Q2 2020 W&T Offshore Inc Earnings Call

Ladies and gentlemen, thank you for standing by welcome to the W. on T. offshore second quarter 2020 conference call. During today's call all parties will be in listen only mode.

Following the company's prepared remarks.

Oh, well be open for question and answers during the question answer session. We ask that you limit your questions to one and a follow up you can always rejoin the queue.

This conference is being recorded in a replay will be made available on the company's website following the call.

I would now like turn the conference over to L. Petri Investor Relations coordinator.

Thank you Brendan and on behalf of the management team I'd like to welcome all of you to todays conference call to review W.M.T. offshore a second quarter 2020 financial and operational result.

Before we begin I would like to remind you put our comments may include forward looking statements. It should be noted that a variety of factors could cause diabetes 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 second quarter 2020 earnings release that we issued yesterday for your disclosure on forward looking statements and reconciliations of non-GAAP measures.

This time I would like to now turn the call over to Tracy Krohn, our chairman and CEO.

Thank you Alan and good day, everyone and thanks for joining us for our second quarter 2020 conference call.

With me today, our agenda today, our executive VP, and Chief Financial Officer, William Wilbert, Our executive VP and General manager Gulf of Mexico, Steve Schrader, Our Chief Technical Officer, Jim Kirsch, Our vice President of Geosciences or they're all available to answer questions later during the call.

So the goal cobot 19 pandemic, coupled with supply demand imbalances upgrade in an environment of uncertainty in temporarily reduced oil prices to unprecedented low levels in the second quarter.

This isn't the first down down down turn that we booked weather than last 40 years, we all know there's a cyclical business [noise].

Our success has always been based on maximizing free cash flow generation.

Operating efficiently and striving to constantly improving the profitability of our assets any commodity price. This time, there's been no different.

So we reacted decisively by spending all drilling activities in significantly reducing our capex proactively curtailing production has selected oil weighted fields operated by WD and lowering our lease operating expenses medically.

Without compromising safety or operational capabilities, and we reduced the that expenses well most of the reductions we've seen on the expense side are sustainable.

We believe that our lease operating gross cost run rate would be about 20% to 25% lower than Q1 for the remainder of 2020.

And our GE that calls runway run rate will be about 10% to 15% lower than Q1 down due to reduced incentive compensation and 22 on it.

So as always we remain committed to the health and safety burn employees and contractors.

Our field operations, we instituted screening of all personal prior to entry to help words enjoyed basis as well as our two gas plants in Alabama.

We're conducting daily temperature screenings and implemented procedures for distancing in hygiene, but our field locations and in our corporate offices. The pandemic remains fluid and we're constantly monitoring the situation will follow the advisor government health leaders.

Okay. So another way we have responded to this current environment is by using some of our free cash flow to repurchase a portion of our outstanding 93 quarters being your second lien notes.

The first quarter, we purchased $27.5 million in principle, where outstanding notes right to half million dollars in the second quarter, we we repurchased an additional $45.1 billion. Those same notes for $15.4 million, that's about 72, and a half million of long term debt, we've repurchased year to date.

For just under $24 million, a that's that's reduced our annual.

Interest expense by over $7 million.

We believe this was a very good uses available cash will I don't blame 71, an even better financial footing moving forward.

Well during Ah turning to our second quarter results.

Hi to low pricing environment, we successfully integrated our acquired assets Imobile by end of November and continue generating good adjusted EBITDA on operational cash flow.

Our costs were down significantly compared to first quarter adjusted EBITDA was $42.1 million, despite a weaker pricing environment.

And our Capex.

Expanded where our capital expenditures were reduced to a $6.4 million.

This is very important because on a cash basis, we continue to create significant value by generating nearly $36 million more of adjusted EBITDA versus our capex, which helped us to reduce long term debt at a substantially discount.

I can't emphasize this enough one of the keys for ongoing success has been our ability to generate positive cash flow.

So in the second quarter 2020, our production averaged 42037 barrels oil equivalent per day, or 3.2, or 3.8 million barrels oil equivalent.

That was up 20% year over year buried in the second quarter 2019.

Q2 production for 2020 was reduced by 22% compared to Q1, largely due to shut ins.

Resulting from lower pricing.

Our differentials and trust will Uh huh.

Our industry experienced a negative pricing experience brought on by future speculations.

I should also mentioned that total liquids production comprised 48% of production in the second quarter 2020.

We temporarily we temporarily showed in a portion of our production do tropical storm Crystal ball.

An estimated net impact of about 110000 net barrels oil equivalent of deferred production in the second quarter.

We didn't experience any material damage to our facilities do Cristobal there was very minimal production impact no storm damage from more recent stone hurricane Hana in July.

So in late April we are proactively curtail production selected oil weighted fields operated by US and also experienced production curtailments from third party operators do the sharp decline in oil prices.

Recently, a majority of the third party shut in volumes will return to production, but we purposely not bins quick to restore all of our oil weighted operated production.

I'm focused on the short term, but are looking at the best way to proactively manage reservoirs and maximize and preserve value over the long term.

Our given that we are cash flow positive we have the luxury to not produce at maximum rates on all fields. When margins are low this allows us flexibility produce more at higher price brighter environments and further drives bad.

We will continue to monitor the market to determine the appropriate time to a return our oil weighted operated production curtailments to production.

Taking into account or operate and curtailments and proactive reservoir management as well as planned downtime and 41 days at Magnolia due to maintenance activity of third party operated a host platform.

Which accounts for an estimated 1300 50 barrels oil equivalent per day of him back to the third quarter 220.

Yeah, no drilling activity or no wells coming online in the near term and natural decline, we believe our third quarter production will be slightly higher than the second quarter and average between 40000 945100 barrels oil equivalent per day.

Our guidance for the full years now 43750 to 46500 barrels oil equivalent per day.

After the second quarter 2020, or average realized sales price per Boe, each declined about 43% compared with the first words.

With declines in pricing for oil Ngls and natural gas.

Our average realized crude oil sales price was $21 of 67 cents per barrel.

Our NGL sales price was $4.67 per barrel and I'm not in our natural gas price was $1.78 per Mcf.

Excluding the effects of hedges.

Revenues for the second quarter decreased quarter over quarter by 56% to $55.2 million from a combination of lower volumes and lower priced.

Turning now to cost with the sharp downtime and prices we quickly implemented several successful initiatives to reduce our ela recalls.

This included replacing higher cost contract personnel with full time employees.

Reduced transportation cost by lowering the number boats and helicopters needed through operational efficiencies cutting workover and facilities costs through vendor and supplier cost reductions and increasing our focus on projects that maintain optimize production.

We have not reduced our commitment to safety operational compliance or environmental protection of any of these actions.

As a result of these cost saving activities and other factors such as the impact of the BBB funds. Our total second quarter L., we came in at $28.3 million down 48% compared to 55, excuse me $54.8 million in the first quarter.

While we expect our cost cutting initiatives to continue to keep balawi low and third quarter and the rest of 22 I.

We'll be returning to a more normal level operational activity this quarter.

As a result, we're projecting third quarter cost be up compared very low cost important too.

But till about 20% to 25% below first quarter.

Our Gina expense in the second quarter, 2020 was $5.6 million, which was well below our first quarter of 14 million.

Dollars, primarily due to credits to expand some BPP funds and lower incentive compensation.

That's our unit cost moving forward, we lower than Q1 by about 10% to 15% and being the range of $11.5 million to $13 million.

Now for the second quarter, we reported a net loss of $5.9 million or four cents per share.

Which included 38 million in unrealized commodity derivative loss offset by $29 million noncash gain on our debt repurchase and 8.7 million of deferred tax benefit.

Our adjusted net loss was $2.2 million or two cents per share.

As we discussed in our June call. Our Bank group recently completed its regularly scheduled spring borrowing base redetermination.

The borrowing base for said at $215 million.

It's down modestly from 250 to 250 Megan.

Additional details can be found in our 10-Q Nash regularly scheduled or Redetermination I will do fall.

Additionally, we've added several oil and natural gas as its since our last call. It a detailed schedule is in yesterdays release.

Following all these actions at June Thirtyth, 2020, or total liquidity stood at $165 million comprised of about 36 million cash hunton $29 million and availability under our revolving credit facility.

Long term debt remaining on our second on our senior notes. This decline in 552.5 million at June 30.

$625 million at year end 2019.

We believe we continue to have a strong balance sheet they have more than sufficient liquidity meet our needs going forward and ER to continue to look at good opportunities that may arise in this downturn.

We remain confident in our extensive inventory of high quality prospects in our asset base. This was evident with our mid year 2020 proved reserve report as calculated by Ns VI.

Devotees independent reserve engineering consultants FCC proved reserves as of June Thirtyth, 22012 totaled 157.5 million barrels oil equivalent compared with 157.4 billion barrels oil equivalent at year end 2019.

Strong positive revisions or previous estimates from field performance of 17.6 million barrels oil equivalent the first six months of 2020.

Offset by a combination of negative revisions due to FCC price changes of 9.9 million barrel Workover and year to date 2020 production of 8.7 million barrels oil equivalent.

Midyear 2020 reserves, which were 85% proved developed producing an proved developed nonproducing.

Were 34% liquids.

The PV 10 of those proved reserves was a billion dollars, which was down compared one port.

A 3 billion at year end 2019, that's due to decreased pricing.

The major FCC PV 10 was based on average crude oil price and $40.84 per barrel compared with $58. An 11 cents at year end 2019 at an average natural gas price in 2009 cents per Mcf compared with 2063 cents at year end 2019.

Oh. This further this report further solidifies the strength of our asset base.

Turning now to operations in the first quarter, the Codell well East Cameron 338, Slash 349 field was successfully drilled and over 290% water accounted for approximately 100 feet above net oil.

Initial production this plan for the first half for 2021 subject to the commodity price environment and the completion of certain infrastructure projects. After drilling this well, we decided to suspend although the drilling activity due to the card on certain pricing environment.

And at this time, we have no active drilling or completion to operation.

We will continue to perform some recompletions and workovers that meet economic thresholds in today's price environments.

So as we previously announced WT was the apparent high bidder on two blocks in the Gulf of Mexico lease sale to 54 held by the building them on March 18.

We were recently awarded both blocks, which included one deepwater block one shallow water block. We continue to believe that there is still good opportunities in the Gulf of Mexico.

With that mine will continue to look at.

The acquisitions that meet our criteria, especially those that provided solid foundation for our ability to generate free cash flow even in the current pricing environment.

We've integrated to strong app acquisitions from 29 thing.

And we'll look for those opportunities moving forward.

We have built devotees to the right combination of attractive property acquisitions, a very methodical integration exploitation of those acquisitions and successful development and exploratory drilling on our legacy themes.

So in closing.

We remain optimistic about future production to we have a premier portfolio of both shallow water and deepwater properties in the Gulf of Mexico, with low decline rates and significant upside.

The proactive actions that we've undertaken this year to reduce capex narrowly.

Coupled with our strong hedge book offering downside protection on commodity prices should allow us to continue to generate good cash flow even in a lower pricing environment.

We remain opportunistic in this environment and we'll look for ways. We can add value doesn't take because we have done this far in 20, joining reducing unloaded cost and closely managing our capital spending.

We do remain focused on operating efficiently in executing our long term strategy.

All that while maintaining our strong balance sheet to maximize shareholder value.

Our management teams interest are highly aligned with those of our show shareholders, given our 34% stake and WMT shares.

Which is one of the highest to be publicly and pickup.

This alignment of interest ensures that were truly incentivized to maximize shareholder value and mitigate risk.

Shareholders should expect to see more acquisitions in the future as well.

With that operator, we can now lines for questions.

We will now begin the question and answer session.

To ask a question you May Press Star then one on your Touchtone phone.

If you are using speakerphone, please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.

At this time, we will pause momentarily to assemble our roster.

Our first question comes from John White with Roth Capital. Please go ahead.

Good morning.

Good morning job.

Hi.

Yeah, I wanted to say that results on L. OE I thought were remarkable my congratulations you know how to manage in this environment.

As you've.

Changed out a lot of contractors and using a full time employees as part of the LOE reduction.

Is there a planned transition back to contractors or is that dependent on commodity prices.

No I believe that we would prefer to have full time employees.

Sometimes in different markets.

People like to go to work as consultants or working for large consulting companies and that's that's an added burden to the company and cost.

You know, sometimes you as as a consultant to look.

What is your best interest of course, but but I think that given the situation that we haven't markets and.

Global.

Virus Pandemics I think that people move towards Conservancy, and going work for a company that has.

A good track record in it gives them it gives them more flexibility in there in their own personal planning to have a little saw little more solid based on on the bottom for.

Yeah of course, well as you know a lot a lot of companies has made that made the same new beds of using full time employees cutting back on the contractors.

Going on across the industry I don't have another question, but I wanted to say I found the mid year.

Reserve report reassuring.

Such a strong must have been some pretty strong PDP performance and to keep reserves flat in this price environment.

Well I appreciate your recognizing that we're very pleased with acquisitions that we've made a mobile bay and Magnolia that I have had a good bit to do that.

All right I'll pass it on.

Thank you Sir.

Our next question comes from Michael see Ela with Stifel. Please go ahead.

Yeah.

Good morning.

Since you.

Set on last quarter's call you'd like to see an oil price around 50 before you really considered going back to drilling just want to see if anything's changed there in terms your cost structure that would.

Change that number at all.

Yeah, no, it's a little bit fungible I still like to see is around 50.

But I.

Since we've been able to cut Tom cut costs, a little better than we had hoped for originally.

That will have an effect on it.

So I think that's it that's a positive movement in that direction.

Good and you mentioned a mobile Bay your Oh.

At least on the PDP side I'm seeing some some good performance there that contributed to sounds like positive revisions.

Wanted to see a if there's still a thoughts next year on.

Drilling a well there given where current gas strip prices are or would you need to see an improvement there before you talked quite a while.

But we are we're I mean, we're examining data. We're we're this is these are deep.

Hi pressure wells, how high pressure a wells that are that require a lot of care.

There was over 20000 feet, we're going through the permitting process right now we don't we havent nailed down a precise location yet.

We're working on that.

So I still anticipate a 2021.

Drill well, but I'm no we do have.

More data to look at so precise location hasn't been nailed down yet.

Okay, and then last one for me I just wanted to ask on the a your first quarter.

He's Cameron coda discovery can you say, how that 100 feet to pay compared maybe relative to your pre drill expectations and do you anticipate any more drilling opportunities around that discovery and maybe what kind of infrastructure spend would be required to get that online next year.

Yeah, well, that's a price dependent is as as a matter of how we looked at it.

We felt like what are the sands would have a little bit more in it as we and that we wouldn't necessarily see a second span. We we saw second sand and ER and the primary Sam was a wasn't quite as big as we thought but it was a.

Together was enough to be about what we thought it was kind of it.

Very good thanks Tracy.

Thank you.

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Our next question comes from Richard Tullis with capital One Securities. Please go ahead.

Thanks, Good morning, good morning, Tracy and the team.

No you gave.

I know you gave the the updated outlook for 2020 and of course.

Capital spending was significantly scaled back given the circumstances that we saw.

Keep winding and beginning of Q2.

How do you see 2021, and maybe even a little bit of 2022 production profile kind of playing out.

Based on where where Youre now.

Expectation toward year end.

No Richard we're just starting to get some visibility on that.

I'm, a little bit hesitation little bit hesitant to give you closed about what we think is going to happen in 21 22.

Right now we're a we've adjusted for the for the.

Aggravated and so from the the Russians in the Saudis him and the the Chinese with regard to cope with 19.

We are we've made those adjustments were we we remain very quick adjustments based on PRASM and we reserve the.

Well, we have reserved ability going forward to up to increase production.

Due to the a the mix of production or we have.

Right now there has been shut in or curtailed.

I Hope I hope I did a good enough a job of explaining that yeah. No. We've got more production capacity going forward and some of it has been curtailed.

Economics do do mean, the deferred to the future and we expect that prices will be higher in the future. That's that's the expectation.

We we've hedged sufficiently to to manage our whatever downturn, we think is coming.

So that we can we can.

Continue to to function.

As a public in peak company.

And the idea is always to increase reserves and and a increased cash flow. When you reduction of sometimes you have to make adjustments like like this time. This was this was a very interesting downturn and I've been through seven of them now since the early eighties.

It's been it's been quite remarkable a I'm very impressed with our team how they've responded.

I'm ready, a really happy where that where the company is right now is as as opposed to what it might have been.

Yeah totally understand Tracy and you know is it fair to say that.

So without getting into specific that you probably can show.

Production growth next year compared to say for Q 20.

From your organic asset base.

Well the goal was always to increase it right.

So yeah, I think that's a fair statement.

Alright, Tracy thank you.

Right back.

As a reminder, if he would like to ask a question. Please press Star then one.

Well I really appreciate everybody listening today, we look forward to talking to near future and hopefully we'll have more good news. Thank so much about.

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

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