BASIS OF PRESENTATION, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND LIQUIDITY, MANAGEMENT'S PLANS AND GOING CONCERN
|9 Months Ended|
Sep. 30, 2020
|Accounting Policies [Abstract]|
|BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND LIQUIDITY, MANAGEMENT'S PLANS AND GOING CONCERN||BASIS OF PRESENTATION, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND LIQUIDITY, MANAGEMENT'S PLANS AND GOING CONCERN
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared by Gulfport Energy Corporation (the “Company” or “Gulfport”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), and reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods reported in all material respects, 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 ("GAAP") 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.
The consolidated financial statements should be read in conjunction with the consolidated financial statements and the summary of significant accounting policies and notes included in the Company’s most recent annual report on Form 10-K. Results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results expected for the full year.
Certain reclassifications have been made to prior period financial statements and related disclosures to conform to current period presentation. These reclassifications have no impact on previous reported total assets, total liabilities, net loss or total operating cash flows.
In March 2020, the World Health Organization classified the outbreak of COVID-19 as a pandemic and recommended containment and mitigation measures worldwide. The measures have led to worldwide shutdowns and halting of commercial and interpersonal activity, as governments around the world have imposed regulations in efforts to control the spread of COVID-19 such as shelter-in-place orders, quarantines, executive orders and similar restrictions.
Gulfport remains focused on protecting the health and well-being of its employees and the communities in which it operates while assuring the continuity of its business operations. The Company implemented preventative measures and developed corporate and field response plans to minimize unnecessary risk of exposure and prevent infection. Additionally, the Company has a crisis management team for health, safety and environmental matters and personnel issues, and has established a COVID-19 Response Team to address various impacts of the situation, as they have been developing. Gulfport has modified certain business practices (including remote working for its corporate employees and restricted employee business travel) to conform to government restrictions and best practices encouraged by the Centers for Disease Control and Prevention, the World Health Organization and other governmental and regulatory authorities. In May 2020, the Company began its phased transition back to the office for its corporate employees. As part of this transition, the Company put into place preventative measures to focus on social distancing and minimizing unnecessary risk of exposure. As of the date of this filing, Gulfport has transitioned the vast majority of its employees back to the corporate office; however, the Company continues to provide a balanced work schedule that allows for a significant portion of the work week to be performed remotely. The Company will continue to monitor trends and governmental guidelines and may adjust its return to office plans accordingly to ensure the health and safety of its employees. As a result of its business continuity measures, the Company has not experienced significant disruptions in executing its business operations in 2020.
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The CARES Act did not have a material impact on the Company’s consolidated financial statements. Gulfport is closely monitoring the impact of COVID-19 on all aspects of its business and the current commodity price environment and is unable to predict the impact it will have on its future financial position or operating results.
Industry Conditions, Liquidity, Management's Plans and Going Concern
Decreased demand for oil and natural gas as a result of the COVID-19 pandemic has put further downward pressure on commodity pricing. In the current depressed commodity price environment and period of economic uncertainty, the Company has taken the following operational and financial measures in 2020 to improve its balance sheet and preserve liquidity:
•Reduced 2020 capital spending by more than 50% as compared to 2019
•Focused on operational efficiencies to reduce operating costs; including significant improvements in development and completion costs per lateral foot
•Repurchased $73.3 million of unsecured notes at a discount
•Evaluated economics across our portfolio and shut-in certain non-economical production in the second quarter of 2020
•Reduced corporate general and administrative costs significantly through pay reductions, furloughs and reductions in force.
Although management’s actions listed above have helped to improve the Company's liquidity and leverage profile, continued macro headwinds including the depressed state of energy capital markets and the extraordinarily low commodity price environments present significant risks to the Company's ability to fund its operations going forward. Additionally, subsequent to September 30, 2020, on October 8, 2020, the Company's borrowing base under its revolving credit facility was reduced for the second time during 2020. The October redetermination reduced the Company's borrowing base from $700 million to $580 million, thereby significantly reducing available liquidity.
Considering the factors above, there is substantial doubt about the Company’s ability to maintain, repay, refinance or restructure its $2.1 billion of long-term debt. The Company elected not to make an interest payment of $17.4 million due October 15, 2020 on its 6.000% senior unsecured notes maturing 2024 (the “2024 Notes”). The Company elected not to make an interest payment of $10.8 million due November 2, 2020 on its 6.625% senior unsecured notes maturing 2023 (the "2023 Notes"). The elections to defer the interest payments do not constitute an “Event of Default” as defined under the indentures governing the 2024 Notes and 2023 Notes (the “Indentures”) if the interest payments are made within 30 days of the due date. If the Company does not make such interest payments within such 30-day period, there will be an event of default under the Indentures upon expiration of the grace period and there can be no assurance that it will have sufficient funds to pay such interest payments prior to such time.
Additionally, on October 15, 2020, the Company entered into the First Forbearance Agreement and Amendment to the Amended and Restated Credit Agreement (the "First Forbearance Agreement"). Pursuant to the First Forbearance Agreement, the lender parties have agreed to (i) temporarily waive any default in connection with the non-payment of interest on the 2024 Notes within 30 days of becoming due (the “Specified Default”) prior to its occurrence without any further action and (ii) forbear from exercising certain of their default-related rights and remedies against the Company and the other loan parties with respect to any default in connection with the Specified Default, in each case, until the earlier of October 29, 2020 or another event that would trigger the end of the forbearance period. On October 26, 2020, the Company entered into the Second Forbearance Agreement and Amendment to Amended and Restated Credit Agreement (the "Second Forbearance Agreement"), which extends the First Forbearance Agreement. Pursuant to the Second Forbearance Agreement, the lender parties have agreed to (i) temporarily waive any default in connection with the Specified Default prior to its occurrence without any further action, (ii) expand the definition of "Specified Default" to include the failure to make the interest payment on the 2023 Notes within 30 days of becoming due and (iii) extend the agreement to forbear from exercising certain of their default-related rights and remedies against the Company and the other loan parties with respect to any default in connection with the Specified Default, in each case, until the earlier of November 13, 2020 or another event that would trigger the end of the forbearance period.
Moreover, the Company's existing revolving credit facility matures in December 2021 and therefore will become a current liability at year end 2020 unless the Company is able to refinance the credit facility with a new credit facility or other financing. Considering the current state of the first lien market and the Company's elevated leverage profile, there is substantial risk that a refinancing will not be available to the Company on reasonable terms. A current liability under the revolving credit facility at year end 2020 may result in a qualified audit opinion which could result in a default under the terms of the current revolving credit facility.
Failure to meet the Company's obligations under its existing indebtedness or failure to comply with any of its covenants, if not waived, would result in an event of default under such indebtedness and result in the potential acceleration of outstanding indebtedness thereunder and, with respect to the revolving credit facility, the potential foreclosure on the collateral securing such debt, and could cause a cross-default under its other outstanding indebtedness. As a result of these uncertainties and other factors, management has concluded that there is substantial doubt about the Company's ability to continue as a going concern over the next twelve months from the issuance of these financial statements.
The Company has engaged financial and legal advisors to assist with the evaluation of a range of liability management alternatives. Additionally, the Company maintains an active dialogue with its senior lenders and bondholders regarding liability management alternatives to improve its balance sheet. There can be no assurances that the Company will be able to successfully complete a liability management transaction that materially improves the Company’s leverage profile or liquidity position.
The consolidated financial statements (i) have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and other commitments in the normal course of business and (ii) do not include any adjustments to reflect the possible future effects of the uncertainty on the recoverability or classification of recorded asset amounts or the amounts or classifications of liabilities.
Impact on Previously Reported Results
During the third quarter of 2020, the Company identified that certain transportation activities during the three and nine months ended September 30, 2019 were misclassified between "natural gas sales" and "midstream gathering and processing expenses" on its consolidated statements of operations. The Company assessed the materiality of this presentation on prior periods’ consolidated financial statements in accordance with the SEC Staff Accounting Bulletin No. 99, “Materiality”, codified in Accounting Standards Codification (“ASC”) Topic 250, “Accounting Changes and Error Corrections.” Based on this assessment, the Company concluded that the correction is not material to any previously issued financial statements. The correction had no impact on its consolidated balance sheets, consolidated statements of comprehensive income, consolidated statements of stockholders' equity or consolidated statements of cash flows. Additionally, the error had no impact on net loss or net loss per share. The Company will conform presentation of previously reported consolidated statements of operations and condensed consolidating statements of operations in future filings. The following tables present the effect of the correction on all affected line items of our previously issued consolidated financial statements of operations for the three and nine months ended September 30, 2019.
Recently Adopted Accounting Standards
On January 1, 2020, the Company adopted ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. The Company adopted the new standard using the prospective transition method, and it did not have a material impact on the Company's consolidated financial statements and related disclosures.
The entire disclosure for the basis of presentation and significant accounting policies concepts. Basis of presentation describes the underlying basis used to prepare the financial statements (for example, US Generally Accepted Accounting Principles, Other Comprehensive Basis of Accounting, IFRS). Accounting policies describe all significant accounting policies of the reporting entity.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef