"Gas price a gallon is now more than four bucks - that's insane isn't?" said Jim, a colleague. "My commute is more than 15 miles each way. Let me tell you Noam, and I did the math, my monthly gas bill increased by more than $200."
I had no idea that gas prices were up. I often cycle to work and when I drive a car, my Subaru is gas-efficient enough that my monthly gas expenses are less than $80. To confirm Jim's lamentation, I went to the local gas station and saw that a gallon of gas, indeed, now costs $4.55.
A high gas price must be a business problem for some companies. So I returned to my desk and looked for publicly-traded companies that explore, develop and sell the commodity.
The initial results were unexciting. WPX Energy (WPX on Nyse), a natural gas liquidity company with market capitalization of $5.23 billion, traded at 23 times the trailing earning and at a 20% premium to reported book value. Cabot Oil & Gas (COG on Nyse), with a market capitalization of $11 billion, traded at 15 times the trailing earning and a whopping 5 times the reported book value.
QEP Resources (QEP on Nyse), operating in the same industry, with market capitalization of $1.76 million, traded at a slight discount to book value. But QEP reported losses in 2018, 2016 and 2015. So did Oasis Petroleum (OAW on Nyse). With a market capitalization of almost $2 billion, the company traded at about its book value but reported losses in 2018, 2016 and 2015.
Frustrated at wasting two hours of sifting through the financials of natural gas companies, I screened for companies - without a specific industry in mind - that traded at 90% below their-5 year high.
One of the first companies I saw was Gulfport Energy Corporation (GPOR on Nasdaq). The stock traded as high as $75 in 2014 and was now trading for $7 a share, a drop of 90%. Curious to understand the reason for the sharp decline in price, I downloaded the 10-k report.
I saw three things: First was the reason for the decline in stock price. Over the past ten years the prices declined for all the commodities sold by GPOR. The oil price per barrel declined to $49 from $68, natural gas price declined to $0.53 from $0.96 and gas price declined to $2.47 from $6.90.
Second, the company's assets grew. Operating with a debt to asset ratio of less than 50%, Gulfport's total assets increased to $5.8 billion from $2.7 billion five years ago, a compounded growth of 16%. Equity increased to $3.3 billion from $2.69 billion, a compound growth of 4%. This was a decent growth track record, especially when considering the company took an impairment loss (which reduced the equity balance) of $715 million in 2016 and $1.44 billion in 2015.
Third, management had repurchased the stock at $8.81 at the end of last year and had budgeted to buy additional stock, up to $200 million worth, in the next two years. I estimate that the company may do buyback the stock without incurring any debt, simply by using free cash flow and perhaps selling non-core assets, such as the 9,829,548 shares GPOR owned in TUSK.
A back of the envelope calculation tells us that just the share repurchase program may result in an increase of 30% to 50% from the current price of $7 (write to me if you would like to see how I calculated this).
Yet what stands between the investor, yours truly (who now owns 1,500 shares) and the income from the natural gas and oil reserves is a board of directors that could easily win the worse capital allocator award, if there ever was one.
Since 2010 Gulfport’s board issued 138 million shares (read: diluted shareholders) at weighted price of $30. Since 2010, the company added to its equity base $3.19 billion; now the entire company can be bought for $1.19 billion, about a third of the price.
Surprisingly, perhaps, half of the board, four of the available eight board seats, is still running the show. Mr. David Houston has been a director since 1998. Mr. Ben Morris has been with the company since 2014. Mr. Craig Groeschel has been with the company since 2011. Mr. Scott E. Streller has been with the company since it became publicly traded in August 2006. As I wrote in A Docile Animal in Captivity, it is not easy to replace the gatekeepers - even ones with such dreadful track records.
In an industry fraught with technical terms such as "Proved Reserved" (page 3 of the recent 10-k report) and "Midstream Gathering"(page 62 of the recent 10-k report), natural gas investors, by default, know less about the business than the gatekeepers.
There are also uncertainties that management cannot plan for but only react to. Among those include supply and demand imbalances and future regulatory and political changes.
Why is there such a wide gap between GPOR's market price and value? Why did investors not complain about the board’s dismal performance? The advent and popularity of passive investing, I believe, is at fault.
Blackrock, via its iShares ETF product, owns 24 million Gulfport shares. Dimensional Fund Advisors, another ETF provider, owns 15 million Gulfport shares. The quantitative firm, LSV Asset Management, owns 9 million shares. In total, over 58 million shares (about 36%) of the available 159 million shares are owned by passive investment funds.
It is little surprise they haven't noticed the gap.