GULFPORT ENERGY CORP

Overview. We strive to maintain sufficient liquidity to ensure financial flexibility, withstand commodity price volatility, fund our development projects, operations and capital expenditures and return capital to shareholders. We utilize derivative contracts to reduce the financial impact of commodity price volatility and provide a level of certainty to the Company’s cash flows. We generally fund our operations, planned capital expenditures and any share repurchases with cash flow from our operating activities, cash on hand, and borrowings under our Credit Facility. Additionally, we may access debt and equity markets and sell properties to enhance our liquidity. There is no guarantee that the debt or equity capital markets will be available to us on acceptable terms or at all.

For the three and nine months ended September 30, 2024, our primary sources of capital resources and liquidity have consisted of internally generated cash flows from operations, and our primary uses of cash have been for development of our oil and natural gas properties, share repurchases and dividend payments on our preferred stock.

We believe our annual free cash flow generation, borrowing capacity under the Credit Facility and cash on hand will provide sufficient liquidity to fund our operations, capital expenditures, interest expense and share repurchases during the next 12 months and the foreseeable future.

To the extent actual operating results, realized commodity prices or uses of cash differ from our assumptions, our liquidity could be adversely affected. See Note 3 of our consolidated financial statements for further discussion of our debt obligations, including the principal and carrying amounts of our senior notes.

As of September 30, 2024, we had $3.2 million of cash and cash equivalents, $30.0 million of outstanding borrowings under our Credit Facility, $63.8 million of letters of credit outstanding, $25.7 million of outstanding 2026 Senior Notes, and $650.0 million of outstanding 2029 Senior Notes. Our total principal amount of funded debt as of September 30, 2024 was $705.7 million.

As of October 28, 2024 we had $3.3 million of cash and cash equivalents, $10.0 million in borrowings under our Credit Facility, $63.8 million of letters of credit outstanding, $25.7 million of outstanding 2026 Senior Notes, and $650.0 million of outstanding 2029 Senior Notes.

Debt. In May 2021, we issued our 2026 Senior Notes. The 2026 Senior Notes are guaranteed on a senior unsecured basis by each of the Company’s subsidiaries that guarantee the Credit Facility. In September 2024, Gulfport Operating purchased approximately 95%, or $524.3 million, of the 2026 Senior Notes in a tender offer using net proceeds received from the private placement of the 2029 Senior Notes. This results in extending the maturity of substantially all of our senior notes from 2026 to 2029.

Additionally, on May 1, 2023, the Company entered into that certain Joinder, Commitment Increase and Borrowing Base Redetermination Agreement, and Third Amendment to Credit Agreement (the “Third Amendment”) which amended the Company’s Credit Facility. The Third Amendment, among other things, (a) increased the aggregate elected commitment amounts under the Credit Facility to $900 million, (b) increased the borrowing base under the Credit Facility to $1.1 billion, (c) increased the excess cash threshold under the Credit Facility to $75 million, and (d) extended the maturity date under the Credit Facility from October 14, 2025 to the earlier of (i) May 1, 2027 and (ii) the 91st day prior to the maturity date of the 2026 Senior Notes or any other permitted senior notes or any permitted refinancing debt under the Credit Facility having an aggregate outstanding principal amount equal to or exceeding $100 million; provided that such notes have not been refinanced, redeemed or repaid in full on or prior to such 91st day. On April 18, 2024, Gulfport completed its semi-annual borrowing base redetermination under its Credit Facility during which the borrowing base was reaffirmed at $1.1 billion with elected commitments remaining at $900 million.

On September 12, 2024, the Company entered into the Commitment Increase, Borrowing Base Reaffirmation Agreement, and Fourth Amendment to Credit Agreement (the “Fourth Amendment”), which amended the Company’s Third Amended and Restated Credit Agreement. The Fourth Amendment, among other things, (a) increased the aggregate elected commitment amounts under the Credit Facility to $1.0 billion, (b) reaffirmed the borrowing base under the Credit Facility at $1.1 billion and (c) extended the maturity date under the Credit Facility to September 12, 2028.

See Note 3 of our consolidated financial statements for additional discussion of our outstanding debt.

Dividends on Preferred Stock. As discussed in Note 4 of our consolidated financial statements, holders of preferred stock are entitled to receive cumulative quarterly dividends at a rate of 10% per annum of the Liquidation Preference with respect to cash dividends and 15% per annum of the Liquidation Preference with respect to dividends paid in kind as additional shares of preferred stock (“PIK Dividends”). We currently have the option to pay either cash dividends or PIK Dividends on a quarterly basis.

The Company paid $1.1 million and $3.3 million of cash dividends to holders of our preferred stock during the three and nine months ended September 30, 2024, respectively, and $1.1 million and $3.7 million during the three and nine months ended September 30, 2023, respectively.

Supplemental Guarantor Financial Information. The 2026 Senior Notes are guaranteed on a senior unsecured basis by all existing consolidated subsidiaries that guarantee our Credit Facility or certain other debt (the “Guarantors”). The 2026 Senior Notes are not guaranteed by Grizzly Holdings or Mule Sky, LLC (the “Non-Guarantors”). The Guarantors are 100% owned by 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. The guarantees rank equally in the right of payment with all of the senior indebtedness of the subsidiary guarantors and senior in the right of payment to any future subordinated indebtedness of the subsidiary guarantors. The 2026 Senior Notes and the guarantees are effectively subordinated to all of our and the subsidiary guarantors' secured indebtedness (including all borrowings and other obligations under our amended and restated credit agreement) to the extent of the value of the collateral securing such indebtedness, and structurally subordinated to all indebtedness and other liabilities of any of our subsidiaries that do not guarantee the 2026 Senior Notes.

SEC Regulation S-X Rule 13-01 requires the presentation of "Summarized Financial Information" to replace the "Condensed Consolidating Financial Information" required under Rule 3-10. Rule 13-01 allows the omission of Summarized Financial Information if assets, liabilities and results of operations of the Guarantors are not materially different than the corresponding amounts presented in our consolidated financial statements. The Parent and Guarantor subsidiaries comprise our material operations. Therefore, we concluded that the presentation of the Summarized Financial Information is not required as our Summarized Financial Information of the Guarantors is not materially different from our consolidated financial statements.

Derivatives and Hedging Activities. Our results of operations and cash flows are impacted by changes in market prices for natural gas, oil and NGL. To mitigate a portion of the exposure to adverse market changes, we have entered into various derivative instruments. Our natural gas, oil and NGL derivative activities, when combined with our sales of natural gas, oil and NGL, allow us to predict with greater certainty the total revenue we will receive. See Item 3 Quantitative and Qualitative Disclosures About Market Risk for further discussion on the impact of commodity price risk on our financial position. Additionally, see Note 10 of our consolidated financial statements for further discussion of derivatives and hedging activities.

Capital Expenditures. Our capital expenditures have historically been related to the execution of our drilling and completion activities in addition to certain lease acquisition activities. Our capital investment strategy is focused on prudently developing our existing properties to generate sustainable cash flow considering current and forecasted commodity prices. For the nine months ended September 30, 2024, the Company's incurred capital expenditures totaled $367.8 million, of which $277.4 million related to drilling and completion activities, $51.6 million related to maintenance leasehold and land investment and $38.8 million related to discretionary acreage acquisitions.

Our drilling and completion capital expenditures for 2024 are currently estimated to be in the range of $325 million to $335 million. Also, we currently expect to spend approximately $50 million to $60 million in 2024 for maintenance leasehold and land investment, which is focused on near-term drilling programs and facilitating increases in our working interests and lateral footage in units we plan to drill in 2024, 2025 and 2026. We expect this capital program to result in approximately 1,055 to 1,070 MMcfe per day of production in 2024.

Additionally, we are pursuing accretive acreage opportunities that expand our resource footprint and provide optionality to our near-term development plans and intend to allocate approximately $45 million in discretionary acreage acquisitions for 2024.

Sources and Uses of Cash

The following table presents the major changes in cash and cash equivalents for the nine months ended September 30, 2024 and 2023 (in thousands):

Net cash provided by operating activities. Net cash flow provided by operating activities was $501.2 million for the nine months ended September 30, 2024, as compared to $567.7 million for the nine months ended September 30, 2023. The decrease was primarily the result of decreases in natural gas revenues.

Additions to oil and natural gas properties. During the nine months ended September 30, 2024, we spud 13 gross (12.7 net) operated wells and commenced sales from 16 gross (15.4 net) operated wells targeting the Utica formation for a total incurred cost of approximately $227.5 million. During the nine months ended September 30, 2024, we commenced sales from 3 gross (2.4 net) operated wells in the SCOOP for a total incurred cost of approximately $47.5 million.

Drilling and completion costs discussed above reflect incurred costs while drilling and completion costs presented in the table below reflect cash payments for drilling and completions. Incurred capital expenditures and cash capital expenditures may vary from period to period due to the cash payment cycle. Cash capital expenditures for the nine months ended September 30, 2024 and 2023, were as follows (in thousands):

Debt activity, net. In the nine months ended September 30, 2024, the Company had $737.0 million and $825.0 million in borrowings and repayments, respectively, on its Credit Facility. In September 2024, the Company purchased $524.3 million of the 2026 Senior Notes in a tender offer. The retirement of the 2026 Senior Notes resulted in a loss on debt extinguishment of $13.4 million, which included cash costs of $12.9 million. The Company also issued $650.0 million aggregate principal amount of its 6.750% senior notes due 2029. As of October 28, 2024 the Company had $10.0 million in borrowings outstanding on its Credit Facility.

Debt issuance and loan commitment fees. During the nine months ended September 30, 2024, the Company incurred debt issuance and loan commitment fees of $14.8 million, as compared to $7.0 million during the nine months ended September 30, 2023. The increase was primarily related to the issuance of the 2029 Senior Notes and the Fourth Amendment to the Credit Facility. See Note 3 of our consolidated financial statements for further discussion of the long-term debt activity.

Repurchases of common stock. During the nine months ended September 30, 2024, the Company repurchased 711,829 shares for approximately $104.4 million under the Repurchase Program at a weighted average price of $146.60 per share. For the same period in 2023, the Company repurchased 976,769 shares for $82.9 million at a weighted average price of $84.88 per share. As of October 28, 2024, we repurchased 5.2 million shares for approximately $518.7 million under the Repurchase Program at a weighted average price of $100.17 per share.

Dividends on preferred stock. During the nine months ended September 30, 2024, the Company paid $3.3 million of cash dividends to holders of our preferred stock compared to $3.7 million in the nine months ended September 30, 2023.

Shares exchanged for tax withholdings. During the nine months ended September 30, 2024, the Company paid $23.6 million of shares exchanged for tax withholdings compared to $3.2 million in the nine months ended September 30, 2023. The increase in shares traded for taxes was primarily due to the vesting of certain PSU awards as discussed in Note 6.

Other. During the nine months ended September 30, 2024, the Company incurred other expenses of $2.1 million, as compared to other income of $1.1 million during the nine months ended September 30, 2023. The change was primarily related to proceeds from sales of oil and gas properties of $2.6 million during the nine months ended September 30, 2023.

Contractual and Commercial Obligations

We have various contractual obligations in the normal course of our operations and financing activities, as discussed in Note 9 of our consolidated financial statements. There have been no other material changes to our contractual obligations from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023.

Off-balance Sheet Arrangements

We may enter into off-balance sheet arrangements and transactions that can give rise to material off-balance sheet obligations. As of September 30, 2024, our material off-balance sheet arrangements and transactions include $63.8 million in letters of credit outstanding against our Credit Facility and $43.8 million in surety bonds issued. Both the letters of credit and surety bonds are being used as financial assurance, primarily on certain firm transportation agreements. Additionally, the Company entered into various contractual commitments to purchase inventory and other material to be used in future activities. The Company's commitment to purchase these materials spans 2024, with approximately $5.5 million remaining. There are no other transactions, arrangements or other relationships with unconsolidated entities or other persons that are reasonably likely to materially affect our liquidity or availability of our capital resources. See Note 9 of our consolidated financial statements for further discussion of the various financial guarantees we have issued.

Critical Accounting Policies and Estimates

As of September 30, 2024, there have been no significant changes in our critical accounting policies from those disclosed in our 2023 Annual Report on Form 10-K.

Oil and Natural Gas Properties. Lower natural gas, oil and NGL prices can reduce the value of our assets. In addition to commodity prices, our production rates, levels of proved reserves, future development costs, transfers of unevaluated properties and other factors will determine the actual ceiling test calculation and impairment analysis in future periods. Given the decline of commodity prices through the date of this filing and the current pricing outlook for the remainder of 2024, we may have additional ceiling test impairments of our oil and natural gas properties in subsequent quarters. Any such ceiling test impairment could be material to our net earnings; however, given the inter-relationship of the various judgements made to estimate proved reserves, it is impractical to estimate the potential changes in these estimates and their impact on the impairment. Full cost impairments have no impact to our cash flow or liquidity.