W&T Offshore Inc (WTI) 2020 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the W&T Offshore second quarter 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.

Thank you, Brandon. And on behalf of the management team, I'd like to welcome all of you to today's conference call to review W&T Offshore's second 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 second quarter 2020 earnings release that we issued yesterday for a disclosure on forward-looking statements and reconciliations of non-GAAP measures.

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

Thank you, Al, and good day to everyone, and thanks for joining us for our second quarter 2020 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 Chief Technical Officer; and Jim Hersch, our Vice President of Geosciences. They're all available to answer questions later during the call.

So the global COVID-19 pandemic, coupled with supply and demand imbalances, have created an environment of uncertainty and temporarily reduced oil prices to unprecedented low levels in the second quarter. This isn't the first downturn that we've weathered in the last 40 years. We all know this is a cyclical business. 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.

So we've reacted decisively by suspending all drilling activities and significantly reducing our CapEx proactively curtailing production on selected oil-weighted fields operated by W&T and lowering our lease operating expenses meaningfully without compromising safety or operational capabilities. And we reduced G&A expense as well.

Most of the reductions we've seen on the expense side are sustainable. And we believe that our lease operating cost run rate will be about 20% to 25% lower than Q1 for the remainder of 2020, and our G&A cost run rate will be about 10% to 15% lower than Q1 due to reduced incentive compensation in 2020.

So as always, we remain committed to the health and safety of our employees and contractors. For our field operations, we instituted screening of all personnel prior to entry to heliports and shore bases as well as our 2 gas plants in Alabama. We're conducting daily temperature screenings and implemented procedures for distancing and hygiene at our fuel locations and in our corporate offices. The pandemic remains fluid. And we're constantly monitoring the situation and will follow the advice of government and health leaders.

Okay. So another way we have responded to this current environment is by using some of our free cash flow to repurchase a portion of our outstanding 9.75% senior second-lien notes. In the first quarter, we purchased $27.5 million in principal of our outstanding notes for $8.5 million. In the second quarter, we've repurchased an additional $45.1 million of those same notes for $15.4 million. That's about $72.5 million of long-term debt that we have repurchased year-to-date for just under $24 million. That's reduced our annual interest expense by over $7 million. We believe that this is a very good use of available cash and will help place W&T on an even better financial footing moving forward.

So during -- turning to our second quarter results. Despite the low pricing environment, we successfully integrated our acquired assets in Mobile Bay and in Magnolia and continue generating good adjusted EBITDA and operational cash flow. Our costs were down significantly compared to the first quarter. Adjusted EBITDA was $42.1 million despite a weaker pricing environment. And our CapEx -- well, capital expenditures were reduced to $6.4 million. This is very important because on a cash basis, we continue to create significant value by generating nearly $36 million more of adjusted EBITDA versus our CapEx, which helped us to reduce long-term debt at a substantial discount. I can't emphasize this enough, one of the keys of our ongoing success has been our ability to generate positive cash flow.

During the second quarter of 2020, our production averaged 42,037 barrels of oil equivalent per day or 3.8 million barrels of oil equivalent. That was up 20% year-over-year compared to the second quarter of 2019. Q2 production for 2020 was reduced by 22% compared to Q1, largely due to shut-ins resulting from lower pricing, higher differentials and tropical weather. Our industry experienced a negative pricing experience brought on by future speculations. I should also mention that total liquids production comprised 48% of production in the second quarter of 2020.

We temporarily shut in a portion of our production due to Tropical Storm Cristobal with an estimated net impact of about 110,000 net barrels of oil equivalent of deferred production in the second quarter. We didn't experience any material damage to our facilities due to Cristobal. There was very minimal production impact and no storm damage from the more recent, Storm Hurricane Hanna, in July.

During late April, we proactively curtailed production in selected oil-weighted fields operated by us and also experienced production curtailments from third-party operators due to the sharp decline in oil prices. Recently, a majority of the third-party shut-in volumes will return to production, but we have purposely not been as quick to restore all of our oil-weighted operated production. We're not focused on the short term but are looking at the best way of proactively manage reservoirs and maximize and preserve value over the long term.

Given that we are cash flow positive, we have the luxury to not produce at maximum rates on oilfields when margins are low. This allows us flexibility to produce more in higher price environments and further drives value. We will continue to monitor the market to determine the appropriate time to return our oil-weighted operated production curtailments to production.

Taking into account our operated curtailments and proactive reservoir maintenance as well as planned downtime of 41 days at Magnolia due to maintenance activity at the third-party operated host platform, which accounts for an estimated 1,350 barrels of oil equivalent per day of impact to the third quarter of 2020. And no drilling activity or no wells coming online in the near term and natural decline, we believe our third quarter production will be slightly higher than the second quarter, and average between 40,900 and 45,100 barrels of oil equivalent per day. Our guidance for the full year is now 43,750 to 46,500 barrels of oil equivalent per day.

Now for the second quarter of 2020, our average realized sales price per BOE declined about 43% compared with the first quarter, with declines in pricing for oil, NGLs and natural gas. Our average realized crude oil sales price was $21.67 per barrel. Our NGL sales price was $4.67 per barrel. And our natural gas price was $1.78 per Mcf. So excluding the effect of hedges, revenues for the second quarter decreased quarter-over-quarter by 56% to $55.2 million from a combination of lower volumes and lower prices.

We're turning now to cost. With the 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. We reduced transportation costs by lowering the number of folks in 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 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 activities and other factors such as the impact of the PPP funds, our total second quarter LOE came in at $28.3 million, down 48% compared to $55 -- excuse me, $54.8 million in the first quarter. While we expect our cost-cutting initiatives to continue to keep LOE low in the third quarter and the rest of 2020, we'll be returning to a more normal level of operational activity this quarter. As a result, we're projecting third quarter cost to be up compared to very low cost in quarter 2 but still about 20% to 25% below first quarter.

Our G&A expense in the second quarter of 2020 was $5.6 million, which was well below our first quarter of $14 million, primarily due to the credits to expense from the PPP funds and lower incentive compensation. We expect our G&A costs moving forward to be lower than Q1 by about 10% to 15% and be in the range of $11.5 million to $13 million.

Now for the second quarter, we reported a net loss of $5.9 million or $0.04 per share, which included $38 million in unrealized commodity derivative loss offset by a $29 million noncash gain on our debt repurchase and $8.7 million of deferred tax benefit. Our adjusted net loss was $2.2 million or $0.02 per share.

As we discussed in our June call, our bank group recently completed its regularly scheduled spring borrowing base redetermination. The borrowing base was set at $215 million. It's down modestly from $215 -- excuse me, $250 million. Additional details can be found in our 10-Q. The next regularly scheduled redetermination will be in the fall.

Additionally, we've added several oil and natural gas assets since our last call and a detailed schedule is in yesterday's release. Following all these actions at June 30, 2020, our total liquidity stood at $165 million, comprised of about $36 million in cash and $129 million in availability under our revolving credit facility.

Our long-term debt remaining on our second -- on our senior notes has declined at $552.5 million at June 30 from $625 million at year-end 2019. We believe we 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.

We remain confident in our extensive inventory of high-quality prospects in our asset base. This was evident with our midyear 2020 proved reserve report as calculated by NSAI, W&T's independent reserve engineering consultants. SEC proved reserves as of June 30, 2020, totaled 157.5 million barrels of oil equivalent compared with 157.4 million barrels of oil equivalent at year-end 2019.

Strong positive revisions of previous estimates from field performance of 17.6 million barrels of oil equivalent in the first 6 months of 2020 was offset by a combination of negative revisions due to SEC price changes of 9.9 million barrels of oil equivalent and year-to-date 2020 production of 8.7 million barrels of oil equivalent. Midyear 2020 reserves, which were 85% proved developed producing and proved developed nonproducing were 34% liquids. The PV-10, those proved reserves was $1 billion, which was down compared to $1.3 billion at year-end 2019, that's due to decreased pricing. The midyear SEC PV-10 was based on average crude oil price of $48.84 per barrel compared with $58.11 at year-end 2019. And an average natural gas price of $2.09 per Mcf compared with $2.63 at year-end 2019.

This further -- this report further solidifies the strength of our asset base, turning now to operations in the first quarter. The Cota well in East Cameron 338/349 field was successfully drilled in over 290 feet of water and encountered approximately 100 feet of net oil pay. Initial production is planned for the first half of 2021, subject to the commodity price environment and the completion of certain infrastructure projects. After drilling this well, we decided to suspend all other drilling activity due to the current uncertain pricing environment. And at this time, we have no active drilling or completions operations. We will continue to perform some recompletions and workovers that meet economic thresholds in today's price environment.

So as we previously announced, W&T was the apparent high bidder on 2 blocks in the Gulf of Mexico Lease Sale 254, held by the BOEM on March 18. We were recently awarded both blocks, which included 1 deepwater block and 1 shallow water block. We continue to believe that there are still good opportunities in the Gulf of Mexico. With that in mind, we'll 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 opportunities moving forward. We've built W&T for the right combination of attractive property acquisitions, a very methodical integration and exploitation of those acquisitions and successful development in exploratory drilling on our legacy fields.

Now in closing, we remain optimistic about the future 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. The proactive actions that we've undertaken this year to reduce CapEx and LOE, coupled with our strong hedge book, offering downside protection on commodity prices should allow us to continue to generate good cash flow even in a lower pricing environment. We remain opportunistic in this environment, and we'll look for ways that we can add value to W&T as we have done thus far in 2020, reducing LOE costs and closely managing our capital spending.

We do remain focused on operating efficiently and executing our long-term strategy, all that while maintaining our strong balance sheet to maximize shareholder value. Our management team's interests are highly aligned with those of our shareholders given our 34% stake in W&T shares, which is one of the highest in these public E&P companies. This alignment of interest ensures that we're truly incentivized to maximize shareholder value and mitigate risk. Shareholders should expect to see more acquisitions in the future as well.

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

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

Yes, I wanted to say the results on LOE, I thought were remarkable. And my congratulations. You know how to manage in this environment. As you've changed out a lot of contractors and using full-time employees as part of the LOE reduction, is there a planned transition back to contractors? Or is that dependent on commodity prices?

No, I believe that we would prefer to have full-time employees. Sometimes in different markets, people like to go to work as consultants or working for large consulting companies. And that's an added burden to the company in cost. Sometimes as a consultant, you look at what is in your best interest, of course.

But I think that given the situation that we have in markets and global virus pandemics, I think that people move towards conservancy and going work for a company that has good track record, and it gives them more flexibility in their own personal planning. They have a little more solid base on the bottom for them.

Yes, of course. Well, as you know, a lot of companies have made the same move of using full-time employees and cutting back on the contractors going on across the industry. I don't have another question, but I wanted to say I found the midyear reserve report reassuring. Such strong -- must have been some pretty strong PDP performance to keep reserves flat in this price environment.

Well, I appreciate you recognizing that. We're very pleased with the acquisitions we've made. Mobile Bay and Magnolia have had a good bit to do with that.

Our next question comes from Michael Scialla with Stifel.

Tracy, you said on last quarter's call, you'd like to see an oil price around $50 before you really consider going back to drilling. Just want to see if anything's changed there in terms of your cost structure that would change that number at all?

Yes. It's a little bit fungible. I'd still like to see it around $50. But since we've been able to cut costs a little better than we had hoped for originally, that will have an effect on it. So I think that's a positive movement in that direction.

Good. And you mentioned Mobile Bay, you're, at least on the PDP side, seeing some good performance there that contributed, it sounds like, positive revisions. Wanted to see if there's still thoughts next year on drilling a well there, given where current gas strip prices are? Or would you need to see an improvement there before you contemplate a well?

We are -- I mean we're examining data. We're -- these are deep, high-pressure wells, hot high-pressure wells that require a lot of care. They're over 20,000 feet. We're going through the permitting process right now. We don't -- we haven't nailed down a precise location yet, but we're working on that. So I still anticipate 2021 drill well, but I -- we do have more data to look at. So precise location hasn't been nailed down yet.

Okay. And then last one for me. I just wanted to ask on the -- your first quarter at East Cameron Cota discovery. Can you say how that 100 feet of pay compared maybe relative to your pre-drill expectations? And do you anticipate any more drilling opportunities around that discovery and maybe what kind of infrastructure spend would be required to get that online next year?

Yes. A lot of that's price-dependent. As a matter of how we looked at it, we felt like one of the sands would have a little bit more in it as we -- that we wouldn't necessarily see a second sand. We saw a second sand. And the primary sand was -- wasn't quite as thick as we thought, but it was -- together, it was enough to be about what we thought it was going to be.

Our next question comes from Richard Tullis with Capital One Securities.

I know you gave the updated outlook for 2020. And of course, capital spending was significantly scaled back given the circumstances that we saw Q1 and beginning of Q2. How do you see 2021 and maybe even a little bit of 2022 production profile kind of playing out based on where you are now and expectations toward year-end?

No, Richard, we're just starting to get some visibility on that. I'm a little bit hesitant to give you clues about what we think is going to happen in '21 and '22. Right now, we're -- we've adjusted for the aggravated insult from the Russians and the Saudis and the Chinese with regard to COVID-19. We've made those adjustments. We made very quick adjustments based on present. And we reserved the -- we have preserved ability going forward to increase production due to the mix of production that we have right now that's been shut-in or curtailed.

I hope I did a good enough job of explaining that, yes, we've got more production capacity going forward. And some of it has been curtailed. Economics do mean the difference in the future, and we expect that prices will be higher in the future. That's the expectation. We've hedged sufficiently to manage our whatever downturn we think is coming so that we can continue to function as a public E&P company. And the idea is always to increase reserves and increase cash flow and increase production.

Sometimes you have to make adjustments like this time. This was a very interesting downturn, and I've been through 7 of them now since the early '80s. It's been quite remarkable. I'm very impressed with our team and how they've responded. I'm really happy where the company is right now as opposed to what it might have been.

Yes. Totally understand, Tracy. And is it fair to say that without getting too specific that you probably can show growth -- production growth next year compared to, say, 4Q '20 from your organic asset base?

Well, the goal is always to increase it, right? So yes, I think that's a fair statement.

(Operator Instructions)

Well, with that, I really appreciate everybody listening today. We look forward to talking to you in the near future, and hopefully, we'll have more good news. Thanks so much. Bye-bye.

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