Market Overview

Firefly Value Partners Sends Letter to Gulfport Energy Corporation Board of Directors

Share:

Gulfport shares have massively underperformed the broader market
and Gulfport's peer group over the last one, three and five years

Believes Gulfport has excellent opportunity to drive shareholder
value by implementing $500 million share repurchase program –
potentially driving more than 100% gain in stock price

Calls for strict moratorium on further share issuances, given that
equity issuances over past five years have been extremely value
destructive

Concerned that current directors lack relevant experience and are
not aligned with stockholders – and believe addition of meaningful
stockholder representation would greatly enhance Board's perspective

Firefly Value Partners, LP ("Firefly" or "we"), which manages funds
that, together with affiliates, collectively beneficially own 8.1% of
the outstanding common stock of Gulfport Energy ("Gulfport" or the
"Company") (NASDAQ:GPOR), today issued a public letter to the Gulfport
Board of Directors ("the Board"). In the letter, Firefly highlights
Gulfport's lack of urgency in addressing persistent stock price
underperformance; failure to commit to steps that could maximize
stockholder value; and the current Board's lack of necessary skills,
experience and alignment with stockholders to effectively steer
Gulfport's strategy and drive long-term stockholder value. Firefly calls
for steps including a $500 million share repurchase program and a
moratorium on value-destructive share issuances.

This press release features multimedia. View the full release here:
https://www.businesswire.com/news/home/20190117005383/en/

GPOR share price (Graphic: Business Wire)

GPOR share price (Graphic: Business Wire)

The full text of the letter is below.

January 17, 2019

Board of Directors
Gulfport Energy Corporation
3001 Quail
Springs Parkway
Oklahoma City, OK 73134

Dear Members of the Board,

Firefly Value Partners, LP ("Firefly" or "we") manages funds that,
together with affiliates, collectively beneficially own 8.1% of the
outstanding common stock of Gulfport Energy ("Gulfport" or the
"Company").

Founded in 2006, Firefly is an investment partnership focused on
fundamental primary research and business analysis, which enables us to
invest with a long-term time horizon in a concentrated portfolio of
deeply undervalued companies. We have substantial experience in the
natural gas industry, particularly with low-cost Appalachian natural gas
producers. Over the past six years, we have invested in industry-related
public equities and private mineral rights.

We have maintained a significant investment in Gulfport since 2013. As a
large, long-term Gulfport stockholder, we have a strong interest in
seeing Gulfport's leadership create value for all stockholders. To date,
we have been patient with decisions made by the Board and management,
and we appreciate the time that Gulfport's Chairman and new CEO recently
spent with us to discuss our views on the Company. However, as we
previously communicated to you, we have been discouraged by the Board's
lack of urgency in addressing the Company's prolonged stock price
underperformance and its unwillingness to commit to actions that we
believe would maximize value for stockholders.

At this point, we are concerned that the current Board does not possess
the necessary skills, experience, or alignment with the Company's
stockholders to effectively steer Gulfport's strategy and maximize
long-term shareholder value.

Gulfport Has Dramatically Underperformed the Broader Market and
Its Peers

Gulfport is one of the largest and lowest-cost producers of natural gas
in the United States. Most of Gulfport's production comes from its
leasehold in two areas: the Utica shale in Southeastern Ohio and the
SCOOP play in Oklahoma. During Q3 2018, Gulfport produced over 1.4
billion cubic feet of gas equivalent per day, with approximately 80%
coming from the Utica shale.1 In addition to substantial
current production, Gulfport has over a decade of low-cost, high-return
drilling inventory. Since our initial investment in 2013, Gulfport has
operated a solid drilling program, delivering increasingly productive
wells, minimizing costs, and efficiently developing the Company's asset
base.

However, despite the Company's apparent strong operational performance,
Gulfport shares have massively underperformed the broader market and the
shares of Gulfport's peer group over the last one, three, and five years:

     

Stock Price Performance2

1 Year     3 Year     5 Year
S&P 500 Index -6% +39% +41%
2018 Proxy Statement Peer Group -30% +34% -62%
Gulfport -35% -63% -84%
                     
Underperformance vs. S&P 500       -29%     -102%     -125%
Underperformance vs. Peer Group       -5%     -97%     -22%
 

Gulfport's Poor Capital Allocation Decisions Have Destroyed
Substantial Value

We believe Gulfport's share price underperformance is the direct result
of poor capital allocation decisions. Gulfport has issued large amounts
of equity five times over the last five years—each time at lower prices
than before!3

From November 2013 to the present, Gulfport has increased its shares
outstanding from roughly 78 million to 173 million, in large part to
finance acquisitions. These share issuances have been extremely
dilutive, reducing stockholders' share of valuable acreage and future
cash flows. Even though Gulfport has issued approximately $2.9 billion
of equity since 2013, its current market capitalization is only $1.5
billion.4 This is stockholder value destruction in the
starkest possible terms.

We Are Concerned that the Board Is Unwilling or Unable to Take
Necessary Actions

Despite Gulfport's long-term underperformance, based on our dialogue
with Chairman David Houston, we are concerned that the Board will not
commit to actions we believe are necessary to maximize stockholder value.

The current Board does not seem up to the task of fixing the Company's
capital allocation strategy and regaining investors' trust. Certain of
the Company's directors appear to lack the relevant experience needed to
navigate Gulfport's business and the expectations of its investors.
Other directors have served for so long that their willingness to drive
change at Gulfport may be compromised. Additionally, Gulfport's
directors own just $2.4M of stock combined—roughly 0.16% of the Company.
And almost all of that stock was acquired as compensation for Board
service. This paltry level of investment creates a misalignment with the
interests of the Company's long-term stockholders.

Thus far, our efforts to engage privately with the Board have left us
questioning whether the Board's composition must change before Gulfport
will take actions necessary to maximize stockholder value. We believe
that adding meaningful stockholder representation would greatly enhance
the Board's perspective.

Gulfport Is Deeply Undervalued

As we have discussed with the Board and detailed below, we believe that
Gulfport shares are trading at a massive discount to their intrinsic
value and may be worth more than $30 per share over time. We arrive at
this value by discounting the future cash flows generated through
Gulfport's measured development of its Utica and SCOOP Woodford assets
over their lifetime, using strip commodity pricing, at industry standard
discount rates. With development of the SCOOP Sycamore or higher
commodity prices, we believe that Gulfport's intrinsic value per share
is substantially higher.

Discounted cash flow analysis aside, several common valuation metrics
illustrate that Gulfport shares are trading at a large discount to
intrinsic value. Gulfport shares trade at under four times trailing
earnings and under four times EV/EBITDA.5 In our opinion, no
matter how one looks at it, Gulfport's shares are significantly
undervalued.

How Has the Company Responded?

Unfortunately, Gulfport has done little to date to take advantage of
this tremendous discount to fair value. The Board authorized $200M in
share repurchases in early 2018, but after buying back $110M in shares
through July, the Company inexplicably stopped repurchases through the
end of Q3 2018.6 Even if Gulfport resumes repurchases under
the Board's previously-announced authorization, in our opinion that will
not be nearly enough. Over the last five months, Gulfport's share price
has declined more than 20%. With significant cash on hand, positive free
cash flow, and non-core assets to sell, Gulfport has been missing a
meaningful opportunity to repurchase additional shares at a discount.

Gulfport's Current Opportunity: Enhance Stockholder Value Through
Share Repurchases

Because the market continues to price Gulfport shares at what we
consider a severe discount to intrinsic value, the Board has an
incredible opportunity to enhance value for stockholders by implementing
a significant share buyback. We are convinced that the Board should
implement a $500 million share repurchase program over the next year.
Our calculations suggest that, on a net asset value per share basis, a
$500 million share repurchase would increase Gulfport's value per share
by at least $9. As commodity prices rise, the impact of share
repurchases is even greater:

 

Gulfport Net Asset Value Per Share7

Henry Hub Natural
Gas Price

    Status Quo     $500M Buyback     Value Created
Forward Strip $22 $31 $9
$3.25/MMBtu     $33     $47     $14
 

Given that Gulfport currently trades below $9 per share, our analysis
indicates that a $500 million share repurchase would create value
exceeding 100% of the current share price.

In our view, buying back shares is the Company's optimal use of capital.
Let us compare two capital allocation options:

(1) Accelerated Drilling: Gulfport spends an incremental $500 million in
capex to pull drilling forward into 2019; and

(2) Share Buyback: Gulfport moderately slows drilling in the near-term
and uses $500 million to buy back shares at today's price.

Our projections show that Gulfport is far better off buying back shares:

                   

Gulfport Capital Allocation Options

Use of Capital    

'19 - '23
Cumulative Prod.
Per Share
(Mcf)

   

'19 - '23
Cumulative
EBITDA Per
Share

   

Year-End '23
Undrilled Core
Wells Per
Million

Shares

Accelerated Drilling 20.7 $30 2.7
Share Buyback     25.9     $37     4.9
 

As the table above illustrates, a $500 million share buyback would
increase production and EBITDA per share over the next five years much
more than an accelerated drilling program would—while preserving
Gulfport's most valuable asset: its inventory of undrilled wells.

Not only do we consider a buyback Gulfport's highest-returning potential
use of capital, but a large buyback would also signal to the market that
the Company is committed to improving its capital allocation.

Cash Sources for Share Repurchase

In our view, Gulfport can easily fund a $500 million share repurchase
over the next 12 months using cash on hand, accelerated non-core asset
sales, and free cash flow generated by the business.

As of September 30, 2018, Gulfport had $124 million in cash on its
balance sheet. Gulfport is also set to generate significant free cash
flow. We expect Gulfport to generate more than $125 million of free cash
flow in Q4 2018.8 In 2019, we believe that Gulfport can
generate another $50 million of free cash flow while still growing
production modestly.9 We recommend that Gulfport plan its
2019 capital budget to maximize free cash flow generation to take
advantage of Gulfport's depressed share price.

Besides cash on hand and cash from operations, Gulfport has a portfolio
of non-core assets that it should monetize. Gulfport's largest non-core
asset is a 22% stake in publicly traded oilfield service company Mammoth
Energy Services Inc. (NASDAQ:TUSK). At current market prices, this
stake is worth roughly $215M.10 In addition to its Mammoth
Energy stake, Gulfport can sell non-core assets in Southern Louisiana,
the Niobrara, the Bakken, and internationally.

The sources of cash we've listed above total well over $500 million:

     
Source of Cash      

Amount
(NYSE:M)

Cash on hand $124
Q4 2018 estimated free cash flow $125
2019 estimated free cash flow $50
Sale of Mammoth Energy Stake $215
Additional asset sales $50
Total $564
 

Importantly, a $500 million buyback program would neither stress
Gulfport's balance sheet nor cause the Company to incur additional debt.

Moratorium on Share Issuances

Finally, considering the value-destructive equity issuances of the past
five years, we believe Gulfport should adopt a strict moratorium on
further share issuances to send a clear message to investors that the
Company is on a new path. This is especially important, as the Company
recently underwent a CEO transition. The Board should reassure
stockholders that it considers long-term capital allocation a top
priority for Gulfport. We believe that a strict moratorium on further
share issuances would show stockholders that the Board has learned from
Gulfport's mistakes and will not repeat them.

Action Plan

In summary, we propose an action plan that we believe allows Gulfport to
create at least $9 per share of value for stockholders (over 100% of the
current market capitalization) over the next 12 months. Executing this
plan will show investors that Gulfport's value-destructive capital
allocation strategy is behind it and set Gulfport on a path to
maximizing value to stockholders. The plan is simple:

  1. Repurchase $500 million in shares over the next 12 months using cash
    on hand, all free cash flow generated in Q4 2018, and proceeds from
    the accelerated divestiture of non-core assets. Commit to generating
    free cash flow in 2019, and using this free cash flow to repurchase
    shares.
  2. Announce a strict moratorium on further share issuances and any other
    dilutive actions, including acquisitions, until Gulfport's market
    value reaches its intrinsic value.

As discussed above, the Board's past capital allocation
decisions—particularly acquisitions, share issuances, and stalled share
repurchases—have destroyed significant stockholder value. We have
engaged the Board in a private, constructive dialogue regarding a plan
to maximize value for all Gulfport stockholders. Based on that dialogue,
we are not encouraged that the Board will act in stockholders' best
interests without additional pressure from other large, long-term
stockholders—or a change in the Board's composition.

We intend to continue our efforts to engage the Board in discussions
regarding our plan described above, and to communicate our views on
Gulfport to our fellow stockholders and the investment community as
appropriate. We urge the Board to take advantage of a significant
opportunity for the Company and execute on our plan.

Sincerely,

Firefly Value Partners, LP

About Firefly Value Partners, LP

Founded in 2006, Firefly is an investment partnership focused on
fundamental primary research and business analysis. Firefly invests with
a long-term time horizon in a concentrated portfolio of deeply
undervalued companies.

________________________
1 Gulfport SEC filings.
2
Performance of GPOR common stock through January 15, 2019. 2018
Proxy Statement Peer Group – AR; NFX; COG; SWN; RRC; PDCE; WPX; XEC;
OAS; CNX; WLL; RICE (through closing of merger with EQT on November 13,
2017); QEP; SM; EGN (through closing of merger with FANG on November 29,
2018); LPI.
3 Gulfport SEC filings.
4
Based on closing price as of January 15, 2019.
5 Source:
Capital IQ as of January 15, 2019.
6 Gulfport SEC
filings.
7 Assumes forward strip pricing net of basis
differentials as of January 15, 2019 and NGL realized price 40% of WTI.
10% discount rate on future free cash flow.
8 Source:
Company guidance and Firefly analysis.
9 Source: Firefly
analysis.
10 Based on closing price on January 15, 2019.

View Comments and Join the Discussion!