W&T Offshore Inc (WTI) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by. Welcome to the W&T Offshore's fourth-quarter 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, Wednesday, February 27, 2013. I would now like to turn the conference over to Mark Brewer, Manager, 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 fourth quarter and full-year 2012. 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 Relations section of the Company's website at www.wtoffshore.com, or via recorded replay until March 6, 2013. To use the replay feature, call 303-590-3030 and dial pass code 4590116 pound.

Information recorded on this call speaks only as of today, February 27, 2013, and therefore time-sensitive information may no longer be accurate as of the date of any replay. Please refer to our fourth-quarter and full-year 2012 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, Mark. Good morning, everyone. We appreciate you joining us on our fourth-quarter 2012 earnings conference call. This morning I have with me several members of management, including Jamie Vazquez, our President; Danny Gibbons, our Chief Financial Officer; and Tom Murphy, Chief Operations Officer.

As you can see from yesterday's press release, we had another solid year as we focused on expanding our opportunities, growing our assets, and creating long-term shareholder value. During the year 2012, we grew our production, increased our reserves, and expanded our operations. Our successful development program allowed us to convert 50% of our undeveloped reserves to the proved developed category, and we grew our proved developed crude oil reserves by 51% over the past year.

As we outlined in yesterday's news release, we achieved strong results financially in 2012, and maintained good liquidity and robust cash flow. We were also pleased that we ended the year with a generous cushion in our year-end ceiling test calculation, thus no impairments due to lower natural gas prices. That is kind of a byproduct of drilling within cash flow.

In 2013, our goal is to replace reserves organically. I am going to repeat that. In 2013, our goal is to replace reserves organically. Over the past few years, we have been expanding our exploration projects to support the Company in its goal to achieve organic growth and be less dependent on acquisitions to accomplish our strategic objectives.

Our 2013 capital expenditure budget of $450 million is currently allocated 63% to exploration and 37% to development projects. It is designed to drive production and reserve growth organically through our focus on exploration. However, we do have the flexibility to modify the plan as necessary, should we choose to complete a strategic acquisition or acquisitions.

The budget is expected to be funded by internally-generated cash flow and, as is our practice, does not include any dollars for possible acquisitions. That is what our bank credit line is for. We also maintain the flexibility to increase the budget if additional projects are identified, or to redirect capital from one basin to another.

In 2013, we will also continue to pursue a more balanced approach -- meaning the balance of offshore projects that are more often characterized by high production and high internal rates of return with onshore projects that have longer life reserves but lower IRRs. And, ultimately, a deepwater discovery may generate significant reserves and high cash flow many years after discovery, where the onshore project may provide long-life reserves more quickly and a multi-well inventory.

For example, a deepwater discovery like our Big Bend prospect, which represents a large capital commitment prior to first production before any significant booking of proved reserves, can be complemented by an onshore discovery from which we are able to book proved reserves on the discovery well and often on undrilled offset locations as well. This balanced approach allows us to maintain good liquidity and high cash flow. Further, it helps us manage our finding and developments costs, and allows us to plan for multiple years and facilitate our goal of generating a more predictable year-over-year growth rate.

Now, also in 2013, we will continue to focus on oil projects that are driven by strong full-cycle economics. As we outlined in our February 12 news release, our 2013 drilling program is heavily weighted toward oil exploration to drive that organic growth.

Offshore, we have several projects of note, including our Mahogany exploration program; that is including two exploration wells, testing a deeper target in the field. This is a highly attractive project that allows us to test to deeper sand with significant upside. However, if that is not successful, both wells have uphole take points in the field P-sand that have been very productive in earlier wells. The economics on this program are very strong, and we have the potential of adding reserves and further development potential. This field just keeps getting bigger.

At our Mississippi Canyon 243 block, or what we call Matterhorn, we are currently drilling a development well that is expected to have an excellent production rate of mostly oil, about 1,000 barrels per day is what we expect. We also expect to follow this well with the Mississippi Canyon 243 A-5 well, which is a water-injection well that will be used for pressure maintenance in the field. This well is expected to increase the ultimate recovery of the eastern sector of the field and, assuming success, should add proved reserves to the field.

At Big Bend, our 2012 discovery with approximately 150 net feet of high quality oil pay, is targeted to be sanctioned in 2013 by the operator. The excellent reservoir and oil characteristics of this discovery give us a lot of confidence that we will be able to realize significant value from the development and production of this resource. To date, we have not booked any proved reserves to Big Bend. That will come with the sanctioning of the project.

Deepwater exploration is a strong focus for W&T this year. We have a large number of deepwater blocks, and a growing inventory of seismic and projects that are moving toward a drill-ready status. We will likely have an additional exploratory drilling activity in the deepwater later this year.

We have an active drilling program planned onshore as well. As we reported in our February 12 release, we are moving forward with the horizontal drilling and vertical down-spacing programs in our Yellow Rose field. At year end, the encouraging results we had allowed us to book some proved reserves from these two programs, but we have done so very conservatively.

We believe that there is substantial upside associated with continued vertical down spacing, and the drilling of additional horizontals in the Wolfcamp and testing newly identified benches. Approximately 80% of our Yellow Rose lease acreage is held by production. That is important, as it allows us to develop the field prudently and take advantage of the best opportunities in the field.

In East Texas, recent results have been very encouraging and are in line with our current expectations. As outlined in yesterday's news release, prior to committing to a long-term development program, we are planning to drill one or more additional wells this year. The next well is expected to spud in March. In Terry County, West Texas, we completed two horizontal wells during the fourth quarter and, based on a review of all our well results and full-cycle economics, we have decided not to pursue additional development of the area at this time.

Regarding our acquisition plans for 2013, the M&A markets are heating up, and we are well positioned to make acquisitions in 2013. We continue to pursue assets that have upside and that would be accretive to the Company.

So, summarizing, we expect organic growth in 2013. We have good strong cash flow and expect to be able to stay within our cash flow for our drilling program. We also have a substantial borrowing base that provides good liquidity and flexibility to take advantage of strategic acquisition opportunities that are likely to arise. So, with that, operator, we are ready to take questions.

(Operator Instructions) We do ask that you please limit yourself to one question and one follow-up, then requeue for any additionals.

Our first question is from the line of Noel Parks with Ladenburg Thalmann. Please go ahead.

Good morning.

Good morning, Noel.

I had a couple questions. When you were talking about -- or actually on the press release, there was a mention at Yellow Rose that you have a lot of the acreage held by production, and that that would help you take advantage of the best opportunities in the field. Can you talk a little bit about the variability you are aware of across the field? And, I mean, should we think of Yellow Rose as being more like a statistical play?

It is. The variability that we refer to is more along the lines of vertical wells and horizontal wells. Some of the acreage isn't geographically shaped so that we can do what we think would be a more optimal horizontal well, as opposed to a vertical well. For instance, if you have got a horizontal well going one direction and another direction, you have got that space in between that may need to be taken advantage of vertically.

Got you. And the Newfield acquisition, I was wondering just if they had made any contribution to proved reserves above what you had specified at the acquisition? And I wonder if anything also got moved up from probables into proved from the Newfield properties.

With regard to Newfield, the properties are actually performing slightly better than we had expected. What we have done is we have begun acquiring additional seismic. We are very encouraged by what we see. We think we see more opportunity than we originally did.

It has opened up the possibilities of partnerships with other companies as well. We have had a good bit of inquiry on that. So, yes, I mean, I expect that we will be doing something with those properties later on this year.

Okay, thanks. That is it for me.

Thank you.

Thank you. The next question is from the line of Michael Glick with Johnson Rice. Please go ahead.

Morning.

Morning, Mr. Glick, how are you?

Pretty good. Just a couple questions on Mahogany. I was wondering if you would provide some more color just on the upside associated with extending the known P-sand reservoir, as well as the deeper potential in that T-sand that you talked about?

Yes, we keep drilling wells out there, and we keep finding new locations to drill the P-sand. We have added more seismic. We found that our maps were okay -- they weren't accurate to the extent that we wanted. Every time we get a new generation of seismic or seismic processing out there, the field gets bigger. We are able to drill better wells and more of them. The size of the field expands in that sand.

The other thing that we noticed is deeper that we see some potential. In fact, one of the wells that we drilled out there -- I can't remember which number it was, Michael -- but it had an additional completion in what we call the N-sand, and I think that was the A-9. Yes, it was the A-9 -- had additional reserves in what we call the N-sand. I am sorry, that was not the A-9, it was the A-2 well. They are writing me notes over here. No, not the A-9, the A-2. Okay, so it was the A-2 well.

We perforated a pretty thin sand that we didn't really expect a whole bunch out of, and the damn thing was making 800 or 900 barrels a day, and has maintained good production since. So, we are excited with that, and then we have got a deeper frontier in what we call the T-sand.

And is the T-sand, is that an oil or gas target?

We think it is going to be oil.

Okay.

We haven't gotten to the bottom of the oil column in this field ever.

I guess just one follow-up. Given the success you have had out there, how are you in terms of running room, in terms of well slots?

I am sorry? In terms of slots?

Yes.

We have got plenty of slots. This is a big platform. If we ran out of slots, we would do some recovery and be able to drill some more wells.

Okay, that is helpful. Thank you.

Thank you.

The next question is from the line of Biju Perincheril with Jefferies. Please go ahead.

Hi, good morning.

Hi, Biju, how are you?

I am doing good. Tracy, in east Texas, can you talk about the data points that you are looking for next, before getting into development there? Is it getting more comfortable with decline rates, or are you looking to delineate more of the acreage?

Yes, I think it is an acreage issue for us. But also it takes a few wells to get the right formula on the completion. So, we are getting better and better at it. And we are seeing what we think is very encouraging signs of wanting to make a large commitment out there.

Okay. And then on the acquisition markets you mentioned looking robust; where do you see more opportunities? Is it still in the Gulf, or are you seeing equal opportunities onshore as well?

We see them in both areas. For us, since we went onshore, we are seeing a lot more opportunity onshore than we did before. We think that there is some opportunities in different states other than Texas that we have [looked] at.

Yes.

And we will continue to pursue that. I still like what we have seen in east and west Texas, of course. And we are seeing opportunities out in the Gulf in the deepwater as well.

Okay. And then, just following up on your comment on Newfield properties, any color on timing when we can see you guys getting more active in the deepwater front once you bring in some partners?

I think later on this year.

Is that in the current CapEx numbers, or is that something that will be incremental?

I don't see that in the CapEx numbers at this time.

Okay. Got it. Thank you.

Thank you.

Thank you. The next question is from the line of Patrick Rigamer with IBERIA Capital Partners. Please go ahead.

Hi, good morning.

Good morning, Patrick.

A couple of questions have been answered already. But just wanted to ask -- with the exploration budget, is that -- should we think of that as similarly 63% offshore? Or is it 80% offshore versus onshore?

That is about 63%, Pat.

63% of the total budget, but is it also 63% offshore versus onshore?

I will get Danny to confirm that. He is still working on the 10-K.

Okay.

(inaudible) for offshore and 37% for onshore; and 63% of the budget is exploration, and 37% is development. So, the question is -- what is the exact split?

No, the exploration dollars -- are those kind of following a similar pro rata, onshore versus offshore split?

Hold on, we are getting that answer.

Ask another question; I will get it.

Go ahead. We will have an answer for you here momentarily.

Okay, thank you. I will jump back in the queue then.

All right.

Thank you. The next question is from the line of Richard Tullis with Capital One Southcoast. Please go ahead.

Thanks, good morning, everyone.

Morning, Richard.

Just a couple of quick questions, I don't think have been touched on yet. Going back to the 2012 reserves, what were the total adds from acquisitions, and then subtractions for divestitures for the year?

We added 40 Bcf-something --

42 Bcf.

-- for acquisitions, and can't remember what we sold.

Yes, 42 Bcf on the add, and about 3 Bcf on the divestment of the small South Tim property.

Okay. That is helpful. Thank you.

We will have those exact numbers in the 10-K, which will come out in a few days.

Okay. And then just on Yellow Rose -- anything to update there on the two recent horizontal wells? The Chablis, do you have a 30-day rate there yet? And then that UL well that was flowing back, do you have an initial rate there?

We haven't given that information out yet, Richard.

Okay. So, nothing to update yet at this point?

We don't have an update for you on that. I will tell you that the field production just about doubled from this time last year -- on a peak rate.

Okay.

And the average rate is just slightly off of that. So, rate in the field is climbing at a nice little pace right now.

Okay. Well, that is all I have. Thanks very much.

Thank you, sir.

(Operator Instructions) The next question is from the line of Jeff Robertson with Barclays Capital. Please go ahead.

Thank you. Tracy, a question on capital. If you all do find an acquisition in 2013, did I hear it right that you would consider deferring some of the exploration activity?

No, I didn't explain that right. What we would be willing to do is spend more money to do the acquisition, which means that we would borrow money to make acquisitions, okay?

So, it would be in addition to the capital budget (multiple speakers) talking about.

So, it wouldn't -- I wouldn't be able to sit here and claim that we were doing our CapEx within cash flow. I would go outside of cash flow to make acquisitions.

And what would you be comfortable with, in terms of debt metrics for the Company? Can you just remind us where you all -- what your criteria are?

I think that -- that is always a really good question, Jeff, and I don't have a stock answer for that. The reason is -- every deal is a little bit of a hybrid.

So, it is a function of how fast it pays down, and how much concentration risk you might have to take in one different field. And what the bank advance rate is, and what -- of course, if we chose to do a larger acquisition and put some of it off in longer-term debt, what those metrics would be, that would make it make sense. What I don't want to do is lower our credit ratings.

In keeping with what you all have done, Tracy -- so a preferred acquisition would be one that brings a reasonable amount of cash flow, in addition to drilling opportunities?

Yes, you know we --

As opposed to just going out and buying drilling opportunities?

Yes, we are always interested in more cash flow.

Okay. (laughter)

That has kind of been our mantra for the last three decades. So, yes, that is more appealing to us.

All right. Thank you very much.

Thank you, sir.

Thank you. The next question is from the line of Curtis Trimble with Global Hunter Securities. Please go ahead.

Thanks, good morning, everyone. I was hoping I might be able to get a little bit of detail on Big Bend internal reserve estimates, expectation for timing on development? I am guessing it is still waiting on Troubadour results. But if you guys had any preliminary discussions with Noble on possible development options, whether or not Troubadour is successful, et cetera?

No, Troubadour is scheduled to spud this year. I don't want to take the lead away from the operator, in this case Noble, as to what they are announcing in the way of reserves and that sort of thing. I think they have printed that out there. I think their gross resource has been made known, and what they consider their economic cases. So, rather than have a differing or potential for any kind of differences in numbers or anything like that, I'd follow their lead.

We haven't really sat down and talked about sanctioning yet, but we will. They are in that process now. We will have to do the FEED study and get it -- I say we, I mean the group, meaning Noble will lead that as operator. I know we have a meeting this week with them. So, there is nothing that we want to do to slow it down, that is for sure.

I understand. I appreciate it.

Okay. Thank you.

Thank you. There are no further questions at this time. I will turn it back over to Mr. Krohn for any closing comments.

Okay. I think we had a follow-up answer on the percentage of our exploration budget going to onshore versus offshore. And so, I think that was Patrick that asked that question. If he is still available, I will cover that with him. If not, we will put it out in the 10-K anyway.

Patrick, the answer to the exploration question -- about 80% of the exploration is dedicated offshore. Again, if you think about the onshore, the question about -- we are talking about drilling quite a few wells onshore, but most of that is development dollars. So, the exploration side is offshore. So, anyway, that is the question you asked.

With that, I will shut it down. We appreciate your attendance, and look forward to talking to you again soon. Thanks very much.

Ladies and gentlemen, this does conclude the conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3030, and enter in the access code of 4590116 pound. Thank you for your participation. You may now disconnect.