W&T Offshore Inc (WTI) 2008 Q3 法說會逐字稿

Thank you for standing by, welcome to the W&T Offshore third quarter earnings conference call. (OPERATOR INSTRUCTIONS). This conference is being recorded on Tuesday, November 4, 2008.

I'll turn the conference over to Mr. Manny Mondragon, Vice President of Finance. Please go ahead, sir.

Thank you, operator. Good morning, everyone. We appreciate you joining us for W&T Offshore's conference call to review the third quarter 2008 results. Before I turn the call over, I have a few items to go over. If you would like to be on the company's e- mail distribution list and to receive future news releases, or you experience a technical problem and didn't receive yours this morning, please call DRG News Office at (713)529- 6600, and somebody will be glad to help you. If you wish to listen to a replay of today's call, it will be available in a few hours via webcast, via recorded replay until November 11th, 2008. You can also find the access instructions in today's press release. The information on this call speaks only as of today, November 4, 2008, and therefore, time sensitive information may no longer be accurate as to the date of any replays.

Today, management going to discuss certain topics that contain forward looking information which is based on management's belief as well as assumptions made by and information currently available to management. Forward-looking information includes statements regarding expected production, and expenses for 2008, and 2009. Although management believes that the expectation reflected in some forward- looking statements are reasonable, they give no assurance that such expectations will prove to be correct. Such statements are subject to certain risks and uncertainties and assumptions which are described in this morning's press release, and the company's most recent annual report on Form 10- K and subsequent filings with the Securities and Exchange Commission. Should one or more of these risks materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those expected. Please also note that this conference call contains references to non-GAAP financial measures. You can find reconciliation of these non- GAAP financial measures to GAAP financial measures in the form 8- K followed by the company earlier today, as well as in this morning's press release.

I would like to turn the call over to Mr. Tracy Krohn.

Thanks, Manny. Good morning, everyone. I would like to thank you all for joining us for our third quarter 2008 conference call. Again, I'm Tracy Krohn, this morning, I will review key events that took place in the third quarter of 2008. With me today are Danny Gibbons, our Chief Financial Officer. Danny will review the company's liquidity, and capital resources. Steve Schroeder, our Chief Operating Officer, Steve is going to talk to you about our operations and Jeff Durrant, our senior VP of exploration geoscience will update you on the 2008 drilling successes and preview next quarter's drilling plans. Also in the room today is Jamie Vazquez, our newly appointed President. Jamie is taking over the position of President. I will will maintain the role of Chairman and CEO. Jamie will focus on the day to day business, which includes the budgeting process, and all the other aspects of daily operations. That's going allow me to focus on strategy and drilling areas that I have extensive background in and that I like doing. Following our formal presentation, we will also have a Q and A section.

Talk a little bit about earnings per share and EBITDA. As this morning's press release stated, we had earnings per share. EPS of $1.03. Our adjusted EPS of $0.79 was an increase of 49% over third quarter 2007 adjusted EPS. Primary driver for the differences in EPS and adjusted EPS was the large unrealized derivative gains we recorded in the third quarter as a result of the sharp drop in commodity prices towards the end of the quarter. Third quarter EBITDA was $236 million, adjusted EBITDA was $208 million, again, the difference being the unrealized derivative gains.

Let's address the current production and hurricane update. As you aware, company incurred some damage as a result of Hurricanes Gustav and Ike. After preliminary assessment of the damage and the cost to repair or build some of the structures, we've elected to debook approximately 4 BCF equivalent, or less than 1% of proven reserves, which is an immaterial amount in regard to the total reserve picture. We're currently producing 8800 barrels of oil per day, and 106 million million cubic feet of gas per day. Or 159 million cubic feet equivalent per day, and we produced about 120, about 120 million cubic feet a day for the month of October. About 2/3 of the current daily production is natural gas.

Addressing insurance a little bit further. As far as insurance is concerned, we have a retention of $10 million that must be satisfied before we are indemnified for losses. Our policy limits are $150 million for property damage, due to named wind storms, and $250 million for removal of records if mandated by any governmental authority. Lastly, addressing drilling a little bit, during the third quarter, despite two hurricanes, we drilled six wells, three successful shelf wells and one deep shelf well. We had a noncommercial well on the conventional shelf and one on the deep shelf. Through the third quarter, we are 14 for 18 in our exploration program, and 2 for 2 with our development program for an overall success rate of 80%. Since the ends of the quarter, we have successfully drilled 1 additional conventional shelf well, and one deep shelf well, upping our overall success rate to 82%. With that, I'll turn it over to Danny Gibbons to expand further on our financial position.

Thank you, Tracy. Instead of focusing on information that you've already received in this morning's press release, I want to concentrate a minute on liquidity. At September 30, 2008, we had positive working capital of $282.1 million, which includes a cash balance of $685.3 million. Working capital decreased $54.7 million from June 30, 2008, due to higher capital expenditures and decreased cash flow associated with decreased production volumes resulting from the hurricanes. At September 30, 2008, our current maturity to long term debt totaled $3 million, and we have $500 million of undrawn capacity available under the revolving portion of the credit agreement.

Total assets were over $3. 5 billion, and total debt was $654 million. Our debt to total book capitalization ratio stood at 31%, but our net debt to book capitalization ratio was actually less than zero. Our adjusted EBITDA to interest coverage was over 21 times interest expense. Our primary liquidity needs are to fund capital expenditures to allow us to replace oil and natural gas reserves, repay outstanding borrowings and make related interest payments into fund-strategic property acquisitions. Historically, we have capital expenditures including acquisitions with cash on hand, cash provided by operations, equity offerings, borrowings under the credit agreement and other long term debt. These sources of liquidity have historically been sufficient to fund our ongoing cash requirements. Although there have been significant disruptions in the US and global capital markets, our company has prepared for these disruptions and is in a positive liquidity position.

The company has historically been able to drill and develop properties and still generate excess cash, and we believe we will continue to be able to do so going forward. We believe that our customers remain creditworthy, and we have continued to pay their bills as they become due. We have a significant amount of cash on hand, and $500 million of capacity available under our revolving loan facility that matures in 2012. Effective October 24, 2008, our buying base is reaffirmed. Allowing for continuation of our revolver at the 500 million there are level. 16 lenders participated our revolving loan facility, and we do not anticipate any of them being unable to satisfy their obligations under the credit agreement. We have traditionally utilized bank financing as our foundation for financial success, and we believe that this credit line will serve us well in this cycle.

With that, I'll turn the call over to Steve Schroeder. Steve?

Thanks, Danny. Let me start with an update on the effect of the storms on production and our remediation status. As of September 30th, 2008, we have expensed $1.3 million toward the retention and expect to expense the remaining $8.7 million in the fourth quarter to meet our $10 million retention for hurricane Ike. We also realized $0.5 million of expenses for Hurricane Gustav, but will not meet the $10 million retention for that storm.

At this time, we are still assessing the damage and are estimating the full cost of repairs. As Tracy and Danny have mentioned though, we have sufficient insurance and liquidity to satisfy our needs. As Tracy said, we are currently producing approximately 159 million cubic feet equivalent a day. Now, let me give you some details related to production and what we currently believe are the leading factors for our buildup and production through the fourth quarter, 2008 and into 2009. First, we have been in close contact with the pipeline companies and the operators of our jointly owned damaged platforms. We have approximately 55 million cubic feet equivalent per day of production deferred as a result of damage to gas pipelines, primarily HIOS, C-Robin, A&R, and Discovery.

We have two major production facilities East Cameron 31` and Ship Shoal 154, where both the oil and gas pipelines are under repair. At East Cameron 321, the damaged gas pipeline is the Tetco western lateral, and the damaged oil export line has portions operated by Marathon, and Exxon. The other facility is Ship Shoal 154, where the gas pipeline shut in is the Tennessee 500 system, and the oil pipeline is White Cap. In total, production deferred for platforms having damage to both oil and gas pipelines is 30 million cubic feet equivalents per day, of which of above two fields comprise approximately 90%. In addition, the production deferred due to platforms where the damage is solely in the oil export line is approximately 20 million cubic feet equivalent per day. About 12 million cubic feet equivalents per day of our production is off- line, due to repairs needed on structures or wells in which we have an ownership but the majority of this deferred production is non-operated. Relative to on shore facilities, the Stingray gas plant was damaged, and approximately 9 million cubic feet is currently off- line until this plant becomes operational. Total production offline due to toppled platforms is approximately 7 million cubic feet equivalent per day.

Remaining production offline is due to various reasons, each being resolved as fast as possible. As repairs are completed on these pipelines and facilities, we will build up production accordingly. Let me be clear that this only explains the effect on W&T's production, for these pipelines and facilities, and we cannot speak as to the effects of other operators' production on these systems. Next, our build up will depend on production additions from the drilling program. As we have mentioned in this and previous calls, we have been active with the drill bit, some of the successes we have had throughout the year and recently announced are not online yet. We have four wells there in the completion phase that should provide some production before year end. This production will be incremental to the production that will return following hurricane repairs.

Lastly, our production will be a function of the natural decline of wells that are still producing. We will need to replace our natural decline before we return to and exceed pre-storm levels of production. The best way to do this will be with new volume additions from drill bit, workovers, recompletes and acquisitions, and with the speed of repair work which we and others are working diligently to do. Operationally, we have 8 active rigs at this point, 6 operated and two non-operated. We averaged 8 rigs in the third quarter and anticipate this level of activity to continue through the remainder of the year, and into 2009. We did lose approximately 25 drilling days per rig during the Hurricanes Ike and Gustav. Even with these delays, we feel we can drill 30 wells for 2008.

Now, lets me update you on some larger projects. At Green Canyon 646, our Daniel Boone project, we are in full development stage. The well has been completed, and we have sub-sea tree. Additional materials and equipment have been ordered, and is manufactured and the pipe has been shipped. Production is expected in the second half of 2009. We did not experience any delays to this project due to the storm. I can report that we are on time and on budget at Daniel Boone. At Green Canyon 82, the Healy project, our deepwater team is currently reviewing different options and doing the necessary flow assurances and economics. Once these are complete, we will be in a position to make a decision on how best to develop that field.

During the third quarter, we produced 19.9 billion cubic feet equivalent, down from the second quarter due to the hurricanes. We believe we deferred approximately 8 billion cubic feet equivalent in the third quarter. We also believe we would have hit the midpoint of our original guidance had it not been for the hurricanes. In the fourth quarter, we anticipate production between 800,000 and 1 million barrels of oil and natural gas liquids, and between 8.1 and 9.6 billion cubic feet of natural gas for a total of between 12.9 and 15.6 billion cubic feet of natural gas equivalents. As a result of the hurricanes, we are revising our full year guidance downwards to a range of 94.6 to 97.2 billion cubic feet equivalents.

Relative to LOE, LOE for the third quarter were $52.4 million, approximately $8 million below the original midpoint of guidance. LOE was $3 million, lower than expected, and work overs and facility expenses were $5 million lower, due to down time from the storms. Looking to the fourth quarter, lease operating expenses are expected to be between 59 and $69 million. The basic expenses stay relatively constant while workovers and facility expense decrease due to hurricane downtime and a focus on remediation. This decrease is offset by the hurricane expense of $8.7 million that we expect to incur in the fourth quarter. Also, let me point out that the absolute amount spent on LOE won't change much, however, production will be lower, so the LOE per MCFE number for the fourth quarter will be higher but we anticipate it returning to normal levels in 2009. LOE for the full year is now expected to be between 217 and $227 million, which is, which includes the $10 million insurance retention. Gathering transportation and taxes were $4 million below the midpoint of the original guidance, mostly due to lower volumes and lower commodity prices. Gathering transportation and taxes are expected to be between 6 and $8 million for the fourth quarter, and between 29 and $31 million for the full year.

Now I'll turn the call over to Jeff Durrant to discuss our third quarter exploration successes and future drilling plans.

Thanks, Steve, and good morning, everyone. As Tracy and Steve have just discussed, we continue to enjoy drilling success in 2008. Despite losing approximately a month of drilling time, W&T completed drilling 6 wells during the quarter, four of which were successful. Of the five exploration wells we drilled, three were successful, including one deep shelf well. For all of 2008 through the end of the third quarter, we have achieved an excellent success rate of 78%, with completions taken or planned in 14 out of 18 wells. Both of the development wells this year have also been successful, including one this quarter, which makes our drilling program 16 out of 20, for an overall 80% success rate through the third quarter.

But more importantly however, production from these wells continues to build. Combined, these wells are currently capable of producing at a net rate of 4400 barrels of oil a day, about 28 million cubic feet of gas per day, or around 24 million cubic feet equivalent per day, net to W&T. Approximately 50% or 25 million a day is still shut in from the recent hurricanes. Of the 13 wells producing or are capable of producing, 7 are from former Kerr McGee properties. Now, let's look at the specifics of our third quarter conventional shelf drill program. The Maine Pass area yielded 2 highly successful wells, 75% working interest Maine Pass 283 A1 Sidetrack and the 75% working interest Maine Pass 108 D- 3. Maine Pass 283 well found 30 feet of gas condensate in the secondary target, and is now producing at a gross rate of 7.6 million cubic feet of gas a day, along with 500 barrels of oil per day, for a net rate of 6.7 million cubic feet equivalent per day to W&T.

This well was the first of a proposed four to five well drilling program from the Maine Pass 283 A platform. The other Maine Pass area success, theD3 well, is currently being completed and we expect this well to be online shortly. The third successful well that is also online is a 100% W&T working interest South Timbalier 230 A 7 side track development well. This well has been completed, and is flowing at a gross rate of just under 800 barrels of oil per day, or about 4.3 million cubic feet equivalent per day, net to W&T. And as I reported on the last call, our only third quarter conventional shelf on economic well was at Maine Pass 266, A- 5.

Turning over to the deep shelf program, we are one for two. We successfully drilled the 90% working interest Ship Shoal 232 B2 side track, to a depth of 17,000 feet. We discovered approximately 80 feet of laminated gas sand in two intervals, this well is currently being completed with first production expected as soon as hurricane repairs to the pipelines are been completed. In our other deep shelf well, we drilled a non-economic well at a 90% working interest Viosca Knoll 519 number 1, this was a James Lime well, this well has been plugged and abandoned for a total financial exposure of approximately $12.9 million.

So what's next in our deep shelf program? We started the fourth quarter off with a deep shelf success at the 100% working interest Eugene Island 186 number 1. We found about 25 feet of gas sands in the section, and our plans are to complete this well and test it in order to prepare development plans. Additionally, right now, we are drilling another deep shelf well, a 94% working interest, B7 well in Vermilion 225. This well has a 15,000 foot objective beneath the salt overhang. And in still another deep shelf well, We expect to begin drilling before the ends of the year on a sub salt development well in 100% working interest Mahogany, that's Ship Shoal 349 A-12 Sidetrack. This well is planned to drill the field's main oil reservoir and deepen approximately 1000 feet to explore for additional potential. And furthermore, you may have seen in our recent presentations planning a second deeper well to test the same geological structural closure, but to a much deeper depth, about 25,000 feet. This well is designed to test the highly perspective upper and middle miocene section that has yielded numerous recent oil and gas discoveries on trend such as tarantula, and on into the Green Canyon deepwater process.

While it's true, that the deep shelf may provide exposure to significant upside, it doesn't mean we forgot about the conventional shelf. In fact, it is still the core of our drilling program. As such, we expect to continue our current main pass rate drilling programs, and 283, 279, and 108 well until 2009. Additionally, we plan to continue our platform drilling program at Ewing Bank 910, also, well into 2009, as well as a new platform drilling program at South Timbalier 316. I think as you've seen with the significant rate build up from this year's drilling program, drilling exploration wells from existing infrastructure provides for timely production, and a quick return on our investments.

With that, I'll turn it back to you, Tracy.

Thanks, Jeff. We expect to be very busy in the acquisition area. We've taken great care to manage our liquidity and operate within our cash flow for year. We note from experience that managing for cash has always been our strength. As the world liquidity crisis has deepened, we been looking very closely at all of our options including acquisition, M&A and drilling, the operative part of that previous statement is that we do have options. How cool is that? The really cool part about it, we can move quickly on any of those options or change the options very quickly as well. If it makes more economic sense to acquire, we will do so. If it makes more sense to grow through the drill bit, we'll do that. We still continue to manage for cash and you can spell that OPPORTUNITY.

With that, that concludes our prepared remarks, and we're ready to take your questions. Operator, please open the phone lines for Q&A.

(OPERATOR INSTRUCTIONS). First question is from the line of Neal Dingmann with Dahlman Rose. Please go ahead.

Say, Tracy, with the great liquidity position that you all have and nice cash flow that you have, what do you look at as far as, as far as opportunities go, number one, paying debt down, are you comfortable there versus looking at additional leases versus at acquisition, wondering how you balance all that.

The last part of that would be, the last list would be paying debt down right now. I think we have a comfortable level of debt. It's long- term, for the most part, and we feel like there's opportunities in it acquisitions and drilling that doesn't necessarily mean we just do acquisitions. It could also mean M&A, could mean we find a bunch of other wells that we think, or prospects we think deserved being drilled. We expect to see deflationary pressure on rig rates and whatnot that will drive the cost of goods and services, at least operating expenses down in the future.

The change here, in the near term, you can say politically, does that give you any concern as far as the chances for holding leases, and what's going on in the Gulf?

I don't think so. You know, whoever, whatever the political landscape is going to be, we'll deal with it accordingly. We always have.

Okay. Thanks.

Next question is from the line of Phil McPherson with Global Hunter Securities. Go ahead.

Congratulations on a great quarter, considering the difficult situation out in the gulf. Tracy, if I do back of the envelope math, are we looking at exiting the year close to 700 Bs, and I take that by taking your unrisk predrill estimates on the deep shelf of 115 Bs, and you went 2 for 3, so about 75 Bs. Is that the way to think about it?

I don't know how to think of looking at our reserves at this point in time. I'm not going to respond to that. We still got some wells to drill before the end of the year.

Is my assumptions on the deep shelf wells in a ballpark range or - -

I don't know.

Okay. And one question for Danny on the financial side. It looked like your payables had jumped up high in this quarter, so the net cash position looks like it's 445? Is there something there, a reason your payables were higher than previous quarters or --?

As I pointed out, working capital decreased about $55 million between June and September. We were doing a lot of projects and accruing for the capital expenditures, and we saw some of that get paid off in the month of October so it was just accruals for capital projects.

Great. I'll let somebody else on I'll let somebody else on

(OPERATOR INSTRUCTIONS). Noel Parks with Ladenburg Thalmann & Co, please go ahead with your question.

Good morning. Just wanted to get a sense of, of the guidance as you look into the rest of the year, and then maybe in the first quarter of '09. Being in the situation again, which is typical after a hurricane where you have infrastructure that needs to come back online, how much variability would you say there is as you assess thing of when things will come on line, and when you get, recent successes online? Do you think it's very difficult to say exactly when things are going to come back? Or do you feel like you have a good handle on the timing?

No, it's really hard to give you a definitive answer on that. I'll qualify that by telling you that as we move further into the remainder of the year, we'll get better information, and I'll give you an example of that. We had one pipeline that was down, a gas pipeline adjacent next to the Ship Shoal 49 field, and we were told it was going to be down for some period of time, and we looked into it further, and realized that the operator of the pipeline just simply didn't have a boat available for saturation diving. We had one on hand that we could youth like and we were able to work with them to get the pipeline on, on production much quicker. In fact, it's online now, so it accelerated that by a couple of months. I don't know if that exists elsewhere. We have another field that apparently has a valve that needs to be shut, again a similar situation, with the operating we are working to resolve that. My sense is that the production, vast majority of it will be back online before the end of the year, barring anything that we may not be aware of at this point in time. But I think that as we sit now, we're fairly comfortable that 2009 will look much better than 2008.

Okay. Great, and just my one other for now, maybe just talk a little bit more about at Mahogany, I understand, I think it was early next year you thousand you would be able to have that start, that test out there, just a little bit more about timing and also you mentioned that the Tarantula find is on trends and any other thoughts on how bad it impacts your view of the risk or geology there?

I'll give you a little flavor. It may have been confusing. We have a rig, the Gorilla 4 that will be on location shortly. It's finishing up the Blackbeard well there. And then it will come to our location. We've got a well, A- 12 side track to drill. That is a pud location with a deeper extension that is exploratory for another block in the field. We are going to drill about another thousand feet deeper there. So that's the first thing we're going to do at Mahogany. The 25,000- foot well is scheduled, as soon as we can get all the design data, we haven't completed the design. We've been telling the market second half of 2009 that will be a function of, again, how quickly we can get equipment to drill this well. We've just chosen a target depth, so now we are working from a target depth of 25,000 feet, were considering up to 30,000 feet, but we decided to back off of that a bit. So now we are planning on that, and that's - - we'll have some more information on that as soon as I get a better handle on what the exact well planning is, and I will be looking at that personally. I hope that gives you more color.

Great, thanks.

Next question is from Nicholas Pope with JPMorgan. Please go ahead.

Hi, Nick.

I was hoping, could you help meet out in terms of lease operating costs? I was trying to get an idea how much of the cost is variable and how much is based on current energy costs versus some fixed costs you have? Do you have a breakout of that?

I don't have a breakdown of variable versus fixed. I would tell you that normally in the fourth quarter, your availability goes down because you're not doing platform maintenance, plate form paintings. We try to get that done during the summer, so you'll see a little lower availability with costs on random things from other operators. Similarly, you'll see workover and whatnot kind of decrease over the fourth quarter, again, weather- related. We try to get work done in the summer, so it's a little lumpy on costs, but I don't really do a fixed versus variable calculation on LOE. We've kinds of guided the market here, we tell them that we expect LOEs to remain the same, and some of that is driven by the fact we are still assessing damage from the hurricanes and still doing work and whatnot that were precipitated by the storms.

Okay, that makes sense. I guess a little more about the opportunities you're looking at. I mean, is there anything in particular that you - - is it, are you looking at more buying production reserves? Or are you looking at reloading the inventory and buying prospects? How do you all think about that?

The answer is yes - -

Okay.

We are looking at both. This is a really good time for us. We took great care in 2007 and 2008 to harbor our cash, husband our cash, if you will, and put ourselves in a position of basically net debt of zero. And that's really going to be key for us going forward. Plus the fact we have very good liquidity with our credit lines of half a billion undrawn, it does give us the opportunity to go out and to make acquisitions. It does not preclude us from making corporate acquisitions as well. That's also within the realm of possibility. Not my preferred method, but it's a possibility.

It's always more difficult to do that than it is straight acquisition as far as drilling other wells, you'll see that people that were over leveraged and have had those issues going into a time of liquidity crisis, doesn't mean they don't have good prospects. They don't have enough money to gets them drilled and their expectations of promoting the wells and whatnot could come down so it's not just our properties that we are looking at, but other people's as well.

And are on shore, is I don't know shore potential in the realm of possibility?

It's just regular return. I told the market for years, it doesn't really matter whether we are onshore or offshore, you can drill and complete in 4000 feet of water in the Gulf of Mexico, probably - - drill in Appalachia, but it doesn't preclude us from going on shore. There may be some good things to look at onshore, or other basins or other parts of the world, but it's a rate of return calculation that we think about and where we think we'll get the best bang for our buck.

All right. Thanks a lot. That's all I have.

Thank you, sir.

(OPERATOR INSTRUCTIONS). We do have a follow up from Phil McPherson. Please go ahead.

Tracy, just on the Daniel Boone, you talked about first production in the second half of '09 what kind of capacity are you planning for that?

First, I didn't say first production, I said we may start the second well first half of '09, deep well. I'm sorry, Daniel Boone.

Yeah, yeah.

We've designed the facility for 10,000 barrels of oil a day.

Great. Thanks, guys.

Hopefully that's the target we'll get to. Thank you.

Management, there are no further questions at this time.

Continue with any closing comments.

Okay. I think that's, that he pretty much wraps it up, operator. Unless there's any other questions. We'll go on back to our rat-killing.

Thank you, this does conclude the W&T conference call. If you would like to listen to a replay of today's conference in its entirety, you can do so by dialing 303-590-3000 and put the access code 11121166. Again, dial 303-590-3000, and put the access code 11121166. AT&T would like to thank you very much for your participation, you may now disconnect. Have a very pleasant rest of your day.