Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



☒	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020



☐	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)
3001 Quail Springs Parkway
Oklahoma City,	Oklahoma	73134
(Address of Principal Executive Offices)		(Zip Code)

(405) 252-4600

(Registrant Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, par value $0.01 per share	GPOR	Nasdaq Global Select Market

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 every Interactive Data File required to be submitted 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 such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated filer ý Accelerated filer ¨

Non-accelerated filer ¨ Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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 May 1, 2020, 159,872,688 shares of the registrant’s common stock were outstanding.

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GULFPORT ENERGY CORPORATION

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		Page
PART I FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (Unaudited):	2

	Consolidated Balance Sheets at March 31, 2020 and December 31, 2019	2

	Consolidated Statements of Operations for the Three Months Ended March 31, 2020 and 2019	3

	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2020 and 2019	4

	Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2020 and 2019	4

	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Conditions and Results of Operations	31

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43

Item 4.	Controls and Procedures	45

PART II OTHER INFORMATION

Item 1.	Legal Proceedings	46

Item 1A.	Risk Factors	47

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49

Item 3.	Defaults Upon Senior Securities	49

Item 4.	Mine Safety Disclosures	49

Item 5.	Other Information	49

Item 6.	Exhibits	51

Signatures		53

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GULFPORT ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS



	March 31, 2020			December 31, 2019
	(Unaudited)
	(In thousands, except share data)
Assets
Current assets:
Cash and cash equivalents	$	1,633		$	6,060
Accounts receivable—oil and natural gas sales	74,099			121,210
Accounts receivable—joint interest and other	42,547			47,975
Prepaid expenses and other current assets	11,848			4,431
Short-term derivative instruments	171,755			126,201
Total current assets	301,882			305,877
Property and equipment:
Oil and natural gas properties, full-cost accounting, $1,608,640 and $1,686,666 excluded from amortization in 2020 and 2019, respectively	10,667,532			10,595,735
Other property and equipment	96,882			96,719
Accumulated depletion, depreciation, amortization and impairment	(7,859,873		)	(7,228,660		)
Property and equipment, net	2,904,541			3,463,794
Other assets:
Equity investments	6,225			32,044
Long-term derivative instruments	—			563
Deferred tax asset	—			7,563
Operating lease assets	10,186			14,168
Operating lease assets—related parties	—			43,270
Other assets	41,453			15,540
Total other assets	57,864			113,148
Total assets	$	3,264,287		$	3,882,819
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities	$	437,453		$	415,218
Short-term derivative instruments	67			303
Current portion of operating lease liabilities	9,873			13,826
Current portion of operating lease liabilities—related parties	—			21,220
Current maturities of long-term debt	688			631
Total current liabilities	448,081			451,198
Long-term derivative instruments	70,829			53,135
Asset retirement obligation	59,444			60,355
Uncertain tax position liability	3,209			3,127
Non-current operating lease liabilities	313			342
Non-current operating lease liabilities—related parties	—			22,050
Long-term debt, net of current maturities	1,898,362			1,978,020
Total liabilities	2,480,238			2,568,227
Commitments and contingencies (Note 9)
Preferred stock, $0.01 par value; 5,000,000 shares authorized (30,000 authorized as redeemable 12% cumulative preferred stock, Series A), and none issued and outstanding	—			—
Stockholders’ equity:
Common stock - $.01 par value, 200,000,000 shares authorized, 159,841,930 issued and outstanding at March 31, 2020 and 159,710,955 at December 31, 2019	1,598			1,597
Paid-in capital	4,209,578			4,207,554
Accumulated other comprehensive loss	(61,863		)	(46,833		)
Accumulated deficit	(3,365,264		)	(2,847,726		)
Total stockholders’ equity	784,049			1,314,592
Total liabilities and stockholders’ equity	$	3,264,287		$	3,882,819

See accompanying notes to consolidated financial statements.

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GULFPORT ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	Three months ended March 31,
	2020			2019
	(In thousands, except share data)
Revenues:
Natural gas sales	$	108,547		$	276,016
Oil and condensate sales	23,151			32,482
Natural gas liquid sales	16,913			32,125
Net gain (loss) on natural gas, oil and NGL derivatives	98,266			(20,045		)
	246,877			320,578
Costs and expenses:
Lease operating expenses	15,986			19,807
Production taxes	4,799			7,921
Midstream gathering and processing expenses	57,896			70,282
Depreciation, depletion and amortization	78,028			118,433
Impairment of oil and natural gas properties	553,345			—
General and administrative expenses	16,169			10,057
Accretion expense	741			1,067
	726,964			227,567
(LOSS) INCOME FROM OPERATIONS	(480,087		)	93,011
OTHER EXPENSE (INCOME):
Interest expense	32,990			35,621
Interest income	(152		)	(152		)
Gain on debt extinguishment	(15,322		)	—
Loss (income) from equity method investments, net	10,789			(4,273		)
Other expense (income)	1,856			(427		)
	30,161			30,769
(LOSS) INCOME BEFORE INCOME TAXES	(510,248		)	62,242
INCOME TAX EXPENSE	7,290			—
NET (LOSS) INCOME	$	(517,538	)	$	62,242
NET (LOSS) INCOME PER COMMON SHARE:
Basic	$	(3.24	)	$	0.38
Diluted	$	(3.24	)	$	0.38
Weighted average common shares outstanding—Basic	159,760,222			162,823,997
Weighted average common shares outstanding—Diluted	159,760,222			163,099,409

See accompanying notes to consolidated financial statements.

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GULFPORT ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)



	Three months ended March 31,
	2020			2019
	(In thousands)
Net (loss) income	$	(517,538	)	$	62,242
Foreign currency translation adjustment	(15,030		)	3,801
Other comprehensive (loss) income	(15,030		)	3,801
Comprehensive (loss) income	$	(532,568	)	$	66,043

See accompanying notes to consolidated financial statements.

GULFPORT ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)



						Paid-in Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders’ Equity
	Common Stock
	Shares		Amount
	(In thousands)
Balance at January 1, 2020	159,711		$	1,597		$	4,207,554		$	(46,833	)	$	(2,847,726	)	$	1,314,592
Net Loss	—		—			—			—			(517,538		)	(517,538		)
Other Comprehensive Loss	—		—			—			(15,030		)	—			(15,030		)
Stock Compensation	—		—			2,104			—			—			2,104
Shares Repurchased	(80	)	(1		)	(78		)	—			—			(79		)
Issuance of Restricted Stock	211		2			(2		)	—			—			—
Balance at March 31, 2020	159,842		$	1,598		$	4,209,578		$	(61,863	)	$	(3,365,264	)	$	784,049



						Paid-in Capital			Accumulated Other Comprehensive (Loss) Income			Accumulated Deficit			Total Stockholders’ Equity
	Common Stock
	Shares		Amount
	(In thousands)
Balance at January 1, 2019	162,986		$	1,630		$	4,227,532		$	(56,026	)	$	(845,368	)	$	3,327,768
Net Income	—		—			—			—			62,242			62,242
Other Comprehensive Income	—		—			—			3,801			—			3,801
Stock Compensation	—		—			2,785			—			—			2,785
Shares Repurchased	(3,619	)	(37		)	(28,293		)	—			—			(28,330		)
Issuance of Restricted Stock	55		1			(1		)	—			—			—
Balance at March 31, 2019	159,422		$	1,594		$	4,202,023		$	(52,225	)	$	(783,126	)	$	3,368,266

See accompanying notes to consolidated financial statements.

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GULFPORT ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Three months ended March 31,
	2020			2019
	(In thousands)
Cash flows from operating activities:
Net (loss) income	$	(517,538	)	$	62,242
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depletion, depreciation and amortization	78,028			118,433
Impairment of oil and natural gas properties	553,345			—
Loss (income) from equity investments	10,789			(4,132		)
Gain on debt extinguishment	(15,322		)	—
Net (gain) loss on derivative instruments	(98,266		)	20,045
Cash receipts (payments) on settled derivative instruments	70,733			(24,836		)
Deferred income tax expense	7,290			—
Other, net	3,223			5,508
Changes in operating assets and liabilities:
Decrease in accounts receivable—oil and natural gas sales	47,111			65,204
Decrease (increase) in accounts receivable—joint interest and other	6,001			(2,083		)
(Decrease) increase in accounts payable and accrued liabilities	(7,637		)	1,366
Other, net	(6,919		)	(1,982		)
Net cash provided by operating activities	130,838			239,765
Cash flows from investing activities:
Additions to oil and natural gas properties	(113,744		)	(241,391		)
Proceeds from sale of oil and natural gas properties	44,383			52
Additions to other property and equipment	(539		)	(3,848		)
Proceeds from sale of other property and equipment	91			56
Contributions to equity method investments	—			(432		)
Net cash used in investing activities	(69,809		)	(245,563		)
Cash flows from financing activities:
Principal payments on borrowings	(180,106		)	(150,151		)
Borrowings on line of credit	125,000			150,000
Repurchases of senior notes	(10,204		)	—
Payments for repurchases of stock under approved stock repurchase program	—			(28,212		)
Other, net	(146		)	(140		)
Net cash used in financing activities	(65,456		)	(28,503		)
Net decrease in cash, cash equivalents and restricted cash	(4,427		)	(34,301		)
Cash, cash equivalents and restricted cash at beginning of period	6,060			52,297
Cash, cash equivalents and restricted cash at end of period	$	1,633		$	17,996
Supplemental disclosure of cash flow information:
Interest payments	$	14,034		$	15,266
Income tax receipts	$	—		$	(1,794	)
Supplemental disclosure of non-cash transactions:
Capitalized stock-based compensation	$	934		$	1,114
Asset retirement obligation capitalized	$	381		$	1,952
Asset retirement obligation removed due to divestiture	$	(2,033	)	$	—
Interest capitalized	$	187		$	766
Fair value of contingent consideration asset on date of divestiture	$	23,090		$	—
Foreign currency translation (loss) gain on equity method investments	$	(15,030	)	$	3,801

See accompanying notes to consolidated financial statements.

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GULFPORT ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


1.	BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 months ended March 31, 2020 are not necessarily indicative of the results expected for the full year.

COVID-19

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 imposed regulations in efforts to control the spread of COVID-19 such as shelter-in-place orders, quarantines, executive orders and similar restrictions.

While the Company continues to deliver energy resources to the United States, it remains focused on protecting the health and wellbeing of its employees and the communities in which it operates while assuring the continuity of its business operations. As a result of its business continuity measures, the Company has not experienced significant disruptions in executing its business operations in the first quarter of 2020. However, 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.

On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The CARES Act as currently structured is not expected to have a material impact on the Company’s consolidated financial statements.

Impact on Previously Reported Results

During the third quarter of 2019, the Company identified that certain activities were misclassified between cash flows from operating activities and cash flows from investing activities. These activities had been included in accounts payable, accrued liabilities and other and presented as cash flows from operating activities while they should have been presented as additions to oil and natural gas properties in cash flows from investing activities. The Company corrected the previously presented statements of cash flows for these additions and in doing so, for the three months ended March 31, 2019 contained herein, the consolidated statements of cash flows and the condensed consolidating statements of cash flows were adjusted to increase net cash flows provided by operating activities by $54.7 million with a corresponding increase in net cash flows used in investing activities. The Company has evaluated the effect of the incorrect presentation, both qualitatively and quantitatively, and concluded that it did not have a material impact on any previously filed annual or quarterly consolidated financial statements.

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,

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including historical experience, current conditions and reasonable and supportable forecasts that affect the collectibility 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.


2.	PROPERTY AND EQUIPMENT

The major categories of property and equipment and related accumulated depletion, depreciation, amortization ("DD&A") and impairment as of March 31, 2020 and December 31, 2019 are as follows:



	March 31, 2020			December 31, 2019
	(In thousands)
Oil and natural gas properties	$	10,667,532		$	10,595,735
Accumulated DD&A and impairment	(7,820,662		)	(7,191,957		)
Oil and natural gas properties, net	2,846,870			3,403,778
Other depreciable property and equipment	91,361			91,198
Land	5,521			5,521
Accumulated DD&A	(39,211		)	(36,703		)
Other property and equipment, net	57,671			60,016
Property and equipment, net	$	2,904,541		$	3,463,794

Under the full cost method of accounting, the Company is required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the Company's oil and natural gas properties. At March 31, 2020, the net book value of the Company's oil and gas properties, less related deferred income taxes, was above the calculated ceiling as a result of reduced commodity prices for the period leading up to March 31, 2020. As a result, the Company was required to record an impairment of its oil and natural gas properties in the amount of $553.3 million for the three months ended March 31, 2020. No impairment was required for oil and natural gas properties for the three months ended March 31, 2019.

Based on prices for the last nine months and the short-term pricing outlook for the second quarter of 2020, the Company expects to recognize additional full cost impairments in the second quarter of 2020. The amount of any future impairments is difficult to predict as it depends on changes in commodity prices, production rates, proved reserves, evaluation of costs excluded from amortization, future development costs and production costs. Any future full cost impairments are not expected to have any impact to the Company's future cash flows or liquidity.

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 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 $5.4 million and $7.7 million for the three months ended March 31, 2020 and 2019, respectively.

The average depletion rate per Mcfe, which is a function of capitalized costs, future development costs and the related underlying reserves in the periods presented, was $0.79 and $1.02 per Mcfe for the three months ended March 31, 2020 and 2019, respectively.

The following table summarizes the Company’s unevaluated properties excluded from amortization by area at March 31, 2020:



	March 31, 2020
	(In thousands)
Utica	$	908,481
MidContinent	697,909
Other	2,250
	$	1,608,640

At December 31, 2019, approximately $1.7 billion of unevaluated properties were not subject to amortization.

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The Company evaluates the costs excluded from its amortization calculation at least annually. Individually insignificant unevaluated properties are grouped for evaluation and periodically transferred to evaluated properties over a timeframe consistent with their expected development schedule.

Asset Retirement Obligation

A reconciliation of the Company’s asset retirement obligation for the three months ended March 31, 2020 and 2019 is as follows:



	March 31, 2020			March 31, 2019
	(In thousands)
Asset retirement obligation, beginning of period	$	60,355		$	79,952
Liabilities incurred	381			969
Liabilities settled	—			(71		)
Liabilities removed due to divestitures	(2,033		)	—
Accretion expense	741			1,067
Revisions in estimated cash flows	—			983
Asset retirement obligation as of end of period	59,444			82,900


3.	DIVESTITURES

Sale of Water Infrastructure Assets

On January 2, 2020, the Company closed on the sale of its SCOOP water infrastructure assets to a third-party water service provider. The Company received $50.0 million in cash proceeds upon closing and has an opportunity to earn potential additional incentive payments over the next 15 years, subject to the Company's ability to meet certain thresholds which will be driven by, among other things, the Company's future development program and water production levels. The agreement contained no minimum volume commitments. The fair value of the contingent consideration as of the closing date was $23.1 million.

The divested assets were included in the amortization base of the full cost pool and no gain or loss was recognized in the accompanying consolidated statements of operations as a result of the sale.


4.	EQUITY INVESTMENTS

Investments accounted for by the equity method consist of the following as of March 31, 2020 and December 31, 2019:



			Carrying value				(Loss) income from equity method investments
	Approximate ownership %		March 31, 2020		December 31, 2019		Three months ended March 31,
	Approximate ownership %		March 31, 2020		December 31, 2019		2020			2019
			(In thousands)
Investment in Grizzly Oil Sands ULC	24.9	%	$	6,186	$	21,000	$	(143	)	$	(393	)
Investment in Mammoth Energy Services, Inc.	21.5	%	—		11,005		(10,646		)	4,526
Investment in Windsor Midstream LLC	22.5	%	39		39		—			—
Investment in Tatex Thailand II, LLC	23.5	%	—		—		—			140
			$	6,225	$	32,044	$	(10,789	)	$	4,273

The tables below summarize financial information for the Company’s equity investments as of March 31, 2020 and December 31, 2019.

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Summarized balance sheet information:



	March 31, 2020		December 31, 2019
	March 31, 2020		December 31, 2019
	(In thousands)
Current assets	$	440,801	$	421,326
Noncurrent assets	$	1,104,297	$	1,260,075
Current liabilities	$	131,175	$	132,569
Noncurrent liabilities	$	171,132	$	163,241

Summarized results of operations:



	Three months ended March 31,
	2020			2019
	(In thousands)
Gross revenue	$	97,383		$	264,844
Net (loss) income	$	(85,031	)	$	24,756

Grizzly Oil Sands ULC

The Company, through its wholly owned subsidiary Grizzly Holdings Inc. (“Grizzly Holdings”), owns an approximate 24.9% interest in Grizzly Oil Sands ULC (“Grizzly”), a Canadian unlimited liability company. The remaining interest in Grizzly is owned by Grizzly Oil Sands Inc. As of March 31, 2020, Grizzly had approximately 830,000 acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. The Company reviewed its investment in Grizzly for impairment at March 31, 2020 and 2019 and determined no impairment was required. The Company paid $0.4 million in cash calls during the three months ended March 31, 2019 prior to its election to cease funding further capital calls. Grizzly’s functional currency is the Canadian dollar. The Company’s investment in Grizzly was decreased by a $14.7 million foreign currency translation loss and increased by a $3.7 million foreign currency translation gain for the three months ended March 31, 2020 and 2019, respectively.

Mammoth Energy Services, Inc.

At March 31, 2020, the Company owned 9,829,548 shares, or approximately 21.5%, of the outstanding common stock of Mammoth Energy Services, Inc. ("Mammoth Energy"). The Company’s investment in Mammoth Energy was decreased by a $0.4 million foreign currency loss and increased by a $0.1 million foreign currency gain resulting from Mammoth Energy's foreign subsidiary for the three months ended March 31, 2020 and 2019, respectively. The Company received no distributions from Mammoth Energy during the three months ended March 31, 2020 and distributions of $1.2 million during the three months ended March 31, 2019 as a result of $0.125 per share dividends in February 2019. The approximate fair value of the Company's investment in Mammoth Energy at March 31, 2020 was $7.4 million based on the quoted market price of Mammoth Energy's common stock. The Company's share of net loss of Mammoth for three months ended March 31, 2020 was in excess of the carrying value of its investment. As such, the Company's investment value was reduced to zero at March 31, 2020. The loss (income) from equity method investments presented in the table above reflects any intercompany profit eliminations.

Windsor Midstream LLC

At March 31, 2020, the Company held a 22.5% interest in Windsor Midstream LLC (“Midstream”), an entity controlled and managed by an unrelated third party. The Company received no distributions from Midstream during the three months ended March 31, 2020.

Tatex Thailand II, LLC

The Company has an indirect ownership interest in Tatex Thailand II, LLC ("Tatex") and received no distributions and $0.1 million in distributions from Tatex during the three months ended March 31, 2020 and 2019, respectively. Tatex previously held an 8.5% interest in APICO, LLC (“APICO”), an international oil and gas exploration company, before selling its interest in June 2019. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering approximately 108,000 acres which includes the Phu Horm Field.

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5.	LONG-TERM DEBT

Long-term debt consisted of the following items as of March 31, 2020 and December 31, 2019:



	March 31, 2020			December 31, 2019
	(In thousands)
Revolving credit agreement⁽¹⁾	$	65,000		$	120,000
6.625% senior unsecured notes due 2023	329,467			329,467
6.000% senior unsecured notes due 2024	595,903			603,428
6.375% senior unsecured notes due 2025	521,360			529,525
6.375% senior unsecured notes due 2026	387,367			397,529
Net unamortized debt issuance costs⁽²⁾	(22,395		)	(23,751		)
Construction loan	22,348			22,453
Less: current maturities of long term debt	(688		)	(631		)
Debt reflected as long term	$	1,898,362		$	1,978,020

(1) The Company has entered into a senior secured revolving credit facility, as amended (the "revolving credit facility"), with The Bank of Nova Scotia, as the lead arranger and administrative agent and other lenders. The credit agreement provides for a maximum facility of $1.5 billion and matures on December 13, 2021. On November 25, 2019, the borrowing base under the Company's revolving credit facility was reduced to $1.2 billion, and the Company's elected commitment remained at $1.0 billion.

As of March 31, 2020, $65.0 million was outstanding under the revolving credit facility and the total availability for future borrowings under this facility, after giving effect to an aggregate of $236.8 million letters of credit, was $698.2 million. The Company’s wholly owned subsidiaries have guaranteed the obligations of the Company under the revolving credit facility.

At March 31, 2020, amounts borrowed under the revolving credit facility bore interest at a weighted average rate of 2.45%.

The Company was in compliance with its financial covenants under the revolving credit facility at March 31, 2020.

(2) Loan issuance costs related to the 6.625% Senior Notes due 2023 (the "2023 Notes"), the 6.000% Senior Notes due 2024 (the "2024 Notes"), the 6.375% Senior Notes due 2025 (the "2025 Notes") and the 6.375% Senior Notes due 2026 (the "2026 Notes") (collectively the “Notes”) have been presented as a reduction to the principal amount of the Notes. At March 31, 2020, total unamortized debt issuance costs were $3.1 million for the 2023 Notes, $6.5 million for the 2024 Notes, $9.1 million for the 2025 Notes and $3.6 million for the 2026 Notes. In addition, loan commitment fee costs for the Company's construction loan agreement were $0.1 million at March 31, 2020.

The Company capitalized approximately $0.2 million and $0.8 million in interest expense to its unevaluated oil and natural gas properties during the three months ended March 31, 2020 and 2019, respectively.

Debt Repurchases

The Company's Board of Directors has authorized $200 million of cash to be used to repurchase its senior notes in the open market at discounted values to par. During the three months ended March 31, 2020, the Company used borrowings under its revolving credit facility to repurchase in the open market approximately $25.9 million aggregate principal amount of its outstanding Notes for $10.2 million. This included approximately $7.5 million principal amount of the 2024 Notes, $8.2 million principal amount of the 2025 Notes, and $10.2 million principal amount of the 2026 Notes. The Company recognized a $15.3 million gain on debt extinguishment, which included retirement of unamortized issuance costs and fees associated with the repurchased debt. This gain is included in gain on debt extinguishment in the accompanying consolidated statements of operations.

Fair Value of Debt

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At March 31, 2020, the carrying value of the outstanding debt represented by the Notes was approximately $1.8 billion. Based on the quoted market prices (Level 1), the fair value of the Notes was determined to be approximately $447.4 million at March 31, 2020.


6.	CHANGES IN CAPITALIZATION

Stock Repurchases

In January 2019, the Company's Board of Directors approved a stock repurchase program to acquire a portion of the Company's outstanding common stock within a 24-month period. The program was suspended in the fourth quarter of 2019, and the May 1, 2020 amendment to the Company's revolving credit facility prohibits further repurchases.

For the three months ended March 31, 2019, the Company repurchased 3.6 million shares for a cost of approximately $28.2 million under this repurchase program. Additionally, during the three months ended March 31, 2020 and 2019, the Company repurchased 80,000 and 15,000 shares, respectively, for a cost of approximately $0.1 million in each period to satisfy tax withholding requirements incurred upon the vesting of restricted stock. All repurchased shares have been canceled and returned to the status of authorized but unissued shares.


7.	STOCK-BASED COMPENSATION

The Company has granted restricted stock units to employees and directors pursuant to the 2019 Amended and Restated Incentive Stock Plan ("2019 Plan"), as discussed below. During the three months ended March 31, 2020 and 2019, the Company’s stock-based compensation cost was $2.1 million and $2.8 million, respectively, of which the Company capitalized $0.9 million and $1.1 million, respectively, relating to its exploration and development efforts. Stock compensation costs, net of the amounts capitalized, are included in general and administrative expenses in the accompanying consolidated statements of operations.

The following table summarizes restricted stock unit activity for the three months ended March 31, 2020:



	Number of Unvested Restricted Stock Units		Weighted Average Grant Date Fair Value		Number of Unvested Performance Vesting Restricted Stock Units		Weighted Average Grant Date Fair Value
Unvested shares as of January 1, 2020	4,098,318		$	4.73	1,783,660		$	2.96
Granted	1,985,452		0.67		—		—
Vested	(211,090	)	8.65		—		—
Forfeited	(344,112	)	5.00		(225,484	)	1.98
Unvested shares as of March 31, 2020	5,528,568		$	3.17	1,558,176		$	3.11

Restricted Stock Units

Restricted stock units awarded under the 2019 Plan generally vest over a period of one year in the case of directors and three years in the case of employees and vesting is dependent upon the recipient meeting applicable service requirements. Stock-based compensation costs are recorded ratably over the service period. The grant date fair value of restricted stock units represents the closing market price of the Company's common stock on the date of grant. Unrecognized compensation expense as of March 31, 2020 related to restricted stock units was $12.9 million. The expense is expected to be recognized over a weighted average period of 1.96 years.

Performance Vesting Restricted Stock Units

The Company has awarded performance vesting units to certain of its executive officers under the 2019 Plan. The number of shares of common stock issued pursuant to the award will be based on relative total shareholder return ("RTSR"). RTSR is an incentive measure whereby participants will earn from 0% to 200% of the target award based on the Company’s RTSR ranking compared to the RTSR of the companies in the Company’s designated peer group at the end of the performance period. Awards will be earned and vested over a performance period measured from January 1, 2019 to December 31, 2021, subject to earlier termination of the performance period in the event of a change in control. Unrecognized compensation expense as of March 31, 2020 related to performance vesting restricted shares was $3.4 million. The expense is expected to be recognized over a weighted average period of 2.11 years.

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Cash Incentive Awards

On March 16, 2020, the Board of Directors of the Company approved the Company's 2020 Incentive Plan (the "2020 Incentive Plan"). The 2020 Incentive Plan provides for incentive compensation opportunities ("Incentive Awards") for select employees of the Company that are tied to the achievement of one or more performance goals relating to certain financial and operational metrics over a period of time. The earning of an Incentive Award and payout opportunity is contingent upon meeting the Incentive Award's applicable threshold performance levels. If such threshold performance levels are satisfied, the payout amount varies for performance above or below the pre-established target performance levels.

During the three months ended March 31, 2020, the Company awarded Incentive Awards to certain of its executive officers under the 2020 Incentive Plan. The cash amount of each award ultimately received is based on the attainment of certain financial, operational and total shareholder return performance targets and is subject to the recipient's continuous employment. Each Incentive Award is subject to a Performance Period of January 1, 2020 to December 31, 2020, and different vesting periods apply to separate one-third portions of each Incentive Award, with a different tranche vesting each on December 31, 2020, 2021, and 2022. The Incentive Awards are considered liability awards as the ultimate amount of the award is based, at least in part, on the price of the Company's shares, and as such, are remeasured to fair value at the end of each reporting period. The fair value of the Incentive Awards at March 31, 2020 was $3.2 million, which also approximated the grant date fair value. Unrecognized compensation expense as of March 31, 2020 related to Incentive Awards was $3.1 million. The expense is expected to be recognized over a weighted average period of 1.77 years.

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8.	EARNINGS PER SHARE

Reconciliations of the components of basic and diluted net income per common share are presented in the tables below:



	Three months ended March 31,
	2020							2019
	Loss			Shares	Per Share			Income		Shares	Per Share
	(In thousands, except share data)
Basic:
Net (loss) income	$	(517,538	)	159,760,222	$	(3.24	)	$	62,242	162,823,997	$	0.38
Effect of dilutive securities:
Stock awards	—			—				—		275,412
Diluted:
Net (loss) income	$	(517,538	)	159,760,222	$	(3.24	)	$	62,242	163,099,409	$	0.38

There were 1,552,423 shares of common stock that were considered anti-dilutive for the three months ended March 31, 2020. There were no potential shares of common stock that were considered anti-dilutive for the three months ended March 31, 2019.

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9.	COMMITMENTS AND CONTINGENCIES

Future Firm Sales Commitments

The Company has entered into various firm sales contracts to deliver and sell natural gas. The Company expects to fulfill its delivery commitments primarily with production from proved developed reserves. The Company's proved reserves have generally been sufficient to satisfy its delivery commitments during the three most recent years, and it expects such reserves will continue to be the primary means of fulfilling its future commitments. However, where the Company's proved reserves are not sufficient to satisfy its delivery commitments, it can and may use spot market purchases to satisfy the commitments.

A summary of these commitments at March 31, 2020 are set forth in the table below:



		(MMBtu per day)
Remaining 2020		316,000
2021		192,000
2022		70,000
2023		17,000
Total		595,000

Future Firm Transportation Commitments

The Company has contractual commitments with pipeline carriers for future transportation of natural gas from the Company's production areas to downstream markets. Commitments related to future firm transportation agreements are not recorded as obligations in the accompanying consolidated balance sheets; however, the costs associated with these commitments are reflected in the Company's estimates of proved reserves and future net revenues.

A summary of these commitments at March 31, 2020 are set forth in the table below:



	Total MMBtu	(In thousands)
Remaining 2020	395,625,000	$	206,292
2021	531,075,000	285,789
2022	531,075,000	286,626
2023	515,867,000	282,945
2024	489,525,000	265,568
Thereafter	3,769,092,000	2,160,732
Total	6,232,259,000	$	3,487,952

Other Commitments

Effective October 1, 2014, the Company entered into a Sand Supply Agreement with Muskie Proppant LLC (“Muskie”), a subsidiary of Mammoth Energy and a related party. Pursuant to this agreement, as amended effective August 3, 2018, 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 through 2021. 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 $1.9 million and $0.3 million in non-utilization fees under this agreement during the three months ended March 31, 2020 and 2019, respectively.

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Future minimum commitments under this agreement at March 31, 2020 are:



	(In thousands)
Remaining 2020	$	5,625
2021	7,500
Total	$	13,125

Litigation and Regulatory Proceedings

The Company is involved in a number of litigation and regulatory proceedings including those described below. Many of these proceedings are in early stages, and many of them seek or may seek damages and penalties, the amount of which is indeterminate. The Company's total accrued liabilities in respect of litigation and regulatory proceedings is determined on a case-by-case basis and represents an estimate of probable losses after considering, among other factors, the progress of each case or proceeding, its experience and the experience of others in similar cases or proceedings, and the opinions and views of legal counsel. Significant judgment is required in making these estimates and their final liabilities may ultimately be materially different.

The Company, along with a number of other oil and gas companies, has been named as a defendant 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 the 15th Judicial District of the State of Louisiana in the 15th Judicial District Court for the Parish of Vermilion on July 29, 2016 (together, the "Complaints"). The Complaints allege that certain of the defendants’ operations violated the State and Local Coastal Resources Management Act of 1978, as amended, and the rules, regulations, orders and ordinances adopted thereunder (the "CZM Laws") by causing substantial damage to land and waterbodies located in the coastal zone of the relevant Parish. 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 interest. The United States District Court for the Western District of Louisiana issued orders remanding the cases to their respective state court, and the defendants have appealed the remand orders to the 5th Circuit Court of Appeals.

In July 2019, Pigeon Land Company, Inc., a successor in interest to certain of the Company’s legacy Louisiana properties, filed an action against the Company and many other oil and gas companies in the 16th Judicial District Court for the Parish of Iberia in Louisiana. The suit alleges negligence, strict liability and various violations of Louisiana statutes relating to property damage in connection with the historic development of the Company’s Louisiana properties and seeks unspecified damages (including punitive damages), an injunction to return the affected property to its original condition, and the payment of reasonable attorney fees and legal expenses and interest.

In September 2019, a stockholder of Mammoth Energy filed a derivative action on behalf of Mammoth Energy against members of Mammoth Energy’s board of directors, including a director designated by the Company, and its significant stockholders, including the Company, in the United States District Court for the Western District of Oklahoma. The complaint alleges, among other things, that the members of Mammoth Energy’s board of directors breached their fiduciary duties and violated the Securities Exchange Act of 1934, as amended, in connection with Mammoth Energy’s activities in Puerto Rico following Hurricane Maria. The complaint seeks unspecified damages, the payment of reasonable attorney fees and legal expenses and interest and to force Mammoth Energy and its board of directors to make specified corporate governance reforms.

In October 2019, Kelsie Wagner, in her capacity as trustee of various trusts and on behalf of the trusts and other similarly situated royalty owners, filed an action against the Company in the District Court of Grady County, Oklahoma. The suit alleges that the Company underpaid royalty owners and seeks unspecified damages for violations of the Oklahoma Production Revenue Standards Act and fraud.

In March 2020, Robert F. Woodley, individually and on behalf of all others similarly situated, filed a federal securities class action against the Company, David M. Wood, Keri Crowell and Quentin R. Hicks in the United States District Court for the Southern District of New York. The complaint alleges that the Company made materially false and misleading statements regarding the Company’s business and operations in violation of the federal securities laws and seeks unspecified damages, the payment of reasonable attorneys’ fees, expert fees and other costs, pre-judgment and post-judgment interest, and such other and further relief that may be deemed just and proper.

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As previously disclosed, in December 2019, the Company filed a lawsuit against Stingray Pressure Pumping LLC, a subsidiary of Mammoth Energy (“Stingray”), for breach of contract and to terminate the Master Services Agreement for pressure pumping services, effective as of October 1, 2014, as amended (the “Master Services Agreement”), between Stingray and the Company. In March 2020, Stingray filed a counterclaim against the Company in the Superior Court of the State of Delaware. The counterclaim alleges that the Company has breached the Master Services Agreement. The counterclaim seeks actual damages, which the complaint calculates to be approximately $6.7 million as of February 2020 (such amount to increase each month), the payment of reasonable attorney fees and legal expenses and pre- and post-judgment interest as allowed, and such other and further relief which it may be justly entitled.

In April 2020, Bryon Lefort, individually and on behalf of similarly situated individuals, filed an action against the Company in the United States District Court for the Southern District of Ohio Eastern Division. The complaint alleges that the Company violated the Fair Labor Standards Act (“FLSA”), the Ohio Wage Act and the Ohio Prompt Pay Act by classifying the plaintiffs as independent contractors and paying them a daily rate with no overtime compensation for hours worked in excess of 40 hours per week. The complaint seeks to recover unpaid regular and overtime wages, liquidated damages in an amount equal to six percent of all unpaid overtime compensation, the payment of reasonable attorney fees and legal expenses and pre-judgment and post-judgment interest, and such other damages that may be owed to the workers.

These cases are still in their early stages. As a result, the Company has not had the opportunity to evaluate the allegations made in the plaintiffs' complaints and intends to vigorously defend the suits.

SEC Investigation

The SEC has commenced an investigation with respect to certain actions by former Company management, including alleged improper personal use of Company assets, and potential violations by former management and the Company of the Sarbanes-Oxley Act of 2002 in connection with such actions. The Company has fully cooperated and intends to continue to cooperate fully with the SEC’s investigation. Although it is not possible to predict the ultimate resolution or financial liability with respect to this matter, the Company believes that the outcome of this matter will not have a material effect on the Company’s business, financial condition or results of operations.

Business Operations

The Company is involved in various lawsuits and disputes incidental to its business operations, including commercial disputes, personal injury claims, royalty claims, property damage claims and contract actions.

Environmental Contingencies

The nature of the oil and gas business carries with it certain environmental risks for Gulfport and its subsidiaries. They have implemented various policies, programs, procedures, training and audits to reduce and mitigate environmental risks. They conduct periodic reviews, on a company-wide basis, to assess changes in their environmental risk profile. Environmental reserves are established for environmental liabilities for which economic losses are probable and reasonably estimable. The Company manages its exposure to environmental liabilities in acquisitions by using an evaluation process that seeks to identify pre-existing contamination or compliance concerns and address the potential liability. Depending on the extent of an identified environmental concern, they may, among other things, exclude a property from the transaction, require the seller to remediate the property to their satisfaction in an acquisition or agree to assume liability for the remediation of the property.

The Company received several Finding of Violation (“FOVs”) from the United States Environmental Protection Agency ("USEPA") alleging violations of the Clean Air Act at approximately 17 locations in Ohio. The first FOV for one site was dated December 11, 2013. Two subsequent FOVs incorporated and expanded the scope on January 4, 2017 and April 15, 2019. The Company has exchanged information with the USEPA and is engaged in discussions aimed at resolving the allegations. Resolution of the matter resulted in monetary sanctions of approximately $1.7 million.

Other Matters

Based on management’s current assessment, they are of the opinion that no pending or threatened lawsuit or dispute relating to its business operations is likely to have a material adverse effect on their future consolidated financial position, results of operations or cash flows. The final resolution of such matters could exceed amounts accrued, however, and actual results could differ materially from management’s estimates.


10.	DERIVATIVE INSTRUMENTS

Natural Gas, Oil and Natural Gas Liquids Derivative Instruments

The Company seeks to reduce its exposure to unfavorable changes in natural gas, oil and natural gas liquids ("NGL") prices, which are subject to significant and often volatile fluctuation, by entering into over-the-counter fixed price swaps, basis swaps and various types of option contracts. These contracts allow the Company to predict with greater certainty the effective natural gas, oil and NGL 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 the NYMEX Henry Hub for natural gas, the NYMEX West Texas Intermediate for oil and Mont Belvieu for propane, pentane and ethane. Below is a summary of the Company’s open fixed price swap positions as of March 31, 2020.



	Location	Daily Volume (MMBtu/day)	Weighted Average Price
Remaining 2020	NYMEX Henry Hub	432,000	$	2.92



	Location	Daily Volume (Bbls/day)	Weighted Average Price
Remaining 2020	NYMEX WTI	6,000	$	59.83



	Location	Daily Volume (Bbls/day)	Weighted Average Price
Remaining 2020	Mont Belvieu C3	500	$	21.63

The Company sold call options in exchange for a premium, and used the associated premiums to enhance the fixed price for a portion of the fixed price natural gas swaps primarily for 2020 listed above. Each call option has an established ceiling price. When the referenced settlement price is above the price ceiling established by these 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 volumes.



	Location	Daily Volume (MMBtu/day)	Weighted Average Price
2022	NYMEX Henry Hub	628,000	$	2.90
2023	NYMEX Henry Hub	628,000	$	2.90

In addition, the Company entered into natural gas basis swap positions. As of March 31, 2020, the Company had the following natural gas basis swap positions open:



	Gulfport Pays	Gulfport Receives	Daily Volume (MMBtu/day)	Weighted Average Fixed Spread
Remaining 2020	Transco Zone 4	NYMEX Plus Fixed Spread	60,000	$	(0.05	)
Remaining 2020	Fixed Spread	ONEOK Minus NYMEX	10,000	$	(0.54	)

Contingent Consideration Arrangement

The Company sold its non-core assets located in the West Cote Blanche Bay and Hackberry fields of Louisiana in July 2019. The sale price included the potential for the Company to receive contingent payments based on commodity prices exceeding specified thresholds over the two years following the closing date. This contingent consideration arrangement was determined to be an embedded derivative. See below for threshold and potential payment amounts.



Period	Threshold⁽¹⁾	Payment to be received⁽²⁾
July 2020 - June 2021	Greater than or equal to $60.65	$	150,000
	Between $52.62 - $60.65	Calculated Value⁽³⁾
	Less than or equal to $52.62	$	—



(1)	Based on the "WTI NYMEX + Argus LLS Differential," as published by Argus Media.
(2)	Payment will be assessed monthly from July 2020 through June 2021. If threshold is met, payment shall be received within five business days after the end of each calendar month.
(3)	If average daily price, as defined in (1), is greater than $52.62 but less than $60.65, payment received will be $150,000 multiplied by a fraction, the numerator of which is the amount determined by subtracting $52.62 from such average daily price, and the denominator of which is $8.03.

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 March 31, 2020 and December 31, 2019:



	March 31, 2020		December 31, 2019
	(In thousands)
Commodity derivative instruments	$	171,755	$	125,383
Contingent consideration arrangement	—		818
Total short-term derivative instruments - asset	$	171,755	$	126,201

Contingent consideration arrangement	—		563
Total long-term derivative instruments - asset	$	—	$	563

Total short-term derivative instruments - liability	$	67	$	303

Total long-term derivative instruments - liability	$	70,829	$	53,135
Total net asset derivative position	$	100,859	$	73,326

Gains and Losses

The following table presents the gain and loss recognized in net gain (loss) on natural gas, oil and NGL derivatives in the accompanying consolidated statements of operations for the three months ended March 31, 2020 and 2019.



	Net gain (loss) on derivative instruments
	Three months ended March 31,
	2020			2019
	(In thousands)
Natural gas derivatives	$	45,853		$	(16,431	)
Oil derivatives	52,874			(454		)
NGL derivatives	920			(3,160		)
Contingent consideration arrangement	(1,381		)	—
Total	$	98,266		$	(20,045	)

Offsetting of Derivative Assets and Liabilities

As noted above, the Company records the fair value of derivative instruments on a gross basis. The following table presents the gross amounts of recognized derivative assets and liabilities in the consolidated balance sheets and the amounts that are subject to offsetting under master netting arrangements with counterparties, all at fair value.



	As of March 31, 2020
	Gross Assets (Liabilities)			Gross Amounts
	Presented in the			Subject to Master			Net
	Consolidated Balance Sheets			Netting Agreements			Amount
	(In thousands)
Derivative assets	$	171,755		$	(70,896	)	$	100,859
Derivative liabilities	$	(70,896	)	$	70,896		$	—



	As of December 31, 2019
	Gross Assets (Liabilities)			Gross Amounts
	Presented in the			Subject to Master			Net
	Consolidated Balance Sheets			Netting Agreements			Amount
	(In thousands)
Derivative assets	$	126,764		$	(53,438	)	$	73,326
Derivative liabilities	$	(53,438	)	$	53,438		$	—

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. None of the Company’s derivative instrument contracts contain credit-risk related contingent features. 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.


11.	FAIR VALUE MEASUREMENTS

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The Company records certain financial and non-financial assets and liabilities on the balance sheet at fair value. Fair value is 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. Market or observable inputs are the preferred sources of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. Fair value measurements are 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 valuation level as of March 31, 2020 and December 31, 2019:



	March 31, 2020
	Level 1		Level 2		Level 3
	(In thousands)
Assets:
Derivative Instruments	$	—	$	171,755	$	—
Liabilities:
Derivative Instruments	$	—	$	70,896	$	—



	December 31, 2019
	Level 1		Level 2		Level 3
	(In thousands)
Assets:
Derivative Instruments	$	—	$	126,764	$	—
Liabilities:
Derivative Instruments	$	—	$	53,438	$	—

The Company estimates the fair value of all derivative instruments using industry-standard models that consider 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.

As discussed in Note 3, the water infrastructure sale included a contingent consideration arrangement. As of March 31, 2020, the fair value of the contingent consideration was $23.0 million, of which $0.6 million is included in prepaid expenses and other assets and $22.4 million is included in other assets in the accompanying consolidated balance sheets. The fair value of the contingent consideration arrangement is calculated using discounted cash flow techniques and based on internal estimates of the Company's future development program and water production levels. Given the unobservable nature of the inputs, the fair value measurement of the contingent consideration arrangement is deemed to use Level 3 inputs. The Company has elected the fair value option for this contingent consideration arrangement and, therefore, will record changes in fair value in earnings in that period. The Company recognized a gain of $0.2 million on changes in fair value of the contingent consideration during the three months ended March 31, 2020, which is included in other expense (income) in the accompanying consolidated

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statements of operations. Settlements under the contingent consideration arrangement totaled $0.3 million during the three months ended March 31, 2020.

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 three months ended March 31, 2020 were approximately $0.4 million.

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 Company's 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.


12.	REVENUE FROM CONTRACTS WITH CUSTOMERS

Revenue Recognition

The Company’s revenues are primarily derived from the sale of natural gas, oil and condensate and NGL. Sales of natural gas, oil and condensate and NGL are recognized in the period that the performance obligations are satisfied. The Company generally considers the delivery of each unit (MMBtu or Bbl) to be separately identifiable and represents a distinct performance obligation that is satisfied at the time control of the product is transferred to the customer. Revenue is measured based on consideration specified in the contract with the customer, and excludes any amounts collected on behalf of third parties. These contracts typically include variable consideration that is based on pricing tied to market indices and volumes delivered in the current month. As such, this market pricing may be constrained (i.e., not estimable) at the inception of the contract but will be recognized based on the applicable market pricing, which will be known upon transfer of the goods to the customer. The payment date is usually within 30 days of the end of the calendar month in which the commodity is delivered.

Transaction Price Allocated to Remaining Performance Obligations

A significant number of the Company's product sales are short-term in nature generally through evergreen contracts with contract terms of one year or less. These contracts typically automatically renew under the same provisions. For those contracts, the Company has utilized the practical expedient allowed in the new revenue accounting standard that exempts the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.

For product sales that have a contract term greater than one year, the Company has utilized the practical expedient that exempts the Company from disclosure of the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these sales contracts, each unit of product generally represents a separate performance obligation; therefore, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required. Currently, the Company's product sales that have a contractual term greater than one year have no long-term fixed consideration.

Contract Balances

Receivables from contracts with customers are recorded when the right to consideration becomes unconditional, generally when control of the product has been transferred to the customer. Receivables from contracts with customers were $74.1 million and $121.2 million as of March 31, 2020 and December 31, 2019, respectively, and are reported in accounts receivable - oil and natural gas sales on the consolidated balance sheets. The Company currently has no assets or liabilities related to its revenue contracts, including no upfront or rights to deficiency payments.

Prior-Period Performance Obligations

The Company records revenue in the month production is delivered to the purchaser. However, settlement statements for certain sales may be received for 30 to 90 days after the date production is delivered, and as a result, the Company is required to estimate the amount of production that was delivered to the purchaser and the price that will be received for the sale of the product. The differences between the estimates and the actual amounts for product sales is recorded in the month that payment is received from the purchaser. For the three months ended March 31, 2020, revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was not material.


13.	LEASES

Nature of Leases

The Company has operating leases associated with drilling rig commitments, field offices and other equipment with remaining lease terms with contractual durations in excess of one year. Short-term leases that have an initial term of one year or less are not capitalized.

The Company has entered into contracts for drilling rigs with third parties to ensure rig availability in its key operating areas. The Company has concluded its drilling rig contracts are operating leases as the assets are identifiable and the evaluation that the Company has the right to control the identified assets. The Company's drilling rig commitments are typically structured with an initial term of one to two years and expire at various dates through 2020. These agreements typically include renewal options at the end of the initial term. Due to the nature of the Company's drilling schedules and potential volatility in commodity prices, the Company is unable to determine at commencement with reasonable certainty if the renewal options will

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be exercised; therefore, renewal options are not considered in the lease term for drilling contracts. The operating lease liabilities associated with these rig commitments are based on the minimum contractual obligations, primarily standby rates, and do not include variable amounts based on actual activity in a given period. The Company has also entered into several drilling rig commitments with an initial term less than one year. The costs for these short-term rig commitments are included in the short-term lease cost for the period as shown below. Pursuant to the full cost method of accounting, these costs are capitalized as part of oil and natural gas properties on the accompanying consolidated balance sheets. A portion of these costs are borne by other interest owners.

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”), a subsidiary of Mammoth Energy and a related party. Pursuant to this agreement, as amended effective July 1, 2018, Stingray Pressure has agreed to provide hydraulic fracturing, stimulation and related completion and rework services to the Company through 2021 and the Company has agreed to pay Stingray Pressure a monthly service fee plus the associated costs of the services provided. As discussed further in Note 9, the Company has terminated its Master Services Agreement for pressure pumping with Stingray Pressure. As a result, in the first quarter of 2020, Gulfport has removed the related right of use assets and lease liabilities associated with the terminated contract.

The Company rents office space for its field locations and certain other equipment from third parties, which expire at various dates through 2024. These agreements are typically structured with non-cancelable terms of one to five years. The Company has determined these agreements represent operating leases with a lease term that equals the primary non-cancelable contract term. The Company has included any renewal options that it has determined are reasonably certain of exercise in the determination of the lease terms.

Discount Rate

As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company's incremental borrowing rate reflects the estimated rate of interest that it would pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.

Maturities of operating lease liabilities as of March 31, 2020 were as follows:



	(In thousands)
Remaining 2020	$	9,920
2021	129
2022	115
2023	90
2024	30
Total lease payments	$	10,284
Less: Imputed interest	(98		)
Total	$	10,186

Lease cost for the three months ended March 31, 2020 and 2019 consisted of the following:

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	Three months ended March 31,
	2020		2019
	(In thousands)
Operating lease cost	$	4,082	$	8,536
Operating lease cost—related party	—		5,610
Variable lease cost	224		429
Variable lease cost—related party	—		31,453
Short-term lease cost	2,810		—
Total lease cost⁽¹⁾	$	7,116	$	46,028



(1)	The majority of the Company's total lease cost was capitalized to the full cost pool, and the remainder was included in general and administrative expenses in the accompanying consolidated statements of operations.

Supplemental cash flow information for the three months ended March 31, 2020 and 2019 related to leases was as follows:



	Three months ended March 31,
	2020				2019