Q2 2021 W&T Offshore Inc Earnings Call

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Ladies and gentlemen, thank you for standing by.

Welcome to the W. N C offshore second quarter 2021 conference call.

During today's call all parties will be in a listen only mode. Following the company's prepared comments.

The call will be opened for questions and answers during the question and answer session. We ask that you limit your questions to 1 and a follow up you can always rejoin the queue. If you require operator assistance. Please press Star then zero. This conference is being recorded and a replay will be made available on the comp.

<unk> website following the call.

I would now like to turn the conference over to Al Petrie Investor Relations coordinator.

Thank you drew 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 second quarter 2021 financial and operation 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.

City of factors could cause <unk> 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 2021earnings release that we issued.

Yesterday for disclosures on forward looking statements and reconciliations of non-GAAP measures at this time I would like to turn the call over to Tracy Krohn, our chairman and CEO.

Thanks Al Good day to everyone and thanks for joining us for our second quarter 2021 conference call.

I have with me today are Janet Yang our executive Vice President and Chief Financial Officer, William Williford, Our executive Vice President and General manager Gulf of Mexico, Steve Schroeder, Our senior Vice President and Chief Technical Officer, and Stuart approach here, our director of Geoscience and they're all available to answer questions later during the call.

Paul.

So we continue to deliver strong operational and financial results from the second quarter and believe that the improved commodity price environment and our commitment to expanding margins will lead to a very good second half 2021 'twenty 'twenty 1.

We are we continue to generate stronger adjusted EBITDA and have reported $58.7 million on free cash flow, thus far in 2020.1.

Operationally, we performed quite well and production was above the midpoint of guidance and increased quarter over quarter, even without any newly drilled wells coming online.

We're very pleased with higher commodity prices, but our focus remains on operational excellence and free cash flow generation.

We have an outstanding asset base, and we will continue to maximize the value of our assets.

So looking at our mid year 2020 Reserve report prepared by our Netherlands Sue.

It was our independent reserve engineering consultants.

<unk> reserves and PV 10 value increased meaningfully.

SEC proved reserves as of June 32021 totaled $158.9 million barrels oil equivalent compared with $144.4 million barrels of oil equivalent at year end 'twenty.

About 36% of midyear reserves were liquids and the balance was natural gas approximately 87% were classified as proved developed producing.

Strong positive revisions from previous estimates from field performance of $6.5 million barrels of oil equivalent in the first 6 months of 2021 nearly offset year to date 2021 production of 7.3 million barrels of oil equivalent.

Any additional drilling to date in 2021 this shows the quality and the significant value of our asset base.

Notably we've spent minimal capital over the past 12 months and we continue to see positive reserve revisions.

In addition, the midyear report reflected $15.3 million barrels oil equivalent of positive revisions due to SEC price changes, resulting from the significant recovery in both oil and natural gas prices.

The PV 10, excluding the impact of a midyear proved reserves utilizing SEC pricing was $1 billion.

That's an increase of 39% compared with $741 million at year end 2020.

The mid year 2021, SEC reserves and PV 10 were based on an average realized crude oil price of $47.78 per barrel compared with 37.778.

At year end 2020.

Average realized natural gas price from $2.50 per Mcf compared with $2.5 at year end 2020.

So utilizing Nymex strip pricing as of July 1.2021 midyear proved reserves were $165.7 million barrels of oil with a PV 10 of $1.5 billion.

Midyear 2021, Nymex strip pricing as of July 1.2021 was based on an average realized crude oil price of $57.80 per barrel and an average realized natural gas price $2.96 per Mcf.

So turning to our operational and financial results. We had good second quarter results as we continue to.

Operating efficiently and an improved commodity price environment, we reported $18.7 million on free cash flow from the second quarter of 2021 and have now generated almost $60 million in free cash flow for the first half of 2021.

Adjusted EBITDA was 49.

EBITDA, rather was $49.8 million in the second quarter of 2021, and we've generated $107.3 million and adjusted EBITDA in the first half of 2021.1.

We reported a second quarter net loss of $51.7 million or <unk> 36 for 6 cents per.

Per share this was largely driven by a $66.1 million unrealized commodity derivative loss, excluding primarily the unrealized derivative loss and our adjusted net income was $2.2 million or <unk> <unk> per share.

And that in addition to the strong quarterly results. We also completed a financial transaction with Munich re and made it meaningfully improved our financial flexibility by more efficiently utilizing the collateral value of our mobile Bay area assets, we transferred 100% of our mobile Bay.

Areas, producing assets and related gas treatment facilities to wholly owned special purpose vehicles and return on the net cash proceeds from a $215 million first lien non recourse term loan to the SPV is at a very competitive fixed interest rate of 7%.

This allowed us to pay off our existing <unk>.

$48 million.

<unk> added significant cash to the balance sheet.

Through our 100% ownership of the Spv's, we've retained the upside value on the asset transfer.

We still plan to drill new wells with mobile back and we will benefit from the potential additional cash flow from those new wells as we received quarterly dividends back to WT after paying principal and interest all alone on building a debt service reserve weighted.

Into a series of natural gas derivative contracts to cover debt service through the term of the loan.

This transaction doesn't impact us operationally and it allows us to take advantage of the long live nature of our mobile Bay assets.

Additionally, it provides long term capital.

Without maintenance covenants or borrowing base redetermination requirements and with no covenants at the parent level.

But most importantly, it provides us the dry powder, we need to continue to accretively grow WT, who attractive property producing property acquisitions.

Over the years, we've built a tremendous group of assets through organic growth and targeted acquisitions. We are actively looking at opportunities that meet our criteria, especially those that provide a solid foundation for our ability to generate free cash flow.

We've integrated 2 strong acquisitions over the past 2 years and we will look for more of those types of opportunities in the future. We believe that market conditions in the Gulf remain very favorable for additional accretive acquisitions.

Immediate access to a significant cash balance and continued strong cash flow generation of well positioned us to actively pursue these.

These opportunities.

So turning to production for the second quarter of 2021.

<unk> produced 40888 barrels of oil equivalent per day, or $3.7 million barrels of oil equivalent.

An increase of 3% compared to 39657 barrels of oil equivalent per day in the first quarter of 2021 per.

Reduction was above the midpoint of our guidance due to better run time efficiency and left an uplift from completed Workovers liquids production comprised 45% of total total production in the <unk>.

Second quarter of 2021.

So looking ahead to the third quarter of 2021 were forecasting our production to be in line with the second quarter and average 38000.542500 barrels oil equivalent per day.

Our operations team is doing a really good job of maintaining our production despite not having any new wells coming online until later this year we're.

We're tightening our full year 2021 production guidance range to between 39, and 41000 barrels of oil equivalent per day.

Although oil production decline profile allows for reductions in capital expenditures without significantly impacting near term production levels in the second quarter, we spent $4.3 million and for the entire first half of 'twenty 'twenty..1 we've always spent $5.9 million of our 30.

2.6 million full year capital budget.

We have an exciting new drilling opportunity in the second half of the year now give more details on that later on this call.

So for the second quarter of 2021, our average realized sale price per barrel of oil equivalent was almost unchanged from the first quarter or second quarter of 2021 average realized crude oil sales price increased to $65.11 per barrel from $56.73 per barrel from first quarter of 2020.

1 and $21.67 in the second quarter of 2020.

Great to see 70 crude oil $70 crude today to actually go negative on an IMAX just a year ago.

Our net our.

Natural gas liquids sales price was also up slightly from the first quarter of 'twenty to 'twenty, 1 to $26.18 per barrel.

Offset by lower natural gas prices of $2.66 per mcf compared to $3.35 from the first quarter.

So excluding the effect of hedges revenues for the second quarter increased quarter over quarter by 6% to $132.8 million driven.

Driven by increased production, despite the improved pricing environment, our focus will remain steadfast on capital discipline operational excellence and most importantly free cash flow generation.

So on March 2021, we issued on our inaugural corporate ESG report.

Since day, 1 we've been committed to developing and producing oil and gas resources.

Safe and environmentally responsible manner.

All the while meeting or exceeding.

All regulatory requirements. These core values have guided our success and provided the foundation for WT to grow into a trusted operator in the Gulf of Mexico, a generous partner to the communities, where we operate and good steward to the environment.

With that in mind, we're working on.

With the new administration and Bessie to ensure that we have safe facilities and minimize the impact to the environment in which we operate.

We've seen some reductions in operating costs from <unk> emissions associated with the consolidation of our 2 mobile bay treating facilities into 1 plant in early 2021. However, we have seen increases in other operating expenses due not only to increased industrial industry activity levels, but also in conjunction.

With ensuring that we meet or exceed regulatory requirements.

Additionally, we are increasing our pnas activity this year and we'll have more capital costs associated with.

Asset retirements, we're expecting to spend $25 million.

$235 million this year of which we have spent only about $11.2 million.

Through June.

We established a multi disciplinary ESG task force that contributed to creating our initial ESG report and they have the ongoing responsibility to monitor our adherence to our ESG standards and formally communicate their findings on to me and our board.

To suggest opportunities for further improvements.

We're acting on their recommendations and continue to improve on our on our commitment to powering America's safely and on a more sustainable manner from many years to come.

I'm also pleased to say that their efforts in creating our first ESG report recently resulted in a meaningful improvement in 1 of our third party ESG ratings by a highly regarded ESG rating agency.

So turning to costs lease operating expense, which includes base lease operating expenses insurance premiums Workovers and facilities maintenance was $47.6 million in the second quarter from 2021 compared to $42.4 million in the first quarter.

We will continue to operate efficiently and to do so on a rising price environment. We may see some cost increase in the near term.

Additionally, recently.

Yeah.

Betsy is prioritize certain types of maintenance repair for our Gulf of Mexico operators due to corrosion related incidents that platforms are operated by other companies. Nonetheless, we haven't changed our annual LOE guidance of $158 million to a $174 million.

We will remain vigilant on our cost containment initiatives and we will control the cost that we can without impacting safety or the environment.

So G&A was $14 million in the second quarter of 2021, which was at the low end of our guidance range. While we while we were at the low end of the range G&A costs were up compared to the $10.7 million. The first quarter of 2021, which benefited from a $2.1 million employee retention credit associated with the cares Act.

We've increased our full year 2021 guidance range for G&A, a little less than 4% which takes into account.

The recent mobile bay financing and other ongoing M&A activity Adil.

Additional details on our expense guidance on the earnings release, we issued yesterday.

So turning to the balance sheet and cash flow net cash provided by operating activities for 3 months ended June 32021 was $1.2 million, which was reduced by $25.6 million.

And derivative premiums paid for our hedging activities in conjunction with the new first lien secured term loan to retain the upside of higher natural gas prices, while locking in floors for natural gas prices for production from mobile play properties over the next 7 years higher settlements and expense.

An increase in operating expenses.

Considering each dollar of gas price increase could cost the company.

$65 million in hedge losses, we believe the call and put premiums are a good insurance cost.

Protect us over the next 7 years as I stated earlier in the second quarter, we utilized a portion of the proceeds from the <unk> transaction to pay off the remaining $48 million <unk> balance.

Working with our bank growth, we recently executed an amendment and waiver that defers. The spring 2021 borrowing base Redetermination under our RVO until early October during the interim time period, we've agreed to not accessed the crack.

Facility, which remains fully undrawn, but given our very strong balance sheet cash balance from $209 million as of June 32021, we don't see a need to access the revolver.

We're also actively monitoring the debt capital markets and intend to seek financing with longer tenors and market based covenants to provide even more liquidity in the future.

Current total debt is $754.7 million, consisting of the balance of the Munich re term loan of $208.3 million and $546.4 million of 975% senior second lien.

Notes due 2023 net of amortized debt issuance costs for both transactions.

<unk> is currently in compliance with all applicable covenants of the credit agreement and our senior secured second lien notes indenture.

Now turning to operations during the second quarter of 2021, we preferred we performed 1 worker.

Mahogany that in total added approximately 700 net barrels of oil equivalent per day to production.

That's a very strong result is both highly economic and helps us to mitigate natural decline.

To continue to perform Workover rig completions as they are often some of the best economic projects in our portfolio.

The successful Codell well that we drilled early last year last year at East Cameron 338, 349 is currently in the development phase of the project and is expected to be on production in this year's fourth quarter.

Oil is in over 290 feet of water was drilled to a total depth of over 6000 feet, while encountering approximately 100 feet of net oil pay.

We have an initial 30% working interest, but our increase.

Our interest will increase to 38, 4% once the wells brought online in certain.

Farmers thresholds are met.

So while we continue to proceed with preparing our internally generated prospects for potential drilling later this year on into 2020 to a third party operated opportunity in Mississippi Canyon recently emerged we're excited about.

So based on our assessment, we believe the well has a high potential but relatively lower risk opportunity located in the <unk> area, where WT has had significant experience and success.

Furthermore, assuming success.

It could derisk additional drilling opportunities that WT has in the area. This prospect was identified using high quality <unk> seismic and reprocessing and has multiple objectives located beneath the salt overhang.

High potential oil play ties directly to analogous fields in the area and has significant upside.

We have a 25% working interest in the well.

It's just but in summary, we believe this is an excellent opportunity with good upside potential that could also allow us to de risk existing organic opportunities.

The rising price environment presents many opportunities for WT.

We have a premier portfolio of both shallow water and deepwater properties in the Gulf of Mexico, with low decline rates and significant upside.

There are many opportunities for our acquisitions and our focus area and we're constantly looking into can meet our stringent criteria.

Our disciplined approach to growth has allowed us to navigate many cycles in the past we remain opportunistic and we'll look for ways that we can add value to WT.

We've always focused on generating free cash flow by operating efficiently and executing our long term strategy to maximize shareholder value.

So production is up reserves are up prices are up over $100 per barrel. Since April 22020 differential spreads are down acquisitions are likely.

Going forward as bid ask spreads have narrowed and we're also seeking growth organically in an area in basin that we know very well armed with better data.

We're quite confident on our ability going forward to gain low cost financing when it is necessary to do so there is plenty of cash on the sidelines looking for yield on the Gulf of Mexico is an excellent place are an excellent play for cash flow as well as lower.

Carbon intensity.

Our management team's interests are highly aligned with those of our shareholders given our 34% stake in <unk> equity, which is 1 of the highest from any public E&P company. This.

This alignment of interest ensures that we are truly incentivized to maximize shareholder value and mitigate risk operator, if you would we can now open the lines for questions.

Thank you we will now begin the question and answer session.

Ask a question you May press Star then 1 on your telephone keypad, if youre using a speakerphone. Please pick up on your handset before pressing the keys.

Any time Youre question has been addressed and you'd like to withdraw your question. Please press Star then 2.

Again during the question and answer session. We ask that you limit your questions to 1 and a follow up you can always rejoin the queue at.

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

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

Good morning, Thanks for taking my question, it's really nice to see all of the free cash flow. So congratulations on that it looks like you're really focused on it.

Thanks, John.

Ah I see with these higher crude prices are you seeing any.

Oil service cost pressure starting to build.

Yeah, we're seeing that.

In transportation.

Boats helicopters.

At this point.

There is.

Of course, some seasonal creep in the price because this is the time of year when we get the most amount of work on second third quarters.

So, it's a little bit hard to discern that but I see.

Price is going up more in the on the transportation side of it at this point.

Thank you.

I really can't see.

On a V announcement about your new well in Mississippi Canyon.

As you mentioned, you've certainly got a lot of experience there with your Matterhorn.

Mississippi Canyon 698, several other blocks.

Would you want to disclose what block this new world.

I'd like to John I, just don't have permission.

Right now from from the other.

Other interest in the well to do so so I'm a little bit reticent to do that we haven't.

Given out the names or.

Depths or anything like that but.

If you did a little research it wouldn't be hard to figure that out I don't think but I just haven't gotten that permission.

Actually I didn't see it so I didn't think it was best to do that since the well just spud a day or so ago.

Okay totally understand a N a.

Ballpark.

Timeline on when we might hear on the results or is that being held tight also.

No I'm hopeful we'll have something by the end of September.

Okay well.

We don't see many.

Wildcats nowadays.

Exciting to see.

It is true.

Very high quality prospects.

I'll pass it on.

Alright. Thanks.

The next question comes from Michael <unk> with Stifel. Please go ahead.

Hey, good morning, Trisha good morning, everybody.

Can you just give any.

Morning, Steve.

Do you give any kind of detail on the capex for the second half you, obviously second half weighted with the spending.

Should we assume.

More of that as a third quarter or fourth quarter.

I think more in the in the third quarter.

Okay. We've got we've got a little bit to spend on the.

Fourth quarter.

Quarter because of Corona.

Third and fourth quarter because of Covid, but more primarily in the third quarter.

Got it so you get the non op well on the third quarter and the flex trend and then.

I assume some some additional workovers in the second half you got the codell, well fourth quarter or anything else that.

We should be thinking about on yes.

We'll be doing the development on the Codell well also.

Right Okay.

And then you had mentioned in your prepared remarks on.

Looking at the debt markets are improving just wanted to get your kind of your view on the high yield market now maybe as that compares to the the new SPV financing opportunity that you have.

Yeah.

Debt markets have been pretty pretty white hot this year. So I think it bears taking a look at and that's that's exactly what we're going to do.

I think.

We should avail ourselves of different options thats kind of what they pay before so.

I'm reticent not to do it I think that there's a really we see a lot of money on the sidelines looking to chase yield and all.

I always think that it's probably better to go find money when you can rather than than when things are are turned around.

Very good thank you Tracy.

Sure.

Again, if you have a question. Please press Star then 1.

The next question comes from Jeff Robertson with water Tower Research. Please go ahead.

Thanks, Good morning Tracy.

I was wondering if you could talk a little bit more about the prospects market in the Gulf of Mexico with the New addition to your capital program in terms of are there.

What kind of promotes people are looking for and also.

Are you seeing opportunities to add prospects to your 2022 capital program.

Yeah. So the first part of your question on promotes and we're not seeing really heavy promotes I think everybody is fairly tentative on their drilling programs at this point in time.

Prices are up so I think that guidance a lot of the thought process.

The most recent well that we're talking about drilling that we are drilling right now.

An opportunity that came to us and an area that.

We know a lot about and we're able to take advantage of the technology that we have.

With the data in house to work to enhance that so.

Im fairly confident that.

We'll see some more things like that in the future and I assure you that that we're looking at it.

In house and from others as well.

Thank you on this well that you are just spud Tracy.

<unk> is this something that adds to the production profile.

Early 2022, or late 2022 or even earlier this year.

It's a little bit of well not a little bit it's a big function of the size of the discovery.

Because.

It makes a difference whether we tie back subsea or whether we go ahead and install a facility.

Okay, and if if if we're if we're worried about installing a facility that means just a lot bigger okay.

Yes.

Potentially a good problem.

That's a quality problem youre right alright.

Alright, Thank you very much thank you Sir.

And we have a follow up from Michael <unk> with Stifel. Please go ahead.

Yes sure.

You just you had mentioned also that you do have the intent now to drill at mobile Bay, just wanted to get a sense of is that something that could happen next year are you thinking longer term.

We're not quite sure yet we've got some.

Permitting things that we need to work through to get that done.

The increase from the price of gas is certainly.

Made that more relevant.

But there are some some some permitting things that we need to do in that area. So I would suspect that.

Permitting in price.

Gas will make that more.

More and more evident than on on more than 1 well. So were relatively confident that this is something will get done in the next or at least we get the permitting done in the next 18 months at this point.

For at least the first well that.

That would be our thought process at this point in time.

We see prices staying up for a good while that's 1 of the reasons why we entered into all these.

Paul.

Contracts that.

Or bought the calls rather to assist us in some of our thought process.

Around pricing on gas.

We're pretty bullish on it.

So.

Hopefully we will get.

These are fairly complex deep wells there.

For miles deep and tot.

High pressure got it relates to that as well.

Right.

Since you mentioned the permanent process can you just talk in general about the regulatory environment now.

How things are.

Changed at all with the New administration.

Yeah. This is more to do with the state of Alabama, but also the fed's 2.

As well as several other agencies.

They didn't need to pass muster on on the process.

And I recall a lot of the.

Permitting things.

We had to do with mobile win when we discovered the field.

Nearly 40 years ago.

Although I will say that.

I'm pretty confident that state of Alabama would like to see some wells drilled out there and we're looking forward to doing it.

I guess more more broadly in terms of your overall operations in the Gulf are you seeing any.

Greater.

Challenges in getting.

Permits or I guess, obviously the.

The whole bidding process has been put on hold for a while the lease sale, but anything else in terms of the regulatory environment.

Lease sale.

New leases are being sold right now arent being auctioned.

But our existing permits or existing leases, we are able to get permits just takes it a little bit longer.

The.

The regulatory folks arent back on their offices yet.

So so I'm sure that will demonstrate now does that it gets more in line with.

Now having people.

Closer together and able to.

Function more efficiently intergroup environment as opposed to on the phone and via video.

A lot of this requires.

I was looking at maps in.

Details that they're really hard to do on a.

On a video screen as opposed to together in a room.

Understood. Thanks Tracy.

Yes, Sir thank you.

There are no further questions at this time I would like to turn the conference back over to Tracy Krohn, Chairman and CEO for any closing remarks.

Operator, we appreciate everybody's attention today and look forward to speaking with you again in the near future. Thanks, So much goodbye.

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

Yeah.

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