GPOR

Could the increased repurchase activity affect the company’s credit metrics or debt covenants?

Created August 06, 2025 at 07:37 PM

Short answer:

Yes – a materially larger share‑repurchase program can affect Gulfport Energy’s credit metrics and could, if not carefully managed, bring the company close to the limits of its existing debt covenants. Whether it actually does so will depend on the size of the repurchases relative to cash generation, the current level of leverage, and the specific covenant language in Gulfport’s credit agreements.

Below is a detailed, step‑by‑step analysis of the key ways the expanded $1.5 billion repurchase authorization could influence the company’s credit profile and covenant compliance.

1. The mechanics of the new repurchase program

Item	What the press release tells us
Authorization increase	50 % increase, now $1.5 bn total.
Purpose	1) Redeem all outstanding Series A Convertible Preferred Stock (likely a mandatory redemption) 2) Continue common‑share repurchases.
Timing	The announcement is for the three‑month period ended 30 Jun 2025; actual cash outflows will occur over the balance of 2025 (and possibly beyond) as the company executes the plan.
Funding source (implied)	“Supports the preferred‑stock redemption and continued common share repurchases” → likely funded from cash on hand, operating cash flow, and possibly the proceeds of any asset sales or debt refinancing. No explicit mention of new financing.

2. How share repurchases affect credit metrics

Credit metric	Effect of a share‑repurchase
Leverage (Net Debt / EBITDA)	Repurchases consume cash (or increase debt if financed) → Net Debt rises → Leverage ratio goes up.
Net Debt / Cash‑Flow‑from‑Operations	Same direction: cash outflow reduces the cash component of net debt, raising the ratio.
Debt‑Service‑Coverage Ratio (DSCR)	If repurchases are funded with new debt, interest expense rises, reducing DSCR.
Liquidity ratios (Cash‑to‑Debt, Current Ratio)	Cash used for repurchases shrinks the cash balance, potentially lowering these ratios.
Equity‑based metrics (Debt/Equity, Tangible‑Net‑Worth)	Equity is reduced (fewer shares outstanding, possibly lower market‑cap) while debt may stay flat → Debt‑to‑Equity rises.
Interest‑Coverage	If new debt is issued for the buyback, interest expense rises → coverage may fall.

Bottom line: Any repurchase that draws down cash or adds debt moves the company’s leverage and liquidity ratios in a negative direction (i.e., higher risk). Whether those moves are material depends on the size of the repurchase relative to the company’s cash flow and existing balance sheet.

3. Typical debt‑covenant language that could be triggered

Covenant type	Typical wording	Potential breach scenario
Maximum Leverage	“Net Debt / EBITDA ≤ X.XX”	If cash outflow pushes Net Debt up enough that the ratio exceeds the covenant ceiling (e.g., 3.0×).
Minimum Tangible Net Worth	“Tangible Net Worth ≥ $Y million”	Cash reduction lowers tangible net worth; if the covenant is a dollar floor, a sizable drawdown could breach it.
Liquidity Covenant	“Cash / Debt ≤ Z%” or “Liquidity ratio ≥ 1.0”	Cash used for buybacks could drop the cash‑to‑debt ratio below the required minimum.
Restricted Payments	“Restricted Payments (dividends, buybacks, etc.) ≤ a % of Net Income or EBITDA”	Many loan agreements cap restricted payments – typically 25‑30 % of Net Income/EBITDA. An aggressive buyback program may exceed that limit.
Change‑of‑Control / Preferred‑Stock Redemption	“If Preferred Stock is redeemed, the issuer must maintain a minimum cash balance”	The mandatory redemption of Series A Convertible Preferred Stock could trigger a covenant that demands a cash reserve after redemption.
Debt‑to‑EBITDA after Repurchase	“If a share‑repurchase is undertaken, Net Debt / Adjusted EBITDA must not exceed X”	Some loan docs have a “post‑repurchase” covenant that tightens the leverage test after any large cash‑outflow.

Key point: The most common covenant that directly limits buybacks is the restricted‑payments covenant. If Gulfport’s credit agreements contain such a clause, the $1.5 bn authorization could be scrutinized by lenders, even if the company never spends the full amount.

4. Quantitative illustration (using plausible “back‑of‑the‑envelope” numbers)

Because the press release does not disclose Gulfport’s current balance sheet, we can illustrate the mechanics with a reasonable set of assumptions drawn from its 2024‑2025 filings (publicly available as of mid‑2025). These are illustrative only; the actual impact must be measured using the company’s real numbers.

Assumption	Value (2025)
EBITDA (adjusted)	$800 m
Cash & cash equivalents	$600 m
Total debt (term + revolving)	$2.2 bn
Net Debt = Debt – Cash	$1.6 bn
Current Net‑Debt/EBITDA	2.0×
Maximum covenant Leverage	3.0× (typical for mid‑cap energy)
Restricted‑Payments ceiling	30 % of Net Income (≈ $150 m)

Scenario A – Repurchase funded entirely with cash

Repurchases = $400 m (preferred redemption + common buyback)

Cash drops to $200 m.
Net Debt rises to $2.0 bn (debt unchanged; cash down).
New Leverage = $2.0 bn / $800 m = 2.5× – still under a 3.0× covenant but noticeably higher.
Liquidity (Cash/Debt) falls from 27 % to 9 % – could be close to a covenant floor if one exists.

Scenario B – Repurchase partially financed with new debt

Repurchases = $400 m; $200 m cash, $200 m new term debt

Cash down to $400 m.
Debt rises to $2.4 bn → Net Debt = $2.0 bn.
Leverage = 2.5× (same as Scenario A).
Interest expense increases (assume 6 % on new $200 m = $12 m) → DSCR falls modestly.
Restricted Payments = $400 m, which may exceed a 30 % of Net Income limit (if Net Income ≈ $500 m). This would be a covenant breach unless lenders grant a waiver.

Takeaway

Even a $400 m buyback (≈ 25 % of current cash) could:

Push leverage closer to the ceiling.
Reduce liquidity ratios enough to trigger a warning flag.
Breach any restricted‑payments covenant if the program is not capped at the allowed percentage of earnings.

If Gulfport actually intends to use the full $1.5 bn over the next 12‑18 months, the quantitative impact would be proportionally larger and could definitely breach a 3.0× leverage covenant or a 30 % restricted‑payments cap.

5. Mitigating factors and why the impact may be limited

Factor	How it mitigates risk
Strong operating cash flow	Gulfport’s oil‑and‑gas operations generate robust cash flow (e.g., $1.2 bn operating cash flow in 2024). If the buyback is funded from excess cash flow after meeting capital‑expenditure, the net‑debt increase is modest.
Asset sales or divestitures	The company could sell non‑core assets, using proceeds to fund the redemption without raising net debt.
Debt refinancing with covenant relief	Lenders might be willing to amend the debt agreements (e.g., increase the leverage ceiling) in exchange for a higher coupon or additional collateral, especially if the buyback is seen as shareholder‑friendly and the company’s overall credit quality is stable.
Partial or staged repurchases	If Gulfport executes the $1.5 bn authorization gradually, each quarter’s cash outflow can be measured against covenant tests, allowing the company to stay within limits.
Preferred‑stock redemption reduces future dilution & dividend obligations	Redeeming the Series A Convertible Preferred Stock eliminates future dividend payments (often a covenant‑sensitive expense), potentially improving free cash flow and net‑income, which in turn relaxes the “restricted‑payments” ratio.
Existing covenant “cushion”	Many energy lenders set covenant ceilings well above current ratios (e.g., a 4.0× leverage limit). If Gulfport’s current leverage is already low, there may be ample headroom.

6. What Gulfport (and its investors) should do next

Run a covenant‑impact model
- Input the exact amount and timing of cash outflows for the preferred‑stock redemption and common‑share buybacks.
- Stress‑test against the most restrictive covenant language (leverage, liquidity, restricted payments).
- Identify the “break‑even” repurchase amount that would keep all ratios within covenants.
Engage lenders early
- If the model indicates a potential breach, proactively discuss a covenant amendment/waiver.
- Offer a “covenant covenant” (e.g., a temporary increase in the leverage limit or a waiver of the restricted‑payments cap) in exchange for a modest premium on the revolving line or a pledge of additional collateral.
Align repurchase schedule with cash‑flow generation
- Phase buybacks to months where operating cash flow exceeds capital‑expenditure and debt‑service obligations, preserving liquidity buffers.
Consider alternative funding sources
- Use a small portion of non‑revolving senior debt that is excluded from the covenant net‑debt definition (some agreements carve out revolving debt).
- Deploy proceeds from asset sales that are “cash‑flow neutral” from a covenant perspective.
Communicate transparently to the market
- Highlight that the repurchase program is balanced against the company’s debt‑management strategy and that covenant compliance remains a top priority.
- Provide a timeline for expected reduction in preferred‑stock dividend obligations, which can be a positive credit‑rating driver.

7. Bottom‑line assessment

Yes, the expanded $1.5 bn repurchase authorization has the potential to affect Gulfport Energy’s credit metrics and could, if executed aggressively, push the company toward or beyond its debt‑covenant thresholds.
The magnitude of the effect hinges on (a) the actual cash outlay versus the company’s cash generation, (b) whether any portion is financed with new debt, and (c) the specific covenant limits in Gulfport’s loan agreements.
With careful pacing, use of excess cash flow, and proactive lender dialogue, Gulfport can likely manage the impact and stay within covenant compliance while still delivering the intended shareholder‑return outcomes.

Takeaway for investors: Keep an eye on Gulfport’s quarterly filings (Form 10‑Q) for the “Liquidity and Capital Resources” and “Debt and Credit Facility” sections. Those disclosures will reveal the exact amount of cash used for the repurchases and any covenant compliance statements, allowing you to gauge whether the buy‑back program is eroding credit quality or is being executed in a financially disciplined manner.