W&T Offshore Inc (WTI) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the W&T Offshore third quarter 2010 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Tuesday, November 2, 2010.

I would now like to turn the conference over to Mrs. Janet Yang, Finance Manager. Please go ahead, ma'am.

Thank you, Operator and good morning, everyone. We appreciate you joining us for W&T Offshore's conference call to review the for results for the third quarter of 2010. Before I turn the call over to Management, I have a few items to point out. If you wish to listen to a replay of today's call, it will be available in a few hours via webcast by going to the Investor Relation section of the Company's website at www.wtoffshore.com or via recorded replay until November 9, 2010. To use the replay feature, call 303-590-3030 and dial the passcode 4376899.

Information recorded on this call speaks only as of today, November 2, 2010 and therefore time sensitive information may no longer be accurate as of the date of any replay. Please refer to our third quarter 2010 earnings release for a disclosure on forward-looking statements. Now I would like to turn the call over to Mr. Tracy Krohn, W&T's Chairman and CEO.

Thanks, Janet, good morning, everyone, glad you could join us today. With me today are most of our usual cast, Danny Gibbons, our Chief Financial Officer, Jeff Durrant, our Senior VP of Exploration/Geoscience, and Steve Schroeder, our Chief Operating Officer.

We had yet another good consecutive quarter with improving results. Our production exceeded guidance and expenses came in less than anticipated. With 51% of our production from oil, higher oil prices drove higher revenues and our earnings per share far exceeded analyst's expectations. GAAP EPS was $0.36 per share, and excluding special items, adjusted EPS was $0.43. Also adjusted EBITDA and EBITDA margins over expanded and cash continued to build. We added over $107 million to our cash balance during the third quarter.

Our focus has been on managing for cash and evaluating acquisitions joint venture opportunities. Recently we increased our ownership interest in three of our existing properties at very attractive prices, one of those being at Main Pass 108 where we've been extremely active. Steve's going to elaborate later on in the presentation.

Also, we're increasingly optimistic about the acquisition joint venture market, the quality and quality of deals that we're evaluating are improving. In fact, we're actively negotiating on a significant package of producing properties at the present time as well as actively evaluating several other packages of properties that have bids due soon. They are both offshore and onshore. We're optimistic that you will see positive movement in that direction by year end. Of course, these types of transactions are always very involved, so it's impossible to know if they're going to close until they do. So for now, that's all we'll be able to say about any potential acquisition. With that, I'll turn it over to Danny to further explain the results of the third quarter.

Thanks, Tracy. Good morning, everyone. Revenues for the third quarter were $169.6 million. Last quarter revenues were $179.7 million which included a one time receipt of $20.1 million recruitment of oil that was previously paid to the BOEM. Thus when revenues are normalized, we were up about $10 million sequentially for this quarter and up about $2.6 million from the third quarter last year. Third quarter 2010 revenues were positively impacted by higher realized sales prices of $8.02 per Mcfe compared to $7.87 last quarter and $6.30 in the third quarter of 2009.

Production in the third quarter averaged 235 million cubic feet equivalent per day compared to 251 million per day last quarter and 279 million per day in the third quarter of 2009. Sequentially production would have been slightly higher this quarter if you exclude the royalty recruitment production volumes that affected both quarters. And volumes would have been higher than last year had the pipeline at our Main Pass 108 field been in operation. As you might recall, Chevron's pipeline servicing our Main Pass 108 field has been down since early June of this year. Also keep in mind that we sold a set of properties in the fourth quarter of 2009 that had production of around [27 million] per day. We received good value for those assets and at the same time lowered our lease operating cost.

Our average realized sales price for oil was $68.35 per barrel in the third quarter, down from $70.97 last quarter but up from $61.09 in the third quarter of last year. For natural gas, our average realized sales price remained steady from the second quarter at $4.47 per Mcf, but was up from $3.08 per Mcf a year ago.

Now let me move on to a discussion of lease operating expense, or LOE, which as we've discussed before is made up of five components, made up of base LOE, insurance premiums, workovers, facilities work and hurricane remediation. Total LOE was $34.4 million, or $1.59 per Mcfe, in the third quarter, and that's down substantially from $52.5 million, or $2.30 per Mcfe in the second quarter, and $53.8 million, or $2.10 per Mcfe a year ago.

The reasons for the decrease in third quarter LOE compared to third quarter last year are numerous. First, hurricane remediation costs decreased $11 million in the third quarter due to insurance reimbursements of excess of cost incurred for 2010. Secondly, insurance premiums decreased 39% to $5.8 million in connection with our policy renewal effective June 1, 2010 covering law control and hurricane damage. Thirdly, base lease operating expenses decreased $3.6 million due to property divestitures of 2009 partially offset by increase associated with the Matterhorn and Virgo fields purchased in the second quarter of 2010. Fourth, workover expense decreased $2.6 million due to increased work activity. Finally, we did have an increase in facility maintenance of $1.6 million due to increased work on certain platforms primarily for sandblasting and painting.

DD&A was flat on a sequential basis but down from a year ago due to the property divestiture in October 2009. General administrative expenses were down $1 million sequentially but up over the third quarter last year due to higher employee and incentive compensation and a decrease in reimbursement activity from joint interest properties.

As Tracy mentioned, we were very pleased with our financial performance and reported net income in the third quarter of $27.2 million, or $0.36 a share, which is sequentially flat but up substantially from a loss of $1.3 million, or $0.02 a share last year. Adjusted for unusual items for the same periods, net income was $32 million, or $0.43 a share, in the third quarter of this year compared to net loss of $2.6 million, or $0.04 a share, in the third quarter of 2009. The unusual items are explained in today's earnings release.

Adjusted EBITDA was $117.9 million in the third quarter of this year and that's compared to $90.8 million last quarter and $93.4 million in the comparable quarter a year ago. Net cash provided by operating activities for the third quarter of this year increased 227% to $148.6 million from $45.5 million from the third quarter of last year. Net cash provided by operating activities for the nine months ended September 30, 2010 increased 328% to $392.9 million from the comparable period of last year. The increase was primarily result of higher prices, lower expenses and a net reduction of working capital including $99.8 million in tax reimbursements and $46.9 million in insurance reimbursements. Cash at September 30, 2010 was $180.5 million, and that's an increase of $107.6 million of a cash balance of $72.9 million at June 30, 2010, and that's $142.3 million from the year end 2009.

During the three months and nine months ended September 30, capital expenditures were $37 million and $244 million respectively. Our liquidity has remained strong and our bank group just completed the Fall redetermination and reaffirmed our borrowing base and availability under our revolving credit facility at $405.5 million. Our revolver is undrawn and our cash balance, which has continued to build since September 30, brings our total current liquidity to around $600 million.

Our third quarter asset retirement obligations, or ARO, expenditures included $27.4 million, and we booked an additional $19 million in ARO due to the new regulations from the BOEM plus another $17 million related to a change of scope of work from BOEM on hurricane-related abandonment. Some portion of this will be reimbursed through insurance recoveries.

Our effective tax rate for the third quarter was approximately 2.5%, and that's primarily due to a decrease in our valuation allowance for our deferred tax assets. Our forecasted taxable income for 2010 has allowed us to reduce a portion of our valuation allowance. Due to the size of the valuation allowance, we are now expect our effective tax rate for 2010 to be approximately 7.8% and that's down from our earlier guidance of 10.3%. During late September and early October, we added oil hedge positions for calendar years 2011 and 2012, which should enhance our financing alternatives should the need arise. A summary of our current positions can be found in our latest investor presentation within the investor relation section of our website. Also as a reminder, our interest rate swap expired in August. And with that I'll turn the call over to Jeff Durrant. Jeff?

Thanks, Danny. During the third quarter we participated in three exploration wells, two of which were onshore and one of which was offshore. The offshore well, Main Pass 108 E-3, was very successful and is currently being completed. We are encouraged by the success we had at the Main Pass 108 E-3 well where we have 100% working interest. The well logged over 300 feet of [net convertible pay] in six sands. And right now we're moving forward with getting it ready for production, which should take just a few more weeks. However, we will not be able to put it on production until the Main Pass pipeline or a suitable alternative is operational.

You might recall, we also drilled a successful well at Main Pass 98 in the second quarter. We have construct the facilities and installed a flow line to Main Pass 108 A production platform and once we have completed the Main Pass 108 E-3 well, we will mobilize this rig to the Main Pass 98 well to complete the well. We'll also have to wait on the Main Pass pipeline issue to be revolved before it can be brought on production. An additional exploration well on to Main Pass 180 is planned to be at TD in the first quarter of 2011 to fully exploit and delineate this prospect.

The two onshore wells, which were both non-operated with two different operators, were unfortunately noncommercial. One was in South Louisiana and the other was in South Texas. Both of these wells had good reserve potential. The combined net drilling cost was less than $6 million. In the future, we plan to continue the strategy of drilling higher risk to high potential wells onshore that could add significant;y to reserves at a reasonable price.

In support of that strategy, we plan to spud a well to test our prospect located in South Texas in December, and after that well is finished, the drilling rig will move to drill another exploratory well to test a second offsetting prospect. We will have a 50% working interest in both projects as non-operator. If these wells are successful, we could expect to have production online as early as first quarter of next year and they could set up additional development locations at both projects. With that, I'll turn the call over to Steve Schroeder. Steve?

Thanks, Jeff. For the nine months of 2010, we drilled or were drilling a total of eight wells split between seven exploration wells and one development well. Five of the eight wells were successful. In the third quarter, we performed nine recompletes that added net incremental production of approximately 9.5 million cubic feet equivalent per day at a cost of $3.5 million. We also did three workovers for a total cost of $450,000 that added net initial incremental production of approximately three million cubic feet equivalent per day. The staff has done an excellent job of mitigating based production decline and we plan to continue our recompletion and workover program for the balance of the year. We have budgeted $7.5 million for recompletes for the remainder of 2010, which includes projects at our recently acquired Virgo and Matterhorn field.

We are seeing improvement in the permitting process and have received permits from the BOEM for workovers, recompletes and drilling activity that we have requested. In fact, we received the permit to complete the Main Pass 108 E-3 within 24 hours of our request.

As Tracy mentioned earlier, we recently made three small acquisitions and increased our ownership in fields that we operate. First, we exercised our preferential rights to purchase two properties. We purchased an additional 13% interest in Ship Shoal 300 and a 22% interest in Ship Shoal 214. We paid approximately $1.1 million for 600 million cubic feet of proved reserves, or at a price of $1.82 per Mcfe for proved reserves. We believe there is also upside in the Ship Shoal 214 through better well performance. Also, after the end of the quarter, we purchased most of the remaining interest which was roughly 25% in the Main Pass 108 field. As you know, we are very active in this area and were able to acquire approximately 5.7 Bcfe for approximately $12 million.

Let me update you on production. We exceeded our third quarter production guidance primarily due to our active workover and recompletion programs, better than expected well performance and no down time related to hurricanes. We also successfully managed around a more difficult regulatory environment and were able to increase production after adjusting for royalty recoupment production volumes. As expected, we were negatively impacted in the third quarter by the continued outage of the Main Pass 108 pipeline operated by Chevron. Getting this production back online is a top priority, not only have we had to shed in at least 14 million cubic feet equivalent per day that had previously been online but we haven't been able to produce new operations such as Main Pass 98 and Main Pass 108 E-3. We are headed down simultaneous paths to solve this problem and expect to have production fully restored during the first quarter of 2011.

During-- due to our active work program, we expect our production volumes to remain fairly steady. For the fourth quarter, we anticipate crude oil and natural gas liquids production of between 1.6 and 1.8 million barrels and natural gas production to be between 10.1 and 11.2 Bcf and total production in the range of 19.7 to 21.7 Bcfe. For all of 2010, we have increased the midpoint of our production guidance by about 2.6 Bcfe and have narrowed the range of our annual production guidance. We now anticipate production to be between 6.8 and 7.1 million barrels of oil and natural gas liquid and between 42.4 and 44.7 billion cubic feet of natural gas, for a total between 83 and 87.3 billion cubic feet of natural gas equivalent.

Relative to lease operating expenses, we really saw the impact of our recent focus to reduce costs and successful collection on our insurance claims with a dramatic reduction in LOE. We're particularly pleased in the third quarter LOE came in significantly lower than we anticipated. First, as Danny mentioned, we have positive impact from our insurance reimbursements, which we don't budget for, and we performed fewer workovers than expected. Additionally we had originally anticipated higher expenses related to Matterhorn and Virgo, but so far the LOE associated with these fields has been lower and therefore actuals were less than our projected guidance.

Our guidance for LOE in the fourth quarter 2010 is in the range of between $42 million and $52 million and between $164 million and $174 million for the full year 2010, down significantly from our prior full year guidance of between $172 million and $211 million. These estimates do not include any allowance for hurricane-related expenses or insurance reimbursements, which we expect will further reduce LOE.

Like last quarter, our gathering and transportation and production taxes for the fourth quarter 2010 are expected to be between $4 million and $5 million and between $18 million and $19 million for the full year, which has been narrowed on prior guidance of $18 million to $22 million. Now let me turn the call over to Tracy for closing remarks.

Thanks, Steve. We're pleased with the results of the Main Pass 108 E-3 well and remain encouraged about this area of the Gulf. If you recall we purchased additional leases in last lease sale nearby and have additional acreage around this area. We originally acquired the Main Pass 108 acreage and platform in connection with the Kerr-McGee transaction and have continued to develop that acreage to add value to our Company.

Our $450 million 2010 capital budget allowed for potential acquisitions, joint ventures and drilling. We've committed about $285 million so far. So regarding our 2011 budget, we're currently developing that and will share that with you in December. For now, we'll continue to focus on joint ventures both onshore and offshore and on acquisitions. With almost $600 million in liquidity, we have numerous options. As I said earlier, we're actively evaluating various opportunities, are in negotiations in-- on one significant transaction. After looking at a lot of properties over the last year or so, we're pleased to see the improving acquisition market. Not only are we seeing more properties available, but the quality seems to be improving as well. Okay with that, we'd be glad to take your questions. Operator, would you please open the lines for Q&A?

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) And our first question is from the line of Richard Tullis from Capital One Southcoast. Please go ahead.

Hello.

Hi, Richard.

Sorry about that.

No worries. Good morning.

Busy day. Going back to Main Pass 108 discovery there, could you give more detail or color around it, Tracy, I guess it's 300 feet of net pay. What's the size of the structure? Have you come up with an estimate on the reserves potential there?

Yes, we normally don't give out proven reserves and that sort of thing, but basically 2 P is around 20 Bcf or so and could grow substantially from that.

The 20 Bcf estimate, was that based on that amount of pay discovered or was it on a lower original estimate?

2 P. So we've got a lot of [advanced full to base].

How many acres do you think that structure covers?

I can't tell you right off hand, Richard.

Okay.

It's several sands, it's six stands, so they're going to have various sizes. The structure itself is fairly large overall which encompasses more than one block in the area, so.

Okay. What's your estimate the oil/gas ratio there?

I got to think about that. Jeff, do you got an answer for that?

Yes, I sure do. This is primary a gas play but fortunately it has a lot of associated liquids where we get routinely about 30 barrels per million of production. So it's relatively rich stuff.

Okay. And what do you think your expected initial production rate could be?

They're telling me about ten million a day or so initially.

Okay.

With associated liquids, so --

Okay. And what about year end 2010 reserves outlook, how does it look at this point?

Well we're not giving guidance on year end reserves yet, Richard. But I-- we'll give that to you as soon as we can get that put together.

Okay. All right. I think that's all I have right now. Thank you.

Thank you, sir.

Thank you. And our next question is from the line of Neal Dingmann with Wunderlich Securities. Please go ahead.

Good morning, Tracy. Say I know you look at most, any acquisitions out there. I'm just wondering, it seems like there's some deepwater things, excuse me, available. Would you, number one, look at something like this and just your thoughts around operating in that environment going forward?

Well yes, I mean, we certainly look at deepwater. We just bought a couple of fields from Total. We believe that we'll see properties in all areas of the Gulf and also onshore as well.

Got it. And then looking forward next year when you start bringing on some of these properties, what's your thoughts on sort of rigs availability I guess for rig rates? In the past you obviously haven't locked in and you've timed pretty well what was going on in the rig market. Just kind of your thoughts in sort of the services and rigs market now or how you sort of see that play out next year.

Well, are you wanting me to comment on everything in the Gulf? Or do you want me to focus on the shelf or --

Just the shelf. If you were to -- a couple-- TF a couple properties here in the -- let's say late this year or some time next year, historically or recently you haven't locked in on any sort of long-term rig rates. Is that continue to be the same going forward or just kind of how you view that?

Well we've seldom locked in on long-term contracts as W&T. We're certainly concerned about what gas prices are going forward. But in any event, the world is starting to wake up and say, it may be time to quit drilling for gas onshore for a little while. So, we do bear that in mind. We are seeing service costs decrease in the Gulf of Mexico for jackup rigs. And I'm not sure that that's gotten to a bottom yet.

Got you, okay. Thank you.

Yes, sir.

Thank you. (Operator Instructions) And our next question is from the line of Noel Parks with Ladenburg Thalmann. Please go ahead.

Good morning.

Good morning, Noel.

Just a couple things. You did mention the M&A environment, you're seeing better quality of properties out there. Where do you think things are as far as how realistic the pricing is that sellers are looking for? And also sort of what's motivating sellers at this point in time do you think?

Well we gave a couple of examples of some smaller deals in the presentation that were around $2 or so on M. Those were small deals and all of them are different. But I will tell you that we feel like we're seeing properties that aren't just loaded up with abandonment in the Gulf and we're seeing things onshore that have some upside potential with them that they started to show some discounts to cash flows and that sort of thing.

Great. And when you talked about sort of $2 in M as an example, do you think people's expectations for getting paid for unbooked reserves, 2 P, 3 P are-- have come in so people aren't necessarily looking to get paid for the upside? Do you think that's fair to say?

Well tell me how is that working out for everybody?

So I take that just to mean that pretty much you're talking just on proved reserves with say-- with people as far as valuation?

I don't know how to respond. I mean all properties are different. They're all hybrids. Everything you look at is a hybrid. I think that it's-- if it's all gas, it's kind of hard to look at it and say gee I'm going to pay a whole bunch of money for $3 to $4 gas.

Right.

And drill those prospects-- or drill those-- that acreage up in a certain amount of time.

Okay. Fair enough. And just on the financial side, it was mentioned that at Virgo and Matterhorn, actually the LOE was coming in better than expected. And I just, in particular, was just curious how that happened and just in general sort of what you've found as you've gotten more involved in those properties, particularly what you think you still have to do out there on the recompletion front? You talked a little about it, but I was wondering if you're seeing a lot more than you expected when you got that interest?

Well the biggest factors in our cost are generally transportation and insurance and labor. So we've been able to effect the transportation pretty well. And we've been able to, as a result, kind of consolidate some of the transportation and different infrastructure in the area. So I think that's helped us a lot. If you'll recall, these are the last two properties that Total had that they were operating in the Gulf of Mexico. But because we get economy of scale, I think that's helped us quite a bit.

Okay. And-- I think that's it for me now. Thanks.

Okay. Thank you, sir.

Thank you. And that does conclude the question-and-answer session. I would now like to turn the call back over to Management for closing remarks.

I think that's -- I think that's it for the day. Please bear with us and hopefully we'll have another good quarter for you next time. Thank you very much, Operator.