W&T Offshore, Inc. (WTI) Earnings Call Transcript & Summary

Again, my apologies, that shouldn't have happened.

We're all learning. We're all learning in this.

All right. Oh, yes. No, that's right. So first, I've skipped the first 12, so why not go to 13? This just gives you an idea of where we are around the Gulf of Mexico. We have operations in shallow water, but even in water as deep as, 7,000 feet. Big Bend and Dantzler were discoveries that we had a few years ago. They're online, producing. And we have a range of subsea tiebacks facilities, stand-alone facilities, large platforms, Virgo is 1,130 feet of water, EW910 is 557 feet of water. We consider deepwater anything in excess of 500 feet, irrespective of what other definitions there might be. And the reason is because that's about the maximum depth that you can work a jack up rig, and its 500 feet. Everything else has to float. 14, again, we go through a fairly rigorous process of evaluating these things and evaluating our projects. It's important to us that we make the economics work. I'd like to focus now more on some of the things that we do that maybe the investment community isn't aware of with regard to our reserves. Always throw this slide up, something we put in our presentations for many years now. It just gives you an idea of what our reserves look like when we make a discovery. We have proved producing reserves. We put online. You can see from this diagram, page -- Slide 15, that we include a proved undeveloped portion, which is up-dip from the proved producing reserves. And if you look at this diagram, this is a cross-section of really what is an anticlinal structure or an underground hill, if you will. Down-dip of the proved producing reserves, you'll see a big probable sand thickness of oil, and you'll see a possible sand thickness of oil. Again, this is a cartoon, but it gives you an idea of what we're thinking about. Those probable and possible reserves can be larger. We're showing you an active water drive. So the water/oil interface is important. We could drill a well at that water/oil interface and prove up all those reserves, but because of the rock properties that we find in the Gulf of Mexico, permeability and porosity, we feel like a lot of times, that would just be superfluous. Mother Nature will bring it to the wellbore. We don't get those reserves booked, but we know they're coming to us. And we proved that graphically. We show you some examples on Slide 16. I'm going to go to our Mahogany field, and specifically 1 sand in Mahogany, what we call our T-Sand, which was a discovery we made after several years owning this field and getting more data and diagnostics and drilling some wells. With -- the initial well that we drilled was several thousand deeper -- several thousand feet deeper than the field pay sands. First well booked 4 million barrels of oil -- 8 million barrels -- of proved producing oil, rather. 8 million barrels of proved probable reserves, and 22 million barrels of possible reserves. Skip forward to year 7. Mind you, we drilled a couple more wells, but we also increased production. We increased proved producing reserves from 4 million barrels to 33 million. We increased probable reserves from 8 million to 52 million, and we increased possible and probable -- probable and possible category to 101 million barrels from 22 million barrels. So a gift that just keeps on giving. We see other examples of that in other fields that they're in deepwater and Fairway field is shallow water. So no real difference from that. We're seeing higher reserves from beginning to end. So that's the point. We do find that our probable and possible reserves add value to the company. So when I think about what kind of value is, we're trying to -- we do give you a quantification on that. At 0 CapEx, we kind of generate between $260 million and $600 million worth of value, roughly. And with a little bit of investment, we can get up to about $1.2 billion in possibles and $733 million in probable. So almost -- well, $1.9 billion in PV-10 with a $258 million investment. That's how we see our probable and possible reserves. We know we get benefit from the probables and possibles as they come to the wellbore. We don't get them booked immediately like you would onshore, being nearby an existing wellbore because of the nature of the geology of the Gulf of Mexico. A few examples of acquisitions that we've made in the past. This is certainly by no means all of them. This just covers the last 10 years or so. But we continue to make acquisitions as we go along. We look for 3 things when we do these acquisitions. We look to find a proved producing reserve base that generates cash flow. We look for upside with the drill bit. And then the last thing we look for is workovers, recompletions and facilities upgrades, things that can increase cash flow near-term and give us an idea of future possibilities with the drill bit and future possibilities with preparing equipment to make it work more efficiently. As we go through that process, we add value to it. So if the answers to all the questions we have prior to making the acquisition is yes, then that's something we want to chase. We look at that as then just being a matter of price. And we've got our fair share over the years, and we expect to get our fair share going forward. Again, we stress making sure that we do an adequate job of evaluating all of our properties. We get the data. We buy data. We do occasionally get involved in original shoots as an underwriter. We're seeing some success with that. It's not a normal part of our business, but where we think it warrants it, that's what we'll do. And we've done that in the area around the -- our fields in Mahogany and closer to our larger assets that we have in the Gulf of Mexico. So with that, I'll just tell you that we're pretty excited about what we're seeing with the data. We think it is a competitive advantage. We, of course, buy other data that people have had out for a few years, not necessarily older vintage, but fairly recent vintage in the last 4 or 5 years, probably. But we are starting to participate in more -- sorry about that. Well, that's what happens in virtual. You get all the other disturbances around you. But we are excited about this data, and we will continue to improve the company with data. On Slide 22, if you're following along in the slide presentation. We give you an idea of areas that we are interested in. We don't find exactly, but it is shelf. It's also deepwater. It's also kind of that medium depth in the 300- to 500-foot range as well. So I think that, that's important for us, and we'll carry this well in the future with not only acquisitions, but making those acquisitions more valuable with a drill bit. We did a drilling joint venture a couple of years ago along with an equity fund, HarbourVest and Baker Hughes GE. We've drilled 9 wells in that program. Obviously, we're having a bit of a pause on it while we go through this period of lower pricing in the pandemic. But I don't see any reason why that doesn't continue into the future. We'll have some more to say about that in the question-and-answer period. I don't think it's any secret about what we do as a company to manage our debt and our acquisitions. That's an ongoing part of our business. It has worked well for the last 35 years. I don't see any reason to change that. We do generate cash flow, and that's one of the stellar aspects of the Gulf of Mexico, is it tends to be cash flow positive for those that manage it properly, and that's always one of the things that I've been very impressed with in the Gulf of Mexico, and the reason why we're still here. So with that, I'm going to tell you that if you go to Slide 27, we take a lot of pride in the fact that we have a large ownership, a large insider ownership in the company. So with us and employees, it's a little over 34%, excuse me, with me and our employees is us. We are over 34% as a management team. So when we think about things in light of fiduciary responsibilities and how we look at the economics, we treat it like it's our own money because it is. So we spent a good bit of time improving our capital structure. Slide 28 gives you an example of that. We've reduced debt quite a bit since 2015 or so. We've reduced debt nearly $1 billion. So we've made a concentrated effort toward doing that. We've done that with cash flow. We made a sale of assets at one point in time, and we did an exchange also of shares for -- I mean debt for equity as well. I did all of things that we needed to do to put the company back in full cash flow position after the debacle in 2014, 2015 pricing, and of course, after the most recent one as well. We continue to generate cash flow. Slide 29, you can look at that at your leisure. We've also made a good bit of effort toward reducing our cash flow -- our cash lifting costs, rather. So we think that that's an important part of what we do. Clearly, in these downtimes, you focus on reducing those costs. And everybody does, but this is the kind of the pictorial proof of it in recent months. So take a look at that at your leisure. CapEx forecast, we put out at $15 million to $25 million. That's about 82% less than we spent in 2019. So we are trying to hoard cash a bit. I think that's important for what we need to do going forward. We are, at the same time, with our geological and geophysical team focusing very hard on what it is that we need to do to continue to grow the company and add reserves and cash flow. We've taken a fairly proactive stance to asset retirement obligations, P&As. We spent a good bit of money in the years before this most recent downturn. As a result, we haven't needed to spend as much as we had in previous years. So that's kind of put us on a good standing at the moment without having to spend money on things that don't generate revenue. If I think about 2020 and beyond, go to Slide 33. We do think about these things all the time because we've been through a bunch of downtimes -- a bunch of downturns, I think, in my career, about 7 of them now. We make our priorities. We have a pretty good idea how to do it. That's why we continue to exist. We do manage our -- or try to manage our relationships with our vendors and manage safety to -- we don't compromise on safety. That's not something that we ever want to do as a function of whatever the producing environment is, but we do manage cost reduction efforts and trying to generate maximum cash flow. Page 34. I'm going to let you look at that pretty much on your own. We do have adequate liquidity. Currently, the debt ratios haven't gotten any worse. In fact, they've gotten better. We do have -- we have added some cash. So there's no -- I'm very pleased with where the company is with regard to the balance sheet. And with that, I'm prepared to turn this over to you guys for questioning.

Tracy, so yes, we have just maybe 5 minutes here. So maybe a couple of questions. You said you continue to look at acquisitions. What does the acquisition market in the Gulf of Mexico look like now? What size and the scale of transactions would you be thinking about? Would be small tuck-in acquisitions like Magnolia? Or larger ones like Mobile Bay? And will the focus would be more on oil or gas? I know you mentioned you're sort of agnostic on commodity. So just curious to get your thoughts there.

Yes. Thanks. I see it as all of the above. We're looking at a lot of different types of acquisitions, single acquisitions, tuck-ins as well as larger acquisitions. There is a lot of activity in the Gulf. We think that market is going to be pretty robust going into the future. And as you noted, we are agnostic as to whether it's oil and gas. We care about what makes money. I think that's been the mantra of the company since day 1.

And then how would you think about financing said acquisitions? Are you concerned about adding leverage to the balance sheet in this kind of pricing environment? Do you still have the potential commitments from the groups like Monza, who would help fund an acquisition?

Yes. We do -- we are very cognizant of the balance sheet. We're reticent to add debt unless it makes really good economic sense. And that's one of the reasons that our RBL has served us well over 3 decades to be able to do that. So we buy something. We lever up. We pay it down as quickly as we possibly can and then lever down and go do it again. We became a public company so that we could attract different types of financing many years ago. And so we always have that tool. And then there's quite a bit of money on the sidelines looking for good deals. And I think as a result of the slaughter that's occurred onshore with the shale plays, that we see a lot of money coming out of private equity that's looking for a home. And I think that some of the larger transactions will attract that.

Okay. And then as you're aware, the sentiment on natural gas has improved significantly in recent months, and you have pretty good leverage to higher natural gas prices. As you develop your drilling budget for 2021, will you prioritize drilling gas wells at Mobile Bay? How much could those wells cost? And what kind of IP rates would you expect for them?

Well, I appreciate. We've looked at Mobile Bay very hard as an acquisition. We took a little abuse when we first bought it from the markets because it was gas. Now it's looking like maybe that wasn't so bad a decision after all. The field is doing well. This is a very long life field. I'm convinced that we do nothing, it's going to be here for another 15 to 20 years. That's what the numbers say. We are looking at drilling out there. Drilling a well for our current estimates are -- drill complete and hookup is around $70 million. And we feel like that's something that's likely to occur in 2021. We are sharpening up that location, as I mentioned before. We've just gotten new data. So we're going to evaluate that and make sure that we go put the well where we wanted, then we'll start the permitting process. And I still expect that to -- the first permit to go out to the Oil and Gas Board probably this year. And we were somewhat deferred from conditions. But the reality is that this field has a lot of life left in it. Gas prices are forward curve. Still pretty good here. We have seen higher pricing for it. So it makes us feel very confident that we've done the right thing. We will be combining the plants shortly. That occurs starting in October. We've done that. Production won't be down very long. It's not a big cost item. It's a few million dollars to make that turnaround, and we'll put it into one plant, which will be the larger plant, that is, in fact, capable of producing about 420 million a day, I believe. The current production leaves us a couple of hundred million cubic feet a day with the combined flow going through one plant. So we see that as advantageous for us. It will save us several million dollars a year in operating costs. We'll be able to utilize those personnel as well for that -- from that facility and other things in the area. So we're very, very pleased to talk about that today, and those plans are on schedule.

Okay. Well, thank you again, Tracy. We've reached the top of our time allocation. So I want to, again, thank you for participating in Barclays Conference, and we'll let you get back to your meetings. We appreciate the time.

Thank you very much. I enjoyed it. Goodbye.