September 6, 2019
Gulfport Energy Corporation
3001 Quail Springs Pkwy. Oklahoma City, Oklahoma 73134
To Gulfport Board of Directors,
Shah Capital owns around 3 million shares or 1.9% stake, and since our founding in 2005 has focused on deep, fundamental analysis to uncover investment opportunities globally. The investment team has a long history of being strategic with an intermediate to long-term investment timeline.
Trading at the lowest valuation metrics since being public, Gulfport Energy (GPOR) shares are down over 95% since September of 2014 compared to S&P being up over 47% despite the strength of GPOR’s asset portfolio with a cumulative Capex of $4.7 billion since 1/1/16. With no maturity of debt until Q2 2023 and an enterprise value of just around $2.6 billion, Gulfport’s BOD has a tremendous shareholder value creation opportunity if it takes an immediate courageous action following through on the following suggestions:
- Immediately announce Gulfport is reducing its 2020 Capital Spending to $400 million from around $550 million. Our preliminary analysis shows GPOR can still generate in 2020 over $100 million free cash flow at prevailing 2020 strip prices of around $2.4 with an assumption that its 2020 production declines by around 5% with $400 million capital spending. This sensible Capex plan sends another signal as Gulfport being a rational player considering current supply/demand imbalance with daily supply of 91bcf to demand of only 84bcf. Ironically, US supply was less than 70bcf just 3 years ago, and 55bcf 10 years ago
- Repurchase 30 million shares either in an accelerated fashion or in a modified Dutch style in September 2019 as part of your $400 million buyback plan announced in Q1 2019
- Accelerate sale of Oklahoma water assets as our analysis indicates this asset could net over $110 million
Shah Capital is fully aware of the headwinds facing natural gas producers including vicious cycle it has been in since 2016, however, our disappointment is rooted in our belief that management and board have not yet utilized some of the tools available to stop this massive equity underperformance, and begin to propel Gulfport towards a more virtuous cycle.
We strongly encourage a greater sense of urgency in the implementation of our above recommendations. Frankly, we challenge the new management team to lead Gulfport in a way that sets an example for the entire E&P industry in terms of further capital discipline and production cutbacks where majority of industry peers including private operators have failed miserably. Though capital efficiency is very important, the E&P industry must also act rational in reducing future dry/wet gas production meaningfully to earn respectable return on invested capital and equity.
The cash generating strength of Gulfport’s Utica assets combined with NGL rich and cost friendly SCOOP acreage, not to mention significant ability to unlock value from quality non-core assets gives us confidence that Gulfport’s underlying strengths have been buried and forgotten by years of past missteps, misappropriations, and lack of agility. Gulfport’s new management team has an extremely unique opportunity to lead to relevance and establish themselves as a role model. In doing so, you will earn the respect of the investment community.
Himanshu H. Shah
Managing General Partner and Chief Investment Officer
Any views expressed in the letter represent the opinion of Shah Capital, whose analysis is based solely on publicly available information including Shah Capital research and official Company records. No representation or warranty, express or implied, is made as to the accuracy or completeness of any information contained therein. Shah Capital expressly disclaims any and all liability based, in whole or in part, on such information, any errors therein or omissions therefrom. Shah Capital also reserves the right to modify or change its views or conclusions at any time in the future without notice. The information contained in the letter does not recommend the purchase or sale of any security nor is it an offer to sell or a solicitation of an offer to buy any security.
Furthermore, the information contained in the letter is not intended to be, nor should it be construed or used as, investment, tax or legal advice. No representation or warranty is made that Shah Capital’s investment process or investment objectives will or are likely to be achieved or successful or that the Shah Capital’s investments will make any profit or will not sustain losses. Past performance is not indicative of future results. Nothing contained in the letter should be taken as any form of commitment on the part of Shah to take any action in connection with any particular security. Shah Capital is in the business of buying and selling securities. We have, and may in the future, buy, sell or change the form of their position in any security for any or no reason whatsoever.