Q3 2021 W&T Offshore Inc Earnings Call

Ladies and gentlemen, thank you for standing by.

Welcome to the W. N T offshore third quarter 2021 conference call during today's call all parties will be in listen only mode.

During the Companys prepared comments I'll be open for questions and answers.

The only question and answer session. We ask you that you limit yourself to one and a follow up you can always rejoin the queue.

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

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

Thank you Nick and on behalf of the management team I would like to welcome all of you to today's conference call to review WT offshore third quarter 2021 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.

<unk> 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 third quarter 2021 earnings release that we issued yesterday for disclosures.

Forward looking statements and reconciliations of non-GAAP measures.

For turning the call to Tracy I'd like to introduce you to Brent Collins, who recently joined <unk> as internal director of IR and is on the call with US. This morning. Many of you know Brent from his prior E&P IR roles with that I'd like to turn the call over to Tracy Krohn, our chairman and CEO.

Thanks Al.

Good morning, and good day to everyone and thank you for joining us for our third quarter 2021 conference call.

With me today are Janet Yang, our executive VP, and Chief Financial Officer, William Williford, Our executive VP and general manager Gulf of Mexico.

Steve Schrader, our senior VP and Chief Technical Officer.

Stuart upwards.

Our directors.

Geosciences.

All available to answer questions later on during the call.

So despite the issues hurricane.

Wherever they created for the industry in the Gulf of Mexico.

<unk> delivered strong operational and financial results in the third quarter.

The improved commodity price environment, and our commitment to expanding margins led to strong adjusted EBITDA.

$45 3 million.

And third quarter, and we have generated $152 6 million of adjusted EBITDA in the first nine months of 2021.

Additionally, we generated $65 1 million in net cash from operating activities and grew our cash position to $257 6 million.

At September 32021.

Operationally, we're close to having our total well online and drilling is proceeding at our high potential exploratory well in Mississippi Canyon.

We are considering drilling additional exploratory wells in our 2022 drilling program, which we will announce with our year end 2021 earnings.

So it's encouraging to see commodity prices at these levels. It allows us to benefit work, we do every day to continuously improve our assets and make sure. Our operations are as efficient as they can be without sacrificing safety or the environment.

We have an outstanding asset base and.

And we will continue to focus on operational excellence to make sure we're maximizing the potential of those assets.

So to those of you who have known WT throughout the years in a row aware that accretive acquisitions have been a hallmark of our success.

The last two years alone we have integrated two strong acquisitions, and we're well positioned to build upon that track record.

As you may recall in May we meaningfully improved our financial flexibility.

Im more efficiently utilizing the collateral value of our mobile assets.

I'm pleased with the financial transaction with Munich re.

Transferred 100% of our mobile Bay area, producing assets and related gas treatment facilities to a wholly owned special purpose vehicle, we return to a net cash proceeds from a $215 million first lien non recourse term loan to the SPV is at a very competitive fixed rate.

Interest of 7%.

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

$48 million net a lot more cash liquidity to the balance sheet.

Importantly, it provides us significant dry powder to pursue more attractive acquisition opportunities.

We're actively looking at opportunities that meet our criteria, which include properties with good cash flow upside that we can achieve with the drill bit and the potential to increase near term cash flow through workovers re completions and facility upgrades.

We believe that market conditions in the Gulf of Mexico remain very favorable for accretive acquisitions, and we intend to pursue opportunities that meet our criteria aggressively.

So turning to production for the third quarter of 2021, WT produced 34, 8000 barrels oil equivalent per day or $3 2 million barrels of oil equivalent a.

A decrease of 15% compared to 49000 barrels or excuse me 49000 barrels or other growth per day in the second quarter of 2021.

Liquids comprised 46% of total production in the third quarter of 2021.

Production for the quarter was reduced by approximately $5 5000 barrels of oil equivalent per day due to deferrals related to hurricane Idaho with approximately 80% of our production temporarily to offline at one point during the storm.

The majority of the impact to production was brought back online during September and the remaining hurricane impacted production is expected to be online by the end of 2021.

I am pleased to note that the big Bend and Dantzler wells that we discussed on our October 18th press release are back online looking forward to the fourth quarter of 2021.

Forecasting our production would be higher than the third quarter as we restore production deferred due to heart gain item and have set guidance between $34 eight from 38 5000 barrels oil equivalent per day.

With that I'll turn it over to Janet Yang our CFO. Thank.

Thank you Tracy.

The third quarter of 2021, our average realized sales price per BLE with $41 per Boe.

An increase of 18% compared to the second quarter of 2021, our third.

Third quarter 2021 average realized crude oil sales price increased to $68 57 per barrel and $65.11 per barrel in the second quarter of 2021.

Larry our NGL sales price was also up meaningfully from the second quarter of 2021 to $32 46 per barrel.

Natural gas prices were up 62% to $4.31 per mcf compared to $2 66 in the second quarter.

The lower production due to hurricane production deferral pre hedge revenue for the third quarter increased slightly quarter over quarter to $133 9 million driven by the favorable pricing hedges changes I just commented on.

Turning to costs, which includes base lease operating expenses insurance premium workover facilities repairs and maintenance expense.

$9 or $39 $5 million in the third quarter of 2021 compared to $47 6 million in the second quarter third quarter reflects the delay of certain facility related expenses that were postponed until the fourth quarter of 2021 due to hurricane Ida.

In the first fourth quarter, we expect to be in the range of $44 six to $50 6 million.

As we see some increased costs associated with hurricane repairs and restoring production.

Fortunately, we had no material damage due to hurricane hit us.

Main vigilant in our cost containment initiatives and we will control the cost that we can without impacting safety or the environment G&A.

G&A was $13 4 million.

Third quarter of 2021, which is below the low end of our guidance range and slightly lower than the second quarter, we expect G&A in the fourth quarter to be between $13 six and $15 million.

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

Turning to the balance sheet and cash flow net cash provided by operating activities for the three months ended September 32021, with $65 1 million.

And 111 three.

For the first nine months of 2021, the strong operational cash flow help has helped to grow our cash and cash position to $257 6 million at the end of the third quarter of 2021.

Capital expenditures were $10 2 million in the third quarter of 2021 and $16 million for the nine months ended September 32021, <unk> 2021 estimated capital budget remains at $30 million to $60 million, excluding potential acquisition and has been weighted towards the second half of 2021.

Additionally, as discussed in our last call we increased our P&A activity. This year and are expecting to spend $25 million to $35 million in 2021 of which we've spent about $19 7 million through September.

As of quarter end total debt stood at seven $742 4 million.

Including cash on the balance sheet, our net debt stood at $484 8 million at September 30th the debt consist of the balance of the nonrecourse medical base term loan of $195 4 million. Following our initial quarterly principal payments and 547 million.

Million of 975% senior second lien notes due 2023, both of these figures are net of amortized debt issuance cost that E&P is in compliance with all applicable covenants of our debt agreement with that I'll turn it back over to Tracy.

Thanks, Janet so regarding the RVO.

I'm happy to report that at quarter end, there were no borrowings outstanding under the former facility.

Yesterday, we announced that we entered into amendments to the credit agreement to replace the current bank group and established a new credit facility with calculus lending.

Given our cash position and the fact that we have not utilized the RVO for some time now we felt it was a good time to step away from the RV end market.

Our view for some time has been that the <unk> market was becoming less flexible.

Imposing more onerous commercial terms on producers, particularly those that operate in the Gulf of Mexico.

This new facility was reviewed by an independent committee of the board given my affiliation with characters lending.

And as at terms that are equal to or better than other similar facilities in the market today.

We don't expect to need the facility and then have to add liquidity. However, it provides us opportunistic liquidity beyond our current cash balance.

So we've had some very good results from the drilling Workover rig completion problems that I would like to discuss as well.

During the third quarter of 2021, we performed two workovers that had initial production rates totaling approximately 1075 net barrels of oil equivalent per day.

Additionally, we performed one recompete driven additional production rate of approximately 400 net barrels of oil equivalent per day.

These are very strong results that they're both highly economic can help us to mitigate natural decline.

So regarding the Codell well that we drilled successfully last year at East Cameron 338049 area with platform and pipeline had been installed and completion operations are continuing well is expected to be completed in the fourth quarter of 2021 with initial production expected late in the quarter once it's tied into two supporting infrastructure.

Well as over 290 feet of water and was drilled to a total depth of over 6000 feet and we.

We encountered approximately 100 feet of net oil pay during drilling we.

We have an initial 30% working interest put our interest will increase to 38, 4% once the wells brought online in certain performance thresholds are met.

So we continue to drill ahead on our high potential Mississippi Canyon exploratory well that was spud in early August.

Based on our assessment, we believe the world as hybrid as a high potential but relatively lower risk opportunity located in the flex trend area, where <unk> has significant experience and success.

So assuming success it would de risk additional drilling drilling opportunities and WD has new era.

This prospect was identified using high quality <unk> seismic and reprocessing and has multiple objectives located beneath the salt overhang.

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

We have a 25% working interest in the well that we believe is a nice opportunity with good upside potential that could also allow us to.

De risked existing organic opportunities.

So despite the improved pricing environment, our focus will remain steadfast on capital discipline operational excellence and most importantly, generating strong operational cash flow.

In March 2021, we issued our note our inaugural corporate ESG report since day one.

We have been committed to developing and producing oil and gas reserves and resources in a safe and environmentally responsible manner, while meeting or exceeding regulatory requirements. We've also been able to attract and retain quality employees by providing an environment, where they can develop professional and culture of integrity.

Honesty.

<unk>.

And the communities, where we live and operate it's always been important for us to have a positive influence in these areas.

These core values have guided our success and provided the foundation for WT to grow into a trustee trusted steward and operator in the Gulf of Mexico.

An employer of choice in our industry and a general partner.

Communities, where we operate.

We have seen ESG improvements throughout 2021 at mobile Bay, we've consolidated our two treating facilities into one plant in early 2021 that resulted in reduced greenhouse gas emissions and operating costs. The company has.

Implemented changes in employee and executive compensation via its annual bonus program that now ties ESG performance to stated goals from a diversity standpoint, 50% of the company's offshore and board members are now women or minorities.

We believe the combination of our actions and ongoing commitment has resulted in a meaningful improvement in one of our third party ratings by a highly regarded ESG rating agency.

We're committed to continued improvement in ESG performance and reporting.

And I think that.

Closes that.

Statement on ESG we.

Used to call. This HSE, we've supplemented in augmented and now we.

HSA, rather who mail recall at ESG.

In closing the rising pricing environment represents 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 upset.

There are many opportunities for acquisitions in our focus area and we constantly look at any of that can meet our stringent criteria.

While we have strong liquidity and dry powder to make acquisitions as opportunities present themselves. Our disciplined approach to growth has allowed us to navigate many cycles in the past.

We'll remain disciplined but opportunistic and we're always looking for ways, we can add value WT one.

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

Our management team's interests are highly aligned with those of our shareholders given our 34% stake in the WT exactly.

This is one of the highest of any public E&P company. This alignment of interest ensures that were truly incentivized to maximize shareholder value and mitigate risk.

With that operator, we can now open the lines for questions.

Yeah.

Well now begin the question and answer session.

I ask a question you May press Star then one on your telephone keypad.

Using a speakerphone please pick up your handset before pressing the keys.

I think Tommy question has been interest and you'd like to withdraw your question. Please press Star then two.

At this time, we'll pause momentarily to assemble the roster.

Okay.

First question comes from John White of Roth Capital. Please go ahead.

Good morning.

Congratulations on the nice results.

Thanks, Jonathan.

Sure.

Where are you made a unique and novel move here with.

Your affiliate now being the.

Provider of the credit facility that's.

Yeah, it's very innovative and not not every chairman and CEO, Ken can have the resources to do that.

So is it fair to say regarding.

These lenders in general.

Our providing less favorable terms and conditions on these credit agreements.

Due to number one.

<unk> is that they've encountered during a multi year period of low oil and gas prices.

Number two.

Pressure from ESG groups on on financing fossil fuel producers.

Well, Yeah, let me, let me start by saying thanks for recognizing that.

It's kind of unique.

But having chairman.

$50 million of liquidity.

And to the balance sheet equations.

I would tell you that.

Yes.

When we started with $12000 is quite a bit.

Quite a unique.

Differentiation so.

With that I'll answer your question with regard to losses and in this year, yes.

The RVO.

Lenders are certainly have.

<unk> experienced a lot of losses.

Primarily onshore.

But some offshore as well.

What 250 plus countries went bankrupt in the last three years.

Most of those are onshore.

They are experiencing issues.

Their shareholder base ramping ESG and requirements and I'm not sure of the necessary to issue their requirements for their shareholder base. We're seeing this more with the with the foreign banks European banks in particular.

<unk>.

Then we have.

No expected to encounter so it was just it was it was more.

Expert issues for us and less onerous to go ahead and shed ourselves of the.

The RVO, we've got plenty of cash.

There were some comments after our our Munich re deal.

Now you are now you're out of cash, but we're not out of cash we're generating cash flow.

Those balances are quite good.

No I remember leveraging $12000 into a half million dollars alone got what do you think we can do with a couple of hundred million dollars plus.

In cash liquidity so.

I am very encouraged by what we might see in the future.

Thank you for that Tracy.

Yes, I agree the balance sheet looks real good.

Yeah.

And what management team wouldn't want to provide their own credit facility.

Yes.

Alright. Thanks.

I wanted to and honest a little lighter note there.

So alright, very good we'll look forward to Mississippi Canyon and.

Graduations again.

Thank you Sir.

Thank you next question from William Howell Stifel. Please go ahead.

Yes.

Good morning, guys and congrats on the quarter I guess, just starting off with the Mississippi Canyon well. If that's successful you have any idea on where it would be tied back and could you talk a little bit about the additional develop opportunities that it might set up for a successful.

Unfortunately, or Fortunately as the case may be William.

Uh huh.

Well his title so we're not giving you any information out on that floor.

Reasons that we.

Thank you our necessary but.

But yes, we're going to be tied into something.

Or or hopefully we have a bigger problem in a quality problem and that is that we don't diet to anywhere we just built on structure.

Assuming these large enough so.

We have options in.

That was another important consideration for us.

And drilling as well.

Understood. Thanks, I guess could you also just talk a little bit about the M&A environment, you're seeing right now.

Sure.

Bid ask.

<unk> is kind of moving around a little bit.

And it seems to flow around with pricing.

But.

We're very encouraged.

We're in day rooms, almost continuously really.

Oh Wow.

I would take.

Great Pride that we have an excellent team working these problems.

We do work them thoroughly.

I'd like to make sure that we're very aware of.

Assets and liabilities.

No.

I think that that's served us well over a long period of time.

There's always another deal in the World, We will continue to move forward with additional acquisitions in.

We don't have as many competitors as we used to have so we're going to approach. This in a very methodical manner.

Got it thanks, guys and congrats again on the quarter. Thank.

Thank you Sir thank you very much.

Thank you next question is from Justin Patterson enter markets. Please go ahead.

Good morning, Justin.

You might be on mute Mr.

Mr. Patterson. Please go ahead.

Can you guys hear me now.

Yes.

Yes, okay. Good.

Okay. Good morning, guys. Thanks.

Thanks for the comment.

I just wanted to ask a couple of questions about the new facilities Tracy.

First is the sense that the competing alternatives where either.

Less flexible or maybe I'm going to say less reliable because that seems like that's what like this in the past or was the pricing on attractive I'm just trying to understand what the pain points for on the competing facilities from third parties I I Echo John's comments about.

The <unk>.

Instructive nature, how does the chairman or management team, providing first lien facility to its company I'm not meaning to sound skeptical.

Curious to understand what your facility was competing against.

Yes, no the.

Reality is it the terms or were definitely more onerous.

Then what we'd like to see but also timing was a little.

Lagging.

I felt like we should we should be doing we we were moving quicker than they could move and we understand that those those credit facilities quite well since we've done them for about 40 years.

Understood, Okay and then.

Am I right to understand there's 100 million dollar facility.

The current borrowing base justifies.

Paucity of $50 million.

Oh easily yes.

Okay got it got it.

And none of it's drawn at this time.

Zero.

Got you, Okay, great and then.

Second take care of it.

If I can interrupt just a moment.

If we think of it as opportunistic.

And.

Good.

If something opportunistic comes along we will fund.

And move forward and it may be bigger than that.

Okay, Okay, great alright.

And then.

I think you guys have about 300 and this is more of a Janet question, maybe but I think you guys have $350 million of first lien capacity under the bond document.

That facility could grow I guess, yes, I think it's about $300 million close right around there yes.

It could grow.

Got you okay.

And then second question unrelated.

In the past you guys have done any drilling JV I think you have one that's currently.

Outstanding.

What's your thoughts Tracy on potentially subsequent or another drilling JV.

Would you price has a lot to do with that doesn't it.

So we've done one we're encouraged we've got prospects going forward.

And.

We'll see how that how that turns out.

Okay got you got you.

That's all for me thanks, guys.

Thank you.

Thank you our next question, Jeff Robertson Water Tower Research. Please go ahead.

Thanks, Good morning Tracy.

Can you talk can you talk a little bit about the nature of the competition Youre seeing in the acquisition market right now.

Well sure.

Oh, there is the usual suspects.

Public companies that are in the Gulf of Mexico.

There is some privates.

We're not really seeing a great deal of startup activity.

In that market.

We think that.

Sure.

Those requirements.

Start up to a much more difficult and the owners than they used to be.

Particularly around.

Bonding.

We've seen some affected as a result of a couple of the larger bankruptcies.

Mainly.

Having to do with arena and field work.

Secondly, as you put as Youre looking at your 2022 capital program can you talk about the prospects market in the Gulf of Mexico, I know the Mississippi Canyon.

Well you are currently drilling.

You have said May set up additional prospects would some of those potentially be included in next year's.

Capital program, and then is there a.

Can you comment on the promote market in the Gulf as you either look to get in prospects or look to bring people into yours.

Yes, that's a that's a pretty broad question there Jeff.

I will tell you that we have plenty of our own.

Prospects to look at and of course, increasing price makes that more likely.

Do we take our interest in other peoples prospects of course.

It's all about prioritizing what what makes the best economic sense. So I don't really care, whether it's ours or somebody else's if that opportunity presents itself you know, we'd like to be able to take advantage of it and that's been part of the reason why we while we've worked on our liquidity and ridding ourselves of some of the.

Eagle's under some of these RV Els.

Okay. Thank you very much.

Sure.

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

Next comes from John White Roth Capital. Please go ahead.

Hey, just wanted to get a follow up here.

Sure.

The number of private companies in the Gulf of Mexico.

This robust oil price environment and more recently robust natural gas price environment are you getting any indications. These private companies are planning a large increases in capital expenditures for 2022.

I don't know that I've got direct indications on that.

As privates.

Sure.

I would expect to see some some fairly cautious increase on that.

No prices have whipsawed, and I think that some of this is gonna be weather related.

Clearly.

We're concerned about what might happen with regard to whether in this winter and can affect gas markets and oil markets as well, but more and more on the gas side of it.

Prices in Europe are quite elevated.

Yes.

We're seeing prices over in Europe.

One 5% to $30 an mcf.

So that gives you a little pause to think about what.

What could happen with the cold winter here.

Okay. Thanks for those comments and good luck on your dealmaking. Thank.

Thank you Sir.

Okay.

Yeah.

This concludes our question and answer session I would like to turn the conference back over to Mr. Karl for closing remarks.

Well, thank you everyone for listening.

Hopefully in between now and the next.

Conference call, we'll have some more good news to share with you. Thanks, so much for tuning in and we'll speak with you again soon.

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