I bought another bond.
The Gulfport Energy (GPOR) 6.625 coupon bond with 1MAY2023 maturity looks like a good value to me. I purchased 9 units yesterday for 73.19 cents on the dollar. The current yield is an impressive 9.05% and yield to maturity is 19.4%. I’ll detail below why this bond is “money good” despite trading for a depressed price.
GPOR is primarily a driller of natural gas. It has some oil assets in the SCOOP but 80% of its revenue comes from Utica shale natural gas. The Marcellus gets most of the media attention when it comes to gas drilling. It has been enormously productive and initially set a lot of records for initial flow rate. The Marcellus is also close to the surface making for easy drilling. The Utica is a “stack” play, meaning it is underneath the Marcellus shale. Drillers naturally drill the shallower play first and consider any stacks to be bonuses that they capture when they prove a lease claim with the shallower wells. GPOR owns the very best acreage in the Utica thanks to first mover status in eastern Ohio. They have twice set the world record for initial flow rate in the Utica. While most shale oil drillers have an all in sustaining cost of production around $1.80 per MMBtu, GPOR can break even as low as 1.20.
The Henry Hub spot price for natural gas has been depressed lately. The price of the GPOR bond tracks this indicator (somewhat irrationally). This is our opportunity as I’m going to show the company can survive much lower gas prices and still service and refinance its debt. Currently with gas around 2.30, the company has interest coverage of about 6 times. We need to see 2 times coverage to ensure the company can refinance at maturity. Since most drillers have a breakeven at 1.80 or higher, it is extremely unlikely the price will make a sustained move below 1.80. Remember that GPOR is profitable above 1.20. The price can go as low as 1.50 and GPOR will retain 2.8 times interest coverage (assuming no decline in production).
The company has been improving its balance sheet recently and will likely have even better interest coverage at maturity. Also, GPOR has 100% of is 2019 production hedged and 15% of its 2020 production already hedged. Any short term move higher lets the company lock in the rest of 2020 production at a profit. It is likely the price of gas will return to 2.50 and above and the bond will trade at par or above again before maturity. If that happens, I’ll sell and boost my yield to maturity.
The company can also pull a few balance sheet levers, the main one of which is to sell off non-core assets in the SCOOP play to raise cash. Standard and Poors estimates an 85% recovery in the event of a reorganization bankruptcy. That leaves us with a capital gain plus any coupons collected. But we still need to consider a liquidation bankruptcy. I think this is extraordinarily unlikely but just in case, I have looked at the balance sheet and made some assumptions on what assets would be worth in a fire sale. A good estimate is liquidation would result in about 50 cents on the dollar in recovery. Since the bankruptcy would not likely happen until principal is due, we would collect 232 in coupons along the way for 73.20 cents recovery on the dollar. At 73.19 purchase price, I almost can’t lose here.
I recommend buying CUSIP 402635AE6 up to 75 cents on the dollar. Sell early if the bond reaches par.
Devour your prey raptors!