W&T Offshore Inc Q4 FY2023 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the W&T Offshore Fourth Quarter and Full Year 2023 Conference Call. During today's call, all parties will be in a listen-only mode. Following the company's prepared remarks, the call will be opened for questions-and-answers. 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. Please go ahead.

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

Thanks, Al. Good day, all, and thanks for joining us for our year-end 2023 conference call. With me today are William Williford, our Executive Vice President and Chief Operating Officer; Sameer Parasnis, our Executive Vice President and Chief Financial Officer; and Trey Hartman, our Vice President and Chief Accounting Officer. They are all available to answer questions later during the call. So in 2023, we continued to deliver strong results while executing on our strategic vision. Our proven strategy is simple and effective. We focus on generating free cash flow, maintaining and optimizing our high-quality conventional assets, and opportunistically capitalizing on accretive opportunities to build shareholder value. We have a strong balance sheet and continue to build cash on hand. We have generated positive free cash flow every quarter for the past six years because we know that cash flow is paramount to our success. We prioritized operational excellence, cost-controlling initiatives, prudent capital spending, and maximizing the value of our prolific asset base to deliver strong production and meaningful EBITDA. In addition, it's our ability to successfully and seamlessly integrate producing property acquisitions that has helped W&T grow during our 40-plus year history. For the past year, we've accomplished many things that I'd like to highlight now. 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. So we have the ability to pay off all that debt, but we believe that liquidity would be extremely important strategically, hence the issuance. We have a low average leverage profile of 1.2 times net debt to trailing 12 months adjusted EBITDA, coupled with the significant cash we have on hand, that provides us with financial flexibility to act quickly should we see additional acquisition opportunities arise. So in September 2023, we used about $27 million of cash on hand to purchase working interest in eight shallow Gulf of Mexico fields. In January 2024, we used about $72 million of cash on hand to purchase 100% working interest in six shallow Gulf of Mexico fields from Cox, adding 18.7 million barrels of oil of proved reserves. So while we were very busy from a financial acquisition standpoint, we also executed operationally. So for the first, well, for the full year 2023, we generated $15.6 million in net income, $183.2 million in adjusted EBITDA and $63.3 million in free cash flow. We delivered strong production of 34,900 barrels of oil equivalent per day. And we continue to pay down debt with net debt falling to $217.3 million. We adopted a quarterly cash dividend policy, paying an initial dividend in December 2023 and announced the first quarter 2024 payment will occur later this month. So we continue to execute at a high level, generating strong adjusted EBITDA and free cash flow despite decreases in pricing because it's such an integral part of our strategy, I'd like to reiterate one more time. The fourth quarter of 2023 marked the 24th consecutive quarter we have generated free cash flow. So coupled with our ability to pay down debt and improve our balance sheet, we're in a strong financial position in 2024 and we remain focused on operational execution to build on these solid results. So over the years, we've created significant value by integrating producing properties acquisitions, but it's not as easy or straightforward as you might think. After we close on any acquisition, we take time to assess and inspect the newly acquired fields, which potentially require shutting in some of the fields in the process. We have a large footprint across the Gulf of Mexico. So we look for ways to optimize operations, increase production, utilize that large footprint where we can, and reduce costs to maximize value. As we look to implement this culture of operational excellence, this can result in production deferrals and increase near-term investment to both bring fields up to our standards and increase production. So with over 40 years of experience integrating acquisitions into our asset base, we have proven that the near-term costs are well worth it to realize the long-term potential of the newly acquired assets to generate cash flow for us for many years to come. So in September 2023, we completed yet another accretive acquisition of properties in the Central Eastern Gulf of Mexico. These fields have a solid base of proved reserves with upside potential and the ability to add production and cash flow. We funded the acquisition of cash on hand and six months later, these assets are exceeding their forecasted production levels. We're in the early stages of the same type of integration process with the recent Cox acquisition. These assets were in bankruptcy, and we are spending the first part of 2024 expecting and assessing these fields. They're located in close proximity to existing assets, and we are identifying workovers, recompletion opportunities, and facility upgrades that need to be performed to increase production. We have the experience and expertise to execute a tried and true acquisition and integration strategy that will allow us to drive value from these latest property additions for our shareholders. We paid around $100 million in cash for these two acquisitions over the past six months, and we still have the flexibility and dry powder to make additional acquisitions. We will continue to generate free cash flow while paying down debt. And because we have no long-term rate commitments or near-term drilling obligations, we have the flexibility to ramp up or defer capital opportunities based on market conditions. Now turning to year-end reserve results. I would like to point out that we continue to see positive well performance and technical revisions, which demonstrates the strength of our world-class conventional Gulf of Mexico assets. This also directly points to our ability to enhance production and our reserve base through operational excellence. For the year ended 2023, we reported SEC proved reserves of 123 million barrels of oil equivalent, which did not include the 18.7 million barrels of oil of proved reserves we acquired in early 2024. The 2023 reserves did include 4 million barrels of equivalent positive performance revisions and an increase of 2.6 million barrels of oil equivalent due to the acquisition made in September. While we had strong performance from the factories we can control, we did see a decrease of 36.2 million barrels of oil equivalent due to pricing revisions as we saw natural gas pricing decrease by 58% in 2022 and oil pricing decline by 17% from 2022. Additionally, we had a production of 12.7 million barrels of oil equivalent in 2023. Despite only spending $41 million on CapEx and $27 million in acquisitions in 2023, we were able to replace about 52% of our production with reserve additions. In our year-end press release issued yesterday, we showed that the reserves associated with the Cox acquisition would have added 18.7 million barrels of oil equivalent and $250 million in PV-10 on a pro forma basis to our year-end 2023 reserves. Pretty impressive numbers for the $72 million purchase we paid, and I predict these reserve numbers will continue to increase absent further price decreases. The PV-10 value of our SEC proved reserves at year-end 2023 was $1.1 billion, approximately 41% of year-end 2022 SEC proved reserves were liquids were 30% crude oil and 11% NGLs, and we had 59% natural gas. The reserves were classified as 67% proved developed producing, 17% proved developed nonproducing, and 16% proved undeveloped. W&T's reserve life ratio at year-end 2023 based on year-end 2023 proved reserves and 2023 production was 9.7 years. So entering 2023, we strengthened our balance sheet by issuing new 2026 senior second lien notes at par, totaling $275 million in a private offering and used the proceeds along with our considerable cash position to retire all of our 2023 senior second lien notes. This significantly reduced our interest payments, preserved financial flexibility, and further improved our balance sheet. At year-end '22, the company had total debt of $693.4 million. And at year-end 2023, W&T's total debt was down 44% to $390.6 million. The total debt includes a $111.1 million balance of the nonrecourse Mobile Bay term loan. We also have nothing drawn on our $50 million secured revolving credit facility. So, yesterday, we provided our detailed guidance for 2024. In the first quarter of 2024, we had several facility and pipeline maintenance projects as well as prolonged downtime at several fields that have temporarily reduced our production volumes. We are predicting the midpoint of Q1 2024 production to be slightly better than Q4 2023. We're also predicting production to increase through time and despite only projecting to spend about $35 million to $45 million in capital expenditures in 2024, we believe the recent acquisitions will help us to offset natural decline and grow production this year. So for the full year 2024, we expect to average 36,900 barrels of oil equivalent per day at the midpoint, which is about a 6% increase year-over-year. So we focus more on acquisitions over the last few years rather than on drilling many new wells. Our ability to maintain strong production numbers is a testament to our culture of operational excellence. So on the cost side, our guidance for LOE and gathering transportation and production taxes includes inflationary pressures that we've seen in 2023 and expect to continue into 2024. In addition, we believe that we will have to spend additional costs to bring the former Cox assets up to our standards. With that said, we do believe that there are opportunities to reduce our operating costs, find synergies to drive lower cost long-term, and we're working hard to reduce costs without impacting safety or deferring asset integrity work. Our first quarter lease operating expense is expected to be between $77.5 million and $86 million, which reflects some of the expected inspection and upgrading work at the former Cox facilities as well as some maintenance and repair costs included with that. First quarter G&A costs are expected to be between $15 million and $17 million. I would like to sincerely thank our team at W&T as we are well positioned to add value in 2024, and everybody has worked incredibly hard, and the results are starting to show. So even after the recent Cox acquisition, we have a solid cash position and additional liquidity that enables us to continue to evaluate growth opportunities, both organically and inorganically. We have a long track record of successfully integrating assets into our portfolio, and we continue to believe the Gulf of Mexico is and will continue to be a world-class basin. We do remain focused on operational excellence and maximizing the cash flow potential of our asset base. So as the company's largest shareholder, I believe W&T is very well positioned to succeed in 2024 and beyond. Our entire 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 largest of any public E&P company.

We can now open the lines for questions.

Good morning and congratulations on the nice results.

Hi, John.

Good to see the positive reserve revisions also. You mentioned you're contemplating a deepwater joint venture similar to your previous Monza joint venture? Do you want to offer any additional comments on that?

Sure, John. We are, of course, going to continue those efforts. I'd like to put a multiple well package together to go forward with that, that would start with Holy Grail. That's a proved undeveloped location with, believe it or not, a little bit of upside to it. So we have some other exploratory projects. We have another one at what we call our Cayman field that is more towards the developed side of the equation. We are, of course, mindful of our balance sheet and what we think are very good acquisition opportunities going forward. As always, that's a little bit hard to predict. But so far, we've been having good success with buying properties, and those are opportunities that we would always like to pursue. But yes, the program for '24 and beyond for drilling wells will depend on putting together this joint venture as well.

Okay. Thanks. And would they be oil industry partners or more financial-type partners?

Yes, I believe you will see both types of partners. We established a drilling joint venture years ago with more financial partners, amounting to $361 million, which has proven quite successful. Therefore, you can expect a mix of both. This is likely to be a multi-hundred million dollar drilling program, and we will explore both options to gauge everyone's willingness and preferences.

Okay. Thanks for the additional detail. I'll pass it back to the operator.

Thank you, sir.

Good morning, all, and thanks for taking my questions. Also, certainly congrats on the Cox acquisition as well. Tracy, I wanted to focus on guidance with my first question. Could you speak to the amount of shut-ins you're expecting in Q1 and perhaps provide color on where volumes could exit the year? Certainly, it sounds like a lot of things are coming into your favor towards the end of the year. But any color you could offer would be greatly appreciated.

There's some uncertainty currently. Virgo remains shut in due to the leak in the Main Pass oil and gas pipeline, which is impacting several million cubic feet per day. We anticipate production later this year to be around 38,100 barrels of oil equivalent per day. This projection is based on the numbers I provided for production increases. I believe the situation will improve as we get more familiar with these assets. The bankruptcy has left many fields in a state of uncertainty due to the rapid loss of personnel and the transition from Chapter 11 to Chapter 7, which involves forced liquidation. We had a temporary service agreement that is no longer valid because personnel had to exit quickly. We've managed to bring on a few of their employees, and we're making progress. While things are a bit more chaotic than usual, it's not something we can't handle. We are confident that the situation will improve significantly. Even now, production continues to increase. Please allow us a few more weeks to gain a better understanding, and we will provide more precise information.

Terrific. And Tracy, I know you're still very early in your assessment, but really leaning in on the Cox acquisition. Could you offer any additional color on the measures you're taking to optimize production and cost and place any broad parameters around the degree of production and cost improvement we could see?

I'd really like to provide more guidance on that. Some of it relates to old contracts that need resolution or were rejected. Many people lost a significant amount of money here, and it didn't really benefit them much. We need to address some transportation issues that require resolution. The previous owners left us quite quickly and did not provide adequate management of some corrosion issues. We've been working on that. I wouldn't categorize it as hazardous; it's just routine repairs needed for some upgrades. Some are straightforward, like valves on production vessels, and we recently installed a clamp on a pipeline that had been shut down by the previous operator, which increased production by 400 barrels a day for a cost of $20,000. While some of these tasks are relatively simple, they do take time. We need to coordinate personnel around these fields from the existing fields and manage transportation and logistics.

Great. And then maybe as one nonrelated follow-up. Wanted to see if you could speak to the A&D environment in the GOM at present as you're clearly taking a conservative cash building position for 2024.

Yes, absolutely. We’re witnessing numerous mergers, not only among smaller companies but also involving larger ones like Chevron and Hess. Hess, in particular, has significant production in the Gulf of Mexico, which I view as a positive development for the industry and for our company. This trend reflects the growing interest from investors in this region, which is the second largest producing basin in the country and the largest by area. We have always valued our ability to operate in this basin, and there are always new opportunities to drill and new properties to acquire. Our enthusiasm for this area has not diminished. We have operated in nine different states across the US in the past, but we remain focused on the Gulf of Mexico.

Thanks, Tracy. Thanks for the color.

Thank you, sir.

Thank you. Good morning. Tracy, a question just philosophically on returns. When you think about what you see with the costs to drill and complete new wells in the Gulf of Mexico across your asset base and the types of opportunities you see in the acquisition environment. Can you compare maybe the risk profile and the types of returns you think you can generate in given what appears to be your preference for acquisitions with what it might be on development drilling or greenfield drilling?

Sure. Our decision-making revolves around assessing the risk versus reward based on our available cash and the level of leverage we can responsibly apply. We generally favor making property acquisitions when opportunities arise, especially if our capacity to acquire aligns with our ability to finance and develop wells naturally. This aligns with our preferred risk profile, as acquisitions generally involve less risk; we have established cash flow and proven reserves, making it a straightforward choice. The challenge arises when we consider potential for exponential growth, which introduces the dilemma of whether to take risks or invest in a known opportunity that guarantees a specific cash flow and return. Drilling is inherently riskier, and I've observed companies that have failed by taking on too much risk with excessive drilling. We have the expertise to operate in both shallow and deep waters and possess promising drilling and exploratory prospects that are likely to gain interest, which will be our focus. However, we do not want to take on these ventures entirely ourselves, so we aim for about 20% to 25% participation. This presents some challenges. It seems there is growing recognition of our basin, with an understanding of the stability in our legal framework and the reasonable pricing we can anticipate. While regulations may sometimes seem strict, we are confident that unexpected windfall profit taxes are unlikely, which reduces many of the risks associated with unpredictable regulatory changes seen in other regions.

If we consider the joint venture, Tracy, I would like to expand on your points regarding risk and reward. If you were able to create a joint venture with another operator in the Gulf of Mexico, would the aim be for W&T to provide some prospects and the partner to offer their own, thereby reducing exposure while covering a wider range of drilling prospects over the next few years?

Yes, I mean that's an admirable goal, sometimes that happens, sometimes it doesn't. The more immediate thought process for us is to optimize that and make that occur, if that makes sense. On the other hand, we believe that the prospects that we have are pretty superior and that we have a lot of data. We've got processing, reprocessing. And I guess everybody could say, yes, our prospects are better. But our success rate in the Gulf over the last decade and almost 1.5 decades has been over 90%. So that's pretty hard to argue with.

Thank you.

Thank you, sir.

At this time, we are showing no more questions in the queue. I'd like to turn the call back over to Mr. Tracy Krohn for any closing remarks.

Thank you, everyone. Stay tuned. There will be more to come in the next several weeks, and we look forward to presenting to you again soon. Thanks so much.

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