W&T Offshore Inc (WTI) 2016 Q2 法說會逐字稿

Greetings and welcome to the W&T Offshore second-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder this conference is recorded.

Now my pleasure to introduce your host, Ms. Lisa Elliott. Thank you, you may begin.

Thank you, Matt, and good morning, everyone. We appreciate you joining us for WT Offshore Conference Call, review the second quarter of 2016 financial results, and for an operational update.

Before I turn the call over to the Company as I'd like to remind you that information recorded on this call speaks only as of today, August 5, 2016, and therefore time sensitive information may no longer be accurate as of the day to day replay. Also please refer to the second quarter 2016 financial results announcement that WT released yesterday for a disclosure on forward-looking statements and reconciliations of non-GAAP measures.

At this time I the call over to Mr. Tracy Krohn, WT's Chairman and CEO.

Thank you Lisa. Good morning everyone.

Joining me this morning are Jamie Vazquez, our President; Danny Gibbons, our Chief Financial Officer; Tom Murphy, our Chief Operations Officer; and Steve Schroeder, our Chief Technical Officer. Yesterday we released our financial and operations results for the second quarter and we also provided guidance for the third quarter and full year 2016. Also we expect to file our second quarter form 10-Q with the SEC today. This morning I'll briefly review some key items from the release and then we'll take your questions.

In the second quarter we produced approximately 3.9 million barrels of oil equivalent, or 42,864 barrels of oil equivalent per day, about the 5.6% [see press release] was oil and liquids. Our production held steady compared to the first-quarter 2016 when we also produced 3.9 million barrels of oil equivalent. Our total production volume in the quarter was in the mid-range of our guidance, although our oil production was higher, and our natural gas production was lower, than our anticipated mix of production.

During the second quarter we experienced production deferrals and downtime attributable to third-party pipeline outages, and some operational issues and maintenance, which we estimate resulted in production deferrals of approximately half a million barrels of oil equivalent, during the second quarter. Majority of those outages were attributable to equipment and facilities operated by others, unfortunately, over which we did not have control.

One of our third-party pipeline outages was rectified during Q2 with the installation of a new W&T-owned export pipeline, that allowed us to more than double production from our import in the East Cameron 321 oil field. Pipeline was installed in May of this year and was executed slightly ahead of schedule, about 30% under budget and cost, field production has exceeded our initial estimate, so we're pleased to have been able to create a favorable solution.

Also in the latter half of June, production from three of our major fields, including Big Bend, Dantzler, and Bank Pass 283, was interrupted for a relatively short period of time as a result of an explosion at Enterprise's onshore gas processing facility in Pascagoula, Mississippi. That facility handles and processes a significant amount of Gulf of Mexico gas production, several people on that line. The third-party pipeline, the transports, some our offshore production to onshore delivery points, including that plant, were shut down when the plant was shut down.

Shortly after the initial event, production was rerouted to two other export systems, so we experienced a relatively short duration shut-in in our fields and a modest curtailment of rates as the alternative export systems were established. We are currently producing at full production rates, and we don't anticipate any additional material volume impacts stemming from the Pascagoula event.

Our information indicates the Pascagoula plant itself may not be operational for months, but we anticipate normal production volumes while enterprise conducts the necessary plant repairs. In total we have deferred only an estimated.37 BCF equivalent of production linked to the event. So we're happy that we had different alternatives to get production to market, and have been able to ultimately reduce the impact of those outages.

While we typically factor in a certain amount of deferral into our guidance, it just demonstrates there are many factors that impact our results relative to guidance. We're fortunate that our second-quarter results turned out relatively in line with our expectations, all the various parties involved in restoring production and transportation should be commended for a great job, our marketing guys, and operations folks, and the third parties the communicated with all did a really good job.

Generally most of our field performed as expected in the second quarter. New production from the recently completed Ewing Bank 954-A8 well, coupled with our production increased at East Cameron 321 oil field, helped to offset the natural production decline.

We don't have any other new wells planned to come online in the third quarter so combined with the various deferrals including the Pascagoula plant outage, we expect to see a little lower production in the third quarter. Nevertheless our full year production guidance remains unchanged.

We expect that some, if not all of the plant work over the recompletions will add to production in the fourth quarter. As usual we included provisions for tropical storm downtime in our third-quarter guidance, but we're hopeful that we will have a quiet storm season this year. So far that is holding true.

Pricing in the second quarter was more, was actually much more improved from the first-quarter 2016, about 31% higher, but still about 27% lower than what we realized per BOEO in the second quarter of 2015. We were again negatively impacted by lower oil price realizations which have been well under the benchmark WTI price this year, due to large negative price differences at several of our major oil fields. Primarily because of pipelines in some of those fields received lower pricing.

Over 70% of our oil production is experiencing negative price differentials and negative crude quality adjustments. WTI crude oil prices averaged $45.46 per barrel for the second quarter 2016, compared to our average realized crude oil sales price of $39.11 per barrel. So, $46, $45, compared to $39.

On a compared oil to natural gas equivalent basis, our average realized sales price for the second quarter was $25.28 per BOE compared to $34.83 per BOE in the second quarter 2015. Although it was well down from last year, it was a great improvement from what we saw in the first quarter, when our average sales price was $19.33 per barrel oil equivalent. That improved pricing grew by $22 million sequential increase in revenue to $99.7 million, nearly $100 million in the second quarter.

Cost-reduction efforts continue to remain in really sharp focus as we work to get operating margins back to more acceptable levels. Lease operating expenses declined 19% to $36.6 million in the second quarter compared to a year ago, which was substantially below the LOE guidance that we provided for the second quarter. Second quarter base LOE was also lower than expected as we continued to work with our contractors and vendors to manage costs in this persistently weak commodity price environment, and we continue to tackle that and try to optimize structural cost changes and reductions with a little more efficient operations.

As reflected in our guidance we anticipate LOE we will be higher in the third quarter, so it's a little bit lumpy during the year, due to an increase in facilities maintenance and white work over. That's weather driven. We have not revised our full-year LOE guidance, as the projects that were scheduled for the second quarter are still expected to occur, but we may be pleasantly surprised if base LOE comes in lower than our full-year guidance.

Second quarter G&A expenses decreased 17.8%, compared to last year to $16.2 million. A substantial part of this reduction is associated with reduced headcount, contractor headcount, and head to bridge, also lowers we have reduced activity levels. Legal cost were higher but travel and medical claims were lower. For the second quarter of 2016, our adjusted EBITDA was $40.8 million, and our adjusted EBITDA margin was 41%.

Comparing that to the first quarter 2016 adjusted EBITDA increased 147%, and adjusted EBITDA margin almost doubled. The higher realized price per barrel oil equivalent in the second quarter 2016 combined with those lower costs drove substantial improvements sequentially.

As we mentioned in our last call, we're also closer to managing capital cost on our asset retirement obligations spending. We currently estimate ARO spending in 2016 will be around $76 million, which is in line with our prior estimate, but below what our initial estimate of $84 million was, that we published a year in 2015. We don't have any current drilling operations, but we think we will continue --, well we will commence, recommence, rig activities at Mahogany this month.

On June 30, 2016, we had a cash balance of $171.8 million and we had about $1.1 million of availability remaining under our revolving bank credit facility. Our borrowings, outstanding under the revolving credit facility are now in conformance with the borrowing base set forth by our lenders. Consummation of the exchange offer that I will discuss in a moment would allow us to pay off all of the bank debt, and provide a $150 million credit line addition to cash on the balance sheet.

As we discussed on our last earnings call, the company received several orders from the Federal Bureau of Ocean Energy Management, demanding that the company provide additional supplemental bonding on certain federal oil, offshore oil and gas leases rights of way and rights of use and easement, owned and/or operated by the company. The outstanding orders totaled $260.8 million.

So, to update you we filed appeals to the Interior Board of Land Appeals, or the IBLA, rather, regarding these orders. Not acknowledging that BOEM, the company we are seeking to resolve the issue through settlement discussions, the IBLA has stayed the effectiveness of the orders a of couple times, with the latest delay extending until the end of this month.

We continue to have discussions with BOEM regarding these matters, as we indicated in our press release yesterday, BOEM issued a new NTL, or notice to lessees last month that becomes effective next month. This is the NTL on financial assurance for plug and abandonment work, and described the procedures and guidelines of BOEM regionals directors can use to determine if and when additional security may be required for OCS leases, ROW and RUE.

Under the new NTL there's a phased in period for establishing compliance, and lessees may seek compliance with its the additional security requirements under a tailored plan. So the tailored plan must be approved by the BOEM, and it requires phased in compliance and three approximately equal installments during a one-year period, from whenever the BOEM approves the tailored plan.

Additional security for sole liability properties may not be phased in. So we have to handle that right away. We're very encouraged about the progress we're making with BOEM and we've been working with them on a tailored plan for the last several months.

With prolonged weakness and commodity prices, our cash flow and liquidity have been pretty dramatically reduced, thereby restricting our ability to fund current and future drilling activity and debt obligations. As a result on July 25, we announced the commencement of an exchange offer to qualifying holders, of our 8.5% senior notes for new secured and unsecured notes and common stock, that could result in a debt reduction of as much as $518 million.

Details of the transaction can be found in the proxy statement and form 8K that was filed with the SEC on July 25, 2016, and a summary can be found in the press release that we issued yesterday. We have a solid asset base with upside potential an outstanding team of employees working hard to make WT a success. Our limited liquidity seriously hampers our ability to meet our obligations and goals currently, our objective is to restructure the balance sheet such that we can increase our ability to perform.

We believe this exchange offers an important element in accomplishing that, and we are working hard to complete that exchange. We are hearing positive feedback from the market, and we believe the offer will provide benefits to both the company and bondholders. We will know the results to the early tender deadline by Tuesday of next week.

One other thing I'd like to add to this, before I open up for questions, I have a personal note: a good friend of mine, Kenny Wilcox, that I've worked with on other projects for many years, his daughter was tragically killed in an accident Monday. I just wanted to extend my personal condolences. A lot of times he will listen to these conference calls, so Kenny, just know that Lori and I are thinking about you.

With that the operator, I'll open it up for questions. Let me mentioned one thing before we do. We're not going to take questions about the exchange offer, the status, or any other matter related to the exchange.

So with that, the operator, would you go ahead and open the lines.

Thank you.

(Operator Instructions)

Our first question comes from Neal Dingmann, from SunTrust, Robinson Humphrey. Please go ahead.

Thank you Tracy.

Hi Neal, good morning.

Just, two quick ones here for you. First, Tracy you certainly have, looking at your portfolio up there, I think you'd agree, a number of really exciting potential deepwater projects an additional wells at Ewing Bank 910 among other things. As well as a number of things on the shelf.

I'm wondering, generally, what you need to see to return? Is it more to get the balance sheet shored up, higher prices? Or all of the above?

It certainly pricing has a huge impact on us. I think that I talk about this a lot. In that really what we need to see is more normal margins.

Our normal margins range between 60% and 70% first quarter we were down around 20%-something. Last quarter we were at 41%. To really stimulate our activity, really takes around 60%-ish it to make it be comfortable about setting forth on future expenditures.

Okay. And then just lastly, infrastructures to me looked like going through more temporary in nature like the enterprise and different things that happened. Is that how you see that, Tracy, or how do see, around your existing wells that you have there?

Did most of those seem more temporary in nature? How should we think about the infrastructure, the issues that we saw?

You should think about it as temporary. Just exactly that. Sometimes during the summer there will be planned outages because the weather is better and that's when a lot of work gets done too different pipelines and infrastructure on platforms and whatnot.

But generally the thing that happened at Pascagoula that is random. Our guys did a really good job of getting everything routed around there and we're back to normal production there, so while it was certainly an aggravation, fortunately nobody got hurt at the plant. I'm glad to hear that, but they're working on it and we have managed to wrap around it.

So I really commend everybody who was involved in that process.

Very good. Thanks Tracy and good luck on the change.

Thank you sir.

Our next question comes from John Aschenbeck Seaport Global, please go ahead.

Good morning, thank you for taking my question. Tracy you are obviously got a near-term in place with the balance sheet with the exchange offer. Congrats on that.

Assuming it plays out and you get some leverage release, some liquidity, region agreement with the BOEM, and once we return to higher commodity price environment, your work on the margins you were talking about, what you see as the next operational steps for the Company? Neil touched on a few of the projects you have but I was curious to understand which one of those you would like to get to first, you mentioned Mahogany in your prepared remarks. But just curious to get an idea of what else you are looking at next.

Mahogany would be a priority for us. Once we get work done there, then we have got some work to do, potentially over at Virgo potentially at Ewing Bank's as well. We're looking at some of our deepwater portfolio, for production enhancement, and exploratory opportunities as well.

Got it, I appreciate it. Thanks Tracy.

Sure, thank you.

Our next question comes from Richard Tullis from Capital One Securities, please go ahead.

Hey, thanks, good morning everyone.

Good morning Richard.

Tracy, going back to the BOEM issue, is the main focus of the current discussions, on the amount of bonding, that would be required by W&T, or is that a settled issue and now it's a matter of what timeline to provide the additional bonding?

It's even a little more intricate than that. It's more structural in nature. As to some of the controls over the agreements that we have in place going forward.

This is, this new NTL is pretty recent. We don't think it really changes anything that we're already going to do. I think it has more of an effect on them with regards to timing on how many other companies they have to deal with.

And it's a daunting task for them. They have received, it's a big job for them to we get everything done on a timely basis. I think it really has more to do with personnel, and getting things in place for the next few years, to get all of this accomplished on a timely basis.

Given where we are now, is there adequate bonding capacity out there to handle the ARO bonding requirements?

On the face of it, you would probably say no. But on the other hand, as you create a need, then markets come in. However right now, I would not say there is a substantial market for bonds. No. That does not mean it won't change in the future but right now it's pretty tight.

And what has been the recent cost estimates for securing, say some level of bonding, say, $10 million as an example?

I can't give you that information, sir.

Okay. Moving away from the BOEM issues, what level of spending CapEx spending, do you think would be required in 2017, to keep production flat, say with second quarter 2016 production, 44,000 barrels a day?

Quite frankly, I'm just not quite there yet. I don't really have that answer yet. It's a function of margins, not just pricing, but the margins that you would need to have to keep it flat.

We are not spending whole bunch of money, we're keeping it pretty flat right now. So we do have some work that would like to get done before the end of the year, so that will be a function of what we have on our plate to finish before the end of the year.

I don't really have an answer for you for flat for 2017 or beyond that. Other than -- we're kind of treading water right now.

Okay. That is all for me. Thank you Tracy.

Yes sir.

(Operator Instructions)

And our next question comes from Jeff Robertson, from Barclays. Please go ahead.

Thanks, Tracy just a question on capital, and some of this has already been asked, you don't have any capital projects planned for the rest of this year?

Yes we're working on that right now Jeff. As I mentioned in the call, we're looking at Mahogany and restarting operations there, we have the rig on location, so we're working toward that goal.

We would have one well to drill there, for sure, and the one we started to drill and shut down. And then we've got another potential workover and depending on the results of the first well, we would have to see what happens, now. A little word of caution obviously it's price-sensitive so if prices jumped downward than that would affect that decision.

Okay. I know you are sensitive around what you can say within the context of the exchange offer but can you talk at all about the [ball] borrowing base redetermination?

No, I think that is something I prefer not to talk about at this time.

Okay. Thank you.

It is a consideration but I would just as soon not talk about it right now.

Okay.

I don't consider it to be an issue.

Our next question comes from Gail Nicholson, from KLR Group. Please go ahead.

Good morning. I'm just curious on your thoughts about potential hedges in 2017, and looking at the strip you would be at, [such as] putting any on?

That is a possibility, Gail. We will look a little bit further, right now I think we are okay. And protecting the amasses we've projected to spend for this year.

I don't really know how to look at 2017 yet. Prices moving up and down, and there's a lot of different opinions about what it might be. We know what the worst-case scenario is, and that we've already experienced that this year.

[$40] would seem like an acceptable place to start putting in hedges, however the way we are structured right now, it really wouldn't make much of a difference if we hedged at [$40]. Our product realizations are slightly less than that. I think we are good where we are right now.

And then looking at where deepwater costs are right now, the onshore guys have seen massive deflation and service cost, the offshore service guys were little slower to catch up on that. Do you think you've plateaued on those service cost reductions or do think there's more room to go?

I think there's more room. I think that as we get further into this cycle with prices remaining where they are or moving slightly up or down that you'll continue to see reductions in OpEx and CapEx.

Okay great thank you.

Great, thank you.

I'd now like to turn the floor back over to Management for any closing comments

We appreciate your attention and we will talk to you next quarter if not sooner. Thanks you so much. Bye.

This concludes today's teleconference. They give your participation. You may disconnect your lines at this time.