W&T Offshore Inc Q1 FY2023 Earnings Call

Ladies and gentlemen, thank you for joining us, and welcome to the W&T Offshore First Quarter 2023 Conference Call. The conference is being recorded, and a replay will be available on the company's website after the call. I would now like to hand the call over to Al Petrie, Investor Relations Coordinator.

Thank you, Jamie. 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 First Quarter 2023 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 disclosures on forward-looking statements and reconciliations of non-GAAP measures.

Thanks, Al. Good day to everyone, and thank you for joining us this morning. With me today are Janet Yang, our Executive VP and Chief Financial Officer; William Williford, our Executive VP and Chief Operating Officer; and Trey Hartman, our Chief Accounting Officer, who will also serve as interim CFO as we search for a successor. They're all available to answer questions later during the call. So we began 2023 by redeeming all of our outstanding 2023 second lien notes and issuing new 2026 second lien notes. Significantly reducing our debt and interest payments moving forward while strengthening our balance sheet and extending our debt maturities. We also delivered another quarter of free cash flow generation and strong adjusted EBITDA generation. Our strategy has always been simple: generate free cash flow, maintain high-quality conventional production, and opportunistically capitalize on accretive opportunities to build shareholder value. Over the years, we have seamlessly integrated producing property acquisitions while maintaining operational excellence, and we plan to continue to do so indefinitely. I'd like to point out some key highlights and accomplishments for the first quarter. We reported net income of $26 million or $0.17 per diluted share and generated solid adjusted EBITDA of $43.1 million. We have generated positive free cash flow for 21 consecutive quarters. In Q1 2023, we produced $12.4 million of free cash flow despite a downturn in both oil and natural gas pricing. We reported production of 32,500 barrels of oil equivalent per day. Production was temporarily diminished by planned facility and pipeline maintenance projects at Mobile Bay and unplanned downtime at other non-operated fields. As I mentioned earlier, in January, we fully paid off the remaining $552.5 million principal outstanding of our 2023 second lien notes and issued $275 million in 2026 second lien notes. This benefits us moving forward as it reduces annual interest payments by about $22 million and eliminates any near-term maturities in our capital structure. We used some of our cash along with the proceeds from new notes to redeem the prior notes and still ended the first quarter with cash and cash equivalents of $177.4 million. This decreased our overall net debt to $225.9 million at March 31, 2023, and our net debt to trailing 12 months adjusted EBITDA continued to improve significantly to 0.4x compared to 2.5x a year ago, which is well below our stated goal of less than 1x. We clearly adhered to our strategy and delivered sustainable and consistent results. I believe that our continued success is driven by the ability of both our operations and finance teams to execute at a high level, and our outstanding asset base in the Gulf of Mexico helps a great deal with that. So again, the first quarter of 2023 marked the 21st consecutive quarter that we've generated free cash flow. Through record low prices and changing geopolitical and economic conditions, we have continued to deliver free cash flow. Coupled with our ability to pay down debt and improve our balance sheet, we're clearly in a much stronger financial position today, and we remain focused on operational execution in 2023 to continue building on our outstanding results. For the last call, we discussed that in the first quarter of 2023, we would have planned periodic facility and pipeline maintenance projects underway at the Mobile Bay field that required us to temporarily shut in the field. These activities shut in production at the Mobile Bay field for 35 days compared to 25 days that we estimated in the guidance range provided for the first quarter of 2023. We also experienced unplanned downtime at some non-operated fields that also temporarily reduced our production volumes in the first quarter. These two events contributed to the lower Q1 2023 production levels, but most of the non-operating fields that were shut in are now back online, and the maintenance project at Mobile Bay was completed. Despite the lower overall reduction, our Q1 2023 oil production of 1,350 million barrels for the quarter was above our guidance range. Total company production has mostly recovered, and we're currently seeing approximately 38,100 barrels of oil equivalent per day. You can see the recovery in our production numbers with Q2 2023 production guidance, an expected midpoint at about 37,000 barrels of oil equivalent per day. We haven't changed our full year '23 guidance. We have focused on acquisitions over the last few years rather than drilling many new wells. Our guidance reflects the low natural decline of our asset base compared with much higher declines in unconventional onshore reservoirs. On the cost side, we continue to see inflationary pressures in the industry, but our first quarter results were encouraging as we were below the midpoint of guidance and about 4.0% actually lower than Q4 2022. We remain focused on cost control and margin expansion. Despite the inflationary environment, our guidance for lease operating expense is expected to be between $63 million and $70 million. We continue to control our G&A costs; in the first quarter, cash G&A costs were within our guidance range at $18 million. For the second quarter, we're expecting cash G&A to be between $16.5 million and $18.5 million. So that's the trend is downward. We will continue to manage controllable costs to help maximize our margins. During the first quarter of 2023, we reduced total debt by almost $300 million from year-end 2022. At the end of the first quarter, we had net debt of $225.9 million, which was total debt of $403.3 million, net of cash and cash equivalents of $177.4 million. At the same time last year, net debt was $504.8 million, so a huge reduction from that. That's not our first rodeo. Although we opted to pay down all $552 million in the previous second lien notes, we instead paid down 50% of the previous second lien notes and maintained significant cash liquidity. Our current opinion is that we're glad we did. The large reduction in total debt was driven by issuing 2026 senior second lien notes at par totaling $275 million in a private offering and using the proceeds along with a portion of our considerable cash position to retire all of those 2023 senior second lien notes. We continue to have the flexibility and dry powder to make additional acquisitions, drill our current prospects and continue to build cash, all while further paying down debt. Because we have no long-term rig commitments or near-term drilling obligations, we have flexibility to ramp up or defer capital opportunities. Last year, we focused on reducing net debt and invested $41.6 million in capital expenditures and $51.5 million in acquisitions. In Q1 2023, we spent $7.4 million in CapEx and continue to anticipate our CapEx range for 2023 to be between $90 million and $110 million. Included in this range are planned capital expenditures related to long lead items, front-end engineering design for our Holy Grail prospect at Magnolia, as well as three shelf wells that we're considering drilling a little later on and capital costs for facilities, leasehold seismic and re-completions. As always, we'll monitor commodity prices throughout the year and adjust our spending plans accordingly. With our modest capital range in 2023, we expect to generate meaningful free cash flow, which provides us with the flexibility to quickly execute on accretive opportunities as they arise. Before I close the call, I'd like to provide some more information about ongoing ESG efforts: environmental stewardship, sound corporate governance, and contributing positively to our employees and the communities where we work are the cornerstones of our culture. ESG metrics are incorporated into our 2021 short-term incentive plan, and we're continuing with that practice moving forward. As reflected in our 2023 definitive proxy statement, we recently filed, we've made a concerted effort in addressing shareholder concerns and improving our ESG metrics. Last week, we announced the addition of a new board member, Dr. Nancy Chang, whose highly successful career and broad-based experience will bring a new voice and unique perspective to our board. She is also the Chair of our Environmental Safety and Governance Committee that oversees our ESG efforts. We believe that Dr. Chang will help guide our continuous improvement and assist us in our commitment to the highest standards of ESG and corporate governance. Nancy is a world-class scientist and problem solver, successful in business and brings a unique perspective to our business as she did to the Federal Reserve Board here in Houston. In closing, we're very pleased with how well we have started 2023, both operationally and financially. I'd like to thank our strong team at W&T as I believe we are well-positioned for continued success in 2023 and beyond. Our strong financial position, which was enhanced with our significant debt reduction and debt maturity extension, provides us with optionality and flexibility moving forward. Our liquidity and cash position enables us to continue to evaluate growth opportunities, both organically and inorganically. We are poised to execute on accretive opportunities that meet our long-standing improvement criteria. We believe the Gulf of Mexico is and will continue to be a world-class basin with strong producing assets. Quickly evaluating and executing on opportunities within our focus area is a pillar of our success. We have a premier portfolio of both shallow water and deepwater properties in the Gulf of Mexico that have low decline rates and significant upside. Our management team's interests are very 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. As a shareholder, I continue to be enthusiastic about W&T's future in 2023 and beyond. Operator, we can open the lines for questions.

Our first question today comes from John White from ROTH MKM.

Maybe getting a little ahead of things here, but let's assume if we get into August or September, and you haven't found a deal and you're not in the midst of working on a promising deal, would that be a point in time where you might pick up drilling activity throughout the latter part of 2023?

That's a possibility, yes, sir.

You have been very open about your active search for acquisitions. Can you describe the main types of sellers? Are they major oil companies divesting noncore assets, or are they private equity-backed exploration and production companies? Where do you observe the most activity?

Yes, it's all of the above, and there will probably be some others that will present themselves in the interim. Fortunately, what we did was we opted to boost our liquidity in anticipation of these kinds of opportunities. We had the opportunity to go ahead and pay off all of our debt, but that would have been at the risk of much greater liquidity. The decision was made that liquidity would be a good thing, and I think that was the right call.

And our next question comes from Derrick Whitfield from Stifel.

Tracy, I wanted to focus on guidance with my first question. In light of the Q2 guide and your stance on reiterating 2023 guidance despite unplanned downtime impacts in Q1, I would ask if you could speak to the trajectory you're expecting for Q3 and Q4? And if there are any material planned maintenance impacts in those quarters?

Well, let me address the maintenance first. No, we had some issues at Mobile Bay with a certain contact power which had a little more corrosion than we had anticipated. You don't know until you open these things up and inspect them. This was a hydrogen sulfide contactor. So it was very important for us to get this right. We have a little H2S production in that field. We wanted to ensure that we had this repair. The last time it was taken down it was 10 years ago. We wanted to avoid having to take it down anytime in the near future. As far as ramping up in Q3 and Q4, yes, that's kind of the expectation. I think that what's not addressed here, there are a lot of other fields that we have interest in that are non-operated as well that we would hope to see some increases in production from there. It's a little bit hard to classify that quantitatively, but the overall feeling is that, yes, that could help us as well.

Terrific. And then with regard to the carbon capture market, I wanted to circle back to your remarks from Q4. Now that you've had more time to advance your efforts, could you perhaps speak to how your thoughts are evolving on the goals that you'd like to pursue with the CCS business?

Sure. We have of course been keeping a press on this and looking at it for a long time. We have numerous reservoirs in our portfolio of saltwater reservoirs that can accommodate this kind of injection both onshore and offshore. We're relatively confident that this will be part of our portfolio in the future. I don't intend to spend a great deal of money. Most of the research and effort will be the first foot from the flue stack. So that's where most of the technology is going to be. Adjustments will be made as to how that is done by people whose expertise is far greater than ours. We expect that W&T will not be a net zero company. We buy properties from other companies in the Gulf of Mexico, and we take those properties and produce them over a long period, longer than they probably would have been produced without creating an additional carbon footprint with massive amounts of drilling, fracking, flaring, and that sort of thing. So we come into the idea of thinking that we will be more of a follower than a leader in that business.

Our next question comes from Jeff Robertson from Water Tower Research.

Tracy, can you discuss how the leases you acquired in the most recent lease sale fit into the asset base and your plans for 2024 or 2025?

Yes. Unfortunately, Jeff, that's a very good question. We haven't been awarded those leases yet. So while we were a high bidder, we haven't been awarded the leases. So it's a little premature for me to talk about that. I'll be happy to talk about it as soon as they are awarded.

Just do you have a feel on how long it might take the OEM to process the bids and award leases from this sale?

Yes, sir. They normally process that within about 90 days of the lease sale itself. So in the next probably 45 to 60 days, we should have a good idea about what they're going to do. I apologize for not being able to elaborate on that. I just think that it would be premature to do so.

Okay. In terms of acquisitions, Tracy, with the balance sheet liquidity that you have, can you just talk about how you think about financing acquisitions between cash and, obviously depending on the size, how much debt you'd want to use?

Sure. In larger transactions, and it depends on how you define large. Well, let's say it was a $1 billion transaction. We would leverage up a little bit, and then you should probably expect to see, when I leverage up, we would expect that to be a temporary leverage increase that we'd pay down quickly. Then we would probably sell off a little piece of equity as well.

So, obviously, in keeping with your past, you would target assets that generate a significant amount of cash flow.

Yes. The company doesn't change its policies over time that work. So yes, generating cash flow is quite essential for us. Levering up, we want to stay within fairly known bounds of leverage right now. It's usually around 1. We would probably go a little bit higher than that to accommodate that acquisition and then temper that with selling off a bit of equity.

And ladies and gentlemen, at this point in showing no additional questions, I'd like to turn the floor back over to Tracy Krohn, Chairman and CEO for closing remarks.

Thank you very much, operator. One other little detail that I'd like to mention is I would like to publicly thank Janet Yang for her service to the company as our CFO. Even before that, Janet has opted to move out of the city and go somewhere else in another state to facilitate some family matters. It's an opportunity for them going forward. We're very sad to see her leaving. I wish it could be another way, but I wish her well. The whole company wishes her well, and we're going to miss her. We hope that everything comes out 100% for her. Thank you very much.

Ladies and gentlemen, with that, we'll conclude today's conference call. We thank you for attending today's presentation. You may now disconnect your lines.