Earnings Call Transcript - WTI Q4 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the W&T Offshore Fourth Quarter and Full Year 2022 Conference Call. During today’s call, all parties will be in a listen-only mode. This conference call 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.

Al Petrie, Investor Relations Coordinator

Thank you, Joe. 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 fourth quarter and full year 2022 financial and operating 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.

Tracy Krohn, Chairman and CEO

Thanks, Al. Good day to everyone, and thank you for joining us for our year-end 2022 conference call. With me today are Janet Yang, our Executive VP and Chief Financial Officer; William Williford, our Executive VP and Chief Operating Officer. I'm really pleased to report that 2022 is one of the best years in our long and profitable history. Our strategy has always been pretty simple: generate free cash flow, maintain high-quality conventional production and opportunistically capitalize on accretive opportunities to build shareholder value. Our ability to integrate producing property acquisitions while maintaining strong operational excellence were significant drivers in our outstanding financial results in 2022. Here are the key things we've accomplished. We reported full year 2022 net income of $231.2 million or $1.59 per share and generated record adjusted EBITDA of $563.7 million, a year-over-year increase of 156%. We generated positive free cash flow for 20 consecutive quarters. In 2022, we produced $376.4 million of free cash flow, which was more than four times what we did in 2021. We completed two attractive property acquisitions in early 2022 and successfully integrated them into our operations, which have already paid out as of August 2022. We increased full year 2022 production to 40,100 barrels of oil equivalent per day. We grew cash and cash equivalents to $461.4 million at year-end. So, hand in hand with our growth in cash has been a significant reduction in net debt. Our net debt was down more than 50% year-over-year to $232.1 million as of December 31, 2022. Our net debt to trailing 12 months adjusted EBITDA improved significantly to 0.4 times compared to 2.5 times a year ago, well below our stated goal of below 1 time per year-end. In January of this year, we paid off our 2023 second lien notes and issued new 2026 second lien notes, significantly reducing our interest payments and debt moving forward. We clearly had an outstanding year, thanks in no small part to the ability of both our operations and finance teams to execute at a high level. This combination of strong production and continued good pricing resulted in our outstanding adjusted EBITDA and free cash flow numbers. To put this in perspective, the $563.7 million in '22 adjusted EBITDA was almost 50% higher than the total of full year's 2021 and 2020 combined, which totaled $383.7 million. Coupled with our ability to pay down debt and improve our balance sheet, we're in a much stronger financial position today and remain focused on operational execution. Turning to our year-end reserve results, I’d like to point out that we continue to see positive well performance in technical revisions, demonstrating 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 year-end 2022, we reported SEC proved reserves of 165.3 million barrels of oil equivalent, including 7.3 million barrels of oil equivalent from positive performance revisions and an increase of 6 million barrels of oil equivalent due to the two acquisitions made early in 2022. We also had strong positive pricing revisions of 9 million barrels of oil equivalent. In total, we added 22.3 million barrels of oil to new reserves, replacing 153% of our 2022 production of 14.6 million barrels of oil equivalent. Our all-in reserve replacement cost for 2022 was $4.10 per barrel of oil equivalent, averaging a very reasonable $2.85 per barrel of oil equivalent over the last three years. We’re particularly pleased with these results since last year, we focused on reducing net debt while completing bolt-on acquisitions and less on drilling. Where you see the biggest impact of higher pricing is in the PV-10 value of our SEC proved reserves, which at year-end '22 nearly doubled to $3.1 billion. Approximately 36% of our year-end SEC proved reserves were liquids, with 25% crude oil, 11% NGLs, and 64% natural gas. The reserves were classified as 75% proved developed producing, 13% proved developed nonproducing, and 12% proved undeveloped. W&T's reserve life ratio at year-end '22 based on year-end proved reserves in 2022 production was 11.3 years. We believe we have built a sustainable group of high-performing Gulf of Mexico assets that will continue to provide meaningful cash flow to our shareholders for many years. In February 2022, the company closed an acquisition of central Gulf of Mexico federal shallow water producing assets for approximately $34 million after taking into account normal and customary post-effective-date adjustments. This acquisition consisted of an average of 80% working interest in over 50 different properties and gross producing wells at Ship Shoal 230, South Marsh Island 27/Vermilion, and South Marsh Island 73. W&T has operated that for the past year. In April 2022, we acquired the remaining 20% working interest in these assets for $17.5 million. Acquisitions are a core pillar of how we create value. This is another example of what we look for when evaluating an acquisition. These assets provide a solid base of proved reserves and produce strong free cash flow, complementary to our existing assets. There are a number of opportunities, both near-term and long-term, that we can undertake to maximize the value of these assets. We also see areas of upside potential that won't require significant amounts of capital. W&T is well positioned for further acquisition activity, and we're continuously on the lookout for deals that meet our criteria. We've used our substantial free cash flow to vastly improve our financial position and strengthen our balance sheet. At year-end '22, our net debt-to-adjusted EBITDA ratio was down to 0.4 times, with available liquidity of $511.4 million, made up of $461.4 million in cash and cash equivalents and $50 million of borrowing availability under our revolving credit facility. In Q4 2022, we entered into an amendment to our credit facility that extended the maturity date and commitment by up to one-year to January 3, 2024. At year-end 2022, the company had total debt of $693.4 million or net debt of $232.1 million, net of cash and cash equivalents, consisting of the balance of the nonrecourse Mobile Bay term loan of $143.3 million and $550.1 million of 9.75% senior secured lien notes net of amortized debt issuance costs for both instruments. 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 a considerable cash position to retire all $552.5 million of our 2023 senior second lien notes. This significantly reduces our interest payments, preserves our financial flexibility, and further improves our balance sheet moving forward. It's important to note, we're pleased that as a result of the new debt offering, we've received upgraded ratings by our two existing rating agencies and received a rating from a new agency this week in line with those upgraded ratings. We have the flexibility and drive to make additional acquisitions, drill our current prospects, continue to build cash, or pay down debt. With no long-term rig commitments or near-term drilling obligations, we have the flexibility to ramp up or defer capital opportunities. In 2022, we focused on reducing net debt with $41.6 million in CapEx and $51.5 million in acquisitions. We're currently anticipating our CapEx range for 2023 to be between $90 million and $110 million. Included in this range are planned expenditures related to long-term lead items and funding the engineering design for our Holy Grail prospect at Magnolia, as well as three shelf wells that may be drilled later this year and capital costs for facilities, leasehold, seismic, and recompletions. We'll monitor commodity prices through the year and adjust our spending plans accordingly. With our modest capital range in 2023, we expect to generate meaningful free cash flow, providing us flexibility to execute on accretive opportunities quickly. Our 2023 P&A budget is expected to be considerably less than in 2022, driven by obligations in prior deferrals on terminated leases. P&A expenditures in 2023 are expected to be in the range of $25 million to $35 million compared with $76.2 million in 2022. Yesterday, we provided our detailed guidance for 2023. In Q1 2023, we have several planned periodic facility and pipeline maintenance projects underway at the Mobile Bay field, along with prolonged downtime at several non-operated fields that have temporarily reduced our production volumes. Most of the non-operational fields that were shut in are now back online, and maintenance projects are nearly complete, with volumes returning to normal levels soon. We expect Q1 2023 production to average about 33,800 barrels of oil equivalent per day. For the full year 2023, we expect to produce between 37,000 and 41,000 barrels of oil equivalent per day, a small decrease of 3% year-over-year and flat compared to Q4 2022, impacted by lower first-quarter volumes. We’ve 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, our guidance for LOE and gathering transportation and production taxes include inflationary and supply chain pressures expected to carry into 2023. We believe there are opportunities to reduce our operating costs and are working hard to reduce future costs while keeping an eye on safety and without deferring asset integrity work. Q1 lease operating expenses are expected to be between $63 million and $70 million, reflecting some of the same cost inflation seen across the entire industry. Q1 cash G&A costs are expected to be between $16.5 million and $18.5 million. Before I close out the call, I’d like to discuss our ongoing ESG efforts, environmental stewardship, sound corporate governance, and positively contributing to our employees and the communities where we work and operate are cornerstones of our culture. The ESG metrics were incorporated into our 2021 short-term incentive plan, and we're continuing with that practice moving forward. We plan to release our third sustainability report later this spring, building on the solid foundation of our previous reports. In closing, we’re pleased with how well we performed in 2022, both operationally and financially. I want to thank the employees working offshore and onshore at W&T for one of the most successful years in our long history. We generated excellent cash flow and adjusted EBITDA in 2022 and are poised for continued success in 2023. Our strong financial position, enhanced with significant debt reduction and debt maturity extension from 2023 to 2026, provides us with optionality and flexibility moving forward. Our liquidity and cash position enable us to evaluate growth opportunities, both organically and inorganically, and we’re poised to execute on accretive opportunities that meet our long-standing and proven criteria. We believe the Gulf of Mexico is and will continue to be a world-class basin with strong producing assets. It’s encouraging to see public markets starting to better appreciate offshore assets, where we've always been focused. 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 deep-water properties in the Gulf of Mexico that have low decline rates and significant upside. Our management team's interests are highly aligned with those of our shareholders, given our 34% stake in W&T's equity, one of the highest of any public E&P company. As a shareholder, I'm excited and very encouraged about the success we had in 2022 and believe we have a bright future in 2023 and beyond. With that, operator, we can open the lines for questions.

Operator, Operator

Operator Instructions. Our first question here will come from John White with ROTH Capital. Please go ahead.

John White, Analyst

Good morning, everyone. And congratulations on the very strong year that you had. Let me further tip my hat to your reserve replacement cost. You just don't see companies putting up numbers like that anymore.

Tracy Krohn, Chairman and CEO

Thanks, John. Thanks very much.

John White, Analyst

And I'd like to get updated on a couple of things here. The Holy Grail, we're about 30 days from the end of the first quarter. Is that going to spud this month or earlier in the second quarter?

Tracy Krohn, Chairman and CEO

The reality is we're evaluating that. We're thinking maybe we might defer on that for a while. I like the cash position we have. I think that we may have a better shot at buying reserves than we do drilling for them right now. The reserves at Holy Grail are proved, and they have been there for a few million years; they can wait another year or so.

John White, Analyst

And the same question on the spud date for your side-track 320, is that looking to be the fourth quarter or might you defer that as well?

Tracy Krohn, Chairman and CEO

Yes, and yes. It might be the fourth quarter, we might defer it. Again, one of the reasons we opted not to pay off all of our debt was in considering existing opportunities that might come up. We're in a position to pay that debt off but opted to ensure a bit more liquidity in the form of cash. We see a likelihood of opportunities to buy more reserves rather than drilling for them. If both options are equal, then we're probably going to try to buy instead.

John White, Analyst

I appreciate that detail. As a follow-up, is your tilt towards potential acquisitions driven in part by oilfield service inflation trends that we are seeing?

Tracy Krohn, Chairman and CEO

Yes, it is. That's definitely a consideration. If I can buy reserves for about what I can drill them for, it makes more sense to pursue that. The only risk is that it's never a guarantee you’ll be able to buy. We don't make predictions on what we will be able to acquire for the year or any time in the future. But we have a good history over the last four years of being able to do that. So, I'm confident we have a good shot at it.

John White, Analyst

Indeed, you do have a good history in acquisitions, and we will look forward to seeing what you come up with. With that, I'll pass it back to the operator.

Operator, Operator

Our next question will come from Derrick Whitfield with Stifel. Please go ahead.

Derrick Whitfield, Analyst

Good morning, all, and thanks for taking my question. The low declining nature of your asset base shows through in your 2023 guidance. Looking beyond 2023, how long could you sustain oil production through workovers and recompletions, assuming the current lower price environment?

Tracy Krohn, Chairman and CEO

That's a great question. I don't know if I have a good answer for you on how long we can maintain that guidance. The repeat is 11.3% right now, somewhat driven by our production at Mobile Bay, which has very long-lived gas reserves. I believe gas reserves are beneficial going forward. So, I think you should take some part with that 11.3% RRC into consideration.

Derrick Whitfield, Analyst

Terrific. As my follow-up, you mentioned in the press release about a carbon capture market opportunity. Could you expand on what roles you are looking to pursue? And would you commit to securing pore space for Class VI wells if federal leases become available?

Tracy Krohn, Chairman and CEO

Yes, I’ll have more to discuss later on regarding that. We are not sitting idle; we are evaluating various markets. What people don’t appreciate is that the difficulty lies not in putting the CO2 in reservoirs, which I find to be a relatively simple exercise. The real question is whether you inject it as a gas or as a liquid. Generally, you're going to put it in as a liquid. The saltwater reservoirs, particularly in the Gulf of Mexico, have nearly unlimited capacity for CO2. The challenges are more related to separating the CO2 from flue gas and getting it into a position for liquefaction or compression into the formation. That technology exists but is expensive. The government has made strides with tax credits going from about 50 to 85, but the states are lagging in assisting with the permitting process. Our infrastructure along the Gulf Coast is robust, allowing us to manage CO2 injections effectively, and we are currently looking at locations off the coasts of Texas, Louisiana, and Alabama.

Derrick Whitfield, Analyst

Perfect. Great color. We look forward to more disclosure from you on that opportunity.

Operator, Operator

And our next question will come from Jeff Robertson with Water Tower Research. Please go ahead.

Jeff Robertson, Analyst

Good morning, Tracy. This might be a follow-up to Derrick's question regarding the decline curve. You all replaced roughly 50% of 2022 production just with positive performance revisions. Can you speak about your assessment of W&T's probable reserves and what your production performance implies for bringing some of those probables onto proved reserves in the coming years?

Tracy Krohn, Chairman and CEO

Yes. Generally, we view those probable reserves as the portion we do not need to spend CapEx on which will materialize from the way these reserves are booked in offshore traps. Offshore, we do not benefit from the same evaluation methods used onshore. We generally end up under booked on the front end, but future reserves can emerge as cash flow. This phenomenon defers the decline curve and brings cash flow. For example, the Gulf of Mexico has a prevalent water drive mechanism, which allows us to access some of those reserves without drilling another well, saving on expenses. We don’t get much market credit for this, and I appreciate the question.

Jeff Robertson, Analyst

Regarding acquisitions, Tracy, could you provide an update on the market state for properties that fit W&T's criteria?

Tracy Krohn, Chairman and CEO

Sure. As I mentioned earlier, our decision not to pay off all of our debt was influenced by our desire for additional liquidity. We're primarily focused on the Gulf of Mexico, and we’re able to look at both deep and shallow water opportunities. Our primary concern is generating profit, regardless of whether it’s oil or gas, or the depth of the well. Offshore operations tend to be more efficient with inherently lower emissions compared to onshore operations. Although we’ve been very successful with majors and large independents, I remain optimistic about acquisition prospects while being aware that we're in confidentiality agreements regarding specific properties. I'm generally encouraged by the current stability in oil and gas pricing.

Operator, Operator

Operator Instructions. Our next question here will be a follow-up from John White with ROTH Capital. Please go ahead.

John White, Analyst

Thank you, operator. Following up on Jeff's question about acquisitions. How would you characterize potential sellers—private equity-sponsored companies or major oil companies making divestitures?

Tracy Krohn, Chairman and CEO

Yes, great question, John. It's both and other entities as well. I can't handicap one versus the other. Many funds have held properties for a period and look to generate a return. We have a good history of dealing with major oil companies to successfully purchase their properties, as we've proven we are responsible custodians. We've contributed over $1 billion worth of P&A obligations over the years, more than any other E&P company in the Gulf. We've dealt with major companies, large independents, and have acquired reserves through various means. So, all options are open at this time.

John White, Analyst

I appreciate that. Thank you. I’ll pass it back to the operator.

Operator, Operator

And our next question will be another follow-up from Jeff Robertson with Water Tower Research. Please go ahead.

Jeff Robertson, Analyst

Tracy, my follow-up is regarding the MOU you announced back in May with Korea National Oil Corp. With the financing of the 2023 notes behind you, I assume you now have a lot more flexibility regarding opportunities to evaluate with them?

Tracy Krohn, Chairman and CEO

That's a possibility. We have discussed opportunities with them in the past, not as a specific project, but the Koreans recognize their emissions as a state entity, and it is important for both parties to consider. There are many talented minds in Korea National Oil Company looking at global issues. We are excited about this association and believe we both can add value. W&T has been more focused on debt and financial liabilities as we started into 2023, now that we've addressed that, we have more time to focus forward.

Jeff Robertson, Analyst

Thank you, Tracy.

Operator, Operator

This concludes our question-and-answer session. I'd like to turn the call back over to Tracy Krohn for any closing remarks.

Tracy Krohn, Chairman and CEO

I appreciate everybody listening in and all the questions. We're extremely encouraged and excited about the opportunities ahead. Prices fluctuate, but we believe we serve our country and our shareholders as a confident and skilled operator in the Gulf of Mexico. We look forward to continued success for many years, and with that, we’ll talk again soon.

Operator, Operator

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