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EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 - GULFPORT ENERGY CORPgpor-20160630xex322.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 - GULFPORT ENERGY CORPgpor-20160630xex321.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 - GULFPORT ENERGY CORPgpor-20160630xex312.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 - GULFPORT ENERGY CORPgpor-20160630xex311.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2016 OR
¨
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to                     
Commission File Number 000-19514
 
Gulfport Energy Corporation
(Exact Name of Registrant As Specified in Its Charter)
 
Delaware
 
73-1521290
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer
Identification Number)
14313 North May Avenue, Suite 100
Oklahoma City, Oklahoma
 
73134
(Address of Principal Executive Offices)
 
(Zip Code)
(405) 848-8807
(Registrant Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share
 
The NASDAQ Stock Market LLC


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated filer  ý    Accelerated filer   ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of August 1, 2016, 125,367,167 shares of the registrant’s common stock were outstanding.




GULFPORT ENERGY CORPORATION
TABLE OF CONTENTS
 
 
 
Page
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 

 

1




GULFPORT ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
June 30, 2016
 
December 31, 2015
 
(In thousands, except share data)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
396,437

 
$
112,974

Accounts receivable—oil and gas
91,462

 
71,872

Accounts receivable—related parties
23

 
16

Prepaid expenses and other current assets
7,782

 
3,905

Short-term derivative instruments
44,672

 
142,794

Deferred tax asset
292

 

Total current assets
540,668

 
331,561

Property and equipment:
 
 
 
Oil and natural gas properties, full-cost accounting, $1,762,439 and $1,817,701 excluded from amortization in 2016 and 2015, respectively
5,686,188

 
5,424,342

Other property and equipment
48,107

 
33,171

Accumulated depletion, depreciation, amortization and impairment
(3,339,087
)
 
(2,829,110
)
Property and equipment, net
2,395,208

 
2,628,403

Other assets:
 
 
 
Equity investments
253,047

 
242,393

Long-term derivative instruments
14,644

 
51,088

Deferred tax asset
24,284

 
74,925

Other assets
11,336

 
6,364

Total other assets
303,311

 
374,770

Total assets
$
3,239,187

 
$
3,334,734

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
289,750

 
$
265,128

Asset retirement obligation—current
75

 
75

Short-term derivative instruments
49,906

 
437

Deferred tax liability

 
50,697

Current maturities of long-term debt

 
179

Total current liabilities
339,731

 
316,516

Long-term derivative instrument
29,269

 
6,935

Asset retirement obligation—long-term
29,993

 
26,362

Long-term debt, net of current maturities
956,754

 
946,084

Total liabilities
1,355,747

 
1,295,897

Commitments and contingencies (Note 10)

 

Preferred stock, $.01 par value; 5,000,000 authorized, 30,000 authorized as redeemable 12% cumulative preferred stock, Series A; 0 issued and outstanding

 

Stockholders’ equity:
 
 
 
Common stock - $.01 par value, 200,000,000 authorized, 125,365,166 issued and outstanding at June 30, 2016 and 108,322,250 at December 31, 2015
1,253

 
1,082

Paid-in capital
3,242,404

 
2,824,303

Accumulated other comprehensive loss
(46,803
)
 
(55,177
)
Retained deficit
(1,313,414
)
 
(731,371
)
Total stockholders’ equity
1,883,440

 
2,038,837

Total liabilities and stockholders’ equity
$
3,239,187

 
$
3,334,734

See accompanying notes to consolidated financial statements.

2


GULFPORT ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands, except share data)
Revenues:
 
 
 
 
 
 
 
Gas sales
$
(57,860
)
 
$
65,871

 
$
73,234

 
$
184,441

Oil and condensate sales
20,533

 
34,465

 
37,654

 
69,965

Natural gas liquid sales
9,168

 
11,958

 
17,914

 
33,965

Other income (expense)
7

 
(24
)
 
9

 
216

 
(28,152
)
 
112,270

 
128,811

 
288,587

Costs and expenses:

 
 
 
 
 
 
Lease operating expenses
14,661

 
16,863

 
31,318

 
33,843

Production taxes
2,856

 
3,285

 
5,967

 
7,570

Midstream gathering and processing
39,349

 
32,904

 
77,001

 
58,285

Depreciation, depletion and amortization
55,652

 
71,155

 
121,129

 
161,064

Impairment of oil and gas properties
170,621

 

 
389,612

 

General and administrative
11,854

 
9,515

 
22,474

 
20,314

Accretion expense
261

 
192

 
508

 
382

 
295,254

 
133,914

 
648,009

 
281,458

(LOSS) INCOME FROM OPERATIONS
(323,406
)
 
(21,644
)
 
(519,198
)
 
7,129

OTHER (INCOME) EXPENSE:

 
 
 
 
 
 
Interest expense
16,082

 
12,023

 
32,105

 
20,782

Interest income
(391
)
 
(248
)
 
(485
)
 
(257
)
Loss (income) from equity method investments
836

 
15,120

 
31,573

 
(4,855
)
 
16,527

 
26,895

 
63,193

 
15,670

LOSS BEFORE INCOME TAXES
(339,933
)
 
(48,539
)
 
(582,391
)
 
(8,541
)
INCOME TAX BENEFIT
(157
)
 
(17,214
)
 
(348
)
 
(2,735
)
NET LOSS
$
(339,776
)
 
$
(31,325
)
 
$
(582,043
)
 
$
(5,806
)
NET LOSS PER COMMON SHARE:
 
 
 
 
 
 
 
Basic
$
(2.71
)
 
$
(0.32
)
 
$
(4.91
)
 
$
(0.06
)
Diluted
$
(2.71
)
 
$
(0.32
)
 
$
(4.91
)
 
$
(0.06
)
Weighted average common shares outstanding—Basic
125,343,723

 
96,663,358

 
118,426,654

 
91,201,824

Weighted average common shares outstanding—Diluted
125,343,723

 
96,663,358

 
118,426,654

 
91,201,824


See accompanying notes to consolidated financial statements.


3


GULFPORT ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Net loss
$
(339,776
)
 
$
(31,325
)
 
$
(582,043
)
 
$
(5,806
)
Foreign currency translation adjustment
(684
)
 
3,247

 
8,374

 
(11,737
)
Other comprehensive (loss) income
(684
)
 
3,247

 
8,374

 
(11,737
)
Comprehensive loss
$
(340,460
)
 
$
(28,078
)
 
$
(573,669
)
 
$
(17,543
)


See accompanying notes to consolidated financial statements.


4


GULFPORT ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)

 
 
 
 
 

Paid-in
Capital
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Retained
Earnings
 
Total
Stockholders’
Equity
 
Common Stock
 
 
 
 
 
Shares
 
Amount
 
 
 
 
 
(In thousands, except share data)
Balance at January 1, 2016
108,322,250

 
$
1,082

 
$
2,824,303

 
$
(55,177
)
 
$
(731,371
)
 
$
2,038,837

Net loss

 

 

 

 
(582,043
)
 
(582,043
)
Other Comprehensive Income

 

 

 
8,374

 

 
8,374

Stock Compensation

 

 
6,561

 

 

 
6,561

Issuance of Common Stock in public offerings, net of related expenses
16,905,000

 
169

 
411,542

 

 

 
411,711

Issuance of Restricted Stock
137,916

 
2

 
(2
)
 

 

 

Balance at June 30, 2016
125,365,166

 
$
1,253

 
$
3,242,404

 
$
(46,803
)
 
$
(1,313,414
)
 
$
1,883,440

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2015
85,655,438

 
$
856

 
$
1,828,602

 
$
(26,675
)
 
$
493,513

 
$
2,296,296

Net loss

 

 

 

 
(5,806
)
 
(5,806
)
Other Comprehensive Loss

 

 

 
(11,737
)
 

 
(11,737
)
Stock Compensation

 

 
6,735

 

 

 
6,735

Issuance of Common Stock in public offerings, net of related expenses
22,425,000

 
224

 
981,594

 

 

 
981,818

Issuance of Restricted Stock
123,543

 
1

 
(1
)
 

 

 

Balance at June 30, 2015
108,203,981

 
$
1,081

 
$
2,816,930

 
$
(38,412
)
 
$
487,707

 
$
3,267,306


See accompanying notes to consolidated financial statements.

5


GULFPORT ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six months ended June 30,
 
2016
 
2015
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net loss
$
(582,043
)
 
$
(5,806
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Accretion of discount—Asset Retirement Obligation
508

 
382

Depletion, depreciation and amortization
121,129

 
161,064

Impairment of oil and gas properties
389,612

 

Stock-based compensation expense
3,936

 
4,041

Loss from equity investments
31,732

 
2,171

Loss on derivative instruments
206,370

 
3,309

Deferred income tax benefit
(348
)
 
(2,735
)
Amortization of loan commitment fees
1,921

 
1,416

Amortization of note discount and premium
(1,135
)
 
(1,065
)
Changes in operating assets and liabilities:
 
 
 
(Increase) decrease in accounts receivable
(19,590
)
 
17,237

Increase in accounts receivable—related party
(7
)
 
(44
)
Increase in prepaid expenses
(3,877
)
 
(11,454
)
Decrease in accounts payable and accrued liabilities
(5,412
)
 
(28,522
)
Settlement of asset retirement obligation
(72
)
 
(1,120
)
Net cash provided by operating activities
142,724

 
138,874

Cash flows from investing activities:
 
 
 
Deductions to cash held in escrow
8

 
8

Additions to other property and equipment
(13,410
)
 
(4,154
)
Additions to oil and gas properties
(257,222
)
 
(898,639
)
Proceeds from sale of oil and gas properties
1,612

 
1,679

Funding of restricted cash

 
(75,005
)
Contributions to equity method investments
(16,690
)
 
(8,267
)
Distributions from equity method investments
4,658

 
4,612

Net cash used in investing activities
(281,044
)
 
(979,766
)
Cash flows from financing activities:
 
 
 
Principal payments on borrowings
(1,685
)
 
(350,088
)
Borrowings on line of credit

 
250,000

Proceeds from bond issuance

 
350,000

Borrowings on term loan
11,962

 

Debt issuance costs and loan commitment fees
(205
)
 
(7,738
)
Proceeds from issuance of common stock, net of offering costs
411,711

 
981,866

Net cash provided by financing activities
421,783

 
1,224,040

Net increase in cash and cash equivalents
283,463

 
383,148

Cash and cash equivalents at beginning of period
112,974

 
142,340

Cash and cash equivalents at end of period
$
396,437

 
$
525,488

Supplemental disclosure of cash flow information:
 
 
 
Interest payments
$
35,026

 
$
24,176

Income tax payments
$

 
$
29,753

Supplemental disclosure of non-cash transactions:
 
 
 
Capitalized stock based compensation
$
2,625

 
$
2,694

Asset retirement obligation capitalized
$
3,195

 
$
4,077

Interest capitalized
$
3,707

 
$
8,399

Foreign currency translation gain (loss) on equity method investments
$
8,374

 
$
(11,737
)
 See accompanying notes to consolidated financial statements.

6


GULFPORT ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
These consolidated financial statements have been prepared by Gulfport Energy Corporation (the “Company” or “Gulfport”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"), and reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods, 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 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. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the summary of significant accounting policies and notes thereto included in the Company's most recent annual report on Form 10-K. Results for the three and six month periods ended June 30, 2016 are not necessarily indicative of the results expected for the full year.
1.
ACQUISITIONS
In April 2015, the Company entered into an agreement to acquire Paloma Partners III, LLC ("Paloma") for a total purchase price of approximately $301.9 million, subject to certain adjustments. Paloma holds approximately 24,000 net nonproducing acres in the Utica Shale of Ohio. In accordance with the agreement, the Company deposited $75.0 million into an escrow account. At the closing of the transaction the deposit was credited toward the purchase price. This transaction closed on August 31, 2015 for a purchase price of approximately $302.3 million, net of purchase price adjustments. At closing, approximately $30.1 million of the purchase price was placed in escrow as security to the Company for potential indemnification claims that may occur as a result of the sale.
On June 9, 2015, the Company completed the acquisition of 6,198 gross and net acres located in Belmont and Jefferson Counties, Ohio from American Energy-Utica, LLC ("AEU") for a purchase price of approximately $68.2 million, subject to adjustment. On June 12, 2015, the Company completed the acquisition of 38,965 gross (27,228 net) acres located in Monroe County, Ohio, 14.6 MMcf per day of average net production (estimated for April 2015), 18 gross (11.3 net) drilled but uncompleted wells, an 11 mile gas gathering system and a four well pad location from AEU for a total purchase price of approximately $319.0 million (the "Monroe Acquisition"). On June 29, 2015, the Company acquired an additional 4,950 gross (1,900 net) acres in Monroe County for an additional $18.2 million from AEU. The total purchase price of these transactions, collectively referred to as the ("AEU Acquisition"), was approximately $405.4 million ($405.0 million net of purchase price adjustments). At closing, approximately $67.1 million of the purchase price was placed in escrow pending completion of title review after the closing. In December 2015, approximately $2.4 million of the escrow was released and returned to the Company with the balance of the escrow account distributed to the seller based on final title review.
The AEU Acquisition qualified as a business combination for accounting purposes and, as such, the Company estimated the fair value of the acquired properties as of the June 12, 2015 acquisition date. The fair value of the assets and liabilities acquired was estimated using assumptions that represent Level 3 inputs. See Note 12 for additional discussion of the measurement inputs.
The Company estimated that the consideration paid in the AEU Acquisition for these properties approximated the fair value that would be paid by a typical market participant. As a result, no goodwill or bargain purchase gain was recognized in conjunction with the purchase.
The following table summarizes the consideration paid in the AEU Acquisition to acquire the properties and the fair value amount of the assets acquired as of June 12, 2015. Both the consideration paid and the fair value assigned to the assets is preliminary and subject to adjustment upon final closing.

7


 
 
(In thousands)
Consideration paid
 
 
     Cash, net of purchase price adjustments
 
$
405,029

Fair value of identifiable assets acquired
 
 
     Oil and natural gas properties
 
 
       Proved
 
$
70,804

       Unevaluated
 
334,225

Fair value of net identifiable assets acquired
 
$
405,029


2.
PROPERTY AND EQUIPMENT
The major categories of property and equipment and related accumulated depletion, depreciation, amortization and impairment as of June 30, 2016 and December 31, 2015 are as follows:
 
June 30, 2016
 
December 31, 2015
 
(In thousands)
Oil and natural gas properties
$
5,686,188

 
$
5,424,342

Office furniture and fixtures
13,139

 
12,589

Building
31,301

 
16,915

Land
3,667

 
3,667

Total property and equipment
5,734,295

 
5,457,513

Accumulated depletion, depreciation, amortization and impairment
(3,339,087
)
 
(2,829,110
)
Property and equipment, net
$
2,395,208

 
$
2,628,403


At June 30, 2016, the net book value of the Company's oil and natural gas properties was above the calculated ceiling as a result of the reduced commodity prices for the period leading up to June 30, 2016. As a result, the Company recorded an impairment of its oil and natural gas properties under the full cost method of accounting of $389.6 million for the six months ended June 30, 2016. No impairment of oil and natural gas properties was required under the ceiling test for the six months ended June 30, 2015.
Included in oil and natural gas properties at June 30, 2016 is the cumulative capitalization of $115.6 million in general and administrative costs incurred and capitalized to the full cost pool. General and administrative costs capitalized to the full cost pool represent management’s estimate of costs incurred directly related to exploration and development activities such as geological and other administrative costs associated with overseeing the exploration and development activities. All general and administrative costs not directly associated with exploration and development activities were charged to expense as they were incurred. Capitalized general and administrative costs were approximately $7.9 million and $15.0 million for the three and six months ended June 30, 2016, respectively, and $6.3 million and $13.5 million for the three and six months ended June 30, 2015, respectively.
The following table summarizes the Company’s non-producing properties excluded from amortization by area at June 30, 2016:
 
June 30, 2016
 
(In thousands)
Utica
$
1,757,014

Niobrara
4,853

Southern Louisiana
431

Bakken
96

Other
45

 
$
1,762,439


8



At December 31, 2015, approximately $1.8 billion of non-producing leasehold costs was not subject to amortization.
The Company evaluates the costs excluded from its amortization calculation at least annually. Subject to industry conditions and the level of the Company’s activities, the inclusion of most of the above referenced costs into the Company’s amortization calculation typically occurs within three to five years. However, the majority of the Company's non-producing leases have five-year extension terms which could extend this time frame beyond five years.
A reconciliation of the Company's asset retirement obligation for the six months ended June 30, 2016 and 2015 is as follows:
 
June 30, 2016
 
June 30, 2015
 
(In thousands)
Asset retirement obligation, beginning of period
$
26,437

 
$
17,938

Liabilities incurred
3,195

 
4,077

Liabilities settled
(72
)
 
(1,120
)
Accretion expense
508

 
382

Asset retirement obligation as of end of period
30,068

 
21,277

Less current portion
75

 
75

Asset retirement obligation, long-term
$
29,993

 
$
21,202

3.
EQUITY INVESTMENTS
Investments accounted for by the equity method consist of the following as of June 30, 2016 and December 31, 2015:
 
 
 
Carrying value
 
Loss (income) from equity method investments

 
Approximate ownership %
 
June 30, 2016
 
December 31, 2015
 
Three months ended June 30,
 
Six months ended June 30,
 
 
 
 
2016
 
2015
 
2016
 
2015
 
 
 
(In thousands)
Investment in Tatex Thailand II, LLC
23.5
%
 
$

 
$

 
$

 
$

 
$
(159
)
 
$

Investment in Tatex Thailand III, LLC
17.9
%
 

 

 

 
189

 

 
189

Investment in Grizzly Oil Sands ULC
24.9999
%
 
49,556

 
50,645

 
763

 
8,494

 
24,448

 
12,636

Investment in Timber Wolf Terminals LLC
50.0
%
 
996

 
999

 
1

 
7

 
4

 
13

Investment in Windsor Midstream LLC
22.5
%
 
26,147

 
27,955

 
(2,881
)
 
881

 
(3,048
)
 
(17,906
)
Investment in Stingray Cementing LLC
50.0
%
 
2,359

 
2,487

 
78

 
105

 
108

 
172

Investment in Blackhawk Midstream LLC
48.5
%
 

 

 

 

 

 
(7,217
)
Investment in Stingray Energy Services LLC
50.0
%
 
4,981

 
5,908

 
139

 
311

 
641

 
321

Investment in Sturgeon Acquisitions LLC
25.0
%
 
22,258

 
22,769

 
134

 
(491
)
 
511

 
(1,059
)
Investment in Mammoth Energy Partners LP
30.5
%
 
121,309

 
131,630

 
2,543

 
5,624

 
9,009

 
7,996

Investment in Strike Force Midstream LLC
25.0
%
 
25,441

 

 
59

 

 
59

 

 
 
 
$
253,047


$
242,393


$
836

 
$
15,120

 
$
31,573

 
$
(4,855
)

The tables below summarize financial information for the Company's equity investments as of June 30, 2016 and December 31, 2015.

9


Summarized balance sheet information:
 
June 30, 2016
 
December 31, 2015
 
 
 
(In thousands)
Current assets
$
105,614

 
$
105,537

Noncurrent assets
$
1,330,877

 
$
1,293,925

Current liabilities
$
41,238

 
$
56,559

Noncurrent liabilities
$
146,642

 
$
155,995

Summarized results of operations:    
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Gross revenue
$
86,732

 
$
130,134

 
$
130,039

 
$
263,690

Net (loss) income
$
(560
)
 
$
(45,246
)
 
$
(25,868
)
 
$
45,422

Tatex Thailand II, LLC
The Company has an indirect ownership interest in Tatex Thailand II, LLC (“Tatex II”). Tatex II holds 85,122 of the 1,000,000 outstanding shares of APICO, LLC (“APICO”), an international oil and gas exploration company. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering approximately 243,000 acres which includes the Phu Horm Field. During the six months ended June 30, 2016, the Company received $0.2 million in distributions from Tatex II.
Tatex Thailand III, LLC
The Company has an ownership interest in Tatex Thailand III, LLC ("Tatex III"). Tatex III previously owned a concession covering approximately 245,000 acres in Southeast Asia. As of December 31, 2014, the Company reviewed its investment in Tatex III and made the decision to allow the concession to expire in January 2015. As such, the Company fully impaired the asset as of December 31, 2014.
Grizzly Oil Sands ULC
The Company, through its wholly owned subsidiary Grizzly Holdings Inc. ("Grizzly Holdings"), owns an interest in Grizzly Oil Sands ULC ("Grizzly"), a Canadian unlimited liability company. The remaining interest in Grizzly is owned by Grizzly Oil Sands Inc. ("Oil Sands"). As of June 30, 2016, Grizzly had approximately 830,000 acres under lease in the Athabasca and Peace River oil sands regions of Alberta, Canada. Initiation of steam injection at its first project, Algar Lake Phase 1, commenced in January 2014 and first bitumen production was achieved during the second quarter of 2014. In April 2015, Grizzly determined to cease bitumen production at its Algar Lake facility due to the level of commodity prices. Grizzly continues to monitor market conditions as it assesses future plans for the facility. The Company reviewed its investment in Grizzly at March 31, 2016 for impairment based on FASB ASC 323 due to certain qualitative factors and engaged an independent third party to assist management in determining fair value calculations of its investment. As a result of the calculated fair values and other qualitative factors, the Company concluded that an other than temporary impairment was required under FASB ASC 323, resulting in an impairment loss of $23.1 million for the three months ended March 31, 2016, which is included in loss (income) from equity method investments in the consolidated statements of operations. As of June 30, 2016, commodity prices had increased as compared to the prior quarter and there were no impairment indicators that required further evaluation for impairment. If commodity prices decline in the future, however, further impairment of the investment in Grizzly may be necessary. During the six months ended June 30, 2016, Gulfport paid $13.7 million in cash calls. Grizzly’s functional currency is the Canadian dollar. The Company's investment in Grizzly was decreased by $0.6 million as a result of a foreign currency translation loss and increased by $9.7 million as a result of a foreign currency translation gain for the three and six months ended June 30, 2016, respectively. The Company's investment in Grizzly was increased by $3.2 million as a result of a foreign currency translation gain and decreased by $11.7 million as a result of a foreign currency translation loss for the three and six months ended June 30, 2015, respectively.

10


Effective October 5, 2012, Grizzly entered into a $125.0 million revolving credit facility, under which $57.2 million was outstanding at June 30, 2016. Grizzly has agreed to pay the outstanding balance by the payoff date in July 2016. Gulfport paid its share of this amount on June 30, 2016.
Timber Wolf Terminals LLC
During 2012, the Company invested in Timber Wolf Terminals LLC (“Timber Wolf”). Timber Wolf was formed to operate a crude/condensate terminal and a sand transloading facility in Ohio.
Windsor Midstream LLC
During 2012, the Company purchased an ownership interest in Windsor Midstream LLC (“Midstream”). Midstream owned a 28.4% interest in Coronado Midstream LLC ("Coronado"), a gas processing plant in West Texas. In March 2015, Coronado was sold to Enlink Midstream Partners, LP ("EnLink") for proceeds of approximately $600.0 million, consisting of cash and units representing a limited partnership interest in Enlink. Midstream recorded an $81.6 million gain on the sale of its investment in Coronado. The Company received $4.9 million in distributions from Midstream during the six months ended June 30, 2016.
Stingray Cementing LLC
During 2012, the Company invested in Stingray Cementing LLC ("Stingray Cementing"). Stingray Cementing provides well cementing services. The loss (income) from equity method investments presented in the table above reflects any intercompany profit eliminations.
Blackhawk Midstream LLC
During 2012, the Company invested in Blackhawk Midstream LLC ("Blackhawk"). Blackhawk was formed to coordinate gathering, compression, processing and marketing activities for the Company in connection with the development of its Utica Shale acreage. On January 28, 2014, Blackhawk completed the sale of its equity interests in Ohio Gathering Company, LLC and Ohio Condensate Company, LLC for a purchase price of $190.0 million, of which $14.3 million was placed in escrow. During the first quarter of 2015, the Company received net proceeds of approximately $7.2 million from the release of escrow from the Blackhawk sale, which is included in loss (income) from equity method investments in the consolidated statements of operations.
Stingray Energy Services LLC
During 2013, the Company invested in Stingray Energy Services LLC ("Stingray Energy"). Stingray Energy provides rental tools for land-based oil and natural gas drilling, completion and workover activities as well as the transfer of fresh water to wellsites. The loss (income) from equity method investments presented in the table above reflects any intercompany profit eliminations.
Sturgeon Acquisitions LLC
During 2014, the Company invested $20.7 million and received an ownership interest of 25% in Sturgeon Acquisitions LLC ("Sturgeon"). Sturgeon owns and operates sand mines that produce hydraulic fracturing grade sand.
Mammoth Energy Partners LP
In the fourth quarter of 2014, the Company contributed its investments in four entities to Mammoth Energy Partners LP ("Mammoth") for a 30.5% interest in this entity. Mammoth originally intended to pursue its initial public offering in 2014 or 2015; however, Mammoth continues to evaluate market conditions and expects to undertake this offering when commodity prices have recovered. The Company reviewed its investment in Mammoth at June 30, 2016 and determined no impairment was needed. If commodity prices decline in the future, an impairment of the investment in Mammoth may result. The Company's investment in Mammoth was decreased by $1.3 million as a result of a foreign currency loss from Mammoth's foreign subsidiary for the six months ended June 30, 2016. The loss (income) from equity method investments presented in the table above reflects any intercompany profit eliminations.
Strike Force Midstream LLC

11


In February 2016, the Company, through its wholly owned subsidiary Gulfport Midstream Holdings, LLC ("Midstream Holdings"), entered into an agreement with Rice Midstream Holdings LLC ("Rice"), a subsidiary of Rice Energy Inc., to develop natural gas gathering assets in eastern Belmont County and Monroe County, Ohio (the "dedicated areas"). The Company contributed certain gathering assets for a 25% interest in the newly formed entity called Strike Force Midstream LLC ("Strike Force"). Rice acts as operator and owns the remaining 75% interest in Strike Force. Construction of the gathering assets, which is underway, is expected to provide gathering services for Gulfport operated wells and connectivity of existing dry gas gathering systems. Strike Force has completed the first phase of the projects: a lateral that connects two existing dry gas gathering systems on which the Company currently flows the majority of its dry gas volumes. First flow from the lateral commenced on February 1, 2016. During the six months ended June 30, 2016, Gulfport paid $3.0 million in cash calls to Strike Force.
The Company accounted for its contribution to Strike Force at fair value under applicable codification guidance. The Company estimated the fair market value of its investment in Strike Force as of the contribution date using the discounted cash flow method under the income approach, based on an independently prepared valuation of the contributed assets. The fair market value was reduced by a discount factor for the lack of marketability due to the Company's minority interest, resulting in a fair value of $22.5 million for the Company's 25% interest. The fair value of the assets contributed was estimated using assumptions that represent Level 3 inputs. See "Note 12 - Fair Value Measurements" for additional discussion of the measurement inputs. The Company has elected to report its proportionate share of Strike Force's earnings on a one-quarter lag as permitted under FASB ASC 323. The loss (income) from equity method investments presented in the table above reflects any intercompany profit eliminations.
4.
VARIABLE INTEREST ENTITIES
As of June 30, 2016, the Company held variable interests in the following variable interest entities ("VIEs"), but was not the primary beneficiary: Mammoth, Stingray Energy, Stingray Cementing, Sturgeon, Midstream and Timber Wolf. These entities have governing provisions that are the functional equivalent of a limited partnership and are considered VIEs because the limited partners or non-managing members lack substantive kick-out or participating rights which causes the equity owners, as a group, to lack a controlling financial interest. The Company is a limited partner or non-managing member in each of these VIEs and is not the primary beneficiary because it does not have a controlling financial interest. The general partner or managing member has power to direct the activities that most significantly impact the VIEs’ economic performance. The Company also held a variable interest in Strike Force due to the fact that it does not have sufficient equity capital at risk. The Company is not the primary beneficiary of this entity.
The Company accounts for its investment in these VIEs following the equity method of accounting. The carrying amounts of the Company’s equity investments are classified as other non-current assets on the accompanying consolidated balance sheets. The Company’s maximum exposure to loss as a result of its involvement with these VIEs is based on the Company’s capital contributions and the economic performance of the VIEs, and is equal to the carrying value of the Company’s investments which is the maximum loss the Company could be required to record in the consolidated statements of operations. See Note 3 for further discussion of these entities, including the carrying amounts of each investment.
5.
OTHER ASSETS
Other assets consist of the following as of June 30, 2016 and December 31, 2015:
 
June 30, 2016
 
December 31, 2015
 
(In thousands)
Plugging and abandonment escrow account on the WCBB properties (Note 10)
$
3,081

 
$
3,089

Certificates of Deposit securing letter of credit
276

 
276

Prepaid drilling costs
5,404

 
58

Loan commitment fees
2,496

 
2,870

Deposits
34

 
34

Other
45

 
37

 
$
11,336

 
$
6,364



12


6.
LONG-TERM DEBT
Long-term debt consisted of the following items as of June 30, 2016 and December 31, 2015:
 
June 30, 2016
 
December 31, 2015
 
(In thousands)
Revolving credit agreement (1)
$

 
$

Building loan (2)

 
1,653

7.75% senior unsecured notes due 2020 (3)
600,000

 
600,000

6.625% senior unsecured notes due 2023 (4)
350,000

 
350,000

Net unamortized original issue premium, net (5)
11,359

 
12,493

Net unamortized debt issuance costs (6)
(16,567
)
 
(17,883
)
Construction loan (7)
11,962

 

Less: current maturities of long term debt

 
(179
)
Debt reflected as long term
$
956,754

 
$
946,084

The Company capitalized approximately $1.4 million and $3.0 million in interest expense to undeveloped oil and natural gas properties during the three and six months ended June 30, 2016, respectively. The Company capitalized approximately $4.7 million and $8.4 million in interest expense to oil and natural gas properties during the three and six months ended June 30, 2015, respectively. During the three and six months ended June 30, 2016, the Company also capitalized approximately $0.4 million and $0.7 million, respectively, in interest expense related to building construction.
(1) The Company has entered into a senior secured revolving credit facility, as amended, with The Bank of Nova Scotia, as the lead arranger and administrative agent and certain lenders from time to time party thereto. The credit agreement provides for a maximum facility amount of $1.5 billion and matures on June 6, 2018. On February 19, 2016, the Company further amended its revolving credit facility to, among other things, (a) increase the basket for unsecured debt issuances to $1.4 billion from $1.2 billion (of which $950 million was then outstanding), (b) reaffirm the Company’s borrowing base of $700.0 million, and (c) increase the percentage of projected oil and gas production that may be hedged by the Company during 2016. As of June 30, 2016, no balance was outstanding under this revolving credit facility and total funds available for borrowing, after giving effect to an aggregate of $205.8 million of letters of credit, were $494.2 million. This facility is secured by substantially all of the Company's assets. The wholly-owned subsidiaries of the Company guarantee the obligations under the revolving credit facility.
Advances under this revolving credit facility may be in the form of either base rate loans or eurodollar loans. The interest rate for base rate loans is equal to (1) the applicable rate, which ranges from 0.50% to 1.50%, plus (2) the highest of: (a) the federal funds rate plus 0.50%, (b) the rate of interest in effect for such day as publicly announced from time to time by agent as its “prime rate,” and (c) the eurodollar rate for an interest period of one month plus 1.00%. The interest rate for eurodollar loans is equal to (1) the applicable rate, which ranges from 1.50% to 2.50%, plus (2) the London interbank offered rate that appears on pages LIBOR01 or LIBOR02 of the Reuters screen that displays such rate for deposits in U.S. dollars, or, if such rate is not available, the rate as administered by ICE Benchmark Administration (or any other person that takes over administration of such rate) per annum equal to the offered rate on such other page or other service that displays an average London interbank offered rate as administered by ICE Benchmark Administration (or any other person that takes over the administration of such rate) for deposits in U.S. dollars, or, if such rate is not available, the average quotations for three major New York money center banks of whom the agent shall inquire as the “London Interbank Offered Rate” for deposits in U.S. dollars.
The Company's revolving credit facility contains customary negative covenants including, but not limited to, restrictions on the Company's and its subsidiaries' ability to: incur indebtedness; grant liens; pay dividends and make other restricted payments; make investments; make fundamental changes; enter into swap contracts and forward sales contracts; dispose of assets; change the nature of their business; and enter into transactions with their affiliates. The negative covenants are subject to certain exceptions as specified in this revolving credit facility. The Company's revolving credit facility also contains certain affirmative covenants, including, but not limited to the following financial covenants: (1) the ratio of net funded debt to EBITDAX (net income, excluding (i) any non-cash revenue or expense associated with swap contracts resulting from ASC 815 and (ii) any cash or non-cash revenue or expense attributable to minority investment plus without duplication and, in the case of expenses, to the extent deducted from revenues in determining net income, the sum of (a) the aggregate amount of consolidated

13


interest expense for such period, (b) the aggregate amount of income, franchise, capital or similar tax expense (other than ad valorem taxes) for such period, (c) all amounts attributable to depletion, depreciation, amortization and asset or goodwill impairment or writedown for such period, (d) all other non-cash charges, (e) exploration costs deducted in determining net income under successful efforts accounting, (f) actual cash distributions received from minority investments, (g) to the extent actually reimbursed by insurance, expenses with respect to liability on casualty events or business interruption, and (h) all reasonable transaction expenses related to dispositions and acquisitions of assets, investments and debt and equity offerings (provided that expenses related to any unsuccessful dispositions will be limited to $3.0 million in the aggregate) for a twelve-month period may not be greater than 4.00 to 1.00; and (2) the ratio of EBITDAX to interest expense for a twelve-month period may not be less than 3.00 to 1.00. The Company was in compliance with these financial covenants at June 30, 2016.
(2) In March 2011, the Company refinanced the $2.4 million then outstanding under its previous building loan for the office building it occupies in Oklahoma City, Oklahoma. This loan agreement, as subsequently amended, bore interest at the rate of 4.00% per annum, required monthly interest and principal payments of approximately $20,000, was collateralized by the Oklahoma City office building and associated land and had a maturity date of December 2018. The Company paid the balance of the loan in full in February 2016.
(3) On October 17, 2012, the Company issued $250.0 million in aggregate principal amount of senior unsecured notes due 2020 (the "October Notes") under an indenture among the Company, its subsidiary guarantors and Wells Fargo Bank, National Association, as the trustee (the "senior note indenture"). On December 21, 2012, the Company issued an additional $50.0 million in aggregate principal amount of senior unsecured notes due 2020 (the "December Notes") as additional securities under the senior note indenture. The Company used a portion of the net proceeds from the October Notes to repay all amounts outstanding at such time under its revolving credit facility. The Company used the remaining net proceeds of the October Notes and the net proceeds of the December Notes for general corporate purposes, which included funding a portion of its 2013 capital development plan. The October Notes and the December Notes were exchanged for substantially identical notes in the same aggregate principal amount that were registered under the Securities Act in October 2013 (the "Exchange Notes").
On August 18, 2014, the Company issued an additional $300.0 million in aggregate principal amount of senior unsecured notes due 2020 (the "August Notes"). The August Notes were issued as additional securities under the senior note indenture. The Company used a portion of the net proceeds from the August Notes to repay all amounts outstanding at such time under its revolving credit facility. The Company used the remaining net proceeds of the August Notes Offering for general corporate purposes, including funding a portion of its 2014 and 2015 capital development plans. The October Notes, December Notes and the August Notes are collectively referred to as the "2020 Notes".
In connection with the issuance of the 2020 Notes, the Company and the subsidiary guarantors entered into a registration rights agreement with the initial purchasers, pursuant to which the Company and the subsidiary guarantors agreed to file a registration statement with respect to an offering to exchange the 2020 Notes for a new issue of substantially identical debt securities registered under the Securities Act. The exchange offer for the October Notes and the December Notes was completed in October 2013 and the exchange offer for the August Note was completed in March 2015.
Under the senior note indenture relating to the 2020 Notes, interest on the 2020 Notes accrues at a rate of 7.75% per annum on the outstanding principal amount from October 17, 2012, payable semi-annually on May 1 and November 1 of each year, commencing on May 1, 2013. The 2020 Notes are the Company's senior unsecured obligations and rank equally in the right of payment with all of the Company's other senior indebtedness and senior in right of payment to any future subordinated indebtedness. All of the Company's existing and future restricted subsidiaries that guarantee the Company's secured revolving credit facility or certain other debt guarantee the 2020 Notes; provided, however, that the 2020 Notes are not guaranteed by Grizzly Holdings, Inc. and will not be guaranteed by any of the Company's future unrestricted subsidiaries. The Company may redeem some or all of the 2020 Notes at any time on or after November 1, 2016, at the redemption prices listed in the senior note indenture. Prior to November 1, 2016, the Company may redeem the 2020 Notes at a price equal to 100% of the principal amount plus a “make-whole” premium. In addition, prior to November 1, 2015, the Company may redeem up to 35% of the aggregate principal amount of the 2020 Notes with the net proceeds of certain equity offerings, provided that at least 65% of the aggregate principal amount of the 2020 Notes initially issued remains outstanding immediately after such redemption.
(4) On April 21, 2015, the Company issued $350.0 million in aggregate principal amount of 6.625% Senior Notes due 2023 (the "2023 Notes" and, together with the "2020 Notes," the "Notes") to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act (the "2023 Notes Offering"). The Company received net proceeds of approximately $343.6 million after initial purchaser discounts and commissions and estimated offering expenses.

14


The 2023 notes were issued under an indenture, dated as of April 21, 2015, among the Company, the subsidiary guarantors party thereto and Wells Fargo Bank, National Association, as trustee. Pursuant to the indenture relating to the 2023 Notes, interest on the 2023 Notes will accrue at a rate of 6.625% per annum on the outstanding principal amount thereof from April 21, 2015, payable semi-annually on May 1 and November 1 of each year, commencing on November 1, 2015. The 2023 Notes are not guaranteed by Grizzly Holdings, Inc. and will not be guaranteed by any of the Company's future unrestricted subsidiaries.
In connection with the 2023 Notes Offering, the Company and its subsidiary guarantors entered into a registration rights agreement, dated as of April 21, 2015, pursuant to which the Company agreed to file a registration statement with respect to an offer to exchange the 2023 Notes for a new issue of substantially identical debt securities registered under the Securities Act. The exchange offer for the 2023 Notes was completed on October 13, 2015.
(5) The October Notes were issued at a price of 98.534% resulting in a gross discount of $3.7 million and an effective rate of 8.000%. The December Notes were issued at a price of 101.000% resulting in a gross premium of $0.5 million and an effective rate of 7.531%. The August Notes were issued at a price of 106.000% resulting in a gross premium of $18.0 million and an effective rate of 6.561%. The April Notes were issued at par. The premium and discount are being amortized using the effective interest method.
(6) In accordance with Accounting Standards Update ("ASU") 2015-03, loan issuance costs related to the Notes have been presented as a reduction to the Notes. At June 30, 2016, total unamortized debt issuance costs were $4.6 million for the October Notes, $1.0 million for the December Notes, $4.5 million for the August Notes and $6.4 million for the April Notes.
(7) On June 4, 2015, the Company entered into a construction loan agreement (the "Construction Loan") with InterBank for the construction of a new corporate headquarters in Oklahoma City. The Construction Loan allows for a maximum principal amount of $24.5 million and requires the Company to fund 30% of the estimated cost of the construction before any funds can be drawn, which occurred in January 2016. Interest accrues daily on the outstanding principal balance at a fixed rate of 4.50% per annum and is payable on the last day of the month through May 31, 2017. Monthly interest and principal payments are due beginning June 30, 2017, with the final payment due June 4, 2025. At June 30, 2016, the total borrowings under the Construction Loan were approximately $12.0 million.
7.
COMMON STOCK AND CHANGES IN CAPITALIZATION
Sale of Common Stock
On March 15, 2016, the Company issued 16,905,000 shares of its common stock in an underwritten public offering (which included 2,205,000 shares sold pursuant to an option to purchase additional shares of the Company's common stock granted by the Company to, and exercised in full by, the underwriters). The net proceeds from this equity offering were approximately $411.7 million, after underwriting discounts and commissions and offering expenses. The Company intends to use the net proceeds from this offering primarily to fund a portion of its 2017 capital development plan and for general corporate purposes.
8.
STOCK-BASED COMPENSATION
During the three and six months ended June 30, 2016 , the Company’s stock-based compensation cost was $3.3 million and $6.6 million, respectively, of which the Company capitalized $1.3 million and $2.6 million, respectively, relating to its exploration and development efforts. During the three and six months ended June 30, 2015, the Company’s stock-based compensation cost was $3.2 million and $6.7 million, respectively, of which the Company capitalized $1.3 million and $2.7 million, respectively, relating to its exploration and development efforts.
 The following table summarizes restricted stock activity for the six months ended June 30, 2016:

15


 
 
Number of
Unvested
Restricted Shares
 
Weighted
Average
Grant Date
Fair Value
Unvested shares as of January 1, 2016
484,239

 
$
43.51

Granted
255,204

 
27.71

Vested
(137,916
)
 
47.31

Forfeited
(8,042
)
 
34.76

Unvested shares as of June 30, 2016
593,485

 
$
35.95

Unrecognized compensation expense as of June 30, 2016 related to restricted shares was $16.0 million. The expense is expected to be recognized over a weighted average period of 1.69 years.

16


9.
EARNINGS PER SHARE
Reconciliations of the components of basic and diluted net loss per common share are presented in the tables below:
 
Three months ended June 30,
 
2016
 
2015
 
Loss
 
Shares
 
Per
Share
 
Loss
 
Shares
 
Per
Share
 
(In thousands, except share data)
Basic:
 
 
 
 
 
 
 
 
 
 
 
Net loss
$
(339,776
)
 
125,343,723

 
$
(2.71
)
 
$
(31,325
)
 
96,663,358

 
$
(0.32
)
Effect of dilutive securities:

 

 

 

 

 

Stock options and awards

 

 

 

 

 

Diluted:

 

 

 

 

 

Net loss
$
(339,776
)
 
125,343,723

 
$
(2.71
)
 
$
(31,325
)
 
96,663,358

 
$
(0.32
)
 
Six months ended June 30,
 
2016
 
2015
 
Loss
 
Shares
 
Per
Share
 
Loss
 
Shares
 
Per
Share
 
(In thousands, except share data)
Basic:
 
 
 
 
 
 
 
 
 
 
 
Net loss
$
(582,043
)
 
118,426,654

 
$
(4.91
)
 
$
(5,806
)
 
91,201,824

 
$
(0.06
)
Effect of dilutive securities:

 

 

 

 

 

Stock options and awards

 

 

 

 

 

Diluted:

 

 

 

 

 

Net loss
$
(582,043
)
 
118,426,654

 
$
(4.91
)
 
$
(5,806
)
 
91,201,824

 
$
(0.06
)
There were 573,187 and 558,894 shares of common stock that were considered anti-dilutive for the three and six months ended June 30, 2016, respectively. There were 378,550 and 382,494 shares of common stock that were considered anti-dilutive for the three and six months ended June 30, 2015, respectively.


17


10.
COMMITMENTS AND CONTINGENCIES
Plugging and Abandonment Funds
In connection with the Company's acquisition in 1997 of the remaining 50% interest in its WCBB properties, the Company assumed the seller’s (Chevron) obligation to contribute approximately $18,000 per month through March 2004 to a plugging and abandonment trust and the obligation to plug a minimum of 20 wells per year for 20 years commencing March 11, 1997. Chevron retained a security interest in production from these properties until the Company's abandonment obligations to Chevron have been fulfilled. Beginning in 2009, the Company could access the trust for use in plugging and abandonment charges associated with the property, although it has not yet done so. As of June 30, 2016, the plugging and abandonment trust totaled approximately $3.1 million. At June 30, 2016, the Company had plugged 463 wells at WCBB since it began its plugging program in 1997, which management believes fulfills its current minimum plugging obligation.
Operating Leases
The Company leases office facilities under non-cancellable operating leases exceeding one year. Future minimum lease commitments under these leases at June 30, 2016 were as follows:
 
 
(In thousands)
Remaining 2016
 
$
386

2017
 
583

2018
 
54

Total
 
$
1,023

Other Commitments
Effective October 1, 2014 and subsequently amended on November 3, 2015, the Company entered into a Sand Supply Agreement with Muskie Proppant LLC ("Muskie") that expires on September 30, 2018. Pursuant to this agreement, the Company has agreed to purchase annual and monthly amounts of proppant sand subject to exceptions specified in the agreement at agreed pricing, plus agreed costs and expenses. Failure by either Muskie or the Company to deliver or accept the minimum monthly amount results in damages calculated per ton based on the difference between the monthly obligation amount and the amount actually delivered or accepted, as applicable. The Company incurred $0.7 million and $2.0 million related to non-utilization fees during the three and six months ended June 30, 2016, respectively.
Effective October 1, 2014, the Company entered into an Amended and Restated Master Services Agreement for pressure pumping services with Stingray Pressure Pumping LLC ("Stingray Pressure") that expires on September 30, 2018. Pursuant to this agreement, Stingray Pressure has agreed to provide hydraulic fracturing, stimulation and related completion and rework services to the Company and the Company has agreed to pay Stingray Pressure a monthly service fee plus the associated costs of the services provided. On February 18, 2016, effective January 1, 2016, the Company amended its Master Services Agreement with Stingray Pressure. The amendment adjusted the amount of service fees payable for the period from January 1, 2016 through September 30, 2016.
Future minimum commitments under these agreements at June 30, 2016 are as follows:
 
 
(In thousands)
Remaining 2016
 
$
26,220

2017
 
52,440

2018
 
39,330

Total
 
$
117,990

Litigation
In two separate complaints, one filed by the State of Louisiana and the Parish of Cameron in the 38th Judicial District Court for the Parish of Cameron on February 9, 2016 and the other filed by the State of Louisiana and the District Attorney for

18


the 15th Judicial District of the State of Louisiana in the 15th Judicial District Court for the Parish of Vermillion on July 29, 2016, the Company was named as a defendant, among 26 oil and gas companies, in the Cameron Parish complaint and among nine oil and gas companies in the Vermillion Parish complaint. Both complaints were filed under the State and Local Coastal Resources Management Act of 1978, as amended, and the rules, regulations, orders and ordinances adopted thereunder, which the Company referred to collectively as the CZM Laws, and allege that certain of the defendants’ oil and gas exploration, production and transportation operations associated with the development of the East Hackberry and West Hackberry oil and gas fields, in the case of the Cameron Parish complaint, and the Tigre Lagoon oil and gas field, in the case of the Vermillion Parish complaint, were conducted in violation of the CZM Laws. Both complaints allege that such activities caused substantial damage to land and waterbodies located in the coastal zone of the relevant Parish, including due to defendants’ design, construction and use of waste pits and the alleged failure to properly close the waste pits and to clear, re-vegetate, detoxify and return the property affected to its original condition, as well as the defendants’ alleged discharge of waste into the coastal zone. The Cameron Parish complaint also alleges that the defendants’ oil and gas activities have resulted in the dredging of numerous canals, which had a direct and significant impact on the state coastal waters within Cameron Parish and that the defendants, among other things, failed to design, construct and maintain these canals using the best practical techniques to prevent bank slumping, erosion and saltwater intrusion and to minimize the potential for inland movement of storm-generated surges, which activities allegedly have resulted in the erosion of marshes and the degradation of terrestrial and aquatic life therein. The Cameron Parish complaint also alleges that the defendants failed to re-vegetate, refill, clean, detoxify and otherwise restore these canals to their original condition. In these two petitions, the plaintiffs seek damages and other appropriate relief under the CZM Laws, including the payment of costs necessary to clear, re-vegetate, detoxify and otherwise restore the affected coastal zone of the relevant Parish to its original condition, actual restoration of such coastal zone to its original condition, and the payment of reasonable attorney fees and legal expenses and pre-judgment and post judgment interest.
Shortly after the Cameron Parish complaint was filed, the Louisiana Attorney General and the Louisiana Department of Natural Resources intervened in the lawsuit asserting similar claims. On April 21, 2016, several of the defendants removed the lawsuit to the United States District Court for the Western District of Louisiana in Lake Charles. The Company was served with this complaint on May 4, 2016. The plaintiffs filed a motion to remand the case back to the 38th Judicial District Court, and the motion to remand is set for hearing on September 1, 2016. The Company has not been served with the Vermillion Parish complaint. The Company has not had the opportunity to evaluate the applicability of the allegations made in such complaints to their operations. Due to the early stages of these matters, management cannot determine the amount of loss, if any, that may result.
In addition, due to the nature of the Company's business, it is, from time to time, involved in routine litigation or subject to disputes or claims related to its business activities, including workers' compensation claims and employment related disputes. In the opinion of the Company's management, none of the pending litigation, disputes or claims against the Company, if decided adversely, will have a material adverse effect on its financial condition, cash flows or results of operations.
11.
DERIVATIVE INSTRUMENTS
Oil, Natural Gas and Natural Gas Liquids Derivative Instruments
The Company seeks to reduce its exposure to unfavorable changes in oil, natural gas and natural gas liquids prices, which are subject to significant and often volatile fluctuation, by entering into fixed over-the-counter fixed price swaps, basis swap and various types of option contracts. These contracts allow the Company to predict with greater certainty the effective oil, natural gas and natural gas liquids prices to be received for hedged production and benefit operating cash flows and earnings when market prices are less than the fixed prices provided in the contracts. However, the Company will not benefit from market prices that are higher than the fixed prices in the contracts for hedged production.
Fixed price swaps are settled monthly based on differences between the fixed price specified in the contract and the referenced settlement price. When the referenced settlement price is less than the price specified in the contract, the Company receives an amount from the counterparty based on the price difference multiplied by the volume. Similarly, when the referenced settlement price exceeds the price specified in the contract, the Company pays the counterparty an amount based on the price difference multiplied by the volume. The prices contained in these fixed price swaps are based on Argus Louisiana Light Sweet Crude for oil, the NYMEX Henry Hub for natural gas and Mont Belvieu for propane. Below is a summary of the Company's open fixed price swap positions as of June 30, 2016. 
 
Location
Daily Volume
(Bbls/day)
 
Weighted
Average Price
July 2016 - June 2017
ARGUS LLS
2,000

 
$
51.10

 
Location
Daily Volume (MMBtu/day)
 
Weighted
Average Price
July 2016
NYMEX Henry Hub
550,000

 
$
3.06

August 2016 - September 2016
NYMEX Henry Hub
560,000

 
$
3.04

October 2016
NYMEX Henry Hub
570,000

 
$
3.05

November 2016 - December 2016
NYMEX Henry Hub
525,000

 
$
3.18

January 2017 - February 2017
NYMEX Henry Hub
442,500

 
$
3.14

March 2017
NYMEX Henry Hub
422,500

 
$
3.13

April 2017 - June 2017
NYMEX Henry Hub
367,500

 
$
3.15

July 2017 - October 2017
NYMEX Henry Hub
305,000

 
$
2.99

November 2017 - December 2017
NYMEX Henry Hub
385,000

 
$
3.03

January 2018 - March 2018
NYMEX Henry Hub
240,000

 
$
3.07

April 2018 - December 2018
NYMEX Henry Hub
160,000

 
$
3.01

January 2019 - March 2019
NYMEX Henry Hub
20,000

 
$
3.37


 
Location
Daily Volume
(Bbls/day)
 
Weighted
Average Price
July 2016 - December 2016
Mont Belvieu
1,500

 
$
19.95

The Company sold call options and used the associated premiums to enhance the fixed price for a portion of the fixed price natural gas swaps listed above. Each short call option has an established ceiling price. When the referenced settlement price is above the price ceiling established by these short call options, the Company pays its counterparty an amount equal to the difference between the referenced settlement price and the price ceiling multiplied by the hedged contract volume.

19


 
Location
Daily Volume (MMBtu/day)
 
Weighted Average Price
January 2017 - March 2017
NYMEX Henry Hub
105,000

 
$
3.27

April 2017 - December 2017
NYMEX Henry Hub
125,000

 
$
3.21

January 2018 - March 2018
NYMEX Henry Hub
20,000

 
$
2.91

For a portion of the combined natural gas derivative instruments containing fixed price swaps and sold call options, the counterparty has an option to extend the original terms an additional twelve months for the period January 2017 through December 2017. The option to extend the terms expires in December 2016. If executed, the Company would have additional fixed price swaps for 30,000 MMBtu per day at a weighted average price of $3.33 per MMBtu and additional short call options for 30,000 MMBtu per day at a weighted average ceiling price of $3.33 per MMBtu.
In addition, the Company has entered into natural gas basis swap positions, which settle on the pricing index to basis differential of MichCon or Tetco M2 to the NYMEX Henry Hub natural gas price. As of June 30, 2016, the Company had the following natural gas basis swap positions for MichCon and Tetco M2, respectively.
 
Location
Daily Volume (MMBtu/day)
 
Hedged Differential
July 2016 - December 2016
MichCon
40,000

 
$
0.02

November 2016 - March 2017
Tetco M2
50,000

 
$
(0.59
)
Balance Sheet Presentation
The Company reports the fair value of derivative instruments on the consolidated balance sheets as derivative instruments under current assets, noncurrent assets, current liabilities and noncurrent liabilities on a gross basis. The Company determines the current and noncurrent classification based on the timing of expected future cash flows of individual trades. The following table presents the fair value of the Company's derivative instruments on a gross basis at June 30, 2016:
 
(In thousands)
Short-term derivative instruments - asset
$
44,672

Long-term derivative instruments - asset
$
14,644

Short-term derivative instruments - liability
$
49,906

Long-term derivative instruments - liability
$
29,269

Gains and Losses
For derivatives designated as cash flow hedges and meeting the effectiveness guidelines of FASB ASC 815, changes in fair value are recognized in accumulated other comprehensive income (loss) until the hedged item is recognized in earnings. The Company has no cash flow hedges in place for the three months ended June 30, 2016 and 2015, as all fixed price swaps, swaptions and basis swaps had either been deemed ineffective at their inception or had been accounted for using the mark-to-market accounting method.
The following table presents the net gain and loss recognized in gas sales, oil and condensate sales and natural gas liquids sales in the accompanying consolidated statements of operations for the three and six months ended June 30, 2016 and 2015.
 
Net (loss) gain on derivative instruments
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Gas sales
$
(133,621
)
 
$
(8,087
)
 
$
(76,621
)
 
$
38,453

Oil and condensate sales

(2,628
)
 
(1,995
)
 
(1,346
)
 
1,569

Natural gas liquids sales
(1,143
)
 

 
(1,690
)
 

Total net (loss) gain
$
(137,392
)
 
$
(10,082
)
 
$
(79,657
)
 
$
40,022


20


Concentration of Credit Risk
By using derivative instruments that are not traded on an exchange, the Company is exposed to the credit risk of its counterparties. Credit risk is the risk of loss from counterparties not performing under the terms of the derivative instrument. When the fair value of a derivative instrument is positive, the counterparty is expected to owe the Company, which creates credit risk. To minimize the credit risk in derivative instruments, it is the Company's policy to enter into derivative contracts only with counterparties that are creditworthy financial institutions deemed by management as competent and competitive market makers. The Company's derivative contracts are with multiple counterparties to lessen its exposure to any individual counterparty. Additionally, the Company uses master netting agreements to minimize credit risk exposure. The creditworthiness of the Company's counterparties is subject to periodic review. Other than as provided by the Company's revolving credit facility, the Company is not required to provide credit support or collateral to any of its counterparties under its derivative instruments, nor are the counterparties required to provide credit support to the Company.
12.
FAIR VALUE MEASUREMENTS
The Company records certain financial and non-financial assets and liabilities on the balance sheet at fair value in accordance with FASB ASC 820, "Fair Value Measurement and Disclosures" ("FASB ASC 820"). FASB ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. The statement establishes market or observable inputs as the preferred sources of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. The statement requires fair value measurements be classified and disclosed in one of the following categories:
Level 1 – Quoted prices in active markets for identical assets and liabilities.
Level 2 – Quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 – Significant inputs to the valuation model are unobservable.
Valuation techniques that maximize the use of observable inputs are favored. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy. Reclassifications of fair value between Level 1, Level 2 and Level 3 of the fair value hierarchy, if applicable, are made at the end of each quarter.
The following tables summarize the Company’s financial and non-financial assets and liabilities by FASB ASC 820 valuation level as of June 30, 2016:
 
June 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Assets:
 
 
 
 
 
Derivative Instruments
$

 
$
59,316

 
$

Liabilities:
 
 
 
 
 
Derivative Instruments
$

 
$
79,175

 
$


The Company estimates the fair value of all derivative instruments industry-standard models that considered various assumptions including current market and contractual prices for the underlying instruments, implied volatility, time value, nonperformance risk, as well as other relevant economic measures. Substantially all of these inputs are observable in the marketplace throughout the full term of the instrument and can be supported by observable data.
The estimated fair values of proved oil and gas properties assumed in business combinations are based on a discounted cash flow model and market assumptions as to future commodity prices, projections of estimated quantities of oil and natural gas reserves, expectations for timing and amount of future development and operating costs, projections of future rates of production, expected recovery rates and risk-adjusted discount rates. The estimated fair values of unevaluated oil and gas properties was based on geological studies, historical well performance, location and applicable mineral lease terms. Based on

21


the unobservable nature of certain of the inputs, the estimated fair value of the oil and gas properties assumed is deemed to use Level 3 inputs. See Note 1 for further discussion of the Company's acquisitions.
The Company estimates asset retirement obligations pursuant to the provisions of FASB ASC Topic 410, Asset Retirement and Environmental Obligations (“FASB ASC 410”). The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with oil and gas properties. Given the unobservable nature of the inputs, including plugging costs and reserve lives, the initial measurement of the asset retirement obligation liability is deemed to use Level 3 inputs. See Note 2 for further discussion of the Company’s asset retirement obligations. Asset retirement obligations incurred during the six months ended June 30, 2016 were approximately $3.2 million.
Due to the unobservable nature of the inputs, the fair value of the Company's investment in Grizzly was estimated using assumptions that represent Level 3 inputs. The Company estimated the fair value of the investment as of March 31, 2016 to be approximately $39.1 million. See Note 3 for further discussion of the Company's investment in Grizzly.
Due to the unobservable nature of the inputs, the fair value of the Company's investment in Strike Force was estimated using assumptions that represent Level 3 inputs. The Company's estimated fair value of the investment as of the February 1, 2016 contribution date was $22.5 million. See Note 3 for further discussion of the Company's contribution to Strike Force.
13.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts on the accompanying consolidated balance sheet for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and current debt are carried at cost, which approximates market value due to their short-term nature. Long-term debt related to the Construction Loan is carried at cost, which approximates market value based on the borrowing rates currently available to the Company with similar terms and maturities.
At June 30, 2016, the carrying value of the outstanding debt represented by the Notes was approximately $944.8 million, including the remaining unamortized discount of approximately $2.3 million related to the October Notes, the remaining unamortized premium of approximately $0.3 million related to the December Notes and $13.3 million related to the August Notes. Also, included in the carrying value of the Notes is unamortized debt issuance cost of approximately $4.6 million related to the October Notes, approximately $1.0 million related to the December Notes, approximately $4.5 million related to the August Notes and approximately $6.4 million related to the 2023 Notes. Based on the quoted market price, the fair value of the Notes was determined to be approximately $960.4 million at June 30, 2016.
14.
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
On October 17, 2012, December 21, 2012 and August 18, 2014, the Company issued an aggregate of $600.0 million principal amount of its 7.75% Senior Notes. The October Notes, December Notes, and the August Notes are collectively referred to as the "2020 Notes". The 2020 Notes are guaranteed on a senior unsecured basis by all existing consolidated subsidiaries that guarantee the Company's secured revolving credit facility or certain other debt (the "Guarantors"). The 2020 Notes are not guaranteed by Grizzly Holdings, Inc. (the "Non-Guarantor"). The Guarantors are 100% owned by Gulfport (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.
In connection with the issuance of the 2020 Notes, the Company and the subsidiary guarantors entered into registration rights agreements with the initial purchasers, pursuant to which the Company and the subsidiary guarantors agreed to file a registration statement with respect to an offer to exchange the 2020 Notes for a new issue of substantially identical debt securities registered under the Securities Act. The exchange offer for the October Notes and December Notes was completed in October 2013 and the exchange offer for the August Notes was completed in March 2015.
On April 21, 2015, the Company issued $350.0 million in aggregate principal amount of 6.625% Senior Notes due 2023 to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. In connection with the 2023 Notes Offering, the Company and its subsidiary guarantors entered into a registration rights agreement, dated as of April 21, 2015, pursuant to which the Company agreed to file a registration statement with respect to an offer to exchange the 2023 Notes for a new issue of substantially identical debt securities registered under the Securities Act. The exchange offer for the 2023 Notes was completed on October 13, 2015.

22


The following condensed consolidating balance sheets, statements of operations, statements of comprehensive (loss) income and statements of cash flows are provided for the Parent, the Guarantors and the Non-Guarantor and include the consolidating adjustments and eliminations necessary to arrive at the information for the Company on a condensed consolidated basis. The information has been presented using the equity method of accounting for the Parent's ownership of the Guarantors and the Non-Guarantor.


23


CONDENSED CONSOLIDATING BALANCE SHEETS
(Amounts in thousands)
 
June 30, 2016
 
Parent
 
Guarantors
 
Non-Guarantor
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
395,703

 
$
733

 
$
1

 
$

 
$
396,437

Accounts receivable - oil and gas
90,758

 
7,721

 

 
(7,017
)
 
91,462

Accounts receivable - related parties
23

 

 

 

 
23

Accounts receivable - intercompany
355,924

 
1,904

 

 
(357,828
)
 

Prepaid expenses and other current assets
7,782

 

 

 

 
7,782

Short-term derivative instruments
44,672

 

 

 

 
44,672

Deferred tax asset
292

 

 

 

 
292

Total current assets
895,154

 
10,358

 
1

 
(364,845
)
 
540,668

Property and equipment:
 
 
 
 
 
 
 
 
 
Oil and natural gas properties, full-cost accounting
5,334,096

 
352,821

 

 
(729
)
 
5,686,188

Other property and equipment
48,064

 
43

 

 

 
48,107

Accumulated depletion, depreciation, amortization and impairment
(3,339,056
)
 
(31
)
 

 

 
(3,339,087
)
Property and equipment, net
2,043,104

 
352,833

 

 
(729
)
 
2,395,208

Other assets:
 
 
 
 
 
 
 
 
 
Equity investments
242,627

 
25,441

 
49,557

 
(64,578
)
 
253,047

Long-term derivative instruments
14,644

 

 

 

 
14,644

Deferred tax asset
24,284

 

 

 

 
24,284

Other assets
11,336

 

 

 

 
11,336

Total other assets
292,891

 
25,441

 
49,557

 
(64,578
)
 
303,311

  Total assets
$
3,231,149

 
$
388,632

 
$
49,558

 
$
(430,152
)
 
$
3,239,187

 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$
281,712

 
$
16,768

 
$

 
$
(8,730
)
 
$
289,750

Accounts payable - intercompany

 
355,991

 
125

 
(356,116
)
 

Asset retirement obligation - current
75

 

 

 

 
75

Short-term derivative instruments
49,906

 

 

 

 
49,906

Total current liabilities
331,693

 
372,759

 
125

 
(364,846
)
 
339,731

Long-term derivative instrument
29,269

 

 

 

 
29,269

Asset retirement obligation - long-term
29,993

 

 

 

 
29,993

Long-term debt
956,754

 

 

 

 
956,754

Total liabilities
1,347,709

 
372,759

 
125

 
(364,846
)
 
1,355,747

 
 
 
 
 
 
 
 
 
 
Stockholders' equity:
 
 
 
 
 
 
 
 
 
Common stock
1,253

 

 

 

 
1,253

Paid-in capital
3,242,404

 
25,822

 
255,244

 
(281,066
)
 
3,242,404

Accumulated other comprehensive (loss) income
(46,803
)
 

 
(45,507
)
 
45,507

 
(46,803
)
Retained (deficit) earnings
(1,313,414
)
 
(9,949
)
 
(160,304
)
 
170,253

 
(1,313,414
)
Total stockholders' equity
1,883,440

 
15,873

 
49,433

 
(65,306
)
 
1,883,440

  Total liabilities and stockholders' equity
$
3,231,149

 
$
388,632

 
$
49,558

 
$
(430,152
)
 
$
3,239,187



24


CONDENSED CONSOLIDATING BALANCE SHEETS
(Amounts in thousands)
 
December 31, 2015
 
Parent
 
Guarantors
 
Non-Guarantor
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
112,494

 
$
479

 
$
1

 
$

 
$
112,974

Accounts receivable - oil and gas
72,241

 
54

 

 
(423
)
 
71,872

Accounts receivable - related parties
16

 

 

 

 
16

Accounts receivable - intercompany
326,475

 
60

 

 
(326,535
)
 

Prepaid expenses and other current assets
3,905

 

 

 

 
3,905

Short-term derivative instruments
142,794

 

 

 

 
142,794

Total current assets
657,925

 
593

 
1

 
(326,958
)
 
331,561

 
 
 
 
 
 
 
 
 
 
Property and equipment:
 
 
 
 
 
 
 
 
 
Oil and natural gas properties, full-cost accounting,
5,108,258

 
316,813

 

 
(729
)
 
5,424,342

Other property and equipment
33,128

 
43

 

 

 
33,171

Accumulated depletion, depreciation, amortization and impairment
(2,829,081
)
 
(29
)
 

 

 
(2,829,110
)
Property and equipment, net
2,312,305

 
316,827

 

 
(729
)
 
2,628,403

Other assets:
 
 
 
 
 
 
 
 
 
Equity investments
231,892

 

 
50,644

 
(40,143
)
 
242,393

Long-term derivative instruments
51,088

 

 

 

 
51,088

Deferred tax assets
74,925

 

 

 

 
74,925

Other assets
6,364

 

 

 

 
6,364

Total other assets
364,269

 

 
50,644

 
(40,143
)
 
374,770

  Total assets
$
3,334,499

 
$
317,420

 
$
50,645

 
$
(367,830
)
 
$
3,334,734

 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$
264,893

 
$
527

 
$

 
$
(292
)