W&T Offshore Inc (WTI) 2016 Q3 法說會逐字稿

Greetings, and welcome to the W&T Offshore third-quarter earnings conference call. At this time, all participants are in a listen-only mode. (Operator Instructions)

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Lisa Elliott. Thank you. Ms. Elliott, you may begin.

Thank you, Operator, and good morning, everyone. We appreciate you joining us for W&T Offshore's conference call to review the third quarter of 2016 financial and operational results, and for an update on planned activities for the remaining of the year.

Before I turn the call over to the Company, I would like to remind you that information recorded on this call speaks only as of today, November 3rd, 2016, and, therefore, time-sensitive information may no longer be accurate as of the date of any replay.

Also, please refer to the third quarter 2016 financial and operational results announcement W&T released yesterday for a disclosure on forward-looking statements and reconciliations of non-GAAP measures.

At this time I'd like to turn the call over to Mr. Tracy Krohn, W&T's Chairman and CEO.

Thanks, 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.

So yesterday we released our financial and operational results for the third quarter, and we provided guidance for the fourth quarter and full year 2016.

We should also be filing our third-quarter From 10-Q with the SEC later today.

So this morning I will review some key items from the release, and then we'll take your questions.

In the third quarter, we produced approximately 3.8 million barrels of oil equivalent, or 41,500 barrels of oil equivalent per day, about 57% of which was oil and liquids.

Our production held relatively steady, comparing 42,900 barrels of oil equivalent per day in the second quarter and 43,300 barrels of oil equivalent per day in the first quarter of 2016.

Our total production volume in the third quarter exceeded our guidance by about 7%, but the storm downtime that was included in our guidance didn't occur. However, we did continue to experience some production deferrals and downtime, primarily attributable to third-party pipeline outages. We estimate that about 200,000 barrels of oil equivalent of production was deferred in the third quarter.

Production has held steady, despite our dramatically reduced capital expenditure program of only 24.1 million in the first nine months of this year.

Most of our fields performed as expected in the third quarter. We've seen solid production contributions from recent worked over and recompletion activities, which is a great way to bring on low-cost production. And that's aided us in maintaining a relatively stable production profile.

Our average realized sales price was down about 3% to $27.97 per barrel of oil equivalent from third quarter of last year.

We were again impacted by oil price realizations that were well under the benchmark WTI price this year, due to large negative price differentials at several of our major oilfields, primarily due to crude quality relative to the WTI [bank].

So our GAAP net income for the third quarter was $45.9 million, and our earnings were $0.48 per share. So excluding special items, to be comparable to Street estimates, we would have had a loss per share of $0.24 per share, which is a substantial improvement compared to a loss of $60 million, or $0.79 per share in the third quarter of 2015.

So before I review our operating activity in more detail, I would like to thank our shareholders and a lot of our senior note holders for their support in our exchange transaction.

If you'll recall, on September 7, 2016, we completed an exchange transaction whereby approximately 79% of our 8.5% senior notes due 2019, were converted into common stock and new secured notes.

So not only did this transaction reduce the Company's overall indebtedness, it dramatically reduced interest expense going forward. For instance, our second quarter 2016 interest expense was nearly $30 million, and our fourth-quarter interest expense is projected at approximately $11 million.

The projected annual cash savings from our reduced interest cost will be in the $50 million to $60 million range, which is money that we can use to invest back in the ground.

The pay-in-kind, or PIK toggle feature of the new notes, also provides us with additional financial flexibility in a market that continues to be uncertain.

Additionally, we closed on a new $75 million 1.5 lien term loan, and used those proceeds to pay transaction costs associated with the exchange transaction and to repay a portion of the borrowings outstanding under our revolving bank credit facility.

We did use cash on hand to reduce the remaining amount outstanding under the revolver to zero.

At September 30th, 2016, our total liquidity stood at $222.5 million. That consisted of cash balances of $73.4 million and $149.1 million of availability under our revolving bank credit facility.

The Company did recognize a gain on the debt exchange of $124 million. The actual debt reduction through the exchange of the unsecured notes for the secured notes -- or excuse me -- of the unsecured notes for the secured notes, was over $400 million.

However, the carrying value of the debt is increased by the total amount of interest that would accrue over the life of the notes. That interest plus the transaction cost served to reduce the amount of the gain.

All the interest on the new notes has been recognized upfront, so we won't be recognizing interest expense on those notes going forward. That's a little bit of a departure for us.

So we have provided a table in the earnings release so that it might be easier to understand the exact nature of the transaction and the effect that it has on our balance sheet.

We also placed a link to a form 8937 titled Report of Organizational Actions Affecting Basis of Securities, on the Investor Relations overview page on our website. And that might be helpful to senior note holders that participated in the exchange.

We're pleased to have this transaction closed, and our focus is now back to new capital projects. So while operating margins are still below our historic levels, they have improved from earlier in the year.

Adjusted EBITDA for the third quarter was $52.5 million and our adjusted EBITDA margin was 49%, and that's up from 41% in the second quarter and 21% in the first quarter.

We do still believe that margins need to get back more in line with historical levels around 60%, to deploy capital at more robust, higher levels. So we're obviously working hard to improve our margins as we continue to drive cost down everywhere we can improving efficiencies.

We believe we have a number of capital projects that work well in today's commodity price environment, thus, we're expanding our capital program.

Our capital budget for 2016 has been expanded to approximately $60 million, and we're working hard on our plan for 2017. At this time, we expect next year's budget to include a number of new projects and the projected expenditures to be above 2016 levels.

I'll discuss a few of those potential new projects here shortly.

So first, let me finish up a discussion of projects for the remainder of 2016. So starting in August, we reinitiated drilling operations of the A-18 well in our Mahogany Field at Ship Shoal 349.

To date, we've penetrated and logged potential pay in two sands, the results of which are encouraging.

We're drilling towards total planned target depth of 18,700-and-something feet, and expect to reach TD in November or December.

We plan to complete and bring that A-18 well online in early January 2017.

Following the completion of the A-18 well, we expect to conduct workover activities on a few of our currently producing wells to further enhance field production.

That A-18 well is a project that was in progress in early 2015, before we ceased operations due to rapidly declining margins from lower oil prices.

Mahogany Field has continued to be an outstanding performer. We're delighted more than ever to develop further the T sand in that field.

As you might recall, that field had historically produced primarily from the P sand, until we discovered the deeper T sand in mid-2013, with our A-14 well. That well's produced over 3.8 million barrels of oil equivalent.

We will be performing a minor through tubing operation on this well in early 2017, in January of 2017, to optimize the production rate.

In addition to the T sand, the A-14 well has numerous other productive sands buying pipe. Eventually we'll want to re-complete to these upper zones to optimize recovery from that well.

I think people forget that the Gulf of Mexico has some of the best stack [pays] reservoirs in the US. With its high permeability and high porosity, it's like the Permian Basin on steroids.

During the recent industry contraction, we have remained focused on evaluating the drilling and production data from certain of the other wells drilled in the field, as well as interpreting the advanced seismic data we acquired to help us better understand Mahogany sub-salt opportunities. We believe we may have numerous other P and T sand prospects in this field.

So we're devoting more capital to our re-completion program. We've been very successful with bringing on additional low-risk production volumes with modest capital expenditures, by completing wells in fields that have substantial unproduced reserves.

We have recently finished the re-completion of the A-1 well at Viosca Knoll 823, our Virgo Field, and the Ewing Bank 954 A-8 well. Both of these wells are performing better than expected, total of about 4,950 barrels of oil equivalent per day gross and 3,300 barrels of oil equivalent per day net. That's on early testing, and should contribute nicely to our fourth-quarter production levels.

So drilling opportunities and major CapEx projects that we think will make the list for 2017, include a water flood expansion project at Matterhorn, new wells in Mahogany, couple of opportunities in the Ewing Bank 910 area, and other projects nearing maturity in both the deepwater and on the shelf.

We also have multiple re-completion opportunities in Matterhorn, Ewing Bank 910 and various shallow water fields that we'll likely add to our list of opportunities in 2017.

Cost of this inventory set would be around $100 million and could increase production over 2016 levels.

Again, we're in the process of developing the 2017 CapEx budget and hope to have that further defined relatively soon.

And although we're encouraged by the improved commodity prices and our stronger financial condition, we do remain diligent about cost control. We're remaining and we are, rather, maintaining a prudent approach to expenses and CapEx spending.

Our third-quarter LOE declined 16.7%, to $37.5 million from the third quarter of last year. LOE was well below guidance, due, in part, to moving some of the plant workover activities to the fourth quarter. That's why we're guiding LOE to be higher in the fourth quarter compared to the third quarter.

For the year, the midpoint of our guidance for LOE is $161 million, which is down over $100 million from levels seen two years ago.

So operating cost and efficiency gains have been a really strong focus for the Company, and that's translated into reduced expenses and lower lifting costs, both in absolute terms, as well in structural unit cost.

This reduction has also been aided by the sale of our Yellow Rose Field.

For the third quarter, G&A decreased 23.2%, $12.7 million, compared to the third quarter of last year. Part of the decrease in G&A expense was due to reclassifying transaction cost associated with the exchange transaction previously recorded in G&A expense, to the line item gain on debt exchange.

So regardless, like-lease operating expenses, the full-year midpoint of our guidance for G&A is $61 million, which is down 30% from levels seen two years ago.

We continue to drive down the cost of goods and services wherever we can to be better in line with commodity prices, obviously, with the goal of improving our EBITDA margins and expanding the business.

So as we've been discussing on the last several earnings calls, the Company received several orders from the Federal Bureau of Ocean Energy Management, demanding that the Company provide additional supplemental bonding on certain federal offshore oil and gas leases, rights-of-way and rights-of-use, an easement owned and/or operated by the Company.

The outstanding orders totaled $260.8 million. As we reported, we filed appeals. And given that we are actively seeing to resolve the BOEM orders through settlement discussions, we have received stays for the effectiveness of the orders a number of times. Our most recent stay extends the effectiveness to January 31 of 2017.

And we will continue to work closely with the BOEM to resolve that.

So in summary, we have some outstanding assets and a significant inventory of upside opportunities. Our objective is to maintain steady production on a modest capital budget, probably in the $100 million range, until we have more confidence in market conditions.

Meanwhile, we will continue to maintain capital restraint and diligent focus on our operating expenses and cost restatement.

Further, we're going to build our inventory projects and deploy our first-tier capital to those high-quality projects with the quickest payback. With a significant portion of our acreage held by production, we have that flexibility to pursue the best opportunities, whether they're organic or an acquisition.

Thus, our goal is to remain optimistic and work to position the Company for when we believe the time is right for more robust capital deployment. Remember, we don't have anything drawn on our credit line either.

So that only do we have excellent organic opportunities, but we believe that the acquisition market offers exciting potentials as well.

We have a solid history of adding value through acquisitions, particularly when others aren't seeing the value we see in the Gulf of Mexico.

So before I close, I want to discuss for a moment the Apache case and try and correct some of the misinformation that has been printed so far.

Let me tell you what we said in the Form 8-K that we filed yesterday. In late 2014, Apache Corporation filed a lawsuit against W&T Offshore, Inc., alleging that W&T breached the joint operating agreement, the contract, related to the abandonment of three deepwater wells in the Mississippi Canyon area of the Gulf of Mexico.

That lawsuit is currently pending in the United States District Court for the Southern District of Texas.

In the suit, Apache contended that W&T failed to pay its proportional share of the cost associated with plugging and abandoning the three wells.

W&T contended that the costs incurred by Apache were excessive and unreasonable.

The case went to the jury on October, I guess it was last Friday. What was that? -- the 28th of 2016. So on the same date, the jury made the following findings.

W&T failed to comply with the contract by failing to pay its proportionate share of the cost to plug and abandon the Mississippi Canyon 674 wells.

The amount of money to compensate Apache for W&T's failure to pay its proportionate share of the cost to plug and abandon the MC 674 wells was $43.2 million.

The $43.2 million referred to should be offset by $17 million. Apache acted in bad faith -- this is the jury verdict. Apache acted in bad faith, thereby causing W&T to not comply with the contract.

I've seen much disinformation in the media concerning this case. The facts in the case are clear.

No judgment has been rendered against W&T. The jury has made its finding, and the judge will now apply the jury findings and render its judgment in due course.

S&T intends to file a motion with the trial court requesting a judgment consistent with the jury's finding that Apache acted in bad faith, thereby causing W&T not to comply with the contract, which W&T asserts bars Apache from recovery for damages under applicable law, and, if damages are not barred in their entirety, that any judgment for monetary damages is offset by $17 million, as determined by the jury.

These words are very different than what was printed in various media outlets, and we just wanted to bring that to your attention.

So with that, Operator, we can now open the lines for questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Ones moment, please, while we poll for questions. (Operator Instructions).

Okay. Well, I guess we got up a little bit too early, Operator. So we're going to go ahead and shut it down now. And if there's any other news that comes up in the next quarter, we'll relay that to the public. So thank you very much, and we appreciate it.

Thank you, sir. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.