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

Good afternoon, everybody. Next up, we're fortunate to have W&T Offshore, an offshore-focused company. I'm going to -- we have Tracy Krohn, the Chairman and CEO. He's going to walk through some slides for a little bit, then we're going to ask some questions at the end. Tracy, the microphone is yours.

Great. Thank you very much. Thanks, everyone, and welcome to our presentation. It's good to be able to have this chance to visit with you. We have a lot to talk about, so let's go ahead and get started. Next slide, please. And that's our forward-looking disclosure. And next, please. And next slide. Okay. A little snapshot to give you an idea of where we are at the end of the first quarter. I think a takeaway here would be the split between Gulf of Mexico deepwater and Gulf of Mexico shelf. So about 7,228 shelf to deepwater and on production. Proved reserves about around 20% in deepwater and the rest that would on the shelf. 2P reserves are fairly substantial for the deepwater and the shelf. And as there will be some slides on this later on as to the quality of those 2P reserves is a lot of that comes to the wellbore without any additional CapEx, and I'll point that out to you as we move around. So about 60%, 40% federal and state production as well. If you would, next slide, please. Well, everybody had an odd year in 2020, and we weren't any different. The good news is is that we were able to reduce the debt -- a long-term debt by about $130 million, and that saved just a good bit of interest expense, about $8.5 million. The RBL borrowings we have are now down to 0. About this last -- this time last year, we were over $100 million, so we've paid down quite a bit of debt. That's an indication of the strength of the cash flow of this company. We actually had a better year in 2020 than we did in 2019. I think that's indicative again of the strength of the assets, the company and the personnel that we have. We also issued our inaugural ESG report, which is now available on the company's website. If you would, next slide, please. So we recently announced the structure with Munich Re. Munich Re is the largest reinsurance company in the world. So they insure insurance covenants. We think it was significant in that it is nonrecourse financing. It's at 7% coupon rate, if you will, term loan rate of 7% rather. That's substantially lower than the current Gulf of Mexico yield -- high-yield deals that we've seen lately. There was some hedging that went around that supported that. This is natural gas. This is our Mobile Bay asset. We purchased a chuck of that from ExxonMobil in 2019 for $168 million. This financing is about $315 million. We used some of those funds to bolster the hedges that we've put in place. We do own 100% of the equity in the SPV. If you look to the right on this slide, you get an idea of the -- graphic on the structure of that was done. It's really not that difficult. We did spend a lot of time and effort making sure that we had a framework around this type of transaction so that this would be repeatable in the future. If you would, next slide, please. So -- and the fact that we closed this and we put ourselves in a position where we have liquidity in the form of cash. So the question comes up, what are you going to use that cash for? We show you a little bit of location awareness here with Mobile Bay, and where it was and what we did in the past with it. I won't focus on that, but clearly, the question becomes, what are you going to do with the cash now that you've got it in hand. And technically, we've got about 360 days around the second lien to put that money back to work. We'll pay off additional second lien debt, expect to see us put it to work. We think that we will have some suitable acquisitions that will come up that will make sense that will be accretive, and I think Marcus should look forward to seeing that, and we will, too. Next slide, please. So this slide kind of gives you an idea of where it is and the leasing around it. In Mobile Bay, we did combine the treating facilities. We had one in Yellowhammer, which was an asset that we acquired from Shell several years ago. And it was in the middle of all of this other Exxon production. We called it the Donut Hole, and the rest of it was the Donut around that hole with what we acquired vis-à-vis ExxonMobil. We shut down the Yellowhammer facility. We have adequate capacity at the onshore treatment facility that we had acquired. So in the future, we'll see a lower cost on that. We're just about finished, or if not, maybe as of early last week, we finished pickling that facility. So that we can either sell it or use it maybe sometime in the future. But suffice to say that with the existing facility, we have adequate capacity, and we'll reduce that operating cost about $5 million a year. So if you would, next slide, please. As I've already told you, we lowered the debt. We purchased some of the second lien notes on the open market. We're saving some interest expense doing that. Of course, most of that was around $0.33 on the dollar. It seemed to make sense to us. So those mines are trading up above 90 now. So we thought it was an opportunistic time to get that down, and we were able to do it. So we went ahead and did it and retired some of that debt. We cut back CapEx last year as a result of what was going on with COVID in the oil markets. I would like to remind everybody that about April of last year exactly -- more exactly, 19th of April, price of oil went to minus $37 a barrel. It's currently $104 higher than that. So oil prices have come up quite a bit. We're feeling a lot better about it, and I'm sure that most of the other markets are as well. But remind you that we've reduced the debt. We paid off the RBL. We had a better year in '20 than we did in '19. We're looking for a better year in 2021 than we had in 2020. So with that, let's go to the next slide. We did put out our inaugural report on ESG. It's available on the website. We're going to invite you to look at it. We spent a good bit of time and effort, and we will be updating that as appropriate going forward. And hopefully, we'll have some very interesting news to show in not-too-distant future. Next slide, please. Okay. So reserves in 2020 ended up at a value of around $1.456 billion. That's totaled 1P. That's excluding ARO. ARO is around $300 million or so. 2P reserves, and I'm going to give you more data on that come up as well. So we're happy with that. And if you would, please go ahead and go to the next slide. So we made some good progress on our debt. We're going to continue to pursue asset acquisitions. The company, over the last 4 decades, has done a pretty good job with regard to making asset acquisitions. We've taken a mantra of GE. The first thing we want to look at is cash flow. Second thing we look at is how can we enhance it with drill bit. And then the last thing we look at is lower hanging fruit: workovers, recompletions, facilities upgrades, things that we can do to increase cash flow short term. And then, of course, where we find it and it makes sense, we'll also buy additional data and try to generate some more activity, more reserves organically. So we've done a pretty good job of that over the last several decades in the form of the work. And function doesn't really vary the different types of properties vary, so all of these acquisitions are hybrids. But the commonality is cash flow being able to make the properties more valuable. Next slide, please. So operationally, we've got some updates for you if you go to the next slide, please. This is a tight log of really what is actually the Mahogany field. We see a lot of stack pays in the Gulf of Mexico. So we show you a bunch of different zones. If you look at the inset on the right-hand side, you'll see toward the bottom of that pile of log there that we have a fairly well-developed sand closer to the bottom. That is actually our key sand at Mahogany. It's generated a great deal of reserves, about 3,000 feet deeper than the original pay sands. This is sub salt, and we were able to image that over time with new data and new processing and make additional discoveries. And I'll tell you a little bit about that as we continue to grow it. So next slide, please. One thing that I would like to point out with regard to the Gulf of Mexico. A couple of things, actually. But one of the things that we like about the Gulf is that it's a cash flow area. This is the second largest basin in the United States and one of the largest basins in the world. Very, very high area. We operate in shallow and deep waters of the Gulf of Mexico. We're proud of our ability to do that and proud of the fact that we've got an excellent safety record, excellent spuds record. We've been very fortunate in that we've been in a basin that generates a lot of cash flow, and we think that's what carried us through for many, many decades and has promoted a great deal of success. But also note that this is the second largest production basin in the United States next to the Permian. Next slide, please. So our deep portfolio continues to expand. This gives you an idea of what kind of production we have, and we're all the way from fixed platforms, excess of 500 feet. We kind of use that as the bell weather to weather deepwater or shallow water or rather shelf. So 500 feet would be about the depth that the largest jack-ups in the world could operate and in excess of that, you would have to have a floater of some sort. We do have tiebacks. We do have structures that we own and operate, and we have interest in other properties that others operate. So -- but there is a matter [indiscernible] Heidelberg are all examples of those types of floating structures that we have out in the Gulf of Mexico. If you would please go to next slide. I developed this slide many years ago. Others have taken it and made different changes to it, but the bottom line is, this is a simple cross-section of what amounts to a hill underground. If you look more towards the center of the slide, you see proved producing. And then as you look down dip, you see oil probable one sand thickness and possible another sand thickness, then you've seen an oil-water contact, indicating an active water drive. And above the proved producing, we have proved undeveloped. So we could drill another well right at that oil-water contact and prove up all those reserves up dip to the existing wellbore and beyond into proved or developed, and we would book more reserves on our balance sheet. But the reality is that we don't need to do that. These reserves will come to the wellbore without having to spend more money. Hence, no additional CapEx. Takes a little longer to get them maybe, but the reality is, we can prove this up over time, and it comes in the form of cash flow. So if you go to the next slide, please. These are examples of areas where we have existing fields, where we've made an initial discovery and been able to enhance that. I believe if you look in the middle of the page, unfortunately, this is obscuring my view a little bit, but in -- the inset is covering up some of my information there. But as I recall, the initial discovery at Mahogany sand was that we booked about 4 million barrels or so. I'll confirm that. And then we booked a few million barrels of probables and 22 million barrels or so of 3P. So over time, it had about 6 or 7 years, and you see proved reserves are 32 million barrels, probable at 51 and possible at 106. So this field got more valuable over time as opposed to the initial booking. A lot of that was as a function of the probable reserves, and you see that in the example that we give from Mobile Bay and also for Big Bend. So with that, if you would go to the next page. So that's important because the probable reserves are really high quality. We're not having to spend money to get cash flow. So the reserves that are associated with the existing proved producing, the probables and possibles associated with the existing proved producing in the form of cash flow that are going to come to the wellbore represents about $550 million of cash flow at 0 CapEx. Similarly to the reserves that are associated with the probables and possibles associated with the proved producing, there will be about $890 million of additional cash flow, 0 CapEx. All in all, about $2.9 billion for a modest expenditure of about $414 million to capture those reserves over time. So people ask us, well, how are you able to increase cash flow and reserve and everything else with regard to 2020 and you didn't do any drilling? Well, it's because of the strength of the probable and possibles that we have that are associated with our proved reserves. We had a lot of that cash came to the wellbore, the production rates didn't decline appreciably, and this is a big reason why. And so the proof is in the numbers. We talk about this quite a bit over time, and the reality is that it really generates a lot of cash and a lot of reserves for us without having to spend a lot of money. Next slide, please. And this is a more graphic representation of it as well. When we talk about reserve life and [indiscernible] in replacement cost, you see this graph, it gives you replacement costs. And when we compare it to reserve replacement cost decreases over some time, while reserve life increased from 5.1 to 9.4 years vis-à-vis acquisition and reduction in our cash flow, our actual cost of goods and services. If you would, please, go to the next slide. This gives you an idea of where we are in the Gulf in the areas that we have additional interest in for exploration and development. We don't name the different areas, but pretty well spread across the Gulf of Mexico or Southeast and West and into the deeper water as well. If you would, next slide, please. So now we talk about strategies and how we're going to continue to go forward and generate cash flow. We look to see companies exiting the Gulf of Mexico as a large inventory of accretive assets comes on the market. Asset sales, one-offs and also M&A consolidation opportunities. We see all of that on the horizon. So again, the criteria are really doesn't generate cash flows. It's something we can reasonably finance. Can we make it more valuable either with a drill bit or -- and/or with the things that will certain things that will affect the short-term cash flow in a positive manner, such as workovers, recompletions and facilities upgrade, along with additional drilling. So if you would, please, next slide. This slide gives an example of some of the things that we've done since the turn of this decade. So they've all been pretty profitable, and we're proud of our payout schedules on these things. We've done some work on almost everything here that you're looking at in a way of new drilling and workovers and recompletes and facilities upgrades, and of course, the latest one being ExxonMobil. We purchased that for $168 million. We -- SPV for $215 million. We have a bunch of cash flow in between. Net average production has been very, very good. This is a gas asset, by the way. It even has little extra to this asset which we strip out in the form of sulfur, and we sell that sulfur now for about $100 to $200 a ton, depending upon where the market is right. Right now, it's around $100 to $120 a ton, as I recall, the last price we get for it. So we made quite a few times of that every day, and it's a high cash flow stream to help offset operating costs. Next slide, please. Might as well review, if you would, next slide. So we're a little bit unusual as a public company and that the shareholders are quite aligned with management because management owns quite a bit of shares. We own in excess of 34% -- between 34% and 35% of the share. So management is the largest shareholder, very unusual for this space and really for most public companies period. But we've always thought that made a difference in the way that if we look at things, people always say that they think of it like -- and they spend money like it's their own money. Well, we really do spend like it's our own money because it really is our own money. So if you would, please, next slide. Well, we're showing you the unlevered free cash flow and what we've done over a period of time. Of course, prices have gone up and down. '20 wasn't a particularly good pricing year, but we still made money. We still had cash flow, and '21 is looking even better. So we're happy with that. We have reduced debt. We've cut CapEx, and we've managed to pay down a substantial amount of our second lien. We paid down all of our RBL. Going forward, we expect to make additional acquisitions as a result of this strong cash flow. And I'll add to that, we don't borrow money to drill with. We have -- we expect to do some more drilling coming up in '21, but we're not going to buy money to drill with. Next slide, please. So this gives you an idea where our CapEx is for 2021. Our P&A guidance, we've got some more P&A work to do in '21, but not dramatically more. Our CapEx, we announced it between $30 million and $60 million for 2021. I expect to see a little bit of losing the purse strings on that we'll probably drill well in the not-too-distant future. I'll foreshadow that for you. I'm not quite ready to announce all that yet, but we think it's a good sign. We do have some plug-in bandwidth, things that we need to do as a function of idle iron that we'll show up in the not-too-distant future as well. But again, prices are up. We're optimistic about what we're going to spend towards 2021 going forward, and what we're not going to spend for 2021 going forward. We expect to make some acquisitions this year. And so hopefully, that will answer some of the questions about what are we going to do with the money that we got on SPV. Next slide, please. I see I'm getting up to about where I want to be on question and answer. So to cap it off, we are focused on free cash flow. We do have priorities with regard to our environmental portion of our program in that we are very conscious in the Gulf of Mexico about how we manage our business and make sure that we're not polluting and having any accidental spillages. We've got a very good safety record companies. We've never had a fatality in 40 years. We have had some injuries, but never in 40 years that we had a fatality. Social governance were aligned with many different -- what I think are very worthy causes, more to do with children and what we can do for kids in the community. And in governance, we have -- 20% of our Board is female as well. We are a conventional asset base, low decline. Our RLP is about 9 -- a little over 9, 9.4 years. We continue to -- over the last couple of years to increase our margins and increase return on capital employed. Good liquidity. Good flexibility. The Munich Re transaction put us in a place where we have capital liquidity in the form of cash that we can move very quickly, and I think that will be important going forward. Of course, things that we're looking for will be accretive borrowing base as well. If you would, please go ahead and open it up for questions.

All right. I may start it off. Thanks for that overview, Tracy. It was very helpful. So you -- the big announcement a couple of weeks ago was the formation of this SPV or formation -- the use of the SPV to raise capital. So you're telling us, this is going to be used for acquisitions. So how do you fund the other part of this? Is there is this effectively the debt financing? Is there equity that comes in? How should we be thinking about that?

Yes. Well, Janet worked really hard on giving the SPV, night and day, and I didn't complain too much. What you did, I didn't actually care. No, I'm just kidding. I really [indiscernible] border out in us too, but we did get it done. Clearly, we have always had an aversion to diluting the shares because we're such large shareholders as a management entity. So that's something that we don't give up easily. It's a tool that we have. I would tell you that yes, if we have anything of size, expect to see a portion of that come out in the form of equity for the financing. We would expect for the bond owners, in the event that we had something that made sense, that we would refi sooner rather than later, probably along with an acquisition that would actually improve the credit stats. And that would probably also include a piece of equity going out to maintain the debt ratios that we want to see in there. And the bondholders would want to see, too.

And you've mentioned acquisitions in your -- what's the opportunity set that you're looking at? And give us a sense of how large you're willing to go?

Well, I don't really have a great answer on how large we would be really willing to go. I mean, if it made sense, and that means something that would be accretive to us and credit positive, then I don't really know what those limits are until we get to that point. But I expect it would have a huge amount of cash flow, and anything that we would be doing would have cash flow. I'm not quite ready to give you particulars and whatnot of what we're looking at now. But trust that we're looking at things right now, and we're working diligently toward that goal. We didn't get all this money up in the form of cash just to have to sit on the books for a year. We're rather more focused on spending it for an accretive acquisition sooner rather than later.

Right. And a lot of our acquisitions, they -- if you kind of go through our presentation, and we show it paid out in a couple of years. So not to say that we can't guarantee that. And obviously, middle base something like that's more long-life, but generally speaking, we're very mindful of how quickly it pays out, and we want to make sure it continues to be accretive to our value.

And you show the terms of the transaction when you announced that there are some pieces missing of it. I don't know what you can't provide, but I'll just ask and tell me if it's not available yet. But you said it was an amortizing structure. So how much of that will be amortized by the end of the 5-year term?

It was the 7-year term. It will be fully amortized over 7 years, and there is a little bit more amortization -- it's not stright line. There is more amortization happening earlier where there's more production, but -- so because of the amortizing over 7 years, we actually don't pay a whole lot of interest expense, in my opinion, over 7 years.

And you -- I don't -- you're waiting to see what the impact to your borrowing basis. Do you expect to maintain a borrowing base with banks after this?

The reality is, it doesn't matter. Whether we do or not is immaterial. Anything that we would do of size, we would redo the facility in any event.

Right. And then, we've only really been using the RBL for acquisitions because we do free cash flow, we haven't needed it for our day-to-day. So to Tracy's point, we haven't felt like we've needed it. And even through all of the downturns. I mean, last year, we were impacted by 8 different hurricanes on our production, negative oil prices. We still generated $76 million of free cash flow and paid off $130 million of debt over 5 quarters. So...

And the RBL.

And the RBL. Now with this transaction, we had $48 million left. We just start to pay that down. So it just has to make sense for us to consider it, I guess.

And I think you had to post some of the cash as collaterals to hedge the cash flows for that asset. How much cash is being tied up there?

So there wasn't any posting of cash, but we did have to pay for hedges. And we look at it as an insurance because it's such a big hedge over 7 years. We did about 4 years loss in 3 years of put. So the cost of the hedges were really related to the put that we bought, the long-dated put, so that we can maintain all the SI on the back end.

So we established the floor and left the upside available to us.

We don't know where gas price is good to be in 4, 5 years, but we definitely -- if it goes up to $8 or anything higher, with natural gas being a transition fueled, we want to be able to capitalize on that. And we also have some natural gas calls that we bought as well. So we intend to be able to capitalize on the upside of gas price.

Got it. And you said there is the potential to do more facilities like this. Is that with the current lender? Or just you just...

We're not likely to go out and put more assets that the company already owns into another SPV. We are likely to go out and make acquisitions using this type of SPV structure.

And Tracy, you pointed out -- I mean, you're the largest shareholder. You have everyone incentivized there. There's been a little bit of a change in the way companies are approaching shareholders with respect to being more conscious of returning cash to shareholders.

Sure.

Has that -- are you rethinking things a little bit differently there? I realize you have put out the priorities right now with reducing debt. And I'm curious if -- how you're thinking about that and weighing that versus potentially buying more assets.

Sure. Well, as a shareholder, of course, I like dividends. We've not been in a position to do that for a while because we've had some debt that we needed to dispose off. But as returning cash to shareholders, dividends for me is more important as -- if I turn my head around say, "I'm the largest shareholder," well, dividends are important to me because cash flow important to me. Share buybacks, we've done some of that in the past, not much. I would prefer to put cash in people's pockets as opposed to hoping that share prices will go up as a function of buying shares. We never know about that. That's not something we get to control. Markets control that, and very often it's thing that we have nothing to do with, such as hurricanes and world politics. But dividends, you can -- are pretty tangible. I think that, again, we've been very reticent to dilute the shares, and I think that shows over time. And I think that's clearly one of the reasons why we've managed to stay around for a long time and excel. And we look forward to the next, what I call, golden age of oil and gas production. And people may not think that's actually possible in some circles, but I firmly believe it, and we're setting the company up for success in the future and managing our footprints and everything else. So there will be more news on that to come with regard to our ESG updates, and I think everybody will be pretty happy with what we have to tell.

Well, look, we're out of time, but I appreciate you guys making time to participate in this conference. And as always, it's interesting to hear your thoughts on your company and what's going on in energy. So thanks again. Janet, nice to see you.

Thank you so much, guys.

Yes. Thanks for having us. We enjoyed that. We look forward to doing it again.

Great. Thanks, guys.