W&T Offshore Inc (WTI) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the W&T Offshore Fourth Quarter and Full Year 2020 Conference Call. (Operator Instructions)

This conference is being recorded, and a replay will be made available on the company's website following the call.

I would now like to turn the conference over to Al Petrie, Investor Relations coordinator. Please go ahead.

Thank you, Kate. 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 Fourth Quarter and Full Year 2020 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 fourth quarter 2020 earnings release that we released yesterday for disclosures on forward-looking statements and reconciliations of non-GAAP measures.

At this time, I would like to turn the call over to Tracy Krohn, our Chairman and CEO.

Thanks, Al. Good day to everyone, and thanks for joining us for our 2020 year-end 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; Stu Obkirchner, our Director of Geosciences; Jim Hersch, actually new title for him, Vice President, New Ventures, who are available -- they're all available to answer questions today later during the call.

So 2020 was extraordinary difficult year for energy companies to say the least. We saw oil prices and production impacted by the global COVID-19 pandemic. Supply and demand imbalances in one of the most active tropical storm seasons that the Gulf of Mexico has ever seen. Nonetheless, in the -- in the interim, every quarter of 2020, we produced positive free cash flow, including $14.2 million in the fourth quarter. Our operations team did an excellent job of returning these properties to production in the fourth quarter, ahead of schedule, which helped us exceed our guidance. In addition, we were able to keep our operating and overhead costs low despite the additional work required to restore production.

Our success has always been based on maximizing free cash flow generation, operating efficiently and striving to constantly improve the profitability of our assets at any commodity price. This past year was no different. We also continue to take steps throughout the last year and into 2021 to protect our employees and contractors during pandemic.

Turning to our operational and financial results. Despite the multiple challenges we faced last year, we generated significant adjusted EBITDA and continue to generate free cash flow. By adjusting quickly to the changing environment early in 2020 and reducing our planned capital expenditures, we generated $76 million in free cash flow for the full year 2020, which was actually higher than the $74 million we generated in 2019. We reported $159 million in adjusted EBITDA in 2020, and our cash capital expenditures were held to only $17.6 million for the full year at the low end of our reduced 2020 budget of $15 million to $25 million. This is very important because on a cash basis, we continue to create significant value by generating substantially higher adjusted EBITDA compared to our CapEx. While the lower decline profile of our conventional asset base allows for reductions in CapEx to align with changes in the pricing environment without significantly impacting near-term production levels.

We also capitalized on opportunities in 2020 by utilizing a portion of our 2020 free cash flow to retire $72.5 million of our senior notes for a total cost of $23.9 million, thereby saving over $7.1 million in annualized interest and preserving long-term capital. From January 1, 2020, through yesterday, we have reduced net debt by $135.3 million this year and have a stronger balance -- excuse me, 2020 and this year, and have a stronger balance sheet now than in 2019. Our revolver balance is now $48 million, and the balance on our senior notes has been reduced to $552.5 million. I can't emphasize enough that one of the keys of our ongoing success has been our ability to generate positive free cash flow and to use that free cash flow wisely to fund accretive acquisitions and pay down debt.

We continue to look for ways to reduce costs to increase our cash flow. We recently completed the consolidation of our 2 natural gas treatment facilities that serve the Mobile Bay area into a single facility with more than enough capacity to our current operations as well as production from future natural gas drilling projects in the area. Consolidation of these facilities is expected to reduce result rather in approximately $5 million per year in savings. Beginning this year, and it has had the added benefit of reducing our carbon footprint by lowering our Scope 1 emissions. Now that's primarily CO2, methane and nitrous oxide.

Now turning to the largest factor impacting third and fourth quarter production. There was an unusually large number of named storms in the Gulf of Mexico in 2020, which caused significant production shut-ins by W&T and other operators. We're very pleased that they resulted in minimal physical damage to our facilities, and we only incurred about $4.7 million in additional fourth quarter LOE restore production. I'm proud of our operations team who met those challenges from the storms, which included multiple evacuations from our platforms, and they did so with no injuries or adverse impact to our people while remaining COVID -- rather while maintaining COVID-19 protocols.

So production for the fourth quarter 2020 was 38,261 barrels of oil equivalent per day or 3.5 million barrels of oil equivalent. That's an increase of 11% compared to 34,459 barrels of oil equivalent per day in the third quarter. So production for the fourth quarter was above the high end of our guidance due to faster than expected recovery from hurricane downtime. And that's primarily due to the tireless efforts of our operational personnel. They did a great job.

Total liquids production remained steady at 47% of production in the fourth quarter of 2020. Now for the full year 2020, production was 42,046 barrels of oil equivalent per day or 15.4 million barrels of oil equivalent. Production declined throughout the year due to several factors, including the large number of named storms into the Gulf in the second half of the year. Capital expenditure reductions due to the decline in oil prices in both operated and nonoperated production that was shut in due to low prices as well as natural decline.

Now for the fourth quarter of 2020, our average realized sales price per BOE increased to about 16% compared with the third quarter, with increases in pricing for oil, NGLs and natural gas. Our average realized crude oil sales price was $42.84 per barrel compared with average WTI prices during the quarter of $42.52 per barrel, slightly higher. Though our NGL sales price was up almost 50% from the third quarter of 2020 to $16.30 per barrel, and our natural gas price was up 36% to $2.63 per Mcf. So excluding the effect of hedges, revenues for the fourth quarter increased quarter-over-quarter by 31% to $94.7 million, driven by higher realized pricing and increased production.

For the full year 2020, realized pricing per BOE was lower by about 39% from 2019. However, we've seen a strong recovery in pricing since the low in the second quarter of 2020, and pricing continues to trend higher, actually up about $100 since the level of 2020. Despite this improved pricing environment, our focus will remain steadfast on capital discipline, operational excellence and most importantly, free cash flow generation.

So turning to cost with a sharp downturn in prices in the first half of 2020. We quickly implemented several successful initiatives to reduce our LOE costs. We swapped out higher cost contract personnel with full-time employees, reduced transportation course caused by lowering the number of boats and helicopters needed through operational efficiencies, cutting workover and facilities costs through vendor and supplier cost reductions and increasing our focus on projects that maintain and optimized production. We've not reduced our commitment to safety, operational compliance or environmental protection with any of these actions.

So as a result of these cost savings initiatives and shut-ins in certain fields as a result of downtime events, our full year 2020 LOE was $162.9 million compared to $184.3 million in 2019. For the fourth quarter, LOE was at the low end of guidance at $43.3 million despite an additional $4.7 million that was spent on hurricane repairs.

So as I mentioned earlier, we recently consolidated our facilities onshore at Mobile Bay. That's expected to result in annual savings of $5 million beginning in 2021 and will help to reduce our carbon footprint by lowering our Scope 1 emissions. Now for the full year 2020, G&A was $41.7 million. That's down 24% compared with full year 2019 G&A of about $55.1 million. The decrease year-over-year is primarily due to lower employee benefits and salary cost resulting from payroll protection program funds received in April 2020 and lower incentive comp boards.

The G&A per barrel oil equivalent was $2.71 in 2020, down 27% from $3.72 in 2019. G&A was $7.7 million for the fourth quarter of 2020, well below our guidance range of $11.7 million to $12.9 million. Fourth quarter 2020 benefited from a $2.7 million credit-related to a settlement with the Bureau of Safety and Environmental Enforcement, referred to as the BSEE, that resolved some pending civil penalties issued by that agency.

In the fourth quarter, we moved our headquarters just up the road in Houston, where we will have about the same amount of space, but will reduce our cost by more than half. We will save about $1.72 million per year annually beginning in 2021.

On a full year basis for 2020, we reported net income of $37.8 million or $0.26 per share and adjusted net loss of $22.9 million or $0.16 per share. For the fourth quarter of 2020, W&T reported a net loss of $8.9 million or $0.06 per share, excluding primarily an $11.5 million unrealized commodity derivative loss, a $6.9 million noncash tax benefit and a $2.7 million credit-related to the BSEE settlement, our adjusted net loss was $6.7 million or $0.05 per share.

So at December 31, 2020, our total liquidity stood at $174.3 million, comprised of about $43.7 million in cash, $130.6 million in availability under our revolving credit facility. Our long-term debt remaining on our senior notes declined in 2020 to $552.5 million in December 31 from $625 million at year-end 2019. Total long-term debt, including $80 million of revolving credit facility borrowings was $625.3 million net of unamortized debt issuance costs.

So in January 2021, W&T's bank group completed its regularly scheduled semiannual borrowing base redetermination, and the borrowing base was set at $190 million. As of March 3, 2021, the borrowings against the facility have been reduced by $32 million in the ordinary course of business this year, 2021 to $48 million. The next regularly scheduled redetermination is in the spring of 2021. We remain in compliance with all applicable covenants of our credit agreement and the senior second lien notes indenture.

We believe we continue to have a strong balance sheet and have more than sufficient liquidity to meet our needs going forward, and we continue to look at good opportunities that may arise.

Turning now to operations during the fourth quarter of 2020, we performed 2 workovers that in total added approximately 800 net barrels of oil equivalent per day to production. We believe that workovers and recompletions are good near-term projects that help to abate natural decline, and we plan to continue to perform as long as they meet economic thresholds in the current pricing environment. The successful Cota well that we drilled last year is currently in the development phase of the project and is expected to be on production in the latter part of 2021.

So looking at our 2020 year in reserve report, W&T's SEC proved reserves were down modestly from 2019, primarily due to lower commodity prices. About 34% of year-end 2020 reserves were liquids. And the balance was natural gas. At year-end, approximately 83% of 2020 proved reserves were classified as proved developed producing, 8% as proved developed non-producing, and 9% as proved undeveloped. W&T reserve life ratio at year-end 2020, based on year-end 2020 SEC proved reserves in 2020 production was 9.4 years.

The PV-10 value of W&T's SEC proved reserves at year-end 2019 was $741 million, down about 43% from year-end 2019. This was driven by reduced pricing with 2020 SEC PV-10 using an average realized crude oil price of $37.78 per barrel and an average realized natural gas price of $2.05 per Mcf. The utilizing realized NYMEX strip pricing as of December 31, 2020 of $44.43 per barrel of oil and $2.66 per Mcf of natural gas, the PV-10 would have been $1.1 billion.

Now for the 3-year period, 2018 through 2020, W&T's all-in reserve replacement cost was $4.62 per barrel of oil equivalent. We think that's very competitive cost for any U.S. E&P and reinforces the value of both the acquisitions and drilling prospects that W&T has developed. But we continue to look at acquisitions that meet our criteria, especially those that provide a solid foundation for our ability to generate free cash flow. We've integrated 2 strong acquisitions over the past 18 months, and we look for those type of opportunities going forward. We have built W&T through the right combination of attractive property acquisitions, methodical integration and exploitation of those acquisitions and the successful development and exploratory drilling on our legacy fields.

Now looking forward to 2021, under this strengthening commodity pricing condition that we're experiencing now, we are forecasting strong free cash flow generation and we will continue to evaluate additional accretive acquisitions and opportunistically pay down debt. This means that we will take a measured approach to drilling, while continuing to fund our capital expenditures, excluding acquisitions, with available cash and cash generated from operations. Our preliminary capital expenditure budget for 2021 is expected to be in the range of $30 million to $60 million and we will be focused on lower risk, high-return projects. This preliminary budget excludes opportunistic acquisitions of oil and gas properties from third parties.

Additionally, we're forecasting 2021 spending of between $17 million to $21 million on asset retirement obligations. We have significant flexibility to adjust our capital spending up or down at any time since we know we have no long-term rig contract commitments or drilling obligations. Our lower production decline profile allows for reductions in CapEx without significantly impacting our near-term production levels. The 2021 capital program will also be weighted toward the second half of the year. That's the production uplift from same and will be more impactful in 2022.

Now our full year 2021 production guidance range is 38,500 barrels to 42,000 barrels of oil equivalent per day, which is only modestly lower than 2020 with the midpoint above our fourth quarter production rate. We also expect our LOE to be in line with or decreased slightly on an absolute basis compared to 2020. We'll continue to control the cost that we can to minimize our margins and generate significant cash flow from our operations. Our release issued yesterday has worked more details on our 2021 first quarter and full year guidance.

So before I close out this call, I'd like to discuss our upcoming inaugural ESG report. We founded W&T nearly 4 years ago. And from day 1, we've been committed to developing and producing oil and gas resources in a safe and environmentally responsible manner while meeting or exceeding all regulatory requirements. These core values have guided our success and provided the foundation for W&T to grow into a trusted operator in the Gulf of Mexico, a generous partner of the communities where we operate and good stewards to the environment.

We believe that every employee has a responsibility to ensure that we operate with the highest regards toward ESG, and we've empowered our management to allocate resources and tools necessary to create a working environment focused on accomplishing our ESG objectives. In 2020, we've created an ESG task force that is comprised of management representatives from operations, HS&E, legal, human resources, investor relations and finance that is charged with the responsibility to monitor our adherence to our ESG standards and formally communicate their findings on an ongoing basis to me and our Board.

Our inaugural report will be released later this month and posted to our website along with our annual report and include key metrics for the past 3 years. We remain committed to sustainability, and we hope to continue powering America safely and in a more sustainable manner for another 40 years.

So in closing, rising price environment presents many opportunities for W&T. We have a premier portfolio of both shallow water and deepwater 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.

We will continue to proactively manage our CapEx and LOE in line with the current pricing environment to ensure that we're generating free cash flow. Our disciplined approach to growth has allowed us to navigate many cycles in the past. We remain opportunistic, and we'll look for ways that we can add value to W&T as we did in 2020 by controlling lease operating expense, overhead costs and closely managing our capital spending. We do remain focused on generating free cash flow by operating efficiently and executing our long-term strategy to maximize shareholder value.

We acknowledge the uncertainty that we and many other E&P companies face regarding limitations on future drilling, on federal land and in federal waters. We're working closely with our industry group to provide feedback to our elected officials on the impact those actions could have on our energy independence and on the people who work or live in and along the Gulf of Mexico that have a strong commitment to the energy industry. As we await any further clarification, it's business as usual for us. Our management team's interest are highly aligned with those of our shareholders, given our 35% stake in W&T's effort. That's 1 of the highest of any public E&P company.

This alignment of interest ensures that we are truly and always incentivized to maximize shareholder value and mitigate risk. With that, operator, we can open the lines for questions.

(Operator Instructions) The first question comes from Michael Scialla of Stifel.

I just wanted to ask on the '21 budget. You got a pretty wide range there, at least on a percentage basis. Can you talk a little bit about the gating factors on what would cause you to spend toward the low end versus the high end? Is it oil price or timing of getting permits or something else?

No, it's primarily pricing. Permits could take a bit longer, but that's not really going to be the driver. It's primarily going to be pricing.

And in terms of number of wells, any color you could add there? Any new wells other than the Cota well you mentioned you'd be bringing on the second half, but any other wells you could be potentially bringing on this year?

Yes, possibly up to 4 more.

Okay. And if I could just sneak one more in. Anything inside the JV this year planned? Or -- and where do you kind of stand with the number of wells that are left within the JV?

Yes. The Cota well is one of the wells in the JV, and we may drill 1 or 2 more with that JV as well.

The next question is from Richard Tullis of Capital One.

Tracy, going with the M&A theme. Perhaps provide an update on the current landscape there and any impact on property offerings that you see and following the recent oil price rebound. Is it impacting what the deal flow or at least what's offered? Or what are you seeing there?

Well, as usual, Richard, you ask very good questions and valid questions. With the new administration comes uncertainty. Business hates uncertainty. I do see that there's going to be some struggle with regard to leasing going forward on new leases. Apparently, the existing leases are just going to take a little bit longer to get things done. I don't really worry about that very much. I think that as we go through the year and succeeding years, we'll resolve all those issues, and the process will get streamlined.

But with regard to M&A, yes, I mean, clearly, we're going to see more M&A in the Gulf of Mexico. And I think that's not just a function of pricing. I think it's more because everybody was kind of holding their breath in 2020 to see what was going to happen. And now there's a little bit more confidence and clarity with pricing, so companies are able to plan a little bit better. 2020 was a particularly difficult year to plan in the Gulf of Mexico. I mean COVID-19, drastic reduction in price, the Saudis and the Russians raising hell with 1 another. And 8 storms. I mean that was a lot to take in 1 year. So it's very difficult to plan around that.

And then a rather shocking day in April of minus $37 oil, kind of shakes your confidence and makes it hard to plan. But we got through all of that as did just about everyone else. But I will tell you that it made it difficult to plan going forward. So yes, I do see more M&A activity in 2021 and beyond just for those reasons.

All right. Tracy, That's helpful. And just as a follow-up, I mean, as you mentioned, the big storm impact in the second half of last year, production rebounded nicely in the fourth quarter. Are you able to say what you exited 2020 oil production rate or maybe what the oil production rate is currently?

Yes. We exited around 38,000 to 40,000 barrels per day. I don't remember the exact number on December 31, but that's about where it was.

(Operator Instructions) The next question is from Ray Deacon of Petro Lotus Analytics.

Tracy, can you give a little bit of color around the guidance relative to your production, there was about a 20% beat versus your guidance. Was that just getting wells turned on sooner or was there anything tied in, in the quarter?

I'm sorry. And you're just referring to production. Is that right, Ray?

Exactly right. On the production side, which -- was there anything tied in? Yes.

Yes. Yes, we did have to do a little bit of planning around the storms and stuff and things that we needed to clear up. As a follow-up, we did have a little bit of damage and a little bit of lost production as a result of that. But we were able to clean that up fairly quickly. And I do think that most of our production is online. I think I know that most of our production is back online. We have 1 pipeline issue that we're still dealing with. It's primarily onshore, that's ready to come on now. We're probably working on it -- as we speak, it's coming on literally.

Got it. Okay. Great. Great. And your G&A guidance for next year looks kind of roughly double the 4Q level. Is there anything next year that -- it sounded as though your cost would be down year-over-year on G&A. But I guess the 4Q was unusually low.

Yes. It was. But it's somewhat caused by PPP and bonuses, okay?

Okay. Right. Got it. And just the last thing I saw there was a small acquisition. Was that of producing properties or?

Yes, it was a bolt-on on a producing property. You're right.

There are no additional questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over -- I'm sorry, we do have a follow-up. Would you like me to take that?

Yes, please.

Okay. We have a follow-up from Michael Scialla of Stifel.

I just had a couple more. I was curious on Magnolia. Do you see any drilling opportunities there? Or is that going to be more of workovers and kind of looking for operational improvements?

Yes and yes.

Okay.

Yes. We do see more activity out there. And, Michael, and we'll give some more color on that later on as we get more prepared.

Got you. Okay. And this one, it probably sounds like a total softball question. I apologize upfront. But I know a lot of companies we follow didn't replace production with proved reserve additions last year. And I don't think you even completed any wells. You even managed to more than offset production with upward revisions. Is that just conservative bookings on your part or was there anything more specific to the positive revisions you had last year?

No, it's just magic. No, it really has a lot to do with how we manage our properties and how we spend our money and how we lower cost. So a lot of that addition came out of a Mobile Bay. And we were -- like we did with Fairway when we bought that in Mobile Bay. We increased reserves without ever drilling a well. We were able to manage costs. And we also, of course, we're working on consolidating the 2 gas plants, and we've accomplished that now. And that will save some more money going forward in '21 and beyond.

This concludes our question-and-answer session. I would like to turn the conference back over to Tracy Krohn for closing remarks.

Thank you, operator. We appreciate you listening to us today. We're very pleased with the performance that we did in 2020 is regarding all the difficulties that us and everyone else faced. We continue to seek opportunities in the Gulf of Mexico this year and going forward. And we see it as a very robust basin, and we'll continue to do that. So with that, I'll turn it over. Thank you very much.

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