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

Good morning, everyone. This is Tracy Krohn.

Tracy, I'll let you -- this is Gregg Brody, I must introduce Tracy Krohn, the Chairman and CEO of WTI Offshore, a company focused in the Gulf of Mexico in both the shelf and deep water. It's an honor to have Tracy here presenting today as I always enjoy his inputs. I'll pass the microphone to Tracy.

Good morning, everyone. This is Tracy Krohn with W&T Offshore. Glad that you could join us today. I hope everyone had a good Thanksgiving and that you're safe and all of your loved ones are safe as well. Starting this morning, I'd like for you to go to Slide 3, which is a company snapshot. Takeaways from this are that we have adequate reserves to cover our debt, and we are continuing to produce in the Gulf of Mexico, in spite of, what, 8 hurricanes in the Gulf this year. We're confident that we'll see better production coming up as a result of some of the things that we're doing. Proved reserves, as you see them from 19 -- 18.1 million barrels of oil equivalent, rather midyear reserve, excuse me. We're looking at an unusual period in the Gulf of Mexico. In fact, for production period across the world, it's our opinion that the -- that supply-demand curve will eventually balance, eventually meaning not 10 years from now, not 5 years from now, we think, much sooner than that. Again, some of that has to do with how our buddies over the Middle East behave. It's to their advantage to make things work a little better, but we don't control that. What we can control is what we produce and what our reserves are and what we have to spend. So -- and we don't get to control the weather, but we can manage through that. In spite of all the aggravation from storms this year, we had no major damage. Total damages were about $5 million across the Gulf of Mexico, which is a number that doesn't even require reimbursement from our insurance. So we're confident that we feel pretty good about what's going to happen in 2021. And we feel like we've weathered the storm, no pun intended. In spite of the multiple shut-ins that we had to endure just to get people out of the way. That said, if you would, please turn to Slide #5 -- no, Slide #4. [indiscernible] All right. They put double printing on the pages as I'm flipping them here myself. So recent highlights. Producing 34 -- about 34.5 million barrels -- excuse me, 34,500 barrels per day in the crude in 3Q -- in the third quarter. That represents a decrease primarily due to hurricanes. We reported a net loss, but we generated free cash flow. Most of that adjusted net loss is noncash. Free cash flow is good, we're cash flow positive, $61.8 million for 2020. And we've paid down about $100 million in debt. So we're pretty confident that, that leads us to a pretty good position going forward. We are -- we did announce that we're going to combine the natural gas treating facilities. Mobile Bay, that's about a $5 million per year savings beginning in 2021. That work will begin shortly. In fact, it's already begun. We think that the actions that we've put in place to reduce LOE was certainly a positive for us. We did that without compromising our safety or operational capabilities. So that was a major accomplishment in Q1 2020 -- was started in 2020, rather, to reduce debt. In spite of COVID, in spite of all the other activities that took place, I think the company is in pretty good shape. If you would, please turn to Page 5. I've already given you pretty much the rundown on this, but I would tell you that we reduced third quarter production by about 9,000 barrels a day. So we're confident that we'll get most, if not all of that back. 4Q '20 production guidance is about 31,500 to 35,000 barrels per day, and I believe that, that's achievable. And that's including other estimated impact from the storms and stuff that occurred during the year. If you would, please turn to Page 6. I'd like to go over a little bit of Mobile Bay with you. Key highlights and a little bit of review there. This is a large piece of production for us. This is a legacy field that we acquired from ExxonMobil in late 2019. We have been very pleased with this acquisition so far. We took a little bit of eating at the end of 2019 because it was primarily gas. And some people fussed at us and some people got it wrong. I'm not really sure, and we didn't think of it as whether it was oil or gas. We're pretty agnostic as to what that product is. What we care about is whether it makes money. And that's really the thing that's shining here. This field does make money. We will increase reserves. We have increased reserves. We've managed to come to a decision about operating both of those plants. We decided that we had enough capacity at Mobile Bay in the former ExxonMobil facility, what we call our onshore treating facility, to handle capacity, and that's over 400 -- call it, 420 million cubic feet per day. So we're -- we have more than enough capacity in that facility now. We have identified some future drilling opportunities. I would tell you that the -- at $3 gas, this probably work going forward. We're still refining that a little bit. We're still refining a definite location, but we're very close to determining where we might want to drill, and we'll have more news about that in the future. If you would, please turn to Page 7 or Slide 7. We'll talk a little bit about Magnolia. This is a field that we purchased from Conoco and Marubeni over the last year. A combined purchase price of $25.8 million, and we assumed the P&A liability, net purchase price of $18.1 million as of the closing dates. That field produces approximately 3,200 net barrels of oil per day in the second quarter. We looked at decreased lease operating expenses. We've reduced that about 30% since acquiring this working interest. That's not unusual. We do have other things that we have in not -- in the area not too far away. So it makes it a little bit more convenient for us, whereas Conoco and Marubeni didn't really have anything close by. So I think that, that's helped us in reducing those costs. We closed those acquisitions with cash on hand, so it didn't take any additional debt to acquire those. We do have some upside there, and we'll -- hopefully, we'll be giving you some information on that in the not too distant future. So if you would flip to Page 8 or Slide 8. And we do talk about corporate responsibility. We acknowledge that we certainly have a responsibility to employers and contractors and the communities where we operate. And we are very aware in the Gulf of Mexico about protecting the environment. We've done a very good job of that over the last nearly, I guess, 37 to 40 years here by my count. So as we look at how we develop our corporate responsibility and what we've done in the past, we've certainly made the commitment to acquire and produce these oil and gas resources safely. We've allocated what I think are necessary resources and tools to meet those objectives. And we certainly don't mind having a discussion about HSE issues and concerns with that. When we talk about safety, I do want to remind, we are -- I spent a lot of time as a -- as an engineer for other companies. I learned very formal structured way of managing safety in the environment. I would tell you that in the Gulf of Mexico, we probably have more regulations than you would ever imagine that we deal with on a regular basis. BSEE inspects us regularly and on surprise inspections. So they don't announce when they're going to come most of the time. And so we need to keep things in shipshape condition, and we do so. We've, over the years, had a very good record with regard to injuries and spills. And I think that's important. Of course, injuries are what we focus on the most, but we do focus on making sure that we don't drop any oil in the Gulf that we can possibly prevent. And I think our safety record on that is very good as well. We support a number of charitable organizations as a company. I personally, as an extension of the company, support a number of organizations as well. So when I think about what is important to us, most of the things that we do have to do with children. They are the [innocents], and I think that, that's where we like to spend our money most of the time. If you would, please turn to Slide 10, and we'll talk about COVID-19, because that's a question we get a lot of. We instituted remote work in latter part of March and rearranged our work schedule, knowing that we were going to have a move coming up very soon, which we have now accomplished. We moved our corporate headquarters to another location, not too far away. We instituted screening personnel. I'll talk about corporate offices. We do screen our personnel daily. We give them a temp check, and we ask that they report any symptoms. If they've got symptoms, and they're not -- they're -- they don't feel like it's something they should test for, we ask them to stay home anyway, just to be sure. And then if they develop further symptoms, we ask them to go get tested, which they have complied with. Field operations, we instituted screening of the personnel prior to entry to the shore bases. That includes a questionnaire and temp screening, and we worked with other operators and also our vendors to make sure that this occurs with their personnel as well, and we do screen them before they get on the boats and the helicopters, just to make sure. That applies to our gas plants in Mobile Bay operations offshore as well. We think that we've done a pretty good job. We have had a couple of inspections. Do think about the Gulf of Mexico when you arrive on a platform as being a separate and remote facility. So it's interesting to think about it as contained when they get there. If there is an infection, everybody on that platform or on that rig is contained for the most part. If the symptoms get bad enough or if they want to go in, then we will certainly transport them, and we do that safely. We have had a few infections, but I think very few. I think for the most part, everybody has done a very good job. If we know we're going to have a sustained operation of any sort, then we quarantine folks before we put them offshore for a period of time now. And we've managed to work through that on a recent operation that involved a oil tubing rig in slick line work, and we've had no issues on that platform for that work. So with that, I'll move on to Slide 11. So I'm not going to spend a whole lot of time. We talk about stack pays in different shale basins, where we've had stack pays in the Gulf of Mexico for a long time as well. We throw you up a little diagram of some of the existing pay in one of our fields that is pretty interesting. And I'll describe that for you later on. That's Mahogany. But this is kind of a type log of Mahogany, but not kind of, it is a type log of Mahogany. And it -- the takeaway here is that the porosity and permeability is much better. And our stack pay than it is everywhere else in the Permian or any of these other shale basins. So that's an important factor. And that's one of the reasons why we have really good cash flow. So if you would, please turn to Slide 12. We'll not tell you what. I'll just let you look at Slide 12 at your leisure, gives you an idea of what the Gulf of Mexico is doing. Let's move on to Slide 13 and give you an idea of the kinds of deepwater projects that we're involved with everywhere from fixed platforms and as much as 1,130 feet of water to tension leg platforms, and SPARs and subsea tiebacks in water as deep as 7,000 feet as is Big Bend, Dantzler at about 6,500 feet. So I think it's important to realize that we are a deepwater producer. We have been for a good while. It's one of the reasons why we went public. We've managed to continue to have success in that arena. And I'll give you an idea of why, if you will turn to Slide 14, kind of gives you an idea of how we go through our methodology for determining how we're going to drill wells. We've had a very good success rate in drilling wells since 2011, it's greater than 90%. I think that when you think about this company, you should consider the fact that management, myself included, hold over 33%, about 34% of the equity of the company. So we look at it as though it's our own money because it is. And if you would, please turn to Slide 15. This is a very important slide for us and one that I created many years ago with regard to probable and possible reserves. Fortunately, I've seen a lot of people copy this. I feel good about this particular slide. It gives you an idea in cross-section of a particular type of reservoir that we see a lot of in the Gulf of Mexico. It's a simple anticline. So basically a hill underground with a pay sand in it. This is the cross-section that you're looking at. If you look at this slide, you see the wellbore crossing through the green portion of the reservoir there, which is proved producing reserves. So we show you push in that sand. We show you one sand thickness of probables and another sand thickness of possibles, reserves that we don't get booked when we initially start producing offshore. Whereas onshore, you would expect to get those booked by continuous acreage around you. The Gulf of Mexico is structural in nature, sometimes stratigraphic, but more structural in nature. We show you a water -- an oil-water contact. So if we drilled another well, down dip of the one that we show you in this diagram, and pushed it right at that oil-water contact, we would certainly pick up more reserves. The good news about the Gulf of Mexico is the rock properties, permeability and porosity, are very good on an order of sometimes a billion times better than what you will see in the shale basins. So that lends itself to not having to frac these wells and not having to drill an excessive number of wells to get those recoveries. We're showing you an active water drive in this. So over time, we would expect to see that oil come to the wellbore, but we don't necessarily get it booked in advance. So when we talk about what we achieved from these probables and possibles, if you'll turn to Page 16, to give you an example of that. I'm going to focus on the Mahogany T-Sand, which is in the middle of the page. When we first drilled this discovery, and this was a sand about 3,000 feet deeper than the existing field pays, we were able to do that vis-à-vis additional seismic data and processing and reprocessing of that data. So year 1, we drilled this well, what we call the T-Sand, we booked 4 million barrels of proved producing reserves -- excuse me, 4 million barrels of proved reserves, of which that small portion of about 1 million barrels was proved producing. And we booked 8 million of probables and 22 million possibles. So move through to year 7. We now have 33 million barrels of proved and 52 million of probable, 100 million of possible. So this is a remarkable increase in reserves over time and an example of this field getting bigger because of the probable and possible reserves that are booked as proved producing over time. If you look at Page 17, we give you a further example of that. Slide 17, we show you CapEx that is $0 for approximately $472 million of cash flow. This is additional probables that will come to the wellbore without having to do any work. This is just that if you'll relate to the previous slide I showed you about reserves coming to wellbore, where you don't have to drill any wells, this is Mother Nature contributing these reserves and no cost to us. If you look at the second example there, we show you additional reserves that are related to the probable and possible reserves themselves. So the caption 1 there is related to the proved reserves, caption 2 is related to the probable and possible reserves. So tangentially greater production. If you look at category 3, we show you that for a fairly modest amount of money, $259 million, we can generate about $925 million of cash flow. We find that very intriguing, and we find that over time this proves itself out as very valuable part of our reserves that we never get credit for as realizable production in cash flow. But I do want you to know that it's there. We've proven it time and time again. That's exactly what occurs. So if you would, please turn to Slide 18. We'll give you an idea of where we get money from and how we generate a large part of our value. And we do that through acquisitions, primarily in the Gulf of Mexico. We show you an anthology, if you will, since 2010 of acquisitions that we've made, most recent of which large acquisition has been ConocoPhillips and Exxon. Conoco and Phillips -- ConocoPhillips and Marubeni wasn't that great a number, but it's a large acquisition and it develops a lot of reserves. There is upside in this field. Again, we'll have more on that in the future. ExxonMobil, we, of course, closed in latter part of August of 2019. Those reserves continue to be strong and growing mainly because we're getting a little bit more efficient out there. Gas prices are continuing to move upward. And so as a corporation that's once again proven to be a very good acquisition for us. We acquired some of that field in an acquisition from Shell several years prior to that. So that was what we call our yellow hammer in Fairway acquisition that leapfrogged into the ExxonMobil acquisition. If you'll turn your attention now to Slide 19, where we show you F&D cost. You can see that decline has been occurring over a number of years. We're getting more efficient. Prices have changed. We've taken advantage of that. Of course, price of oil has gone down a good bit, too. So we kind of put it to the vendors that the price of oil has dropped 50%, what do we expect you to do. And for the most part, they've responded very positively. Everybody has learned how to adjust in a lower-price environment. As you would expect and -- but I do think that our guys have done an exceptional job of this, particularly on LOE and in F&D. So thank you to our employees for making this happen. Page 20, we're showing you -- or Slide 20, we're showing you kind of the areas that we're involved with, with current inventory and what we're looking at. We just announced a high bid on a couple of new leases in the Gulf of Mexico. Hopefully, we'll get that presented to us by the government as a new lease, and we'll be able to continue to work towards developing those as well. And if you would turn to Slide 21, we announced this a few years ago, but this is a Gulf of Mexico drilling joint venture that we were able to accomplish with anchor investors, HarbourVest and Baker Hughes GE for $361.4 million. We've drilled 9 wells so far. Admittedly, we put that a little bit on hold as a result of the lower pricing structure and COVID as well. So we think that there's still prospectivity there, and we have some plans moving forward. We're working that. Higher prices helps that and prices are starting to move up and have moved up and down, but it looks like the longer-term to us is more favorable. Fairly when the economy opens up, this is going to make a significant difference for the whole country, not just ourselves. Page 22, I want you to take a look at this, this is important to us. And when we talk about managing the balance sheet and using free cash flow, we are operating on a cash flow-positive basis. So I think that's important. We are generating our own projects, and we're making assets. But we're also paying down debt at the same time. I think it's important to note that we've paid down our long-term debt, we've paid down our short-term debt as well. So we expect to continue to do that with our free cash flow, and we expect to be able to drill within cash flow as well. So if you look at history, and I'll turn your attention to Slide 23 and let you take a look at this yourself. This is the history of the company. We make acquisitions from companies that want to sell those assets to generate or accelerate their cash flow or they're exiting the Gulf of Mexico. And we're able to make asset purchases, and we're able to look at it as a continuing part of our business and it has been for almost 4 decades now. So we look at the production base, and we decide that we like the cash flow, we like the reserves. It's something we can finance and that we have upside on. Those are all important things to us. We look at properties with the idea that we're going to make money from them. Cradle to grave, whenever we buy and whenever we -- whether we sell any interest in and further out, we do look at it as a full cycle recovery of dollars on those assets. So we treat it just like, hopefully, you would treat your own budget. Slide 25, I've alluded to already in talking about management ownership. I think that if you look at most of the companies in our space, you'll see that we are among the highest of public E&P companies in management ownership. And we think that's important in understanding the velocity of the corporation, how we look at things and think about them. We will go up on debt with our acquisitions. And then what we strive to do is pay it down as quickly as we can and use the cash flow to enhance the properties and make it more valuable. And that's been the formula for nearly 4 decades. We do drill some wells. It's not intended to do anything but enhance the reserves and cash flow. That's not what we live by as drilling wells. I found that over a period of time that people that do that generally fail if all they're relying on is drilling as smaller companies. Now majors is a different story because they have more diversification. But generally, independents look at things as acquisition and not drilling-oriented. There are some exceptions, but very rare and most fail in that endeavor. And we just took a position a long time ago that we would want to balance that and make sure that we didn't depend on any one thing to make it occur, but we do lean heavily on acquisitions because we find that we can get upside along with those. The criteria being cash flow upside, what can we do to enhance the cash flow near term vis-à-vis workovers and recompletions and enhancement of existing facilities. And then, is there any upside that we can generate with the drill bit. If the answer to all those questions is yes, then we will continue to look at buying those properties and then it just becomes a matter of how much it is to purchase. So we don't get all of them. In fact, we get -- the hit ratio on that is fairly minimal because there's always a bid-ask spread, but we get our fair share, and we've managed to do that over a long period of time. If you turn to Slide 27, you'll see where we are with cash flow over the last several -- or last few years, I should say, since 2016. We do generate positive cash flow, and we use that to continue our operations, generate dollars for LOE and F&D and drill wells, and we try to do that without going into more debt. So we'd like to say the dry powder for making the acquisitions, and we like to use the money that comes out of those acquisitions as free cash flow to further enhance those assets. So if you would, please turn to Slide 28. And this just gives you an idea of what our CapEx allocation is. You can look at that for yourself. We reduced CapEx dramatically, of course, since 2019, as most people have as a result of current conditions. If you turn to Slide 29, you'll see that we do manage our AROs, our decommissioning cost, if you will, to plug and abandonment -- for the plug and abandonment of wells and structures and pipelines. We think that we've got that down to a manageable level over the next several years. The slide itself is fairly explanatory. I won't go into a lot more detail, but you can look at that and certainly, feel free to ask us a question about that. If you would, please turn to Slide 30. And I think this is a fairly comprehensive methodology for how we've behaved in the past and how we expect to behave going forward. And it does include some comments here about HS&E, and we think that, that's primarily to making sure that we manage our assets properly. Clearly, we want to maintain safety as a primary concern for us. I do want you to understand that the people at this company get it, the field personnel get it. If you're sitting on a platform in the Gulf of Mexico or a rig in the Gulf of Mexico, there's not very far you can run before you got to jump in the ocean. So it's to their advantage to make sure that they're safe. And having been out there a lot of -- a good portion of my life, I think it's important that our operational people realize this and continue to improve our safety and corporate responsibility record. So when we think about investments, if you would turn to Page 31, I'm just about done here. And we do focus on free cash flow. So I'm going to give you a little review here again, but we want to operate within cash flow. We will lever up to make acquisitions that will generate additional cash flow, and that's important to note. That's what we use our free cash flow for and also our credit lines. So -- and we think we've proven we can do a good job of that over a long period of time. We don't want to generate excessive debt. We do want to manage within our current boundaries and do what we can to improve those assets. That's the point. We do reduce costs. We do improve the margins, and we do increase return on capital -- return on capital, excuse me. We think about how we continue to operate in the Gulf of Mexico and what's going to happen in the future. Some of that, we don't get to control. We don't get to control pricing. We don't get to control the OPEC cartel. If we talk about pricing and what we can do to manage that in the United States, we would go to jail as executives, whereas cartels have a slightly different advantage in that region. It's important to note that 3-year all-in replacement costs of $5.05 a barrel is pretty demonstrative of our abilities. I challenge most people to match that. But I'm not going to crow and say that, that can't change. Certainly, it can. There are some things we don't get to control. But in spite of all the negativity around the markets regarding this sector of energy, we're very confident of our ability to go forward. We think that we have adequate liquidity at this point in time to do that. And we think that with the right assets, that liquidity can go upward. Clearly, we don't want to take anything in a way of debt, it's not demonstrably capable of reducing that debt load on a very rapid basis. And of course, the Gulf of Mexico, because of the strong cash flow that we have, that is the differentiator between us and what we see in shale basins we've got on onshore. We've maintained that the Gulf of Mexico is certainly the highest cash flow regions that we can find, and we intend to continue to do that for a long time. So the operating plan is clear. It has been clear for a long time. We expect to go up on debt occasionally and pay it down as fast as we can and then go do the next one. So it's not complicated, it's not hard to understand. The numbers are reasonable at this time for what we've got on our plate and what we have going forward. And we're thinking that the market is getting better for doing acquisitions, and that you'll see more acquisitions in the future that will certainly make sense. And with that, operator, I'll turn it over for Q&A.

I'll just throw a couple in. Just -- could you just give us a sense of your borrowing base redetermination if you expect it to go up or down in terms of your borrowing base? And then also, can you comment a little bit more about just M&A? How you think you would fund it today?

Sure. Okay. Well, 2 very good questions. We are in the middle of our bank redetermination. So I don't have any news on that for you just yet. So I can't really comment on that. As far as M&A, yes, I mean, you're going to see more of that. You're seeing more of it as larger companies merge, most of these are being done without cash. They're not just purchases. I would tell you that we're more likely predator than prey. I believe that the company is in good shape going forward. That's what makes me get up in the morning. We think about acquisitions as potentially being done as special purpose vehicles, SPVs, going forward as well. It doesn't necessarily have to be that way, but it lends itself to a different type of cost structure where we can attract outside capital.

That makes sense. And then, obviously, the change in the administration has potential applications for permitting in the Gulf of Mexico. I'm just curious how you think about that today. How that may impact your operations?

Yes, I'll comment on that. I -- of course, we do think about what that effect could be for us. I'll make a couple of general observations, Gregg, and that is that when Obama came into office, he was fairly positive on our business. And then, of course, we had a very large spill out there, and that outlook changed and it became punitive. And I don't think that this administration looks at the concept of -- the current administration looks at the concept of fossil fuels as being a vital part of our economy. And I believe that irrespective of the rhetoric for campaign purposes, the reality is going to be different, it has to be. You just simply can't do some of the things that the administration has discussed or the incoming administration has discussed, excuse me, with regard to shutting down drilling and fracking and other things. Fracking will take care of itself as a market response, not necessarily as a punitive response from the incoming administration. But the world, as we see it, is more cash flow-oriented going forward. I think that, that's important. And of course, I understand that, yes, we don't want to -- as a campaign promise, there is fracking, there isn't fracking, it's a little bit unclear through the campaign. But clearly, administrations do move towards the center, irrespective of their initial orientation. I'm not quite sure what that is. But I will make one other observation. And some people are going to take offense at this. But the reality is, is that generally when democratic administrations are in office, this sector of the economy does better. So energy does better as a function of pricing. And it's just an empirical observation I've had over several decades. So I'll leave it at that.

I guess just to be more specific, do you see any permitting issues that could affect your operations at this point or are you ahead of that?

I don't think that you'll see any issues with existing leases. I'm fairly confident that this administration will allow operators to work on existing leases. To do otherwise would, in the long run, create a shortage. So they have to balance that with what the economy is. And again, campaign rhetoric and reality are different things.

And just my last question for you. So obviously, you've been buying back longer-dated your bonds as well as the revolver -- and paying down revolver. How do you think about allocating capital to drilling versus paying down debt and potentially buying back bonds that are in the 50s?