W&T Offshore Inc (WTI) 2021 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the W&T Offshore Third Quarter 2021 Conference Call. (Operator Instructions) Conference is being recorded, and a replay will be made available on the company's website following the call.

Now, I'd like to turn the call over to Al Petrie, Investor Relations Coordinator.

Thank you, Nick. And on behalf of the management team, I would like to welcome all of you to today's conference call to review W&T Offshore's third quarter 2021 financial and operational results.

Before we begin, I'd like to remind you that our comments may include forward-looking statements. It should be noted that a variety of factors could cause W&T's actual results to differ materially from the anticipated results or expectations expressed in these forward-looking statements.

Today's call may also contain certain non-GAAP financial measures. Please refer to the third quarter 2021 earnings release that we issued yesterday for disclosures on forward-looking statements and reconciliations of non-GAAP measures.

Before turning the call to Tracy, I'd like to introduce you to Brent Collins, who recently joined W&T as Internal Director of IR and is on the call with us this morning. Many of you know Brent from his prior E&P IR roles.

With that, I'd like to turn the call over to Tracy Krohn, our Chairman and CEO.

Thanks, Al. Good morning, and good day to everyone, and thank you for joining us for our third quarter 2021 conference call. So with me today are Janet Yang, our Executive VP and Chief Financial Officer; William Williford, our Executive VP and General Manager, Gulf of Mexico; Steve Schroeder, our Senior VP and Chief Technical Officer; and Stuart Obkirchner, our Director of Geosciences and they're all available to answer questions later on during the call.

So despite the issues Hurricane Ida temporarily created for the industry in the Gulf of Mexico, W&T delivered strong operational and financial results in the third quarter. The improved commodity price environment and our commitment to expanding margins led to strong adjusted EBITDA of $45.3 million in the third quarter, and we have generated $152.6 million of adjusted EBITDA in the first 9 months of 2021.

Additionally, we generated $65.1 million in net cash from operating activities and grew our cash position to $257.6 million at September 30, 2021. Operationally, we're close to having our Cota well online, and drilling is proceeding at our high potential exploratory well in Mississippi Canyon. We are considered drilling additional exploratory wells in our 2022 drilling program, which we will announce with our year-end 2021 earnings.

So it's encouraging to see commodity prices at these levels. It allows us to benefit the work we do every day to continuously improve our assets and make sure our operations are as efficient as they can be without sacrificing safety or the environment. We have an outstanding asset base. And we'll continue to focus on operational excellence to make sure we are maximizing the potential of those assets.

So to those of you who have known W&T throughout the years and are well aware that accretive acquisitions have been a hallmark of our success. In the last 2 years alone, we have integrated 2 strong acquisitions, and we're well positioned to build upon that track record.

As you may recall, in May, we meaningfully improved our financial flexibility by more efficiently utilizing the collateral value of our Mobile Bay assets and completed the financial transaction with Munich Re, wherein we transferred 100% of our Mobile Bay area of producing assets and related gas treatment facilities to a wholly owned special purpose vehicle in a return for the net cash proceeds from a $215 million first-lien non-recourse term loan to the SPVs at a very competitive fixed rate interest of 7%. This allowed us to pay off our then existing RBL balance of $48 million and added a lot more cash liquidity to the balance sheet.

Importantly, it provided a significant dry powder to pursue more attractive acquisition opportunities. We're actively looking at opportunities that meet our criteria, which include properties with good cash flow upside that we can achieve with drill bit and the potential to increase near-term cash flow through workovers, recompletions and/or facility upgrades.

We believe that market conditions in the Gulf of Mexico remained very favorable for accretive acquisitions, and we intend to pursue opportunities that meet our criteria aggressively.

Well, turning to production for the third quarter of 2021, W&T produced 34,800 barrels of oil equivalent per day, or 3.2 million barrels of oil equivalent, a decrease of 15% compared to 40,900 barrels oil -- excuse me, 40,900 thousand barrels of oil equivalent per day in the second quarter of 2021.

Liquids comprised 46% of total production in the third quarter of 2021. Production for the quarter was reduced by approximately 5,500 barrels of oil equivalent per day due to deferrals related to Hurricane Ida, with approximately 80% of our production temporarily went off-line at one point due to the storm.

Majority of the impacted production was brought back online during September, and the remaining hurricane impacted production is expected to be online by the end of 2021. I'm pleased to note that the Big Bend and Dantzler well that we discussed in our October 18 press release are back online.

Looking forward to the fourth quarter of 2021, we're forecasting our production to be higher than the third quarter as we restored production deferred due to Hurricane Ida and have set guidance between 34,800 and 38,500 thousand barrels of oil equivalent per day.

And with that, I'll turn it over to Janet Yang, our CFO.

Thank you, Tracy. For the third quarter of 2021, our average realized sales price per BOE was $41.05 per BOE, an increase of 18% compared to the second quarter of 2021. Our third quarter 2021 average realized crude oil sales price increased to $68.57 per barrel from $65.11 per barrel in the second quarter of 2021. Similarly, our NGL sales price was also up meaningfully from the second quarter of 2021 to $32.46 per barrel.

Natural gas prices were up 62% to $4.31 per Mcf compared to $2.66 in the second quarter. Despite the lower production due to hurricane production deferrals, pre-hedge revenue for the third quarter increased slightly quarter-over-quarter to $133.9 million, driven by the favorable pricing hedges -- changes I just commented on.

Turning to costs. LOE, which includes base lease operating expenses, insurance premiums, workovers, facilities, repairs and maintenance expense was $39 -- $39.5 million in the third quarter of 2021 compared to $47.6 million in the second quarter. Third quarter LOE reflects the delay of certain facility-related expenses that were postponed until the fourth quarter of 2021 due to Hurricane Ida. In the fourth quarter, we expect to be in the range of $44.6 million to $50.6 million as we see some increased costs associated with hurricane repairs and restoring production.

Fortunately, we had no material damage due to Hurricane Ida. We remain vigilant in our cost containment initiatives and will control the cost that we can without impacting safety or the environment.

G&A was $13.4 million in the third quarter of 2021, which was below the low end of our guidance range and slightly lower than the second quarter. We expect G&A in the fourth quarter to be between $13.6 million to -- and $15 million. Additional details on our expense guidance are in the earnings release we issued yesterday.

Turning to the balance sheet and cash flow. Net cash provided by operating activities for the 3 months ended September 30, 2021, was $65.1 million and $111.3 million for the first 9 months of 2021. This strong operational cash flow has helped to grow our cash position to $257.6 million at the end of the third quarter of 2021.

Capital expenditures were $10.2 million in the third quarter of 2021 and $16 million for the 9 months ended September 30, 2021. W&T's 2021 estimated capital budget remains at $30 million to $60 million, excluding potential acquisitions and has been weighted towards the second half of 2021.

Additionally, as discussed in our last call, we increased our P&A activity this year and are expecting to spend $25 million to $35 million in 2021, of which we've spent about $19.7 million through September.

As of quarter end, total debt stood at $742.4 million. Including cash on the balance sheet, our net debt stood at $484.8 million at September 30. The debt consists of the balance of the nonrecourse Mobile base term loan of $195.4 million following our initial quarterly principal payment and $547.0 million of 9.3/4% senior second lien notes due 2023. Both of these figures are net of amortized debt issuance costs. W&T is in compliance with all applicable covenants of our debt agreement.

With that, I'll turn it back over to Tracy.

Thanks, Janet. So regarding the RBL, I'm happy to report that at quarter end, there were no borrowings outstanding under that former facility.

Yesterday, we announced that we have entered into amendments to the credit agreement that replaced the current bank group and established a new credit facility with Calculus Lending. Given our cash position and the fact that we have not utilized the RBL for some time now, we felt it was a good time to step away from the RBL market.

Our view for some time has been that the RBL market was becoming less flexible and was imposing more onerous commercial terms on producers, particularly those that operate in the Gulf of Mexico.

This new facility was reviewed by an independent committee of the Board, given my affiliation with Calculus Lending, it is at terms that are equal to or better than other similar facilities in the market today. We don't expect to lead the facility as in -- to add liquidity. However, it provides us opportunistic liquidity beyond our current cash balance.

So we've had some very good results on the drilling workover recompletion front that I would like to discuss as well. During the third quarter of 2021, we performed 2 workovers that had initial production rates totaling approximately 1,075 net barrels of oil equivalent per day.

Additionally, we performed one recomplete with an additional production rate of approximately 400 net barrels of oil equivalent per day. These are very strong results that are both highly economic and help us to mitigate natural decline.

So regarding the Cota well that we drilled successfully last year at East Cameron 338/349 area. The platform and pipeline have been installed, and completion operations are continuing. The well is expected to be completed in the fourth quarter of 2021, with initial production expected late in the quarter once it's tied into supporting infrastructure.

The well is in over 290 feet of water and was drilled to a total depth of over 6,000 feet, and we encountered approximately 100 feet of net oil pay during drilling. We have an initial 30% working interest, but our interest will increase to 38.4% once the well is brought online and certain performance thresholds are met.

So we continue to drill ahead on our high potential Mississippi Canyon exploratory well that was spud in early August. Based on our assessment, we believe the well is a high potential, but relatively lower risk opportunity located in the Flex Trend area where W&T has had significant experience and success.

So assuming success, it would derisk additional drilling opportunities that W&T has in the area. This prospect was identified using high-quality 3D seismic and reprocessing and has multiple objectives located beneath the salt overhang. This high potential oil play ties directly to analogous fields in the area and has significant upside. We have a 25% working interest in the well that we believe has a opportunity with good upside potential that could also allow us to derisk existing organic opportunities.

So despite the improved pricing environment, our focus will remain steadfast on capital discipline, operational excellence and, most importantly, generating strong operational cash flow.

In March 2021, we issued our inaugural corporate ESG report. Since day one, we've been committed to developing and producing oil and gas reserves and resources in a safe and environmentally responsible manner while meeting or exceeding regulatory requirements. We have also been able to attract and retain quality employees by providing an environment where they can develop professionally and culture of integrity, honesty and transparency.

In the communities where we live and operate, it's always been important for us to have a positive influence in these areas. These core values have guided our success and provided the foundation for W&T to grow into a trusted steward and operator in the Gulf of Mexico, an employer of choice in our industry and a generous partner to the communities where we operate.

We have seen ESG improvements throughout 2021. At Mobile Bay, we consolidated our 2 treating facilities into one plant in early 2021 that resulted in reduced greenhouse gas emissions and operating costs. The company has implemented changes in employee and executive compensation via its annual bonus program that now ties ESG performance to stated goals.

From a diversity standpoint, 50% of the company's officer and Board members are now women or minorities. We believe that the combination of our actions and ongoing commitment has resulted in a meaningful improvement in one of our third-party ratings by a highly regarded ESG rating agency.

We're committed to continued improvement in ESG performance in reporting. And I think that closes that statement on ESG. We used to call this HSE. We've supplemented and augmented it, and now we -- HSE rather -- and now we call it ESG.

In closing, the rising pricing environment represents many opportunities for W&T. We have a premier portfolio of both shallow water and deep water properties in the Gulf of Mexico with low decline rates and significant upside. There are many opportunities for acquisitions in our focus area, and we constantly look at any that can meet our stringent criteria.

While we have strong liquidity and dry powder to make acquisitions as opportunities present themselves, our disciplined approach to growth has allowed us to navigate many cycles in the past. We will remain disciplined, but opportunistic, and we're always looking for ways that can add value to W&T. We have always focused on generating strong cash flow by operating efficiently and executing our long-term strategy to maximize shareholder value.

Our management team's interests are highly aligned with those of our shareholders, given our 34% stake in the W&T's equity. This is one of the highest of any public E&P company. This alignment of interest ensures that we're truly incentivized to maximize shareholder value and mitigate risk.

With that, operator, we can now open the lines for questions.

(Operator Instructions). First question comes from John White of ROTH Capital.

Well, you made a unique and novel move here with your affiliate now being the provider of the credit facility. That's very innovative and not every Chairman and CEO can have the resources to do that. Is it fair to say regarding these lenders in general are providing less favorable terms and conditions on these credit agreements due to, number one, losses that they've encountered during the multi-year period of low oil and gas prices? And number two, pressure from ESG groups on financing fossil fuel producers?

Well, yes, let me start by saying, well, thanks for recognizing that it's kind of unique to have a Chairman add $50 million of liquidity into the balance sheet equation. I would tell you that when we started with $12,000, this is quite a unique differentiation.

So with that, I'll answer your question with regard to losses in ESG. Yes, the RBL lenders certainly have experienced a lot of losses, primarily onshore, but some offshore as well. What, 250-plus companies went bankrupt in the last 3 years. Most of those are onshore. They are experiencing issues with their shareholder base surrounding ESG and requirements. And I'm not sure they're necessarily issue, they're just requirements for their shareholder base. We're seeing this more with the foreign banks, European banks, in particular. Then we've expected to encounter.

So it was just -- it was more expeditious for us and less onerous to go ahead and shed ourselves of the RBL. We've got plenty of cash, and there were some comments after our Munich Re deal. Although, not yet out of cash. We're not out of cash. We're generating cash flow. Those balances are quite good. And I remember leveraging $12,000 into $0.5 million loan, God, what do you think we can do with a couple of $100 million plus in cash liquidity. So I'm very encouraged by what we might see in the future.

I agree, the balance sheet looks real good. And what management team wouldn't want to provide their own credit facility. I wanted to end on a little lighter note there. So all right, very good. We'll look forward to Mississippi Canyon.

Next question is from William Howell, Stifel.

I guess just starting off with the Mississippi Canyon well. If that's successful, do you have any idea on where it would be tied back? And could you talk a little bit about the additional development opportunities that it might set up, if successful?

Yes. Unfortunately or fortunately, as the case may be, William, that well is [tied hold], so we're not giving any information out on that for reasons that we think are necessary. But, yes, I mean, we're going to be tied into something or hopefully, we have a bigger problem -- and a quality problem, and that is that we don't tie it to anywhere. We just build our own structure, assuming it's large enough. So we have options, and that was another important consideration for us in drilling this well.

I guess, could you also just talk a little bit about the M&A environment you're seeing right now?

Sure. The bid-ask is kind of moving around a little bit. And it seems to flow around with pricing, but we're very encouraged. We're in day rooms almost continuously ready. So I take great pride that we have an excellent team working these problems. And we do work them thoroughly. And we like to make sure that we're very aware of assets and liabilities. So I think that that's served us well over a long period of time. And there's always another deal and the world will continue to move forward with additional acquisitions, and we don't have as many competitors as we used to have. So we're going to focus this in a very methodical manner.

Next question is from Justin Patterson, Intermarket.

Justin, you might be on mute man.

Can you guys hear me now? I'm not on mute.

I can. All right. Yes.

I just wanted to ask a couple of questions about the new facility, Tracy. First, is the sense that the competing alternatives were either less flexible or maybe I'm going to say less reliable, because that seems like that's what's plagued this in the past? Or was the pricing unattractive? I'm just trying to understand what the pain points were on the competing facilities from third parties. I echo John's comments about the constructive nature of the chairman or management team providing a first lien facility to its company. So I'm not meaning to sound skeptical, I just I'm kind of curious to understand what your facility was competing against?

Yes. No, the reality is that the terms were definitely more onerous than what we would like to see, but also timing was a little lagging for what I felt like we should be doing. We were moving quicker than they could move, and we understand those credit facilities quite well since we've run them for about 40 years.

And then it's -- am I right to understand is the $100 million facility of which the current borrowing base justifies capacity of $50 million?

Easily. Yes.

And none of its drawn at this time?

0.

And then second…

We think of it -- if I can interrupt just a moment, Justin, we -- we think of it as opportunistic. And if it -- if something opportunistic comes along, we will fund it and move forward, and it may be bigger than that.

And then I think you guys have about 300 -- this is more of a Janet question maybe, but I think you guys have $350 million of first lien capacity under the bond document. So conceivably, that facility could grow, I guess?

Yes. I think it's about $300 million, but close -- yes, right around there, and yes, it could grow.

And then second question, unrelated. What -- in the past, you guys have done these drilling JVs, I think you have one that's currently outstanding. What's your thoughts, Tracy, on potentially subsequent or another drilling JV?

Well, gee, price has a lot to do with that, doesn't it? So we're -- we've done one. We're encouraged. We've got prospects going forward. And we'll see how that turns out.

Next question, Jeff Robertson, Water Tower Research.

Can you talk a little bit about the nature of the competition you're seeing in the acquisition market right now?

Well, sure. There's the usual suspects, the public companies that are in the Gulf of Mexico. There're some privates. We're not really seeing a great deal of start-up activity in that market. We think that those requirements as start-ups are much more difficult and onerous than they used to be, particularly around bonding. We've seen some effect as a result of a couple of the larger bankruptcies, mainly having to do with Arena and Fieldwood.

Secondly, as you're looking at your 2022 capital program, can you talk about the prospects market in the Gulf of Mexico? I know the Mississippi Canyon - well, you're currently drilling, you've said may set up additional prospects. Would some of those potentially be included in next year's capital program? And then is there a -- can you comment on the promote market in the Gulf as you either look to get in prospects or look to bring people into yours?

Yes. That's a pretty broad question there, Jeff. I will tell you that we have plenty of our own prospects to look at. And of course, increasing price makes that more likely. Do we -- would we take interest in other people's prospects? Of course. It's all about prioritizing what makes the best economic sense. So I don't really care whether it's ours or somebody else's. If that opportunity presents itself, we'd like to be able to take advantage of it. And that's been part of the reason why we've worked on our liquidity and ridding ourselves of some of the unnecessary evils under some of these RBLs.

(Operator Instructions) Next comes from John White, ROTH Capital.

I just wanted to get a follow-up here. Given the number of private companies in the Gulf of Mexico and this robust oil price environment and more recently robust natural gas price environment, are you getting any indications that these private companies are planning large increases in capital expenditures for 2022?

I don't know that I've got direct indications on that as privates. I would expect to see some fairly cautious increase on that. Prices have whipsawed. And I think that some of this is going to be weather related. Clearly, we're concerned about what might happen with regard to weather in this winter and how it can affect gas markets and oil markets as well, but more on the gas side of it. Prices in Europe are quite elevated. We're seeing prices over in Europe, $25 to $30 an Mcf. So that gives you a little pause to think about what could happen with the cold winter here.

This concludes our question and your session. I'd like to turn the conference back over to Mr. Krohn for closing remarks.

Well, thank you, everyone, for listening. Hopefully, in between now and the next conference call, we'll have some more good news to share with you. Thanks so much for tuning in, and we'll speak with you again soon.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.