W&T Offshore Inc Q3 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to the W&T Offshore Third Quarter 2021 Conference Call. During today’s call, all parties will be in a listen-only mode. Following the Company’s prepared comments, the call will be open for questions and answers. During the question-and-answer session we ask you to limit yourself to one question and a follow-up. You can always rejoin the queue. 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, 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 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 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 would like to introduce you to Brent Colland, who recently joined W&T as Internal Director of Investor Relations, and is on the call with us this morning. Many of you know Brent from his prior investor relations roles. With that, I would like to turn the call to Tracy Krohn, our Chairman and Chief Executive Officer.

Thanks, Al. Good morning and good day to everyone and thanks for joining us for our third 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 General Manager of Gulf of Mexico; Steve Schroeder, our Senior Vice President and Chief Technical Officer; and Stuart Obkirchner, our Director of Geosciences and they are 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 nine months of 2021. Additionally, we generated $65.1 million net cash from operating activities and grew our cash position to $257.6 million at September 30, 2021. Operationally, we are close to having our Cota well online and drilling is proceeding at our high-potential Cota well in Mississippi Canyon. We are considering drilling additional exploratory wells in our 2022 drilling program, which we will announce with our year-end 2021 earnings. So it is encouraging to see commodity prices at these levels. It allows us to benefit from 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 will continue to focus on operational excellence to make sure we are maximizing the potential of those assets. For 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 few years alone, we have integrated two strong acquisitions, and we are 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 whereby we transferred 100% of our Mobile Bay area producing assets and related gas treatment facilities to a wholly-owned special purpose vehicle in return for net cash proceeds from a $215 million first lien non-recourse term loan to the SPV at a very competitive fixed-rate interest of 7%. This allowed us to pay off the then existing RBL balance of $48 million and netted significantly more cash liquidity to the balance sheet. Importantly, it provided significant dry powder to pursue more attractive acquisition opportunities. We are actively looking at opportunities that meet our criteria, which include properties with good cash flow upside that we can improve, 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 remain very favorable for creative acquisitions and we intend to pursue opportunities that meet our criteria aggressively. Turning to production, for the third quarter of 2021 W&T produced 34.8 thousand barrels of oil equivalent per day, or 3.2 million barrels oil equivalent for the quarter, a decrease of 15% compared to 40.9 thousand barrels oil equivalent per day in the second quarter of 2021. Crude oil comprised 46% of total production in the third quarter of 2021. Production for the quarter was reduced by approximately 5,500 barrels per day due to deferrals related to Hurricane Ida. Approximately 80% of our production was temporarily offline at one point during the storm. The 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 bigger and denser wells that we discussed in our October 18th press release are back online. Looking forward to the fourth quarter of 2021, we are forecasting our production to be higher than the third quarter as we restore production deferred due to Hurricane Ida and have set guidance between 348,000 and 385,000 barrels oil equivalent per day. And with that, I will 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-related production deferrals, pre-hedge revenue for the third quarter increased slightly quarter-over-quarter to $133.9 million driven by the favorable pricing changes I just commented on. Turning to LOE, which includes base lease operating expenses, insurance premiums, workovers, facilities repairs and maintenance expense, LOE was $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 LOE 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 costs 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 and $15.0 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 three months ended September 30, 2021 was $65.1 million and $111.3 million for the first nine months of 2021. The 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 $16.0 million for the nine 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 exploration and development activity this year and are expecting to spend $25 million to $35 million in 2021, of which we spent about $19.7 million through September. As of quarter end total debt sits 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 a balance of a non-recourse Mobile Bay term loan of $195.4 million, following our initial quarterly principal payment, and $547.0 million of 9.75% 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 agreements. With that, I will 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 the agreements 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 would become 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 on terms that are equal to or better than other similar facilities in the market today. We don’t expect to need the facility to add liquidity given our current cash balance. We are generating strong cash flow. We have had some very good results on the drilling, workover and recompletion front. During the third quarter of 2021, we performed two workovers that had initial production rates totaling approximately 1,075 net barrels of oil equivalent per day. Additionally, we performed one recent workover 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. Regarding the total well we drilled successfully last year at East Cameron 338/349 area: the platform and pipeline have been installed and completion operations are continuing well, as expected to be completed in the fourth quarter of 2021 with initial production expected late in the quarter once it is tied into the supporting infrastructure. The well is in over 2,900 feet of water, and it was drilled to a total depth of over 6,000 feet and we encountered approximately 100 feet of net oil pay while 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. We continue to drill ahead on our high-potential Mississippi Canyon exploratory well that began in early August. Based on our assessment, we believe the well has high potential but relatively lower risk; it is located in the Flex Trend area where W&T has had significant experience and success. Assuming success, it would de-risk 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 is a nice opportunity with good upside potential; it could also allow us to de-risk 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 have 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 where cultural integrity, honesty and transparency are valued. In the communities where we live and operate, it has always been important for us to have a positive influence. 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 and 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 two training 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 officers and board members are now women or minorities. We believe the combination of 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 are committed to continuing to improve ESG performance and reporting. We used to call this HSE; we have supplemented and augmented it and now 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 deepwater properties in the Gulf of Mexico with low decline rates and significant upside. We have many opportunities for acquisitions in our focus area and we constantly look at deals 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 new cycles in the past. We will remain disciplined but opportunistic and we are always looking for ways we can add value. 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 W&T equity. This is one of the highest insider ownership levels in W&T’s capital. This alignment of interest ensures that we are truly incentivized to maximize shareholder value and mitigate risk. With that operator, we can now open the lines for questions.

We will now begin the question-and-answer session. The operator provided instructions for participation. First question comes from John White of ROTH Capital. Please go ahead.

Good morning. Congratulations on the nice results. Well, you have made a unique and novel move here with your affiliate now being the provider of the credit facility; that is 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 they are providing less favorable terms and conditions on these credit agreements due to number one, losses that they have encountered during the multiyear 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, thanks for recognizing that it is kind of unique to have a chairman add $50 million in 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 will answer your question with regard to losses. Yes, the RBL lenders have certainly experienced a lot of losses primarily onshore, but some offshore as well. Over 250 companies went bankrupt the last three years; most of those were onshore. They are experiencing issues with their shareholder base surrounding ESG and requirements. I’m not sure that these are necessarily bad issues; they are requirements from their shareholder base. We are seeing this more with foreign banks, European banks in particular, than we had expected to encounter. So it was more expeditious for us and less onerous to go ahead and step away from the RBL. We have got plenty of cash and there were some comments after our Mobile Bay re-deal that now you are out of cash, but we are not out of cash; we are generating cash flow. Those balances are quite good and I remember leveraging $12,000 into a $0.5 million loan; what do you think we can do with a couple $100 million plus in cash liquidity? So I’m very encouraged by what we might see in the future.

Thank you. Next question is from William Howell with Stifel. Please go ahead.

Good morning guys and congrats on the quarter. I guess just starting off with the Mississippi Canyon well, if that is successful, do you have any idea on where it would be tied back? And could you talk a little bit about the additional developed opportunities that it might set up if successful?

Yes. Unfortunately, or fortunately as the case may be William, that well is tied up under title restrictions. So, we are not providing specific tie-back information for reasons we think are necessary. But yes, we are going to be tying into something or, hopefully, we have a bigger discovery and we don’t need to tie it to anywhere; we would just build our own structure if it is large enough. So, we have options and that was another important consideration for us in drilling as well.

Understood, thanks. I guess, could you also just talk a little bit about the M&A environment you are seeing right now?

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

Got it. Thanks guys and then congrats again on the quarter.

Thank you. Next question is from Justin Patterson with Intermarket. Please go ahead.

Can you guys hear me now? I’m now unmuted. Okay. Good morning guys. Thanks for the comments. I just wanted to ask you a couple of questions about the new facility, Tracy. First, is the sense that competing alternatives were either less flexible, or maybe less reliable, 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. I’m not meaning to sound skeptical, I’m just curious to understand what your facility was competing against.

Yes. No, the reality is that the terms being offered were definitely more onerous than what we would like to see. But also timing was a little lagging for what I felt we should be doing. We were moving quicker than they could move and we understand those credit facilities quite well since we have been in this industry for about 40 years.

Okay. And then, am I right to understand that this is roughly a $100 million facility of which the current borrowing base justifies a capacity of $50 million?

Easily. Yes.

Okay. Got it. And none of it’s used at this time?

Zero. If I can interrupt just a moment, Justin: we think of it as opportunistic. If something opportunistic comes along, you will find it and move forward and it may be bigger than that.

Okay, great. And then I think you guys have about $300 million of first lien capacity under the bond documents, so conceivably that facility could grow, I guess?

Yes. I think it is about $300 million, but close to—yes, right around there—and it could grow.

Got you, okay. And then second question unrelated: in the past, you guys have done drilling JVs; I think you have one that is currently outstanding. What are your thoughts, Tracy, on potentially another drilling JV?

JV activity has a lot to do with opportunity set. We have done one and we are encouraged. We have prospects going forward and we will see how that turns out.

Okay, got you. That is all for me. Thanks guys.

Thank you, sir.

Thank you.

Thank you. The next question is from Jeffrey Robertson with Water Tower Research. Please go ahead.

Thanks, good morning Tracy. Could you talk a little bit about the nature of the competition you are seeing in the acquisition market right now?

Well sure. The usual suspects: the public companies that are in the Gulf of Mexico and some private companies. We are not really seeing a great deal of startup activity in that market. We think that startup requirements are much more difficult and onerous than they used to be, particularly around bonding. We have seen some effects as a result of a couple of the larger bankruptcies, mainly with regard to bonding and field work.

And secondly, as you are looking at your 2022 capital program, can you talk about the prospect market in the Gulf of Mexico? I know the Mississippi Canyon well you are currently drilling may set up additional prospects. Would some of those potentially be included in next year’s capital program and is there—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?

That is a pretty broad question, Jeff. I will say that we have plenty of our own prospects to look at and, of course, increasing prices make that more likely. Would we take any interest in other people’s prospects? Of course. It is all about prioritizing what makes the best economic sense. So I don’t really care whether it is ours or somebody else’s; if that opportunity presents itself we would like to be able to take advantage of it. That has been part of the reason why we have worked on our liquidity and stepped away from some of the unnecessary exposures.

Okay. Thank you very much.

Next comes from John White of ROTH Capital. Please go ahead.

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

I don’t have direct indications from the privates. I would expect to see some fairly cautious increases. Prices have whipsawed and I think some of this will be weather-related. Clearly, we are concerned about what might happen with regard to weather this winter and how it can affect gas markets and oil markets as well, but more on the gas side. Prices in Europe are quite elevated; we are seeing prices in Europe at $25 to $30 per MMBtu equivalent, so that gives you pause to think about what could happen with a cold winter here.

Okay. Thanks for those comments and good luck on your deal making.

Thank you, sir.

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

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

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