Is Gulfport Energy's 250% Production Growth Enough to Keep Investors Happy?

Gulfport Energy Corp stands out in the exploration and production sector with forecasted growth for 2014 in the 250% range. The incredible part is that the stock collapsed around 20% back in May due to expectations for much higher growth.

The company is a leading pure-play in the Utica Shale with several other interesting investment positions, yet it has one glaring problem, especially considering the rich valuation of over $5.5 billion. The company has favorable production growth compared to other pure-plays such as Rice Energy in the Marcellus Shale and Diamondback Energy in the Permian Basin, but it is lacking in some of the more important areas.

Incredible first quarter growth
While growth rates always are greatly affected by the starting point, Gulfport Energy grew first quarter production by 323% over the prior year period to reach 27,087 boe/d. The main growth drivers were substantial production gains in natural gas and natural gas liquids. The latter grew from 223.1 million gallons in the first quarter of 2013 to 18,234.8 million gallons in the last quarter.

The company forecast that second quarter production will match the first quarter, disappointing the market. The numbers were affected by 14 wells taken offline due to issues in the Utica Shale and a desire to build an inventory of wells awaiting completion in order to improve long-term well recoveries and leveraged pricing and efficiencies from dedicated crews.

For investors, the second quarter numbers are lower than expected, but the company is still forecasting full year average production of nearly 40,000 boe/d. Considering the company produced roughly 27,000 boe/d during the first quarter and expects to exit the year in the mid-50,000 boe/d range, investors shouldn't complain too much.

Not so impressive oil growth
In the current bifurcated pricing of the energy market, revenue growth is greatly affected by shifts from one source to another. In the case of Gulfport, the company is shifting more toward natural gas liquids as the Utica Shale has less oil than originally expected. The shift caused the average realized price after hedges to decline roughly 50% per boe. The oil equivalent price per boe went from $102.45 last year to only $51.90 for the first quarter of 2014.

So despite a massive growth rate in production, revenue only grew about 100% to hit $117.9 million. The dramatic shift from oil production to natural gas production has a negative impact on revenue and ultimately profits.

At the present time, analysts forecast a higher revenue growth rate for Rice Energy. The company is more focused on the less attractive natural gas market in the Marcellus Shale, but any shift in production from moving toward the Utica Shale and liquids could only lead to higher prices from production. For the first quarter, revenue surged nearly 600% due to surging production and higher realized prices for natural gas.

In the same manner, Diamondback Energy saw revenue surge from a continued focus on oil production. The company saw revenue in the first quarter shoot up to $98 million from only $29 million in the prior year period. The incredible gain came from over 200% increases in oil production and more importantly a sharp increase in the average realized price to $79.48 per boe from $63.51 per boe last year.

Bottom line
Even after slowing production down, Gulfport Energy has impressive growth potential. Once the investor base gets past the downshift in production growth and the impact to revenue from a shift toward less rewarding natural gas, the company has an impressive position in the Utica Shale plus attractive investments to provide value. In the short term, though, Diamondback Energy and Rice Energy might benefit the most from a focus on growth and higher realized prices on those production gains.