Value (In thousands)
Options outstanding at December 31, 2014
5,000

 
$
9.07

 
0.69
 
$
163

Granted

 

 
 
 
 
Exercised

 

 
 
 

Forfeited/expired

 

 
 
 
 
Options outstanding at March 31, 2015
5,000

 
$
9.07

 
0.44
 
$
184

Options exercisable at March 31, 2015
5,000

 
$
9.07

 
0.44
 
$
184

The following table summarizes information about the stock options outstanding at March 31, 2015:
 

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Exercise
Price
 
Number
Outstanding
 
Weighted Average
Remaining Life
(in years)
 
Number
Exercisable
$
9.07

 
5,000

 
0.44
 
5,000

 
 
5,000

 
 
 
5,000

The following table summarizes restricted stock activity for the three months ended March 31, 2015:
 
 
Number of
Unvested
Restricted Shares
 
Weighted
Average
Grant Date
Fair Value
Unvested shares as of December 31, 2014
387,245

 
$
55.87

Granted
100,226

 
44.04

Vested
(60,381
)
 
52.94

Forfeited

 

Unvested shares as of March 31, 2015
427,090

 
$
53.51

Unrecognized compensation expense as of March 31, 2015 related to outstanding stock options and restricted shares was $18.9 million. The expense is expected to be recognized over a weighted average period of 1.55 years.


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7.
EARNINGS PER SHARE
Reconciliations of the components of basic and diluted net income per common share are presented in the tables below:
 
 
Three months ended March 31,
 
2015
 
2014
 
Income
 
Shares
 
Per
Share
 
Income
 
Shares
 
Per
Share
 
(In thousands, except share data)
Basic:
 
 
 
 
 
 
 
 
 
 
 
Net income 
$
25,519

 
85,679,606

 
$
0.30

 
$
82,558

 
85,259,407

 
$
0.97

Effect of dilutive securities:

 

 

 

 

 

Stock options and awards

 
440,424

 

 

 
479,219

 

Diluted:

 

 

 

 

 

Net income
$
25,519

 
86,120,030

 
$
0.30

 
$
82,558

 
85,738,626

 
$
0.96



     There were no potential shares of common stock that were considered anti-dilutive for the three months ended March 31, 2015 and 2014.


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8.
COMMITMENTS AND CONTINGENCIES
Plugging and Abandonment Funds
In connection with the Company's acquisition in 1997 of the remaining 50% interest in its WCBB properties, the Company assumed the seller’s (Chevron) obligation to contribute approximately $18,000 per month through March 2004 to a plugging and abandonment trust and the obligation to plug a minimum of 20 wells per year for 20 years commencing March 11, 1997. Chevron retained a security interest in production from these properties until the Company's abandonment obligations to Chevron have been fulfilled. Beginning in 2009, the Company could access the trust for use in plugging and abandonment charges associated with the property, although it has not yet done so. As of March 31, 2015, the plugging and abandonment trust totaled approximately $3.1 million. At March 31, 2015, the Company had plugged 463 wells at WCBB since it began its plugging program in 1997, which management believes fulfills its current minimum plugging obligation.
Employment Agreements
Effective November 1, 2012, the Company entered into an employment agreement with Messrs. James Palm, Mike Liddell and Michael G. Moore, each with an initial three-year term expiring on November 1, 2015 subject to automatic one-year extensions unless terminated by either party to the agreement at least 90 days prior to the end of the then current term. These agreements provided for minimum salary and bonus levels, subject to review and potential increase by the Compensation Committee and/or the Board of Directors, as well as participation in the Company's incentive plans and other employee benefits.
Effective February 15, 2014, Gulfport's former Chief Executive Officer, James D. Palm, retired and his employment agreement with the company terminated. The Company entered into a separation agreement with Mr. Palm, under which agreement certain benefits are provided to, and obligations imposed on, Mr. Palm. As of March 31, 2015, the minimum commitment under Mr. Palm's separation agreement was approximately $0.4 million.
Mr. Liddell resigned as the Company's Chairman effective June 2013 at which date his employment agreement with Gulfport terminated. At that same time, the Company entered into a consulting agreement with Mr. Liddell. Mr. Liddell terminated his consulting agreement with the Company effective January 1, 2015.
On April 22, 2014, the Board of Directors appointed Michael G. Moore as Chief Executive Officer of the Company. The Company and Mr. Moore entered into an amended and restated employment agreement. The agreement has a three-year term commencing effective April 22, 2014. This agreement provides, among other things, for a minimum salary level, subject to review and potential increase by the Compensation Committee and/or the Board of Directors, as well as participation in the Company's incentive plans and other employee benefits.
On March 13, 2015, the Company entered into an employment agreement with Ross Kirtley, the Company's Chief Operating Officer. The agreement has a two-year term commencing effective April 22, 2014. This agreement provides, among other things, for a minimum salary level, subject to review and potential increase by the Compensation Committee and/or the Board of Directors, as well as participation in the Company's incentive plans and other employee benefits.
On March 13, 2015, the Company entered into an employment agreement with Aaron Gaydosik, the Company's Chief Financial Officer. The agreement has a three-year term commencing effective August 11, 2014. This agreement provides, among other things, for a minimum salary level, subject to review and potential increase by the Compensation Committee and/or the Board of Directors, as well as participation in the Company's incentive plans and other employee benefits.
The aggregate minimum commitment for future salary at March 31, 2015 under the above listed employment agreements was approximately $2.0 million.
Effective as of April 29, 2015, the Company amended and restated its existing employment agreement with Mr. Moore. For a description of the amendments to Mr. Moore’s employment agreement, see Note 14 - “Subsequent Events.”

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Operating Leases
The Company leases office facilities under non-cancellable operating leases exceeding one year. Future minimum lease commitments under these leases at March 31, 2015 were as follows:
 
(In thousands)
Remaining 2015
$
450

2016
524

2017
451

2018
20

2019

Total
$
1,445


Other Commitments
Effective October 1, 2014, the Company entered into a Sand Supply Agreement with Muskie that expires on September 30, 2018. Pursuant to this agreement, the Company has agreed to purchase annual and monthly amounts of proppant sand subject to exceptions specified in the agreement at a fixed price per ton, subject to certain adjustments, plus agreed costs and expenses. Failure by either Muskie or the Company to deliver or accept the minimum monthly amount results in damages calculated per ton based on the difference between the monthly obligation amount and the amount actually delivered or accepted, as applicable. The Company did not incurred any expenses related to non-utilization fees during the three months ended March 31, 2015.
Effective October 1, 2014, the Company entered into an Amended and Restated Master Services Agreement for pressure pumping services with Stingray Pressure that expires on September 30, 2018. Pursuant to this agreement, Stingray Pressure has agreed to provide hydraulic fracturing, stimulation and related completion and rework services to the Company and the Company has agreed to pay Stingray Pressure a monthly service fee plus the associated costs of the services provided.
Future minimum commitments under these agreements at March 31, 2015 are as follows:
 
(In thousands)
Remaining 2015
$
39,330

2016
52,440

2017
52,440

2018
39,330

Total
$
183,540


Litigation

Due to the nature of the Company's business, it is, from time to time, involved in routine litigation or subject to disputes or claims related to its business activities, including workers' compensation claims and employment related disputes. In the opinion of the Company's management, none of the pending litigation, disputes or claims against the Company, if decided adversely, will have a material adverse effect on its financial condition, cash flows or results of operations.
    
9.
HEDGING ACTIVITIES
Oil Price Hedging Activities
The Company seeks to reduce its exposure to unfavorable changes in oil and natural gas prices, which are subject to significant and often volatile fluctuation, by entering into fixed price swaps and basis swaps. These contracts allow the Company to predict with greater certainty the effective oil and natural gas prices to be received for hedged production and benefit operating cash flows and earnings when market prices are less than the fixed prices provided in the contracts. However, the Company will not benefit from market prices that are higher than the fixed prices in the contracts for hedged production.

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Table of Contents


The Company accounts for its oil and natural gas derivative instruments as cash flow hedges for accounting purposes under FASB ASC 815 and related pronouncements. All derivative contracts are marked to market each quarter end and are included in the accompanying consolidated balance sheets as derivative assets and liabilities.
During 2014 and 2015, the Company entered into fixed price swap contracts for 2014 through 2018 with four financial institutions. The Company’s fixed price swap contracts are tied to the commodity prices on Argus and NYMEX. The Company will receive the fixed price amount stated in the contract and pay to its counterparty the current market price as listed on Argus for Louisiana Light Sweet Crude for oil and on the NYMEX Henry Hub for natural gas. At March 31, 2015, the Company had the following fixed price swaps in place:
 
 
Daily Volume
(Bbls/day)
 
Weighted
Average Price
April 2015 - June 2016
1,000

 
$
62.25

 
Daily Volume (MMBtu/day)
 
Weighted
Average Price
April 2015
191,250

 
$
4.05

May 2015 - June 2015
201,250

 
$
4.05

July 2015 - August 2015
216,875

 
$
4.04

September 2015
246,875

 
$
3.97

October 2015 - December 2015
262,500

 
$
3.96

January 2016 - March 2016
252,500

 
$
3.82

April 2016
242,500

 
$
3.81

May 2016 - December 2016
172,500

 
$
3.73

January 2017 - June 2017
142,500

 
$
3.67

July 2017 - December 2017
80,000

 
$
3.45

January 2018 - December 2018
30,000

 
$
3.40

In addition, the Company has entered into natural gas basis swap positions, which settle on the pricing index to basis differential of MichCon to the NYMEX Henry Hub natural gas price. As of March 31, 2015, the Company's natural gas basis swap positions were as follows:
 
Daily Volume (MMBtu/day)
 
Hedged Differential
April 2015 - December 2016
30,000

 
$
0.02

April 2015 - December 2016
10,000

 
$
0.01

At March 31, 2015 the fair value of derivative assets and liabilities related to the fixed price swaps and basis swaps was as follows:
 
 
(In thousands)
Short-term derivative instruments - asset
$
93,030

Long-term derivative instruments - asset
$
41,956

Short-term derivative instruments - liability
$
823


All fixed price swaps and basis swaps have been executed in connection with the Company’s oil and natural gas price hedging program. For fixed price swaps and basis swaps qualifying as cash flow hedges pursuant to FASB ASC 815, the realized contract price is included in oil and gas sales in the period for which the underlying production was hedged.
For derivatives designated as cash flow hedges and meeting the effectiveness guidelines of FASB ASC 815, changes in fair value are recognized in accumulated other comprehensive income (loss) until the hedged item is recognized in earnings.

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The Company had no cash flow hedges in place for the three months ending March 31, 2015 and 2014, as all fixed price swaps and basis swaps were deemed ineffective at their inception.
At March 31, 2015, no amounts related to fixed price swaps or basis swaps remain in accumulated other comprehensive loss.
Hedge effectiveness is measured at least quarterly based on the relative changes in fair value between the derivative contract and the hedged item over time. Any change in fair value resulting from ineffectiveness is recognized immediately in earnings. The Company recognized a gain of $31.3 million related to hedge ineffectiveness for the three months ended March 31, 2015 which is included in oil and condensate and gas sales in the consolidated statements of operations. The Company recognized a loss of $8.7 million related to hedge ineffectiveness for the three months ended March 31, 2014 which is included in oil and condensate and gas sales in the consolidated statements of operations.

10.
FAIR VALUE MEASUREMENTS
The Company records certain financial and non-financial assets and liabilities on the balance sheet at fair value in accordance with FASB ASC 820. FASB ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. The statement establishes market or observable inputs as the preferred sources of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. The statement requires fair value measurements be classified and disclosed in one of the following categories:
Level 1 – Quoted prices in active markets for identical assets and liabilities.
Level 2 – Quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 – Significant inputs to the valuation model are unobservable.
Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.
The following tables summarize the Company’s financial and non-financial liabilities by FASB ASC 820 valuation level as of March 31, 2015:
 
 
March 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Assets:
 
 
 
 
 
Fixed price swaps
$
134,986

 
$

 
$

Liabilities:
 
 
 
 
 
Fixed price swaps
$
823

 
$

 
$

The estimated fair value of the Company’s fixed price and basis swap contracts were based upon forward commodity prices based on quoted market prices, adjusted for differentials. See Note 9 for further discussion of the Company's hedging activities.
The estimated fair values of proved oil and gas properties assumed in business combinations are based on a discounted cash flow model and market assumptions as to future commodity prices, projections of estimated quantities of oil and natural gas reserves, expectations for timing and amount of future development and operating costs, projections of future rates of production, expected recovery rates, and risk-adjusted discount rates. The estimated fair values of unevaluated oil and gas properties was based on geological studies, historical well performance, location and applicable mineral lease terms. Based on the unobservable nature of certain of the inputs the estimated fair value of the oil and gas properties assumed is deemed to use Level 3 inputs. See Note 1 for further discussion of the Company's acquisitions.
The Company estimates asset retirement obligations pursuant to the provisions of FASB ASC Topic 410, “Asset Retirement and Environmental Obligations” (“FASB ASC 410”). The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated

22

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with oil and gas properties. Given the unobservable nature of the inputs, including plugging costs and reserve lives, the initial measurement of the asset retirement obligation liability is deemed to use Level 3 inputs. See Note 2 for further discussion of the Company’s asset retirement obligations. Asset retirement obligations incurred during the three months ended March 31, 2015 were approximately $1.6 million.
Due to the unobservable nature of the inputs, the fair value of the Company's initial investment in Mammoth was estimated using assumptions that represent level 3 inputs. The Company estimated the fair value of the investment as of the November 24, 2014 contribution date. See Note 3 for further discussion of the Company's contribution to Mammoth. The estimated fair value of the Company's investment in Mammoth was $143.5 million at December 31, 2014.

11.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts on the accompanying consolidated balance sheet for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and current debt are carried at cost, which approximates market value due to their short-term nature. Long-term debt related to the building loan is carried at cost, which approximates market value based on the borrowing rates currently available to the Company with similar terms and maturities.
At March 31, 2015, the carrying value of the outstanding debt represented by the Notes was $614.1 million, including the remaining unamortized discount of approximately $2.8 million related to the October Notes and the remaining unamortized premium of approximately $0.4 million related to the December Notes and $16.5 million related to the August Notes. Based on the quoted market price, the fair value of the Notes was determined to be approximately $615.8 million at March 31, 2015.
The fair value of the derivative instruments is computed based on the difference between the prices provided by the fixed-price contracts and forward market prices as of the specified date, as adjusted for basis differentials, and for the Company's swaptions, market implied volatilities of the underlying commodity are also evaluated. Forward market prices for oil and natural gas are dependent upon supply and demand factors in such forward market and are subject to significant volatility.

12.
CONDENSED CONSOLIDATING FINANCIAL INFORMATION

On October 17, 2012, December 21, 2012, and August 18, 2014, the Company issued an aggregate of $600.0 million principal amount of its 7.75% Senior Notes. The October Notes and the December Notes were exchanged for substantially identical notes in the same aggregate principal amount that were registered under the Securities Act. The Exchange Notes and the August Notes are collectively referred to as the "Notes". The Notes are guaranteed on a senior unsecured basis by all existing consolidated subsidiaries that guarantee the Company's secured revolving credit facility or certain other debt (the "Guarantors"). The Notes are not guaranteed by Grizzly Holdings, Inc. (the "Non-Guarantor"). The Guarantors are 100% owned by Gulfport (the "Parent"), and the guarantees are full, unconditional, joint and several. There are no significant restrictions on the ability of the Parent or the Guarantors to obtain funds from each other in the form of a dividend or loan.

In connection with the issuance of the August Notes, the Company and the subsidiary guarantors entered into a registration rights agreement with the initial purchasers on August 18, 2014, pursuant to which the Company and the subsidiary guarantors have agreed to file a registration statement with respect to an offer to exchange the August Notes for a new issue of substantially identical debt securities registered under the Securities Act. The registration statement relating to the exchange offer for the August Notes was filed on November 6, 2014, as amended on February 3, 2015, and declared effective by the SEC on February 4, 2015. The exchange offer for the August Notes was completed in March 2015.

The following condensed consolidating balance sheets, statements of operations, statements of comprehensive income (loss) and statements of cash flows are provided for the Parent, the Guarantors and the Non-Guarantor and include the consolidating adjustments and eliminations necessary to arrive at the information for the Company on a condensed consolidated basis. The information has been presented using the equity method of accounting for the Parent's ownership of the Guarantors and the Non-Guarantor.


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CONDENSED CONSOLIDATING BALANCE SHEETS
(Amounts in thousands)
 
March 31, 2015
 
Parent
 
Guarantors
 
Non-Guarantor
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
73,667

 
$
1,072

 
$
1

 
$

 
$
74,740

Accounts receivable - oil and gas
79,621

 
59

 

 

 
79,680

Accounts receivable - related parties
33

 

 

 

 
33

Accounts receivable - intercompany
48,154

 
26

 

 
(48,180
)
 

Prepaid expenses and other current assets
15,777

 

 

 

 
15,777

Short-term derivative instruments
93,030

 

 

 

 
93,030

Total current assets
310,282

 
1,157

 
1

 
(48,180
)
 
263,260

Property and equipment:
 
 
 
 
 
 
 
 
 
Oil and natural gas properties, full-cost accounting
4,139,903

 
38,769

 

 
(710
)
 
4,177,962

Other property and equipment
19,008

 
43

 

 

 
19,051

Accumulated depletion, depreciation, amortization and impairment
(1,140,142
)
 
(26
)
 

 

 
(1,140,168
)
Property and equipment, net
3,018,769

 
38,786

 

 
(710
)
 
3,056,845

Other assets:
 
 
 
 
 
 
 
 
 
Equity investments and investments in subsidiaries
365,840

 

 
167,186

 
(158,055
)
 
374,971

Derivative instruments
41,956

 

 

 

 
41,956

Other assets
18,566

 

 

 

 
18,566

Total other assets
426,362

 

 
167,186

 
(158,055
)
 
435,493

  Total assets
$
3,755,413

 
$
39,943

 
$
167,187

 
$
(206,945
)
 
$
3,755,598

 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$
399,912

 
$
184

 
$

 
$

 
$
400,096

Accounts payable - intercompany

 
48,072

 
108

 
(48,180
)
 

Asset retirement obligation - current
75

 

 

 

 
75

Short-term derivative instruments
823

 

 

 

 
823

Deferred tax liability - current
29,622

 

 

 

 
29,622

Current maturities of long-term debt
1,781

 

 

 

 
1,781

Total current liabilities
432,213

 
48,256

 
108

 
(48,180
)
 
432,397

Long-term derivative instrument

 

 

 

 

Asset retirement obligation - long-term
18,656

 

 

 

 
18,656

Deferred tax liability
215,122

 

 

 

 
215,122

Long-term debt, net of current maturities
779,130

 

 

 

 
779,130

Total liabilities
1,445,121

 
48,256

 
108

 
(48,180
)
 
1,445,305

 
 
 
 
 
 
 
 
 
 
Stockholders' equity:
 
 
 
 
 
 
 
 
 
Common stock
857

 

 

 

 
857

Paid-in capital
1,832,062

 
321

 
233,174

 
(233,494
)
 
1,832,063

Accumulated other comprehensive income (loss)
(41,659
)
 

 
(41,659
)
 
41,659

 
(41,659
)
Retained earnings (accumulated deficit)
519,032

 
(8,634
)
 
(24,436
)
 
33,070

 
519,032

Total stockholders' equity
2,310,292

 
(8,313
)
 
167,079

 
(158,765
)
 
2,310,293

  Total liabilities and stockholders' equity
$
3,755,413

 
$
39,943

 
$
167,187

 
$
(206,945
)
 
$
3,755,598



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CONDENSED CONSOLIDATING BALANCE SHEETS
(Amounts in thousands)
 
December 31, 2014
 
Parent
 
Guarantors
 
Non-Guarantor
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
141,535

 
$
804

 
$
1

 
$

 
$
142,340

Accounts receivable - oil and gas
103,762

 
96

 

 

 
103,858

Accounts receivable - related parties
46

 

 

 

 
46

Accounts receivable - intercompany
45,222

 
27

 

 
(45,249
)
 

Prepaid expenses and other current assets
3,714

 

 

 

 
3,714

Short-term derivative instruments
78,391

 

 

 

 
78,391

Total current assets
372,670

 
927

 
1

 
(45,249
)
 
328,349

 
 
 
 
 
 
 
 
 
 
Property and equipment:
 
 
 
 
 
 
 
 
 
Oil and natural gas properties, full-cost accounting,
3,887,874

 
35,990

 

 
(710
)
 
3,923,154

Other property and equipment
18,301

 
43

 

 

 
18,344

Accumulated depletion, depreciation, amortization and impairment
(1,050,855
)
 
(24
)
 

 

 
(1,050,879
)
Property and equipment, net
2,855,320

 
36,009

 

 
(710
)
 
2,890,619

Other assets:
 
 
 
 
 
 
 
 
 
Equity investments and investments in subsidiaries
360,238

 

 
180,217

 
(170,874
)
 
369,581

Derivative instruments
24,448

 

 

 

 
24,448

Other assets
19,396

 

 

 

 
19,396

Total other assets
404,082

 

 
180,217

 
(170,874
)
 
413,425

  Total assets
$
3,632,072

 
$
36,936

 
$
180,218

 
$
(216,833
)
 
$
3,632,393

 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$
371,089

 
$
321

 
$

 
$

 
$
371,410

Accounts payable - intercompany

 
45,143

 
106

 
(45,249
)
 

Asset retirement obligation - current
75

 

 

 

 
75

Deferred tax liability
27,070

 

 

 

 
27,070

Current maturities of long-term debt
168

 

 

 

 
168

Total current liabilities
398,402

 
45,464

 
106

 
(45,249
)
 
398,723

 
 
 
 
 
 
 
 
 
 
Asset retirement obligation - long-term
17,863

 

 

 

 
17,863

Deferred tax liability
203,195

 

 

 

 
203,195

Long-term debt, net of current maturities
716,316

 

 

 

 
716,316

Total liabilities
1,335,776

 
45,464

 
106

 
(45,249
)
 
1,336,097

 
 
 
 
 
 
 
 
 
 
Stockholders' equity:
 
 
 
 
 
 
 
 
 
Common stock
856

 

 

 

 
856

Paid-in capital
1,828,602

 
322

 
227,079

 
(227,401
)
 
1,828,602

Accumulated other comprehensive income (loss)
(26,675
)
 

 
(26,675
)
 
26,675

 
(26,675
)
Retained earnings (accumulated deficit)
493,513

 
(8,850
)
 
(20,292
)
 
29,142

 
493,513

Total stockholders' equity
2,296,296

 
(8,528
)
 
180,112

 
(171,584
)
 
2,296,296

  Total liabilities and stockholders' equity
$
3,632,072

 
$
36,936

 
$
180,218

 
$
(216,833
)
 
$
3,632,393



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Table of Contents


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Amounts in thousands)
 
Three months ended March 31, 2015
 
Parent
 
Guarantors
 
Non-Guarantor
 
Eliminations
 
Consolidated
 
 
 
 
 
 
 
 
 
 
Total revenues
$
175,832

 
$
485

 
$

 
$

 
$
176,317

 
 
 
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
 
 
 
Lease operating expenses
16,787

 
193

 

 

 
16,980

Production taxes
4,253

 
32

 

 

 
4,285

Midstream gathering and processing
25,374

 
7

 

 

 
25,381

Depreciation, depletion, and amortization
89,908

 
1

 

 

 
89,909

General and administrative
10,761

 
36

 
2

 

 
10,799

Accretion expense
190

 

 

 

 
190

 
147,273

 
269

 
2

 

 
147,544

 
 
 
 
 
 
 
 
 
 
INCOME FROM OPERATIONS
28,559

 
216

 
(2
)
 

 
28,773

 
 
 
 
 
 
 
 
 
 
OTHER (INCOME) EXPENSE:
 
 
 
 
 
 
 
 
 
Interest expense
8,759

 

 

 

 
8,759

Interest income
(9
)
 

 

 

 
(9
)
(Income) loss from equity method investments and investments in subsidiaries
(20,189
)
 

 
4,142

 
(3,928
)
 
(19,975
)
 
(11,439
)
 

 
4,142

 
(3,928
)
 
(11,225
)
 
 
 
 
 
 
 
 
 
 
INCOME (LOSS) BEFORE INCOME TAXES
39,998

 
216

 
(4,144
)
 
3,928

 
39,998

INCOME TAX EXPENSE
14,479

 

 

 

 
14,479