W&T Offshore Inc (WTI) 2020 Q3 法說會逐字稿

Good morning, and welcome to the W&T Offshore Third Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

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

Thank you, Brandon. 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 2020 financial and operational results.

Before we begin, I would 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 2020 earnings release that we released yesterday for disclosures on forward-looking statements and reconciliations of non-GAAP measures.

At this time, I'd 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 third quarter 2020 conference call. With me today are Janet Yang, our Executive VP and Chief Financial Officer; William Williford, our Executive VP and General Manager, Gulf of Mexico; and Jim Hersch, our VP, Geoscience. They're all available to answer questions later during the call.

Well, 2020 has been an extraordinary and difficult year for energy companies. We've seen oil prices and production impacted by the global COVID-19 pandemic, supply and demand imbalances. And more recently, one of the most active tropical storm seasons that the Gulf of Mexico has ever seen.

These events have created an environment of uncertainty, but this is not the first downturn that we've weathered in the last 37 years, and we have certainly experienced active hurricane seasons in the past.

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 time has been no different. Every quarter so far in 2020, we have produced positive cash flow, and we continue to produce positive adjusted EBITDA.

So turning to the largest factor impacting third and fourth quarter production. There has been an unusually large number of named storms in the Gulf of Mexico in 2020, which have caused significant production shut-ins by W&T and other operators in the Gulf, but we're pleased that we've resulted in minimal physical damage to our facilities.

These storms and unplanned downtime at Mobile Bay adversely affected our third quarter 2020 production by nearly 9,000 barrels of oil equivalent per day.

We've continued to experience an impact to our production in the fourth quarter, both from earlier storms and those we've experienced in October.

This additional impact coupled with uncertainty around when Magnolia and other fields are restored production, the impact of additional shut-ins at Mobile Bay, including consolidation of the gas plants and any additional tropical weather this quarter is why we guided our fourth quarter production to be between 31,500 to 35,000 barrels of oil equivalent per day.

While the storms have impacted production, we have experienced no material damage to W&T's platforms or infrastructure through October. Having said that, we do expect to incur in the fourth quarter 2020 approximately $5 million in additional lease operating expenses related to repairs and restoring production.

Since June, we've had 8 evacuations of personnel from our platforms that were in the path of the storms.

I'm proud of our operations team who met that challenge multiple times and did tell of no injuries or adverse impact to our people and continue to maintain our COVID-19 protocols.

Turning to our third quarter results. Despite the impact from a historically active tropical storm season at GOM and a continued low pricing environment, we generally -- well, we generated positive adjusted EBITDA and continue to generate free cash flow.

Adjusted EBITDA was $19.5 million, despite a continued weak pricing environment, and our capital expenditures were held to only $1.2 million. This is very important because on a cash basis, we continue to create significant value by generating over $18 million more of adjusted EBITDA versus our CapEx.

Earlier this year, in response to the uncertainty in oil prices, we suspended our drilling and completion activities and reduced our estimate of 2020 CapEx to $15 million to $25 million to preserve cash flow, and we're continuing with that plan.

Beginning with yesterday's release, we added a calculation of free cash flow, which is our adjusted EBITDA less accrual basis CapEx, plug and abandonment costs and net interest expense.

We've focused on free cash flow for a long time, well before it became a major popular issue with the investment community. For the third quarter of 2020, we generated $5.9 million.

In the same period in 2019, it was $13.3 million, and in the second quarter of 2020 was $20.8 million. All periods we reported were positive.

For the first 9 months of 2020, we generated a total of $61.8 million, which is particularly meaningful considering the challenges we faced with low and also negative oil prices and the impact from the storms.

I'd like to remind you that we've also capitalized on opportunities in 2020 and repurchased over $72 million of our senior notes at a substantial discount of just under $24 million, thus saving $7.1 million in annualized interest in preserving long-term capital.

Year-to-date, we've reduced our net debt, which we define as total debt principals less cash by $121.6 million. I can't emphasize enough that one of the keys of our ongoing success has been our ability to generate positive cash flow.

In the third quarter of 2020, our production averaged 34,459 barrels of oil equivalent per day or 3.2 million barrels of oil equivalent. That was a decrease of 16% year-over-year due to the extraordinary 2020 hurricane season and, to a lesser extent, unplanned downtime at Mobile Bay, planned downtime at the Magnolia field and a combination of operated and non-operated production that remains shut in due to the decline in oil prices. Total liquids production remained steady at 48% of production in the third quarter of 2020.

So for the third quarter of 2020, our average realized sales price per barrel of oil equivalent increased about 50% compared with the second quarter, with increases in pricing for oil, NGLs and natural gas.

Our average realized crude oil sales price was $41.81 per barrel compared with average WTI prices during the quarter of $40.89 per barrel. Our NGL sales price more than doubled since the second quarter to $10.99 per barrel, and our natural gas price was $1.94 per Mcf.

Excluding the effects of hedges, revenues for the third quarter increased quarter-over-quarter by 31% to $72.5 million due to higher realized pricing, somewhat offset by lower volumes.

So now turning to costs. With a sharp downturn in prices, we quickly implemented several successful initiatives to reduce our LOE costs.

This included replacing higher cost contract personnel with full-time employees, reducing transportation costs by lowering the number of boats and helicopters needed through operational efficiencies, cutting work-over and facilities costs through vendor and supplier cost reductions and increasing our focus on projects that maintain and optimize production.

We have not reduced our commitment to safety, operational compliance or environmental protection with any of these actions. As a result of these cost-saving initiatives, our third quarter 2020 LOE was $36.4 million, that's down about 23% from the third quarter of 2019.

While it was lower year-over-year, it was up compared with $28.3 million in this year's second quarter. As we mentioned on our last conference call, our second quarter LOE was somewhat lower due to PPP funds that offset costs over in our refunds and other factors.

So in prior calls, we mentioned that we were analyzing whether to keep our 2 natural gas treatment plants that service the Mobile Bay area or combine them into 1.

We've completed that review and have decided to consolidate the 2 facilities into the onshore treating facility we acquired in 2019 from ExxonMobil and will close our Yellowhammer plant.

The OTF, offshore treating -- Onshore Treating Facility has more than sufficient capacity to meet our current and expected needs as we further develop Mobile Bay and other regional natural [gas sets] in the future. The consolidation of the facilities is expected to result in savings of approximately $5 million per year beginning in 2021.

G&A was $14.5 million for the third quarter of 2020 compared to $10.1 million in last year's third quarter and $5.6 million in this year's second quarter.

The increase in third quarter of 2020 G&A expense compared with the same period in 2019 was driven primarily by additional legal costs incurred in reviewing potential acquisition opportunities and higher benefits costs.

The increase in this year's third quarter compared with the second quarter was driven primarily by compensation costs that returned to normal levels after benefiting from credits in the prior quarter from our PPP funds and by increased legal and higher benefits costs. We expect our G&A costs moving forward to be about 15% lower than this year's third quarter.

Earlier this year, we entered into a new lease agreement for our headquarters here in Houston. We're moving just up the road later this month where we will have about the same amount of space, but will reduce our rental cost by nearly half and save about $2 million in 2021.

We reported a net loss of $13.3 million or $0.09 per share for the third quarter, which included a noncash tax benefit of $21.2 million and a $13.1 million unrealized commodity derivative loss. Our adjusted net loss was $19.9 million or $0.14 per share.

During the third quarter, we added a number of oil and natural gas hedges, which were detailed in yesterday's earnings release and are located on our website.

So as of September 30, 2020, our total liquidity stood at $187.1 million, comprised of $56.5 million in cash and $130.6 million in availability under our revolving credit facility.

Our long-term debt remaining on our senior notes has declined to $552.5 million at September 30 from $625 million at year-end 2019.

Total long-term debt, including $80 million in -- at revolving credit facility borrowings was $624.7 million net of unamortized debt issuance costs.

We remain in compliance with all applicable covenants of our Credit Agreement and the Senior Second lien Notes indenture. We believe we'll continue to have a strong balance sheet and have more than sufficient liquidity to meet our needs going forward and to continue to look at good opportunities that may arise in this downturn.

Turning now to operations. During the third quarter of 2020, we performed 2 recompletions and 5 workovers that in total added approximately 500 net Boe per day to production. We believe that workover's and recompletes are good near-term projects that help to abate natural decline, and we plan to continue to perform them as long as they meet economic thresholds in the current pricing environment.

While we've temporarily suspended our drilling and completion operations, we remain confident in our extensive inventory of high-quality prospects in our asset base.

We also continue to believe that Gulf of Mexico basins are a world-class asset with significant future potential, and we've demonstrated our ability to successfully integrate acquisitions over several decades.

And now with that in mind, 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 even in the current pricing environment.

We've integrated 2 strong acquisitions from 2019, and we'll look for those types of opportunities moving forward.

We've built W&T through the right combination of attractive property acquisitions, methodical integration and exploitation of those acquisitions and successful development and exploratory drilling on our legacy fields.

So in closing, we remain optimistic about the future 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.

We will continue to proactively manage our CapEx and LOE in line with the current pricing environment to ensure we are generating free cash flow. Our disciplined approach to growth, coupled with our strong hedge book offering downside production on commodity prices should allow us to navigate the near-term uncertainty associated with a lower pricing environment.

We remain opportunistic in this environment, and we look for ways that will continue to add value to W&T as we've done thus far in 2020 through debt repurchases at a discount, integrating acquisitions, reducing LOE costs and closely managing our capital spending.

We remain focused on operating efficiently and executing our long-term strategy in order to maximize shareholder value.

Our management team's interests are highly aligned with those of our shareholders, given our 34% stake in W&T's equity, which 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.

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

(Operator Instructions) Our first question comes from John White with ROTH Capital.

Congratulations on managing your way through this dreadful tropical storm and hurricane season.

Good news on consolidating the Mobile Bay gas plant, that looks like a significant amount of expense savings. Did you want to comment on what kind of CapEx is needed for that? I would guess it's probably minimal or you would have mentioned it?

Yes, it really has been minimal. I believe it's under a couple million dollars. Between $2 million and $3 million is now -- yes, what's forecast.

You're just shutting down the one plant and then doing some plumbing work to reroute?

That is correct.

Our next question comes from Michael Scialla with Stifel.

This is William Howell filling in from Mike Scialla. Could I get your thoughts on participating in November Federal Lease sales, given the potential of a Biden presidency?

Sure. We're going to participate. There's no reason not to participate. Federal leases -- we don't do fracking out in the Gulf of Mexico as a routine event. I don't see why that should be a concern.

We still need the energy for the country. And it generates really good royalties for the federal government. Apparently, they need money to operate. So I think that's an excellent plan. And I think we have a proven safety record. We don't flare gas in the Gulf of Mexico.

And we haven't done that for -- ever since my career. We've been very -- except for very short periods of time, we might be testing a well or something like that or there's a system upset. And we're geared up to manage that.

Great. I guess my other question would just be, can you talk about -- a little bit more about the decision to consolidate plants at Mobile Bay. Is that not set with growth potential? Or are you thinking more about improving margins and reducing [done achieving] costs?

No, I believe it's increasing margins and reducing costs. Both plants are -- treat the gas. There was a question early on about increasing total production in the area. We believe that after further study, the gas plant that we have that we acquired from Mobil will be adequate to manage our production over years even with discovery or even 2 that we hope to drill in the not-too-distant future.

And couple that with the overall decline rate in the field, we believe that if we got to the maximum capacity of the existing plant, we'd be really, really happy about that.

(Operator Instructions)

All right. Then operator, I think I got it. I appreciate everybody listening in this year or this quarter, rather. We'll talk to you again next quarter and hopefully have some more good news for you. Thanks so much.

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