W&T Offshore Inc Q1 FY2024 Earnings Call

Thank you, Chuck. 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 2024 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 earnings release that we issued Friday for disclosures on forward-looking statements and reconciliations of non-GAAP measures.

Thanks, Al, and good day to everyone. We appreciate you joining us on our conference call. Today, we have William Williford, our Executive VP and Chief Operating Officer; Sameer Parasnis, our Executive VP and Chief Financial Officer; and Trey Hartman, our Vice President and Chief Accounting Officer with us, and they'll be available to answer questions later on. We started 2024 with another quarter of strong operational and financial results while continuing to execute our strategic vision. Our focus remains on generating free cash flow, maintaining and optimizing high-quality conventional assets, and capitalizing on opportunities that enhance shareholder value. Our balance sheet is robust, and our emphasis on generating free cash flow has allowed us to increase cash reserves. We have consistently generated positive free cash flow for over six years, as we recognize the importance of cash in allowing us to seize various opportunities. Our priorities include operational excellence, cost control, prudent capital spending, and maximizing the value of our asset base to achieve strong production and meaningful adjusted EBITDA. Furthermore, our proficiency in seamlessly integrating acquired properties has contributed to our growth over our 40-plus year history. In the first quarter, we accomplished several strategic goals that showcase our successful execution of this strategy. In January 2024, we acquired operatorship and a 100% working interest in six shallow Gulf of Mexico fields for $77.2 million, adjacent to our current operations. The immediate impact of this acquisition was evident, as we reported production exceeding 35,000 barrels of oil equivalent per day, surpassing the midpoint of our guidance range and reflecting a 3% increase from the fourth quarter. More significantly, we achieved a 15% increase in oil production compared to the previous quarter, which contributed to our adjusted EBITDA rising to $49.4 million—a 10% quarter-over-quarter increase that exceeded the 3% rise in production for the same period, boosted by higher oil output. We remain focused on cost control, as evidenced by our first-quarter lease operating expenses being below the low end of our guidance, partly due to deferrals of workover and facilities projects. We generated $32 million in free cash flow, more than double the amount generated in the fourth quarter, and continued to return cash to shareholders by paying another dividend in the first quarter, with the second quarter 2024 payment scheduled later this month. The first quarter of 2024 marked the 25th consecutive quarter of free cash flow generation, and combined with our cash reserves and an ATM offering of approximately $83 million, we find ourselves in a solid financial position for 2024. We are still dedicated to operational execution to build upon these strong results. With over 40 years of experience in integrating new assets into our portfolio, we have demonstrated that short-term costs are worthwhile to unlock long-term potential for cash flow generation from newly acquired assets. Regarding the Cox asset acquisition, we have made significant progress in integrating these new assets into W&T, though additional work remains to increase production from these fields. We have onboarded select Cox offshore personnel and completed the necessary regulatory transfers of operatorship, lease ownership, and financial responsibility. Our teams have diligently integrated accounting, production reporting, cost tracking, and other data into our current systems. Additionally, we have ensured that W&T's health, safety, and environmental standards are upheld while negotiating midstream services for the newly acquired fields. In the first quarter, our oil production saw significant growth due to these new fields, and we will continue focusing on increasing production, especially oil production, and managing operational costs. It is worth noting that three of the newly acquired fields were shut-in during the first quarter, affecting their expected positive contributions to our operational and financial results. We are actively working to bring these assets online to fully leverage their potential. According to an updated third-party year-end engineering report, the proved SEC reserves for these assets are 21.8 million barrels of oil equivalent, approximately 17% more than our initial expectations at the time of acquisition, highlighting the significant potential we see in these assets. Alongside the production gains from the new assets during the first quarter of 2024, we also executed three workovers and three recompletions, positively impacting quarterly production. We will keep pursuing these low-cost, short payout operations that enhance both production and revenue and help mitigate natural decline. In our earnings release, we shared our production guidance for the second quarter, projecting it to be in a similar range as the first quarter. This guidance accounts for some anticipated shut-ins of selected fields due to third-party maintenance work. We plan to increase lease operating expenses in the second quarter to address some deferred projects from the first quarter and benefit from better weather conditions for these operations. We are also focused on bringing the other three acquired fields back online to improve our operational and financial performance. Our full-year 2024 lease operating expense is expected to be around $23 per barrel of oil equivalent. For capital expenditures, we anticipate investing between $35 million to $45 million in 2024, excluding acquisitions, with about $3.2 million incurred in the first quarter. These expenditures primarily target facility projects on our existing fields and the fields acquired in late 2023 and early 2024 to maximize production. Before concluding, I want to express my gratitude to our team at W&T, as we are well positioned to create value throughout 2024 and beyond. Our strong balance sheet enabled us to finalize the Cox acquisition by utilizing part of our cash reserves, and we remain committed to expanding our cash balance, now nearing $100 million. In early 2023 and late 2022, we concentrated on managing our debt and paying off our second lien. We faced the decision of whether to fully pay off that second lien at that time or refinance it while maintaining liquidity with a new $275 million issuance. Ultimately, opting to pay off that second lien and focus on strategic acquisitions proved to be the right choice, as evidenced by our subsequent acquisitions. We plan to leverage our substantial cash position and expertise to acquire complementary Gulf of Mexico assets, enhancing W&T's scale. Such acquisitions play a crucial role in our success, and our ability to integrate and elevate those assets has allowed us to grow reserves and production for the past 40 years. We are also dedicated to enhancing shareholder value and returning value through our quarterly dividend program launched in November 2023. We believe in our proven strategy and expect to continue executing both operationally and financially in 2024 and beyond. As the company’s largest shareholder, I firmly believe W&T is excellently positioned to succeed. Our management team’s interests align closely with those of our shareholders, given our 34% equity stake in W&T, one of the highest among public exploration and production companies. We are focused on operational excellence and maximizing the cash flow potential from our asset base. Operator, we can now open the lines for questions.

Congratulations on the impressive results. I noticed that the new guidance for gathering, transportation, and G&A was slightly lower than my estimates. Would you like to provide some comments on that?

Yes. Some of that reason is because we have some of that production still shut in. And that reflects some of that. We're negotiating somewhat on some of the midstream issues around that. And there's still maintenance that we need to do on some of that property.

And the lower G&A?

Yes. Go ahead.

Yes. Look, the G&A was slightly higher than the midpoint just because of some one-off costs that we have. But again, we maintain our guidance for the full year. We don't expect that to change.

Yes. It's not unusual for us to see a little increase in LOE and G&A with acquisitions in the initial part of the production curve going forward. It helps us to bring the facilities up to standard, hire the right people, and we want to take a little share in doing this. Get it right the first time and you don't have to invest this much further on down the line.

Tracy, on the Cox assets, how long does it typically take to evaluate what kind of remediation work you need to do to bring the assets up to standards you're comfortable with? And then also to quantify and put a plan together for any kind of development or recompletion work to enhance the production profile of the assets?

Yes. Normally, it takes a few months, Jeff. In this particular case, there wasn't the normal kind of care that we see in making these types of acquisitions, this company, the predecessor Cox, went into bankruptcy and the maintenance wasn't what we'd normally expect to see. So as a result, we're having to do some remediation primarily around corrosion and that's taken a bit of time. It's not anything dangerous or anything. It's just something that needs to get done. And the regulatory agency certainly recognizes it, and we do too. So we're making sure that all gets done. I think that long term, that's a better strategy to make sure that we handle all the operating issues on the front end. It's been a little extra money to generate better revenues and better safety conditions going forward.

Tracy, you mentioned during the year-end earnings call the possibility of establishing a drilling partnership that might involve Holy Grail. Can you share any updates on the progress of that effort?

Yes, that's a great question. As I mentioned earlier, we faced some challenges in late 2022 regarding whether to pay off all our debt from the second lien without making another issuance. In the end, we chose to redeem all those notes and proceed with a new issuance for $275 million to ensure we had more liquidity. That turned out to be the right choice. Looking ahead, we see opportunities for more acquisitions and growth for the company based on this approach. Jeff, I'm sorry, I didn't directly answer your question with regard to drilling. We did focus on making the acquisition; that's why we haven't unveiled the drilling joint venture we mentioned. We told shareholders and potential investors that we would probably defer for about a year. We are looking at that now, and we're putting together that program. It's going to be relatively extensive. I'm very encouraged by what I'm seeing; we are seeing interest in the program. We'll start off at Holy Grail still looking for proven reserves actually initially. And it looks like that's still a goal for next year and possibly sooner if we get all the program put together in time. But I'm relatively pleased with the quality of not only the proven reserves that we're looking for, but also the exploratory potential of several of these projects that are fairly large. So I'm expecting a drilling program in the range of $500 million to $1 billion to drill, complete and hook up.

And there are no further questions showing at this time. So this will conclude our question-and-answer session. And now I would like to turn the conference back over to Mr. Tracy Krohn for any closing remarks.

Ladies and gentlemen, we appreciate your interest in W&T. We will continue to work hard to make sure that we're increasing production reserves and cutting costs. Those are the primary things that we need to do and work towards every day. I do want to thank the team. They've done a really good job under difficult conditions with the latest acquisition that came out of bankruptcy. Nobody is ever happy during bankruptcy and understandably so. But it does have a nice outcome for us, and we look forward to continuing to develop these assets and continue to also look at other assets to acquire. So thank you for your attention. We'll talk to you again soon.

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