Q2 2023 W&T Offshore Inc Earnings Call

Ladies and gentlemen, thank you for standing by.

And welcome to the W. E T offshore second quarter 2023 conference call.

During today's call all parties will be in a listen only mode.

Following the Companys prepared remarks, the call will be opened for questions. During the question and answer session. We ask that you limit yourself to one question and one follow up you.

You may always rejoin the queue. If you have an additional question.

To join the queue you May Press Star then one on your Touchtone phone into withdrawal yourself from the queue. Please press Star then two.

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

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

Thank you Joe and on behalf of the management team I would like to welcome all of you to today's conference call to review Wnet offshore second quarter, 2023 financial and operation results.

Before we begin I would like to remind you that our comments may include odd looking statement. It 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 the reconciliation of non-GAAP measures.

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

Thanks Al.

Good day, everyone and thanks for joining us this morning.

With me today are William Williford, our executive Vice President and Chief operating Officer, <unk>, <unk>, our new executive Vice President and Chief Financial Officer.

Troy Hartman, our chief accounting officer will be available to answer questions later.

So before I get into the operational and financial results I would like to welcome severe process, who joined us as our new CFO in early July we'd be working with Samir for years. He was a trusted advisor at Stifel and instrumental in helping W. T complete some key strategic.

<unk> initiatives.

These include our drilling joint venture and corporate debt refinancing in 2018 and loan financing in 2021.

And the at the market equity offered in 2022, Needless to say Sameer already has a strong working relationship with our senior leadership team and his extensive capital markets and financial experience will be valuable to WD live.

Let me begin by reviewing our long standing and successful strategic rationale.

Strategy has always been simple.

Generate free cash flow maintain high quality conventional production and opportunistically capitalize on accretive opportunities.

Sure I will get back.

We've delivered 22 consecutive quarters of free cash flow, because we prioritize cash flow.

We invest capital when we have a valuable asset base that delivered strong production and generate meaningful adjusted EBITDA.

That'd be put that into perspective, we have generated.

Positive free cash flow for every quarter since the beginning of 2018.

Successfully navigating through the COVID-19 pandemic.

Highly volatile commodity prices and several economic cycles.

Oh, but prioritizing Castro, we ensure we maintain a strong balance sheet with ample cash to opportunistically acquire complementary assets.

So we begin 2023 by redeeming all of our outstanding 2023 senior.

Second lien notes and issuing new 'twenty 'twenty six second lien notes.

This significantly reduced our debt and interest payments.

Strengthening our balance sheet.

This provided us with financial flexibility and the uncertain economic environment, we've seen so far in 'twenty three 'twenty two 'twenty three that's included much lower natural gas prices and softer oil prices.

So because of those factors, we decided to proactively reduce our current year capital budget and the way a significant portion of our drilling capital investments until 'twenty 'twenty four.

We believe that a lower pricing scenario enhances acquisition opportunities and we have a strong cash position and balance sheet to act quickly should we see the right acquisition opportunity right.

We feel that patience is important.

What we're looking for strategic strategic value and free cash flow generation digitally all acquisition opportunities that we're currently evaluating.

Over the years, we've created significant value by seamlessly integrating producing property acquisition, while maintaining strong operational excellence.

All you have to continue to do so in the future.

We foresee a number of opportunities horizon allow us to continue with that strategy in the meantime, assuming no acquisitions for the remainder of the year.

We are reducing our capital expenditure plans for 2023.

Range of $90 million to $110 million.

$250 million to $70 million.

And are focused on maintaining cash.

This will delay some production uplift from our drilling program, but we will continue high rated return re completion and workover projects to help mitigate declines and maintain those production levels. What are the most attractive attributes of our asset base is our ability to adjust our drilling plans without losing drilling opportunities since our leases are.

Largely held by existing production.

Now turning to second quarter results I would like board out some key highlights.

Okay.

We increased production by 14% to 37000 barrels oil per day.

Which was at the midpoint of our guidance as expected production recovered from 32000 barrels of oil per day in the first quarter due to planned and unplanned downtime.

We generated strong adjusted EBITDA of $38 $8 million.

We reported $26 $2 million net cash from operating activities and generated $9 $7 billion of free cash flow, our 20 <unk> consecutive quarter. Despite continued softening of commodity pricing.

So we maintained a strong cash balance at the end of the second quarter with cash and cash equivalents of $171.6 million and an undrawn, our b L with a 50 million dollar base.

Gives us significant dry powder to continue to do evaluate meaningful acquisition opportunities in the Gulf of Mexico.

So overall, our net debt remains low at 231 $9 million at June 30, 'twenty to 'twenty three.

And reducing by virtue of amortization of debt at mobile Bay.

Our net debt to trailing 12 months adjusted EBITDA is just 0.9 times.

Less than a turn.

We reported mid your FCC proved reserves using SEC pricing.

A $157 $7 million barrel oil equivalent.

Uh huh.

The the reserves were prepared by our third party independent Engineering Reserve consultants Netherland Sewell and associates.

10 value of those reserves is $2 $1 billion.

We clearly adhering to our strategy and delivered sustainable and consistent results.

We believe that continued success is driven by the ability of both our operations and finance teams executed at a high level.

And our outstanding based in the Gulf of Mexico helps or whatever held with our ability to pay down debt and improve our balance sheet. We're clearly in a much stronger financial position today and we remain focused on operational execution in 2023 and beyond to continue building on those outstanding results.

Last call, we discussed that in the first quarter 'twenty to 'twenty three we had several planned periodic facility pipeline maintenance projects underway at the mobile Bay field.

Required us temporarily shut in the field.

Experienced some unplanned downtime at several nonoperating fields, but temporarily reduced our production back to the first quarter.

These events contributed to the lower Q1 2023 production levels.

As you saw with our Q2 production of 37000 barrels of oil equivalent per day and increased 14% production deferrals are now behind us.

Washington was in line with guidance that maybe one 3 million barrels of oil or 43000 barrels of Ngls and 10 Bcf of natural gas for the quarter.

Well taking into account the reduction in capital for 'twenty to 'twenty three we expect to see modest declines in the second half of 2023, Q3, 'twenty twenty-three production guidance midpoint, only down 4% compared to Q2.

We focused on acquisitions over the last few years last few years, rather than on the drilling new wells.

Our guidance reflects the low natural decline of our asset base compared with much higher declines in the unconventional onshore reservoirs, we saw the benefit of seven workovers during the second quarter and we will continue to focus on high returning workover rig completions to help mitigate production declines in the second half of 2023.

Well on the cost side, we continue to see inflationary pressures in the industry with our second quarter results were very encouraging as we were able to maintain lease operating expense nearly flat compared to the first quarter.

With production, increasing 14% and cost essentially flat.

L O a decline from $22 29 in Q1.

'twenty three to $19 60 stats in Q2 'twenty.

We remain focused on cost control and margin expansion. Despite the current inflationary environment.

In the third quarter, our guidance for lease operating expense is expected to be lower so between 60 and $67 million.

We also continue to control our G&A costs in the second quarter cash G&A costs were $15 $3 million down, 14% and $18 million in Q1 2023.

Well the third quarter, we are expecting cash G&A decreased modestly between $15 4 million and $17 3 million.

We'll continue to manage controllable costs to help maximize our margins.

So turning to our balance sheet. During 2023 were dose we've reduced total debt by almost $300 million from year end 2022 at the end of the second quarter. We had net debt at June 31, 9 million, which was total debt of $43 6 million net of cash and cash equivalents of 171 point.

$6 million.

Well as I mentioned previously the large reduction in total debt was driven by issuing new 2026 senior second lien notes in January 'twenty, two 'twenty three at par totaling $275 million in a private offering using the proceeds along with a portion of our considerable cash position.

All of our outstanding 'twenty to 'twenty, three senior second lien notes.

Well, we continue to have the flexibility and dry powder to make additional acquisition continue to build cash.

Further paying down debt.

Because we have no long term rig commitments or near term drilling obligations. We do have the flexibility to wrap up and before capital opportunities. We will continue to FERC capital expenditures in 'twenty two 'twenty three as we monitor current commodity pricing environment and service calls.

So in Q2, 2023 we spent $15 6 million in Capex and.

And have been bid and have invested 2300.

23 million for the first six months of this year.

And as I mentioned, we have lowered our capex range for 2023 by about $40 million and I'll be in a range of 50 and 75 million $70 million.

Included in this range, our planned expenditures related to long lead items capital call facilities leasehold seismic and re completions.

Back to continue generating meaningful free cash flow, which provides us flexibility to execute on accretive opportunities quickly.

Before I close the call I'd like to talk to you about a midyear 2020 Threep Reserve report.

Born out that we continue to see positive well performance and technical revisions.

Which demonstrates the strength of our World Class mentioned G O M assets.

There's also directly point to our ability to enhance production in our reserve base through operational excellence go for mid year 2023 reported FCC Pud reserves why did 57 7 million barrels of oil weapon, which included $3 5 million barrels of positive performance revisions offset by a decrease in.

4.8 million barrels due to pricing revisions and production of $6 3 million barrels of oil.

We're pleased with these results since over the past 18 months, we focused on reducing net debt all completing bolt on acquisitions in the last name because it's not really.

Yeah.

Impac Ebola pricing was also seen in the PV 10 value of our SEC.

Proved reserves, which was $2 $1 billion, a decrease of 35% year in 2022.

<unk> 36 per cent of mid year 2023, SEC proved reserves were liquids.

With 24% crude oil and 12% Ngls, we had 64% natural gas.

Our large natural gas reserve position is very good upside potential from future higher prices.

Mark as anticipated increased demand for natural gas and the related strong price recovery when the new LNG export facilities, along the Gulf coast or in line or online rather than in 2024.

All of our reserves are well positioned to benefit from that increase in demand.

There are some classified as 71% proved developed producing 16% proved developed non producing and 13% proved undeveloped.

2000, 2030 proved reserves and PV 10 were based on average S. E. C 12 mile crude oil and natural gas prices were.

$83 23 per barrel and $4 76 per btu.

Year in 2022 prices were 94.

<unk> dollars 14 cents per barrel of oil and $6 36, that's M. A btu of natural gas. We believe we've built a sustainable group outperformed with G O M S.

That will continue to provide meaningful cash flow.

Our shareholders for many years.

So with regard to our ongoing ESG issues and initiatives, we've made a concerted effort in addressing shareholder concerns and improve our ESG metrics.

<unk> culture of success and sustainability is built on environmental stewardship.

Also sound corporate governance, and contributing positively to our employees and communities, where we work and operate.

Earlier this year, we added a new board member Dr. Nancy Chang.

He was the chair of our environmental safety government's committee that oversees our ESG efforts.

We believe the Doctor change will help the guide.

Our continuous improvement and it's just it's not a commitment to the highest standards ESG and corporate governance.

Ongoing commitment will be demonstrated when we issue our 2022 sustainability report in the next few weeks that's going to highlight our continued progress on our ESG efforts.

So in closing, we're very pleased with how well we performed thus far in 2023, both operationally and financially.

Like to thank our strong team at <unk> I believe we're well positioned to continued success in the future the.

The strong financial position provides us with optionality and flexibility moving forward.

Our liquidity and cash position enables us to continue to evaluate growth opportunities, both organically and Inorganically and report and we are poised to execute on accretive opportunities that meet our long standing criteria.

We believe the Gulf of Mexico is and will continue to be a world class basin strong producing assets.

Hopefully evaluating and executing on opportunities within our focus area is a pillar of our success.

A premier portfolio of both shallow water and deepwater properties in the Gulf of Mexico that have low decline rates and significant upside.

Management teams efforts and interests.

Highly aligned with those of our shareholders, given our 34% stake Wd's equity, which would which is one of the highest so many public E&P company, who.

So as a shareholder I'm very confident that deputies bright future in 2023 and gone as modern question operator, well now open the lines for questions.

We will now begin the question and answer session.

Yes.

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

If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

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

And our first question will come from John White with Roth. Please go ahead.

Good morning, and thanks for taking my question.

I.

I was wondering.

Does the reduction in our capital expenditures for the remainder of the year does that.

Uh huh.

In some way reflect increased our optimism about a potential acquisition.

Well in a word yes.

And as usual John you put your finger on.

A very substantial portion of the thinking.

No. We're we're always going to look at different opportunities.

They ebb and flow a little bit but.

Yeah, that's that is a substantial part of the thought process there.

Okay.

That's a I appreciate the the straightforward answer.

I'll I'll pass the call back to the operator, thank you.

Thanks, Sean.

Our next question will come from Nate Pendleton with Stifel. Please go ahead.

Good morning, Al Congrats on the strong quarter.

Thanks Nate.

Did you offer some more color on the service environment that you alluded to earlier in the gum and its impact on your capital investment decisions.

Yeah.

Sure.

We are in the process one we're in the process of.

So what I'm, saying and refurbishing a drilling rig that are a platform rig that'll go out.

Oh yeah.

To drill our Holy Grail prospect.

We decided to defer on that a little bit not only because of winter months coming up but also oh, because there's a good bit of uncertainty on.

Pricing at the moment.

It's well.

I hear a lot of different opinions.

Things of my own.

And we do see some inflation and our pricing, particularly in transportation.

Which is one of our key components.

What's your more expensive there, they're more difficult to get a lot of this is seasonal.

That breaks a little bit and.

In the winter time because of the weather.

People, often think that the issues with the drilling occur in the southern summer due to hurricanes, but they're really more.

Obviously in the winter because continued a wave of activity when he'd whatnot other effects of our vessels and helicopters out there.

I do see.

Upward inflation pressure with the personnel and the costs in.

And in fact in some in some cases with regard to quality.

Oh I think that's.

That's a little bit more empirical.

But it's still a factor for us.

I think that Oh, we're seeing supply chains to get a little better.

Well I think if there's a cost of goods.

Is concerned that we're seeing.

A plateau there at this point in time services or are a little bit of a different story.

So we want to make sure that we're well ahead of the curve and getting personnel or equipment.

We need to have them with the right time.

So that's part of the equation.

The continued softening in commodity prices makes it makes it more difficult for everyone.

Thanks for the detail.

And regarding your prior comments Lauren C. T. S. Can you speak to what you see as the advantages of W. E T and the potential of doing offshore Ccs versus onshore.

Yeah sure I mean, we've got the infrastructure to do it.

What what people need to be aware of with regard to our autograph sequestration is that.

It takes a long time with departments and until that changes.

I don't feel the need to go out and do a great deal of effort on that the real technology is the technology coming off flue gas stack.

And how to separate that out and get it get it offshore.

People think that it's just C O two and it's not there there's a whole oh slew of Oh.

Yes. It is in particular come along with that master be separated out.

Oh.

You start with just your C O two and brown.

And it's doubtful that it will just be pure C O two there'll probably be some over the top.

Tom Polen, maybe yeah.

Five drops in Oh saltwater satisfaction.

This portion of the lease.

CBS all emissions.

So I don't really.

See the value in going out and spending a great deal of money.

We already have reservoirs.

The description.

But what you'd need to to be able to encapsulate.

Huge volumes of <unk>.

In the ground.

So the real problem again.

Meat Department and others.

Primacy in Louisiana, or Texas at this point in time.

Our Alabama for that matter.

So I think that until that permitting process speeds up its up.

A little bit about why some of our energy I'd, rather focus on things that generate cash flow at this point in time.

Got it thanks for taking my question.

Sure.

Our next question will come from Jeff Robertson with water Tower Research. Please go ahead.

Thank you good morning, Jason.

You talked a little bit about about your pricing outlook. There maybe some of the volatility that you see and you see other people talk about affecting your decision on capital spending are you seeing pricing volatility concerns play their way into valuations in the acquisition market.

Yeah, we are.

Literally.

It's it's a almost.

By wig wait maybe even day by day.

Oh.

Factor in everything we do.

No.

Oil and gas commodity projects are always affected by price the most.

We do see that.

I can't tell you what the price is going to be a week from now but I can tell you that we are oh.

We are not.

Not hedged on oil at this point in time.

We're pretty heavily hedged on gas at our I'm hope you buy a facility, but all the rest of the corporate kind of the gas is not hedged.

And the oil isn't hedged either.

I don't know, which way prices are going to go but my perception is the short term they're going up.

You all have excuse me at June 30 of 170 $170 million of cash on the balance sheet can.

Can you talk about the funding considerations for an acquisition.

If you just assume do one with all the cash would you use that I'm sure. It all depends on the song.

<unk> of the opportunity, but can you just share your thoughts around how that plays out.

Yeah, you know, we we look at them all.

As individual entities are for purchase.

Not necessarily on a corporate basis, but.

There's properties, we think of them as it is.

All hybrids.

Some of them have more food.

She was a reserve some of them have more.

Ill reserve some of them have I buy.

And in disproportionate numbers.

Some of them have better cash flow than others. Some of them have more abandonment decommissioning liabilities. So they're all different and and of course, then there's the size size does matter here.

Hum.

And I think it's important that you understand the liabilities around the properties very well.

We've done over $1 billion of decommissioning over the years.

That's an important consideration oh, there's a lot of the private equity entities.

<unk> involved in this business really had not paid that much attention to.

It's more because they're they're concerned about are they're not as concerned about that because they're they're not strategic players.

But I would tell you that that.

Well the ideal such situations are probably good.

Good cash flow in and something that we can consider upside with the drill bit we want to be able to drill and bring to fruition.

And then the rest of us are workovers re completions.

Facility upgrades.

We can do to generate cash flow short term, so they're all a little bit different.

There there are we've seen a bunch of different properties over the years. So we have a pretty good appreciation.

Things that that are that have value and also take away from value.

Thank you.

Sure.

Again, if you have a question or a follow up you may join the queue by pressing Star then one.

Our next question is a follow up from John White with Roth I'm Kim. Please go ahead.

Yeah, I wanted to come back on and.

I had another question, but also wanted to offer my congratulations too it's Amir on his recent appointment and I look forward to working with him going forward.

Hey, Thank you John I appreciate it I look forward to working with you as well.

Great Tracy did your previous comments on Holy Grail.

Those comments indicate that well has been put into 'twenty 'twenty four.

Yes, Sir Yeah. That's that's what we expect to begin there around February .

February of 2024.

Okay. Thank you.

I'll come back to the operator.

I'm sorry.

This will conclude our question and answer session I would now like to turn the conference back over to Tracy Krohn for any closing remarks.

Thanks, operator, well look are we appreciate your attention hopefully we will have.

Some other news before our next our next conference call. We look forward to talking with you again soon thank you very much.

The conference has now concluded. Thank you very much for attending today's presentation and you may now disconnect your lines.