Markets typically overreact to good and bad tidings, resulting in arbitrary stock price movements that do not always match a company's fundamentals.
Just as there are a number of companies that are breezing past their fair value, there are potentially underpriced ones that are trading way below their intrinsic value.
Shares of Gulfport Energy GPOR have been in the red for a while now, evident from its stock price trend in the past year. This Zacks Rank #3 (Hold) company has plummeted more than 78%, underperforming its industry’s 25.6% plunge.
What’s Ailing the Stock?
No major commodity witnessed a worse 2019 than natural gas. The resource endured a difficult year, hitting an all-time annual low since 2014. Prices dropped more than 25% last year, as buyers made an exit from the market over growing apprehensions about record output and concerns of an ongoing supply glut. In fact, last week, natural gas prices were at rock bottom since May 2016.
With natural gas prices seeing persistent downfalls for three years and Gulfport being one of the most gas-weighted upstream players, the company's performance remains under pressure. Consequently, its bottom-line decreased year over year in the last reported quarter amid weak commodity prices.
As Gulfport is located in the Utica Shale, it is largely exposed to takeaway constraints of transmitting produced natural gas out of Appalachia. While the pipeline capacity will improve from this year onward, the region is likely to suffer infrastructure bottlenecks in the period, affecting the company’s performance.
Moreover, our proprietary model does not conclusively predict an earnings beat for Gulfport in the fourth quarter of 2019. The right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 — increases the odds of a positive surprise. But that’s not the case here as the company has an Earnings ESP of -72.07% and a top Zacks Rank. The Zacks Consensus Estimate for the to-be-reported quarter’s earnings is pegged at 18 cents, indicating an almost 61% drop from the year-ago reported figure while the consensus mark for first-quarter 2020 earnings stands at 12 cents, suggesting a 63.64% slump from the prior-year reported number.
Due to the aforementioned headwinds, the stock appears a risky proposition.
Is There Any Silver Lining?
The stock looks stressed to strive for better performance. Its second-largest shareholder Firefly Value Partners, a New-York based hedge fund, urged the company to repurchase shares worth $500 million. Gulfport at its end created a $400-million buyback program, which was recently suspended due to weak near-term gas price outlook. This strategic move is expected to help the company improve its leverage profile and liquidity.
The Oklahoma City, OK-based natural gas producer reduced workforce by 13% to cope with the current bearish pricing environment. It now plans to use excess cash to lower its debt burden. This tactical action will in turn, strengthen the company’s balance sheet, which is burdened with long-term debt of $2.1 billion, representing a debt-to-capitalization ratio of 36.8% at the end of the third quarter.
The acquisition of ‘oily’ SCOOP assets in 2017 enabled Gulfport to produce more liquids and diversify its sales. While production from these properties complements the company’s Utica Shale acreage, increasing liquids exposure should aid it to strengthen oil prices and enhance its cash margins.
Shares of Gulfport on the whole, present investors with mixed reviews of both positive and negative signals. In view of the above, we believe that even though the stock is grappled with issues, it should be retained by investors.
Investors looking to reap huge profits in the year ahead may consider some better-ranked stocks in the industry like Cenovus Energy Inc. CVE, Suncor Energy Inc. SU and Murphy USA Inc. MUSA, each sporting a Zacks Rank of 1. You can see the complete list of today’s Zacks #1 Rank stocks here.
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