Q4 2021 W&T Offshore Inc Earnings Call
Yeah.
Good day and welcome to the W. N T offshore fourth quarter 2021 earnings conference call.
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Thank you operator and on behalf of the management team I would like to welcome all of you to today's conference call to review WT offshore <unk> fourth quarter, and full year 2021 financial and operational results before.
Before we begin I'd like to remind you that our comments may include forward looking statements.
Should be noted that a variety 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 earnings release that we issued yesterday for disclosure 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 .
Thank you Brad good day to everyone and thanks for joining us for fourth quarter 2021 conference call.
With me today are Janet Yang, our executive Vice President and Chief Financial Officer, William Williford, Our executive Vice President and newly appointed Chief operating Officer.
Congratulations on that Williams, and Steve Schrader, our senior Vice President and Chief Technical Officer, and Stuart <unk>, our director of Geosciences.
They're all available to answer questions later on during the call.
So these past two years have been truly extraordinary to say the least with everything from the global COVID-19 pandemic to several active tropical storms in the Gulf the wild swings in oil and gas pricing.
Through it all we persevered by doing what has been successful for the past four decades, maximizing cash flow generation operating efficiently and striving to constantly improve the profitability of our assets at any commodity price.
Our operations and finance teams have done an excellent job adapting to the changing market conditions, while maintaining the highest levels of safety and operational excellence WT finished 2021 on a particularly strong note as evidenced by the financial and operational results, we posted for the fourth quarter.
And every quarter of 2021, we produced positive free cash flow, including approximately $23 million in the fourth quarter and over $90 million for the full year.
In the fourth quarter, we also experienced improved pricing for all three commodities on a sequential basis.
We saw our average realized price per BOE before the impact of hedges increased by 16% to $47.70 up from $41 five saves in third quarter.
We also did a good job managing our key cost during the quarter. We came in we came in at the low end of our LOE guidance and G&A was right in the middle of the range we provided com.
Combination of strong production and favorable pricing.
Cost control resulted in $65 7 million and adjusted EBITDA in the fourth quarter of 2021, which was up 42% increase over the third quarter 2021.
For the full year 2021, adjusted EBITDA increased to increased by 35% to $220 million.
One just dropped.
Cash that benefited us in the fourth quarter.
Our operations team did an excellent job of returning the vast majority of properties that were impacted by hurricanes either back to production in the fourth quarter.
This helped us exceed the midpoint of our production guidance production increased by 7% compared to the third quarter to 37.2 thousand barrels of oil per day equivalent with 45% of our production being liquids.
In the past, we've talked about our ability to generate free cash flow from our stable long life asset base.
Its importance to our long term sustainability.
That is particularly evident in our outstanding year end reserve results.
So proved reserves at year end, 2021 increased 9% to a HUD and $57 6 million barrels or.
Compared to last year.
While improving SEC pricing <unk>.
And that contributed quite a bit to the increase.
Also had positive performance revisions of over 5 million barrels oil equivalent.
To me this is a testament to our solid reserve base.
As demonstrated our ability to maintain and even grow our reserve base without acquisitions, bringing online any new wells in 2021 or.
Our solid two P reserves are a major contributed contributed to this result.
The company's reserve life index linked into 11 three years up from nine four years at the end of 2020.
Yes.
So in addition to increasing reserves. We also saw a dramatic increase in the PV 10 value of our proved reserves.
The PV 10 value of <unk> <unk> SEC proved reserves at year end 2021 was $1 6 billion, an increase of 119% from year end 2020.
This was driven by improved pricing with an average realized crude oil price of $65 25 per barrel and average realized natural gas price of $3 68 per Mcf.
That's using using a nymex strip prices as of March 2nd the PV 10 value of our year end reserves increases to $2 billion.
We're clearly much stronger today compared to a year ago, both operationally and financially.
And in 2021, we took several definitive steps from a financial perspective that enhanced our liquidity.
Lowered our net debt and improved our financial flexibility for the future.
Most of this improved financial flexibility as the result of our Munich re transaction in May of 2021.
As Youll recall in 2019, we paid $167 million for our mobile Bay area, producing assets and related gas treatment facilities, which was a great price than it looks even better now we transferred those assets to our wholly owned special purpose vehicle and returned for net cash proceeds from the 215 million firstly non <unk>.
Seven year term loan to the SPV is at a very attractive fixed interest rate of 7%. When the debt is paid off we will continue to own 100% of these assets.
This was a significantly better loan to value ratios than anybody could give us at the time and it allowed us to fully pay off our RBR provided by banks that were downsizing their U S. R. B O exposure due to ESG and other pressures.
We now have substantial cash on the balance sheet and liquidity.
<unk> us to move quickly when opportunities arise.
Well the windows required hedging for this event for this financing. We also utilized puts in loan calls in our hedging strategy to maintain a lot of the upside on natural gas prices, which turned out to be beneficial for us as natural gas prices have increased substantially since early 2021.
So in Q4, we restructured our RV Earl to provide us additional financial flexibility.
We were seeing banks, becoming increasingly aggressive last year with limitations on GE, OEM blending and enacting more restrictive covenants.
To free us from those challenges, we established a $100 million first priority lien secured.
Revolving facility with a borrowing base of $50 million with calculus lending.
While we currently have no borrowings on the facility provides us access to additional capital at attractive terms.
These important steps, we took in 2020 , one to improve our financial flexibility will allow us as we address our second lien notes that.
Mature in 2023 to move forward.
In February 22.
<unk> closed the previously announced amcor acquisition for $30 2 million.
Our immediate access to cash in our balance sheet facilitated our being able to close the transaction quickly.
This accretive acquisition consistent with over 50 gross producing wells at ship Shoal 230, South Marsh Island Vermilion 191.
South Marsh Island 73.
WT will operate all those properties, we estimate that this will add proved reserves of approximately $5 5 million barrels of oil equivalent 69% of which is oil to proved reserves are estimated to be approximately $7 6 million barrels of oil.
I should note that acquisitions are a core pillar of how we create value here at WT and this is a great example of what we look forward, we're evaluating an acquisition.
And core assets provide a solid base of proved reserves and produce strong free cash flow.
These are these properties are very complementary.
<unk>, Missouri to our existing assets.
Good synergies there there are a number of opportunities both near term and long term that will allow us to.
Maximize the value of these assets.
We're generating meaningful free cash flow and methodically paying down our debt on our seven year term loan total debt decreased by approximately 12 million during the fourth quarter to $739 million net debt, which is total debt less cash and cash equivalents stood at $485 1 million.
We substantially reduced net debt, which is down about 97 million since year end 2020, and 202 million since year end 2019, while significantly increasing our liquidity to $296 million from out in $74 million a year in 2020, and 172 million at year end 2019.
This is all despite COVID-19 negative oil prices and meaningful downtime due to prior hurricane activity.
So with a strong balance sheet and lock in a large amount of cash on hand, we will continue to evaluate accretive opportunities that meet our criteria, while systematically paying down debt.
So moving on to operations, the Codell well that we drilled successfully in 2020 at East Cameron $333 49 came online earlier this week and is currently cleanup.
Flooring and cleaning up our last report I got was about 1000 barrels today barrels oil per day with a very minimal drawdown, so that rate's going to go higher.
The wells in over 290 feet of water and was drilled to a total depth of over 6000 feet and we have encountered approximately 100 feet of net oil pay during drilling.
We have an initial.
An initial 30% working interest, but our interest will increase to 38, 4% once the well is brought online and certain performance thresholds are met.
So the flex trained exploratory well in Mississippi Canyon that we discussed last quarter recently completed drilling and it was determined that there were not sufficient quantities of hydrocarbons to develop at this time W. T and the other working interest owners will continue to evaluate information derived from drilling a well along with further <unk> seismic and Jia.
A logical analysis to determine if additional drilling is warranted, we have a 25% working interest in that well.
In the fourth quarter, we were very active doing well workovers at mobile Bay and completed <unk> and completed 14 during the quarter.
A positive impact on our production.
We plan to continue to perform Workovers and re completions in 2022 that meet economic thresholds.
Capital expenditures were $16 million in the fourth quarter of 2021 and for the full year, our capex totaled $32 million.
So looking ahead to 2022 under the strengthening commodity price conditions.
Forecasting strong free cash flow generation, and we will continue to evaluate additional accretive acquisitions, while systematically paying down debt.
Yesterday, we provided guidance for 2022 at the midpoint, we expect to average 39 5000 barrels oil equivalent per day in 2022, which is an increase of approximately 4% year over year, we are focused on acquisitions, increasing liquidity and reducing net debt over the last few years rather than on drilling many new wells.
So our guidance reflects the natural decline of the asset base offset by the addition of the EMCORE assets in Dakota well.
I'd also note that we have some downtime planned late in the year mobile Bay in mahogany and the impact of this temporary production deferral is included in our forecast.
But we see a lot of opportunities in 'twenty two.
To expand our organic drilling program and expect to expand.
70, and $90 million in capital this year.
Excluding acquisitions.
The major part of that going to be drilling the development deepwater well. We also have capital allocated for three shelf drill wells as well as supporting capital for facilities leasehold seismic and re completions. In addition, our P&A budget has increased compared to prior years and is being driven by obligations in prior deferrals, mainly due to COVID-19 .
<unk> on terminated leases wood basket.
On the cost side, our guidance for LOE and gathering transportation and production taxes includes the addition of the Angkor properties as of February one.
Majority of the expected increase in LOE is associated with this recent acquisition.
We see opportunities to reduce the operating cost of those newly acquired assets as we've done with our prior acquisitions all of our guidance can be found in yesterday's press release.
So before I close out the call I'd like to talk to you about our ongoing ESG efforts.
The elements that comprise what we now call ESG have always been important to WT environment stewardship sound corporate governance, and contributing positively to our employees and the communities, where we work and operate our cornerstone to our culture.
Last year, we achieved a meaningful milestone by issuing our inaugural ESG report, it's great. It's a great base.
To build on and we will continue to demonstrate the importance of ESG or sustainability by issuing reports with more disclosures and information.
The coming weeks will be issuing our next annual ESG report, which will demonstrate our commitment to a high quality ESG effort as we continue to make progress on our ESG journey.
We believe that ESG is not just a responsibility of the board and our executive leadership, but also extends to our employees as such we had ESG metrics incorporated into our 2021 short term incentive plan and we continue we intend to continue with that practice moving forward.
Thus in closing, we are well positioned with a meaningful cash position and strong liquidity and a strong current pricing environment, which presents many opportunities for WMC.
We are projecting significant cash flow and EBITDA generation in 2022.
Creasing, our capital spending in 2022 to evaluate some of our attractive organic drilling opportunities. Additionally, we're constantly evaluating the Gulf of Mexico vast pool of assets through accretive acquisitions within our focus area. We are a well established operator with a premier portfolio of both shallow water and deepwater properties in them.
Gulf of Mexico that have low decline rates and significant upside as you can see.
Our focus on generating strong cash flow throughout the past 40 years has contributed to our success. We accomplish this by operating efficiently and executing on our long term strategy and that is centered on maximizing shareholder value.
Our management team's interests are highly aligned with those of our shareholders do you ever in our 34% stake in <unk> equity and that's one of the highest of any public E&P company.
As a shareholder I'm very excited about what the future looks like for WT and we look forward to a successful 2022.
Operator, we can open the lines for questions.
Yeah.
Well now begin the question and answer session if.
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We will pause momentarily to assemble our roster.
The first question comes from John White with Roth Capital. Please go ahead.
Good morning, everybody.
John .
Congratulations on the quarter and congratulations to Mr. Wilford also.
Thanks.
Thank you Sir.
Reserve report look good nice to see those positive revisions in there.
In your press release regarding the 22018 Capex program.
As you mentioned, one deep water well and three a shallow shelf wells could you would you be able to tell us what prospects of their own.
Yeah, we have.
We have a well planned it.
Ah at Magnolia.
That's a development well there and the other three wells are on the shelf.
Okay. Thanks, very much that's all I have for now I'll pass it along thanks.
Thanks, John .
The next question comes from William <unk> with Stifel. Please go ahead.
Okay.
Hey, good morning, guys and congrats on a strong year. My question is regarding the lease sales that could be invalidated what are your options there and if you could talk a little bit about the current leasing environment, especially in light of the current macro conditions.
Sorry, you cut out on the first part of your question there William would you repeat that please.
Yeah regarding the lease sales that could be invalidated what are your options there.
How well this has happened before.
So with regard to lease sale, we had two leases that we were.
Successful bidders on we paid the money it was around a half million dollars total.
In the past.
There was a lease sale off the east coast that was held in then deemed invalid and it took about 10 years to get the money back so.
I'm not sure that it'll take 10 years. This time, because I expect there will be a different administration in power and not to come in not too long.
Not too distant future.
But yeah, they're they're not they're not in any real hurry to give the money back usually.
So it's not going to have a major effect on us we do a lot with the existing properties that we have we make acquisitions, that's part of our core efficiency and I don't see that necessarily as a negative for WT and stopping the leases.
I actually see it as more of a positive for us.
Okay got it.
My other question is what would you want to see on the balance sheet do you have a leverage target you would want to see when you start thinking about return of capital and what might that look like.
Yeah, we've thought about that a lot we're going to be.
Working on our on our longer term debt here and we've already begun the fact, but but.
But generally one to one and a half times.
Okay, any thoughts yet on dividends versus buybacks or is that kind of something you evaluate down the road.
Well you know, that's always near and Dear to my heart I have a substantial amount of the stock so.
That's an important question I don't have a.
A quick answer for you, but that's our that's where we want to add too.
Yeah.
Sounds good thanks for taking my question and congrats again on the quarter.
Thank you Sir.
The next question comes from Jeff Robertson with water Tower Research. Please go ahead.
Thank you Tracy on the deepwater well at Magnolia in the couple of shelf wells are those wells that could add production in 2022 successful or is that 2023, and maybe even 24, depending on timing of Magnolia.
It's a little bit of both I mean, a little bit of all three rather.
Magnolia will be on the.
It would be on location this year hopefully.
Hopefully, we'll see some production latter part of the year from.
Magnolia, but this is a.
This is a high capacity well.
So it will and we own 100% of Magnolia, So it'll it'll have a meaningful effect on our production latter part of the year.
The other the other plays on the shelf.
23, and 'twenty, four and we'll be laying out a little bit more of that.
Land here in the not too distant future.
Thanks, do you plan to to maintain 100% working interest at Magnolia.
Yes.
Okay.
Can you talk.
About the acquisition and some of the LOE reduction initiatives and how much of that might be included in.
Your.
Hello, we expectations for 2022.
Sure.
Actually the.
The properties that we purchased have a higher LOE.
<unk> per barrel.
At present, we would expect to be able to affect that.
Cause of the synergies that we have in the area.
So I think that that's important to note. This is one of the reasons that we were interested is it doesn't require a great deal with change and our logistical change.
Our logistical change rather.
We think that will.
Well, we will be able to affect production and cost and all of those fields.
So it sounds like you can serve it with your additional boats and other things that you use for.
Offshore services, yes.
Yes.
Okay.
And then lastly back on the lease sale I think the API had filed a notice of intent to appeal. The decision of the court in January and I think your release mentioned you're considering participating.
Can you say where that stands.
Oh, Yeah, well I, you know I I sit on the board of the API, So I'm gonna I'm, certainly going to support it.
It's it's a it's a no brainer I mean.
Unfortunately, the diatribe that comes from the administration right now is that that Gee. We've got all these permits out there that that haven't been executed and it completely.
Oh.
Avoids the the obvious which is that hey, yeah. You you have all these leases, but putting a well online and drilling a well or different activities than just picking up a lease you've got to get permits you've got to get.
Locations down you've got a finished geology their seismic involved usually I mean theres a lot of steps here that that doesn't make it.
So that you're just immediately.
Flip the switch and start drilling on 9000 leases.
We know it takes months and months to get a permit.
It takes months and months to evaluate data.
You want to make sure that you get extra data, sometimes youre working on just fairly simple leaves what while I wouldnt call them prospects I'd just call them leads when you're when you're making.
Bids for leases and their competitive bids. So are you already know who are the high high bidder.
No. It's it's not a simple process.
And then last question if I can can you talk about what you are.
We're shedding a light on what you're thinking about with respect to the notes that mature next year and how you'll look at refinancing those.
Yeah, I will too to an extent I mean I think that.
The situation is better than it was.
Month ago, and Hell of a lot better than it was a year ago.
Have higher prices.
We have more cash flow.
Bonds are trading at par right now.
And that's that's the first time in a long time that that's occurred.
So I'm I'm very optimistic that we'll come back with a better solution than we had before.
Okay. Thank you very much Tracy thank you Sir.
The next question comes from Jay Spencer with Stifel. Please go ahead.
Hi, good morning.
That's on a good year a good quarter.
A lot of my questions have already been addressed but I just had a.
A few others.
In terms of production in the fourth quarter.
Was there a impact from storms.
Uh huh.
Could you quantify that.
No I can't really quantify it I don't see a whole lot of impact from storms.
In our in our data, there's there's usually a little bit, but it's not necessarily meaningful.
It's hard to.
Assume that that Oh, there, there's there's a great deal.
At most.
Short term.
For that quarter so.
I'll, probably not more than 1000 to 2000 barrels of oil equivalent per day for a short period of time.
Okay, great Thanks and.
In terms of your hedging program.
Are you guys thinking about your hedging program in light of higher commodity prices.
That's a really good question.
I wish I had a great entrant seems to change by six or $7 a barrel per day here.
Recently.
Clearly.
It's on it's on our minds here, we havent been required to do any hedging here lately are under our previous agreements with our banks. It was a rolling 18 months.
We are looking at what we would want to protect and basically.
Assuming that we did hedge.
Hmm.
We want to protect our budget and Capex spendings.
So that's that's really kind of.
Premier and our mines.
We Fortunately, we bought a bunch of calls on the gas, which maybe you raised a lot of our.
No.
Unrecognized gains and losses with regard to gas going into the.
The next several years. So we're hedged on we bought calls up until 'twenty five.
So on the gas so and that's proven to be fairly prophetic it was.
We spent $20 million or so on that and it was a it was a hard decision to make at the time, but.
But it turned out to be a pretty good answer.
Now we were hedged on the downside and it occurred to us.
Might not be able to to capitalize on the upside if we don't do something in the gas the gas calls appear to be cheap to us at the time.
Werent, so cheap today I believe it or not.
But.
In hindsight I wish we'd done that too, but I'm sure everybody does it that had to do swaps for oil right now.
But fortunately our oil production is going to continue to increase right now.
We've got a new well coming online and that's that's underneath it.
I don't have inhibited by hedges so.
That's that's a good bit of cash flow.
For the year on that so.
Got you, Okay, well, thank you and I guess my last one would be on the M&A environments.
Just how would you characterize that.
In terms of the opportunity set are there are there are many more out there like the anchor acquisition in terms of size and quality.
I would characterize it as excellent.
The answer to that is yes.
I'm very encouraged maybe.
I've said this more than once but.
Last year was a tough year for acquisitions, because there was so much flux in the markets with the pandemic and pricing in the economy and new administration in and a lot of variables to deal with.
The people have to look at with regard to selling assets.
And I think now it feels a little better.
In this environment.
It was going to free free up nobody wants to sell assets at a low price environment. They prefer to see it in the higher price environment, we've done in both of those environments over the past.
I look forward to a robust year of acquisitions.
Right, Okay, well. Thank you I appreciate that thank you.
Sure.
The next question is a follow up from John White with Roth Capital. Please go ahead.
Yes.
In 2021, you performed.
A large amount of Workovers at mobile Bay for 2022, and our the Workovers again going to be concentrated at mobile Bay will they be more spread out across sure.
Our asset base.
They'll definitely be spread out more John we did some some maintenance work we had the freeze up earlier in the year in 'twenty one.
Some of those wells have a little bit of water in them by load up we had to we had to get lift boats out there and and clean them up and get them back online. We've had some some shutdowns in the field due to maintenance issues that we had to address.
And so that's why you saw a lot of them mobile Bay.
We're on a work over right now.
That has good promise to it.
And the main pass area that we're working on so you'll see it more in the rest of the Gulf.
Okay. Thank you very much I'll pass it on.
Thank you Sir.
We have no further questions. So this concludes our question and answer session I'll turn the conference back over to Mr. Tracy Krohn for any closing remarks.
Thank you operator.
We appreciate your attendance here, everyone and look forward to talking to you again in the very near future. Thanks, So much.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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