W&T Offshore Inc (WTI) 2021 Q4 法說會逐字稿

Good day, and welcome to the W&T Offshore Fourth Quarter 2021 Earnings Conference Call. (Operator Instructions) Please also note, this event is being recorded. And I would now like to turn the conference over to Brent Collins, Director of Investor Relations. Please go ahead.

Thank you, operator. 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 fourth quarter and full year 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 earnings release that we issued yesterday for a disclosure on forward-looking statements and reconciliations of non-GAAP measures.

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

Thank you, Brent. Good day to everyone, and thanks for joining us for our fourth quarter 2021 conference call. So with me today are Janet Yang, our Executive Vice President and Chief Financial Officer; William Williford, our Executive Vice President and newly appointed Chief Operating Officer -- congratulations on that, William; Steve Schroeder, our Senior Vice President and Chief Technical Officer; and Stuart Obkirchner, our Director of Geosciences. They're all available to answer questions later on during the call.

So these past 2 years have been truly extraordinary to say the least, with everything from global COVID-19 pandemic to several active tropical storms in the Gulf, the wild swings in oil and gas pricing. Through it all, we persevered by doing what has been successful for the past 4 decades: maximizing cash flow generation, operating efficiently and striving to constantly improve the profitability of our assets at any commodity price.

Our operations and finance teams have done an excellent job adapting to the changing market conditions while maintaining the highest levels of safety and operational excellence. W&T finished 2021 on a particularly strong note, as evidenced by the financial and operational results we posted for the fourth quarter.

In every quarter of 2021, we produced positive free cash flow, including approximately $23 million in the fourth quarter and over $90 million for the full year. In the fourth quarter, we also experienced improved pricing for all 3 commodities on a sequential basis. We saw our average realized price per BOE before the impact of hedges increased by 16% to $47.70, up from $41.05 in the third quarter. We also did a good job managing our key costs during the quarter. We came in at the low end of our LOE guidance, and G&A was right in the middle of the range we provided.

Combination of strong production, favorable pricing and cost control resulted in $65.7 million in adjusted EBITDA in the fourth quarter of 2021, which was a 42% increase over the third quarter of 2021. For the full year 2021, adjusted EBITDA increased by 35% to $220 million. It wasn't just our ability to generate meaningful cash that benefited us in the fourth quarter. Our operations team did an excellent job of returning the vast majority of properties that were impacted by Hurricane Ida, back to production in the fourth quarter. This helped us exceed the midpoint of our production guidance.

Production increased by 7% compared to the third quarter to 37,200 barrels of oil per day equivalent with 45% of our production being liquids.

In the past, we've talked about our ability to generate free cash flow from our stable, long-life asset base and its importance to our long-term sustainability. That is particularly evident in our outstanding year-end reserve results. So proved reserves at year-end 2021 increased 9% to 157.6 million barrels of oil compared to last year. While improving SEC pricing certainly contributed quite a bit to the increase, we've also had positive performance revisions of over 5 million barrels of oil equivalent. To me, this is a testament to our solid reserve base as it demonstrated our ability to maintain and even grow our reserve base without acquisitions or bringing online any new wells in 2021.

Our solid 2P reserves are a major contributor to this result. The company's reserve life index lengthened to 11.3 years, up from 9.4 years at the end of 2020.

So in addition to increasing reserves, we also saw a dramatic increase in the PV-10 value of our proved reserves. The PV-10 value of W&T's SEC proved reserves at year-end 2021 was $1.6 billion, an increase of 119% from year-end 2020. This was driven by improved pricing with an average realized crude oil price of $65.25 per barrel and an average realized natural gas price of $3.68 per Mcf. That's using NYMEX prices as of March 2, the PV-10 value of our year-end reserves increases to $2 billion.

We're clearly much stronger today compared to a year ago, both operationally and financially. And in 2021, we took several definitive steps from a financial perspective that enhanced our liquidity, lowered our net debt and improved our financial flexibility for the future. Much of this improved financial flexibility is the result of our Munich Re transaction in May of 2021. As you'll recall, in 2019, we paid $167 million for our Mobile Bay area producing assets and related gas treatment facilities, which was a great price there and looks even better now.

We transferred those assets to a wholly owned special purpose vehicle and returned for net cash proceeds from a $215 million first lien nonrecourse 7-year term loan to the SPVs at a very attractive fixed interest rate of 7%. When the debt's paid off, we will continue to own 100% of these assets. This was a significantly better loan-to-value ratio than any bank would give us at the time, and it allowed us to fully pay off our RBL provided by banks that were downsizing their U.S. RBL exposure due to ESG and other pressures. We now have substantial cash on the balance sheet and liquidity that permits us to move quickly when opportunities arise.

While the lenders required hedging for this financing, we also utilized puts and long calls in our hedging strategy to maintain a lot of the upside on natural gas prices, which turned out to be beneficial for us as natural gas prices have increased substantially since early 2021.

So in Q4, we restructured our RBL to provide us additional financial flexibility. We were seeing banks becoming increasingly aggressive last year with limitations on GOM lending and enacting more restrictive covenants. To free us from those challenges, we established a $100 million first priority lien secured revolving facility with a borrowing base of $50 million with Calculus Lending. While we currently have no borrowings on the facility, it provides us access to additional capital at attractive terms. These important steps that we took in 2021 to improve our financial flexibility will allow us as we address our second lien notes that mature in 2023 to move forward.

In February 22, W&T closed the previously announced ANKOR acquisition for $30.2 million. Our immediate access to cash on our balance sheet facilitated our being able to close the transaction quickly. This accretive acquisition consisted of over 50 gross producing wells in Ship Shoal 230, South Marsh Island, Vermilion 191 and South Marsh Island 73. W&T will operate all those properties.

We estimate that this will add proved reserves of approximately 5.5 million barrels of oil equivalent, 69% of which is oil. 2P reserves are estimated to be approximately 7.6 million barrels of oil equivalent. You should note that acquisitions are a core pillar of how we create value here at W&T. And this is a great example of what we look forward when we're evaluating an acquisition.

The ANKOR assets provide a solid base of proved reserves and produce strong free cash flow. These properties are very complementary to our existing assets. Good synergies there. There are a number of opportunities, both near term and long term that will allow us to maximize the value of these assets.

We're generating meaningful free cash flow and methodically paying down our debt on our 7-year term loan. Total debt decreased by approximately $12 million during the fourth quarter to $730.9 million. Net debt, which is total debt less cash and cash equivalents, stood at $485.1 million. We substantially reduced net debt, which is down about $97 million since year-end 2020 and $202 million since year-end 2019, while significantly increasing our liquidity to $296 million from $174 million at year-end 2020 and $172 million at year-end 2019. This is all despite COVID-19 negative oil prices and meaningful downtime due to prior hurricane activity.

So with a strong balance sheet and a large amount of cash on hand, we'll continue to evaluate accretive opportunities that meet our criteria while systematically paying down debt.

Now moving on to operations. The Cota well that we drilled successfully in 2020 at East Cameron 338/349 came online earlier this week and is currently cleaning up -- flowing and cleaning up. Last report I got was about 1,000 barrels of oil per day with a very minimal drawdown. So that rate is going to go higher.

The well is in over 290 feet of water and was drilled to a total depth of over 6,000 feet, and we have accounted 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 the Flex Trend exploratory well in Mississippi Canyon that we discussed last quarter, recently completed drilling, and it was determined that there were not sufficient quantities of hydrocarbons to develop at this time. W&T and the other working interest owners will continue to evaluate information derived from drilling a well along with further seismic and geological analysis to determine if additional drilling is warranted. We have a 25% working interest in that well.

In the fourth quarter, we were very active doing well workovers at Mobile Bay, and completed 14 during the quarter that had a positive impact on our production. We plan to continue to perform workovers and recompletions in 2022 that meet economic thresholds. Capital expenditures were $16 million in the fourth quarter of 2021. And for the full year, our CapEx totaled $32 million.

So looking ahead to 2022, under the strengthening commodity price conditions, we're forecasting strong free cash flow generation, and we will continue to evaluate additional accretive acquisitions while systematically paying down debt. Yesterday, we provided guidance for 2022. At the midpoint, we expect to average 39,500 barrels of oil equivalent per day in 2022, which is an increase of approximately 4% year-over-year. We've focused on acquisitions, increasing liquidity and reducing net debt over the last few years rather than on drilling many new wells. So our guidance reflects the natural decline of the asset base, offset by the addition of the ANKOR assets in the Cota well.

I'd also note that we have some downtime planned late in the year at Mobile Bay and Mahogany, and the impact of this temporary production deferral is included in our forecast.

We see a lot of opportunities in '22 to expand our organic drilling program and expect to expend between $70 million and $90 million in capital this year, excluding acquisitions. That's where the major part of that drilling the development deepwater well. We also have capital allocated for 3 shelf drill wells as well as supporting capital for facilities, leasehold seismic and recompletions.

In addition, our P&A budget has increased compared to prior years and is being driven by obligations and prior deferrals, mainly due to COVID-19 on terminated leases with BSEE.

On the cost side, our guidance for LOE and gathering transportation production taxes includes the addition of the ANKOR properties as of February 1. Majority of the expected increase in LOE is associated with this recent acquisition. We see opportunities to reduce the operating cost of those newly acquired assets as we've done with our prior acquisitions. All of our guidance can be found in yesterday's press release.

So before I close out the call, I'd like to talk to you about our ongoing ESG efforts. The elements that comprise what we now call ESG have always been important at W&T, environmental stewardship, sound corporate governance and contributing positively to our employees and the communities where we work and operate our cornerstone to our culture.

Last year, we achieved a meaningful milestone by issuing our inaugural ESG report. It's a great base to build on. We will continue to demonstrate the importance of ESG to our sustainability by issuing reports with more disclosures and information. In the coming weeks, we'll be issuing our next annual ESG report, which will demonstrate our commitment to a high-quality ESG effort as we continue to make progress on our ESG journey.

We believe that ESG is not just the responsibility of the Board and our executive leadership, but also extends to our employees. As such, we had ESG metrics incorporated into our 2021 short-term incentive plan, and we intend to continue with that practice moving forward.

Last in closing, we're well positioned with a meaningful cash position and strong liquidity in the strong current pricing environment, which presents many opportunities for W&T. We are projecting significant cash flow and EBITDA generation in 2022. We're increasing our capital spending in 2022 to evaluate some of our attractive organic drilling opportunities. Additionally, we're constantly evaluating the Gulf of Mexico's vast pool of assets for accretive acquisitions within our focus area. We are a well-established operator with a premier portfolio of both shallow water and deepwater properties in the Gulf of Mexico that have low decline rates and significant upside.

As you can see, our focus on generating strong cash flow throughout the past 40 years has contributed to our success. We accomplished this by operating efficiently and executing on our long-term strategy, and that's centered on maximizing shareholder value.

Our management team's interests are highly aligned with those of our shareholders, given our 34% stake in W&T's equity, and that's one of the highest of any public E&P company. As a shareholder, I'm very excited about what the future looks like for W&T, and we look forward to a successful 2022.

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

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

Congratulations on the quarter, and congratulations to Mr. Williford also.

Thanks, John.

Reserve report looked good, nice to see those positive revisions in there. In your press release regarding the 2022 CapEx program, as you mentioned, 1 deepwater well and 3 shallow shelf wells. Would you be able to tell us what prospects those are on?

Yes. We have a well planned at Magnolia. That's a development well there. And the other 3 wells are on the shelf.

The next question comes from William Howell with Stifel.

Congrats on a strong year. My question is regarding the lease sales that could be invalidated, what are your options there? And if you could talk a little bit about the current leasing environment, especially in light of the current macro conditions?

I'm sorry. You cut out on the first part of your question there, William. Would you repeat that, please?

Yes. Regarding the lease sales that could be invalidated, what are your options there?

Well, this has happened before. So with regard to lease sale, we had 2 leases that we were successful bidders on. We paid the money. It was around $0.5 million total. In the past, there was a lease sale off the East Coast that was held and then deemed invalid and it took about 10 years to get the money back. So I'm not sure that it will take 10 years this time, because I expect there will be a different administration in power in not too distant future. But yes, they're not in any real hurry to give the money back usually. So it's not going to have a major effect on us. We do a lot with the existing properties that we have. We make acquisitions. That's part of our core efficiency. And I don't see that necessarily as a negative for W&T and stopping the leases. I actually see it as more of a positive for us.

Okay. Got it. My other question is, what would you want to see on the balance sheet? Or do you have a leverage target you'd want to see when you start thinking about return of capital and what might that look like?

Yes. We've thought about that a lot. We're going to be working on our longer-term debt here, and we've already begun the fact. But generally, 1x to 1.5x.

Okay. Any thoughts yet on dividends versus buybacks? Or is that kind of something you'll evaluate down the road?

Well, that's always near and dear to my heart. I have a substantial amount of the stock. So that's an important question. I don't have a quick answer for you, but that's where we want to head to.

Sounds good. Congrats again on the quarter.

The next question comes from Jeff Robertson with Water Tower Research.

Tracy, on the deepwater well at Magnolia and the couple of shelf wells, are those wells that could add production in 2022, if successful? Or is that 2023 or maybe even '24 depending on timing of Magnolia?

It's a little bit of both. I mean a little bit of all 3, rather. Magnolia will be on -- the rig will be on location this year. Hopefully, we'll see some production in the latter part of the year for Magnolia. But this is a high capacity well. So it will -- and we own 100% of Magnolia. So it will have a meaningful effect on our production in the latter part of the year. The other plays on the shelf, '23 and '24, and we'll be laying out a little bit more of that plan here in the not-too-distant future.

Do you plan to maintain 100% working interest at Magnolia?

Yes.

Okay. Can you talk about the acquisition and some of the LOE reduction initiatives? And how much of that might be included in your LOE expectations for 2022?

Sure. Actually, the properties that we purchased have a higher LOE per barrel at present. We would expect to be able to affect that because of the synergies that we have in the area. So I think that that's important to note. This is one of the reasons that we were interested, is it doesn't require a great deal of change in our logistical change -- our logistical chains rather. We think that we'll be able to affect production and cost in all those fields.

So it sounds like you can serve it with your additional boats and other things that you use for offshore services?

Yes.

Okay. And then lastly, back on the lease sale. I think the API had filed a notice of intent to appeal the decision of the court in January. And I think your release mentioned you're considering participating. Can you say where that stands?

Yes. Well, I sit on the board of the API. So I'm certainly going to support it. It's a no-brainer. I mean unfortunately, the diatribe that comes from the administration right now is that, gee, we've got all these permits out there that haven't been executed and completely avoids the obvious, which is that, hey, you have all these leases, but putting a well online and drilling a well are different activities than just picking up a lease. You've got to get permits. You've got to get locations done. You've got to finish geology. There's seismic involved usually. I mean there's a lot of steps here that doesn't make it. So that you just immediately flip the switch and start drilling on 9,000 leases. It takes months and months to get a permit, and it takes months and months to evaluate data.

You want to make sure that you get extra data, sometimes you're working on just fairly simple lease. I wouldn't call it prospects, I'd just call them leads when you're making bids for leases. And they're competitive bids. So you already know you're the high bidder. It's not a simple process.

And then last question, if I can. Can you talk about what you're -- shedding light on what you're thinking about with respect to the notes that mature next year and how you'll look at refinancing those?

Yes. I will to an extent. I mean, I think that the situation is better than it was a month ago and a hell of a lot better than it was a year ago. We have higher prices. We have more cash flow. The bonds are trading at par right now. And that's the first time in a long time that that's occurred. So I'm very optimistic that we'll come back with a better solution than we had before.

The next question comes from Jay Spencer with Stifel.

Congrats on a good year, good quarter. A lot of my questions have already been addressed, but I just had a few others. In terms of production in the fourth quarter, was there an impact from storms? And if so, can you quantify that?

No, I can't really quantify that. I don't see a whole lot of impact from storms in our data. There's usually a little bit, but it's not necessarily meaningful. It's hard to assume that there's a great deal. At most, it's short term for that quarter. So probably not more than 1,000 to 2,000 barrels of oil equivalent per day for a short period of time.

Okay. Great. And in terms of your hedging program, how are you guys thinking about your hedging program in light of higher commodity prices?

That's a really good question. I wish I had a great answer. It seems to change by $6 to $7 a barrel per day here recently. Clearly, it's on our minds here. We haven't been required to do any hedging here lately. Under our previous agreements with our banks, it was a rolling 18 months. We are looking at what we would want to protect. And basically, assuming that we did hedge, then we would want to protect our budget and CapEx spending. So that's really kind of premier in our minds.

Fortunately, we bought a bunch of calls on the gas, which ameliorated a lot of our unrecognized gains and losses with regard to gas going into the next several years. So we're hedged on -- we bought calls up until '25, so on the gas. And that's proven to be fairly prophetic. We spent, I don't know, $20 million or so on that. And it was a hard decision to make at the time, but it turned out to be a pretty good answer.

We were hedged on the downside and it occurred to us we might not be able to capitalize on the upside if we don't do something. And the gas calls appeared to be cheap to us at the time. The oil calls weren't so cheap at the time, believe it or not. But in hindsight, I wish we'd done that, too. But I'm sure everybody does -- that had to do swaps for oil right now. But fortunately, our oil production is going to continue to increase right now. We've got a new well coming online, and that's uninhibited by hedges. So that's a good bit of cash flow for the year on that, so.

Got you. Okay. And I guess my last one would be on the M&A environment. Just how would you characterize it in terms of the opportunity set? Are there many more out there like the ANKOR acquisition in terms of size and quality?

I would characterize it as excellent. The answer to that is yes. I'm very encouraged. Maybe I've said this more than once. But last year was a tough year for acquisitions because there was so much flux in the markets with the pandemic and pricing and the economy and new administration and a lot of variables to deal with that people had to look at with regard to selling assets. And I think now it feels a little better in this environment that those are going to free up.

Nobody wants to sell assets in a low-price environment. They prefer to see it in a higher price environment. We've done it in both of those environments over the past. I look forward to a robust year of acquisitions.

The next question is a follow-up from John White with ROTH Capital.

Yes. In 2021, you performed a large amount of workovers at Mobile Bay. For 2022, are the workovers again going to be concentrated at Mobile Bay? Or will they be more spread out across your asset base?

Yes. They'll definitely be spread out more, John. We did some maintenance work. We had the freeze earlier in the year in '21. Some of those wells have a little bit of water in them. They load up. We had to get lift boats out there and clean them up and get them back online. We've had some shutdowns in the field due to maintenance issues that we had to address. And so that's why you saw a lot of it in Mobile Bay. We're on a workover right now that has good promise to it in the Main Pass area that we're working on. So you'll see it more in the rest of the Gulf.

We have no further questions. So this concludes our Question-and-Answer Session. I'll turn the conference back over to Mr. Tracy Krohn for any closing remarks.

Thank you, operator. We appreciate your attendance, everyone, and look forward to talking to you again in the very near future. Thanks so much.

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