W&T Offshore Inc (WTI) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the W&T Offshore's third-quarter earnings conference call. During today's presentation, all participants will be listen-only mode. Following the presentation, the conference would open for your questions and instructions will be given at that time. Today's conference is being recorded, October 31, 2012. I would now like to turn the conference over to our host, Mark Brewer of Investor Relations. Please go ahead.

Thank you, operator and good morning everyone. We appreciate you joining us for W&T Offshore's conference call to review the results of the third quarter of 2012. Before 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 Relations section of the Company's website at www.wtoffshore.com or via recorded replay until November 7, 2012. To use the replay feature called (303) 590-3030, and dial the pass code 456-8692. Information recorded on this call speaks only as of today, October 31, 2012, and therefore, time-sensitive information may no longer be accurate as of the date of any replay. Please refer to our third-quarter 2012 earnings release for a disclosure on forward-looking statements. Now I'd like turn the call over to Mr. Tracy Krohn, W&T's Chairman and CEO.

Thanks Mark. Good morning, everyone. We do appreciate your interest in W&T, and we thank you for joining us on our third-quarter 2012 earnings conference call. I have with me today several members of management including Jamie Vazquez our President; Danny Gibbons, our Chief Financial Officer; Tom Murphy, Chief Operations Officer; and Steve Schroeder, our Chief Technical Officer.

Last quarter when we reported our second-quarter results and operations update, we presented a lot of information in the earnings release and focused our conference call primarily on recent operational highlights. Forward-looking information was included in that, and we responded to your questions. Since the feedback was positive, I'm again going to just make a few opening remarks, and then we will turn it over for your questions. Before I talk about the third-quarter activities, I should mention that we did declared a regular quarterly dividend of $0.08 per share and a special dividend of $0.47 per share, effective to shareholders of record on November 16, 2012, and payable on December 3, 2012.

So, to follow that I will talk about the third quarter. Third quarter was active, and we were highlighted by several important events and further enhanced our platform for growth. We announced the acquisition of Newfield's Gulf of Mexico assets. We acquired a total of about 480,000 gross acres in the Gulf of Mexico. That includes several leases that we were awarded, as well. We've increased our exploration activities both onshore and offshore, and we've continue to have excellent results with drilling in key development projects. Our strategy is to continue to employ a balanced approach between exploration, exploitation, development and acquisitions.

Let's talk a little bit about the Newfield Gulf of Mexico property acquisition. We closed on that acquisition on October 5. For the fourth quarter, that's going to add production cash flow and improve reserves. Going forward, this acquisition adds several hundred million barrels of unrisked exploratory potential to our portfolio. If we are just successful on a little portion of that, this transaction isn't just a home run for us, it is a Grand Slam.

We acquired 78 offshore lease blocks, including 65 blocks in the deep-water. That obviously dramatically increases are exposure to deep-water opportunities. Total gross acreage acquired was 432,700 acres including the overriding royalty interests. This acquisition does include producing properties, six of which are in deep water, four on the conventional shelf and two producing overriding royalty interests in the deep-water. Production is currently about 44% oil and approximately 84% from the deep-water.

So not only did this acquisition reach our strategic goals of increasing our exposure to the deep-water Gulf of Mexico, which we view as a totally separate basin from the conventional shelf, but it met our historic acquisition criteria, as well. Generally, the philosophy is to maintain discipline regarding valuation and complete acquisitions at a reasonable price. Newfield deal satisfies all of our key acquisition criteria of acquiring properties that have a combination of cash flow, upside, opportunities that may not have been pursued by previous operators, for various reasons. In this case I think the previous operator had directed his budget to other assets that they felt like there were going to get a better return out of.

Our production from these properties for the first 23 days of October was approximately 8,330 barrels of oil equivalent per day net. Based upon what we believe to be the most prudent operational approach, we're going to reduce the choke on one of the wells, and expect a fiscal result in production more along the lines of 7,500 barrels per day for the remainder of the fourth quarter. We can explain that in more detail with your questions. It has more to do with a reservoir -- particular reservoir category or problem with one of the wells that will actually ultimately result in more recovery.

We expect these assets to produce in the range of 3.4 to 4.4 BCF equivalent for the fourth quarter of 2012. And, we will use that cash flow to fund further development exploration activities. We currently analyzing seismic data, which we recently acquired to evaluate those undeveloped leasehold acreage blocks that we acquired from Newfield. Once we complete our evaluation, we expect to incorporate additional exploration projects into our prospect inventory and future year budgets.

So, increasing focus on exploration. Over the last few years, we've increased our focus on exploration by increasing our staff of exploration professionals, primarily geologists, geophysicist. We've acquired new seismic for the Gulf of Mexico, as well as onshore, and we are applying latest reprocessing techniques to evaluate those opportunities within our portfolio including in-house processing.

So, going forward, we are seeking organic growth through various exploration projects. In addition to the substantial acreage acquired from Newfield, in deep-water, we recently acquired 11 leases, that's approximately 47,200 acres, from the June 2012 Central Gulf of Mexico Lease Sale Most of the lease blocks acquired are located near or even next current producing leases and infrastructure we operate. We see this as an opportunity to add more reserves and production, reduce operating costs offshore on a per unit basis. We are also increasing our exposure to exploration upside by participating in several non-operated prospects notably West Cameron 73 and Mississippi Canyon 698.

The majority of our capital budget in the second half of 2012 is being devoted toward exploration activities both onshore and offshore. Onshore exploration is primarily horizontal drilling, that pilot program for the reduction of spacing. In West Texas, we expect to have drilled and completed two horizontal wells in Terry County and all three horizontal wells at Yellow Rose by year end. We recently fracked the second well at Yellow Rose, the Pinotage 8H, and the initial flowback results are very positive. As we've mentioned before, all the Permian horizontals are targeting the Wolfcamp formation.

Additional, we've commenced our pilot program to reduce spacing on our vertical wells from 80 acres to 40 acres in the Yellow Rose field. The results of that pilot program should be completed by year end. At our Star project in East Texas, we've just finished our frac operation on Colwell A8 well, and we are initiating flowback. We are currently drilling the McMahon A-28, our fourth horizontal exploration well in the 4 Well Delineation Program, which commenced in 2011. Offshore, the West Cameron 73 number 2 well, in which we have a 30% working interest, found multiple stacked pays zones and is being completed at this time. Well will need a pipeline tie-back with production platform, which should have on production in the third quarter of 2013.

We started the non-operated deep-water exploration well, Big Bend in Mississippi Canyon 698 earlier this month. Drilling continues to progress. At the current rate, we hope to reach TD before year end. We have a 20% working interest in this well and hope to have more information to share after the first of the year. If you'll recall this is a noble operated well, that's the drilling rig Ensco 8501.

We had commenced drilling operations for the Main Pass 108 B-1 ST2, which is the first of two exploratory wells, in our Main Pass 108 field. As I recall, we have 100% working interest in that field, so once we drill the completed B-1 ST2, we will begin drilling the 108 B-2 ST1 well in the first quarter 2013. We have a very good track record in that field since we acquired it from Kerr-McGee in 2005, or about seven years ago. We expect to continue our exploration programs in 2013, and we should be able to provide details on the scope and magnitude of those projects once we complete our budgeting process.

Development activities. Let's talk about that a little bit. On the development front, we're continuing to have good success in our Ship Shoal 349 Mahogany field. We drilled four consecutive development wells since mid-2011, which together have a combined IP rate of approximately 5,520 barrels of oil equivalent per day net. In the third quarter, we brought on production via the fourth well at Mahogany, the A-5 ST. That well is now flowing at 1,100 barrels of oil equivalent per day net. We have operations on both the A-9 ST, a development, and the A-2 well, which is a recomplete, both of which should be completed by year end. The A-14 well should spud in the early first quarter 2013, as well as development well, that has a deep exploratory target, which could result in even more development opportunities.

At our Yellow Rose field in West Texas we are continuing our vertical drilling program on 80-acre spacing, and during the third quarter, drilled another 17 wells. Net production at Yellow Rose reached 3,000 barrels of oil equivalent per day in late October. This is approximately 500 barrels equivalent per day higher than -- or more than 20% above our monthly September average. We will continue to develop the Yellow Rose acreage in 2013, and we'll be able to provide more clarity on the mix of horizontal versus vertical wells once we have results for the current horizontal program.

So production in the fourth quarter 2012. We expect to have much-improved production compared to the third quarter. Not only will we be adding the production from Newfield acquisition and various development wells, but production that we differed in the third quarter during Hurricane Isaac, Tropical Storm Debbie and third-party pipeline outages. We should -- and that shoal will be back online. So on October 17, we completed a private offering of $300 million of 8.5% two-year notes due 2019. It was an add-on to $600 million issuance of 8.5% senior notes from June 2011. It was very well-received. Upsized from $250 million, and issued at a premium of 106% of par, resulting in a yield to earliest call at par of 6.96% and gross proceeds of $318 million. We applied the net proceed of this private offering to repay all of the outstanding indebtedness under our revolving credit facility, which had been used to fund out acquisition of the Newfield properties. So, we reloaded our bank facility. We continue to generate substantial cash flow, and we have excellent liquidity to fund that growth. We currently have $36 million in cash and $575 million available under our revolver. Danny Gibbons tells me that we're expecting to see an increase in our borrowing base to $725 million, but the commitments for the banks aren't due until tomorrow; regardless our borrowing base will be increasing. Our liquidity continues to be very good.

As you know we are very active in the M&A market. We are seeing so many opportunities right now. You had mentioned at our last conference that we looked at over 45 deals valued at $30 billion plus. Those numbers continue to grow, as well. The [dealer] market continues to be strong. There's a lot of focus to sell properties. There may be some really good opportunities before the end of the year. We remain well-positioned to make additional acquisitions and think this is a good time to continue to focus on growing the business. We will ramp up when those right opportunities arrives. So, operator, if you would, please open the lines for Q and A.

Thank you. (Operator Instructions)

Michael Glick, Johnson Rice.

Good morning, guys.

Good morning. How are you?

Good. Just had a question for you guys on deepwater exploration, specifically. Between the Newfield transaction and some other things you are doing in house expanding your exploration capabilities, just wondering if you could talk a little bit about your appetite for risk in the context of the deepwater exploration program? Would you look to bring in partners? Would you look to keep majority operating interest or 100% interest? Maybe and just expand on that a little bit?

Sure. Well, particularly as you think about the deepwater, we like what we see in our exploration portfolio. I always tell people, and temper it a little bit, but you've got to be careful in deepwater because in you might screw up and find something. And then, you have to go develop it. So we do have that in mind.

We are not looking at 100% deals [literally]. We are looking at -- well, particularly, this last well with Noble, we've taken 20% interest, which we feel -- we think is the right number. So we didn't jump out and take a real large interest in it, so I think that that's a fairly conservative approach, and I think that will work very well whether we are operating or nonoperating.

Okay. Thank you.

Sure.

Thank you. Noel Parks, Ladenburg Thalmann.

Good morning.

Good morning, Noel.

Just a couple things. Wanted to talk about the cost guidance that you provided. I realize that with the annual guidance adding the Newfield properties doesn't really move the needle that much, but as we look forward into next year, can you give us any sense directionally of where we might see changes in the cost mix?

I'm not quite ready to address guidance for 2013. But I think it is reasonable to assume that our budget is going to go up. So that should be an indicator for you. We expect production to be up, and that should be an indicator for you. And we are continuing to see a lot of different acquisitions that have interest for us.

Okay. I guess I was just trying to get a sense of with this decent size slug of new properties coming in, on unit cost basis is there any movement, or do they lead in pretty well with the overall Company portfolio?

Yes, we are cognizant of cash flow first, right? And then, what we can do to enhance the value of those properties, be it exploitation or exploration. We are just a little time away from determining what our budget is going to be. This thing with Newfield came up fairly quick. We are incorporating that.

It is a lot of acreage, so we want to give that to the proper amount of time. We think that it really does move the needle with some focus on the exploratory side of it. So, we are pretty excited about that. We continue to see things in the deepwater, in the shelf and onshore. It is coming at us from a bunch of different directions, so we do have to take some time and mind that as a function of our overall budget.

Okay, great. And just my last one. Bit of housekeeping, in the cash flow statement, I guess this would be for Danny, the asset retirement item was a negative, I think, $63 million. I was having a little bit of trouble following -- that's a nine-month number, of course -- having a little bit of trouble following how much of that applies to the quarter and what sort of -- the normal accretion that we would generally add back to cash flow, and then what's I guess an adjustment from the acquisition maybe?

Noel, the $63 million is actually the cash out the door relative to ARO for the first nine months. Now, if you pull June, and subtract the two numbers, you only get the cash for the quarter.

Okay. It is a pretty big number though just in the one quarter then, right?

I don't remember what June was. It seems like it was $36 million. I'm guessing at what the number is --

Let me add a little bit to that, Noel, because normally in the summertime is when we do most of the work, because that's when we have the best weather. So, that's not unusual. It is usually a little lumpy throughout the year, but the normally you'll see bigger numbers on not just P&A but also on platform maintenance and that sort of thing.

Got you. Thanks a lot.

Sure.

Thank you. Jeb Bachmann, Howard Weil.

Good morning everyone.

Good morning Jeb.

Just a few questions, Tracy. First on infrastructure in the Permian, there's a few guys out there have had some issues with third-party processing facilities. Just wondering what your situation is there now, and how much running room you have over the next couple years to handle your program?

Pretty good, actually, particularly Yellow Rose, which is the majority of where our acreage is located in our production. Most of that is hooked up in pipelines. It is not just individual [tank] that are sitting on the middle of nowhere. We do have it hooked up to pipelines and processing plants, so our infrastructure is actually very good there.

Okay. And then looking to offshore, I noticed that you mentioned that it oil mix on the Newfield property is now at 44%. I guess that was up from 37% when the deal was announced, and wondering is that basically just because some of the gas production has come off versus the oil production there? Is that's what moving that mix oilier?

Yes, is just a matter of kind of the instantaneous production from each of the fields. A couple of the fields have been doing some different operational aspects. For instance we just brought on a specific zone at power-play, and that yielded quite a bit more oil in the relative short term, but it is going to float around that approximate number. And as Tracy alluded, we are making some specific operational changes at fields, which we do on all of our fields, so I would expect that general number, but it is going to float in the high 30%s to mid 40%s probably.

Okay, great. One last quick one for me. On the NGL mix going forward what should we look for as a percent of total production?

(Inaudible) oil versus gas ratio, as far as NGLs go, cannot imagine it errors too much from what --

I don't foresee any real significant changes from our recent past history. We continue to do -- well, we are drilling in every sector. I mean we are drilling more in West Texas, so that brings a lot of NGLs, but we have got a lot of other NGLs in our other areas. As Tracy said, we are drilling some pretty high chance factor success wells in Main Pass. They also bring a lot of NGLs, but I think over the long haul, at least in the next six months or so, our NGL mix will probably be fairly static to what it is now.

Yes, that's assuming no acquisitions or anything like that, and I wouldn't make the assumption that we won't have any acquisitions the next 12 months. I think we will. So, that's a tough question, but it's got to be somewhat lumpy.

Okay, great. Thanks for the color guys.

Sure.

Thank you. (Operator Instructions).

Richard Tullis, Capital One Southcoast.

Thank you. Good morning.

Good morning Richard.

Tracy, looking at that Mississippi Canyon 243 Well that sanded up, that was in the prior press release, what's the status on that well?

Yes. We are preparing to drill another sidetrack there.

Okay. What was that production prior to the shut in?

Well, as I recall, it was making a 1,500 barrels a day.

Okay. On Big Bend, what's the pre-drill unrisked reserve estimate on that one?

We never gave that out. I'm not sure if Noble did, but I would defer to them for any kind of numbers. We generally don't try to add any color to unrisked reserves before we go drill these wells.

Okay. Jumping to onshore, what's the timing at this point for your evaluation results at the Star Project and Terry County exploration work? Do you think you'll wait until the next quarterly update January, February next year, put something out sooner than that?

It could be sooner than that, but that's kind of a range. Yes.

I know you talked about M&A a little bit thus far in the call. Are you more likely to stay in the Gulf of Mexico and Permian or start looking into some other areas outside that? Those two?

We've been looking at other areas all along. Again, this is just -- this is opportunistic, and as far as I'm concerned, it is value driven. We've been fairly agnostic as to what we've looked at. Clearly, when we jumped off -- out of the Gulf of Mexico to West Texas, that was a profound variation from our normal theme of the last three decades. So, I don't have any philosophical issues with going into different areas. Clearly, East Texas and West Texas are different from the Gulf of Mexico, and as far as we are concerned, although the ratings agencies don't look at it this way, when you're in the deepwater, I think that's a profound difference from being on the shelf.

Then just last for me, with the Newfield acquisition, have you been able to retain most of the employees that you wanted to hold -- to bring into the new organization?

Yes, on the operations side of it, we certainly have.

Alright, well thank you. Appreciate it.

Thank you. (Operator Instructions).

Curtis Trimble, Global Hunter Securities.

Sure, thank you. Good morning, everyone. Just trying to get a little idea here of what's driving end of year fourth-quarter guidance and looking at second-quarter rate, and obviously you had deferrals related to hurricanes, as you've documented and referred to before. But was hoping I could get a little bit of idea, maybe onshore, offshore mix, of what you expect to contribute to fourth-quarter production.

Obviously, if I look at second-quarter average of [48,600] give or take and later on the 7.5 million -- or excuse me the 7,500 barrels a day you are looking at in the new field, you get a higher number for the fourth quarter. I'm just trying to get a little bit of context as to potential deferrals or what's composing fourth-quarter numbers in the context of your year end guidance?

There's several things. One of them is that the pipeline outages that we had earlier simply aren't going to be there. We are out of hurricane season now. We don't expect any more downtime from hurricanes. Although certainly, we wouldn't say that hurricane season was over judging from what happened in New York over the last couple days. And certainly we do see some upside in production from West Texas. We are starting to ramp up a little bit over there, particularly in the last 30 to 60 days, and we are starting to flowback a couple of these fracs and everything onshore in West Texas and East Texas. So we are cautiously optimistic.

Got you, but it doesn't necessarily include the two operations you've got going on the development side of Mahogany that you expect to bring on for year end? You still got other levers, if you will, to pull on that side?

Yes, I think so. We are in the midst of a workover at Mahogany right now. We will jump on the other well we were drilling as a sidetracked function, too. So, Mahogany continues to remain the focal point for us, and originally we had only figured we were going to drill three or four wells there, and it's just continues to get better. And we've said this before, just about every time, that we get new data, and we drill more wells and we find better opportunities and the field gets a little bigger.

Thanks. But it's safe to say that likelihood of those wells being more impactful on the first quarter of next year and of course the other sidetrack with the Matterhorn, that likely is the first quarter impact in addition to the Yellow Rose horizontal. So prospectively, if you're looking for some bigger numbers, first quarter probably more likely than fourth quarter?

I think that's a reasonable assumption.

I appreciate it.

Yes, sir, thank you.

Thank you. I'm showing no further questions in the queue at this time. I'd like to turn the call back to you, Mr. Krohn, for any closing remarks.

I'm done. We appreciate your attention, and we look forward to talking to you again soon.

Ladies and gentlemen, this does conclude our conference for today. If you'd like to listen to a replay of today's conference, you may do so by dialing (303) 590-3030 and entering the access code of 456-8692 followed by the pound sign. Thank you for your participation. You may now disconnect.