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

Hi. Good afternoon, everyone. Thanks to us for joining us. We are very pleased today to have Mr. Tracy Krohn, Chairman and CEO of W&T Offshore. The company, for those of you who aren't as familiar, they're focused in the Gulf of Mexico, and they have a history of very attractive acquisitions. The company currently has 346,000 net acres in the Gulf of Mexico shelf as well as 78,000 net acres in the Gulf of Mexico deepwater. So the company also has a strong history of generating free cash flow, which was not only used for acquisitions, but it also has been used to maintain a very prudent balance sheet. So I don't think I did you justice Tracy. So I'm just going to hand over the reins to you, but thank you for taking the time today.

Thank you, Jeanine. No, you did great. Thanks so much, and welcome, everyone. Thank you for joining us here today. Let me go ahead and get one thing out of the way real quick with regard to the hurricane because I've gotten this question several times today. And we gave you some information in the presentation. But just to be advised that all of our people are safe. All of our platforms are in good shape. We had one structure that had a little bit of issue with it. There's only 600,000 cubic feet of gas per day, and it's got some structural damage, and this is one of the ones that was close to the entry point of the Hurricane Ida, but -- so way damaged. But nothing -- outside of it, there's no leakage that we have. There's no spill issues that we have. All of our people are safe, and we're going about the business of being prepared and ready to begin operations again. We're up at about 50% run rate right now. That will increase as these plants and refineries get electrical power. One report had about 30,000 poles down. So I've noticed I actually went over there last week and made a fuel and water delivery to some of our relatives. And our company has an office in New Iberia, Louisiana, so they've been able to deliver some supplies to our employees as well. But lots of creosote poles headed that way, lots of linemen headed that way. I think we're doing pretty well on this. Katrina was the last storm that gave us this kind of issue. We were down for about 30 days and that was a much more disastrous storm than it is or was. But in any event, I'm feeling pretty good about where we are with regard to the hurricane. Now with that, I'll go ahead and -- let's see what I got here. Okay. All right. I get -- here it is. Got it. It's on the screen, nevermind. With that, I'll move into the presentation, and I'll just ask you to focus on this slide, Slide 4. And if you get nothing else from this slide, I understand that we do focus on free cash flow generation, that's been the hallmark of the company for nearly 40 years. We're very cash-on-cash oriented. Clearly, we have a responsibility and a requirement and a governance mandate that says we treat people fairly and equally. We respect the environment. We not only say we actually generate cash flow with a very decided environmental edge to it in that we make sure that we do as good a job as we can preserving the environment, and we've never had a fatality on any of our structure in the Gulf of Mexico. We've never lost an employee, and we've never had any kind of a sizable spill. In fact, we've got an excellent record with regard to spillage in the Gulf of Mexico and with regard to entries in the Gulf of Mexico. So we're quite proud of that. It doesn't mean that we can't lose somewhat in an accident we can, but we do the very best we can. We don't hire rookies. We hire people with a lot of experience to work for us. We're not a training facility although we do maintain continuous training. So with that, be advised that this is a conventional asset base. For those of you that aren't familiar with us. So very good rock properties, good porosity, good permeability, low declines. We've been able to reduce costs and improve margins during this period of COVID and while price changes and regime changes, administrative changes, we recently took some steps to shore up our liquidity. We did a hybrid transaction in Mobile Bay and garnered about $200 million of liquidity in cash. We see different opportunities in the Gulf of Mexico. We're constantly looking at different opportunities to acquire reserves or do M&A work as well. So with that, if you would turn to Slide 5. And part of our success over the years has been centered around management ownership. So we own as a management group close to 34% of the shares. I think that differentiates us from just about everybody in this universe of companies in the E&P space. There are some with more, but very few. I've always been proud of that. I think that we're in the risk business. But I also think we're in the treasure hunting business. So I like that kind of risk. And I think our personnel do as well, and I think it shows in the performance that we've had over the years. A little information slide here on Page 6, kind of gives you a snapshot of where we are, where our production is onshore and where it is in federal, state waters, excuse me. About 60% of our production is in federal leases and 40% state and most of our acreage is in federal and a small percentage of it in state, about 18%. We're -- we show you what the reserve numbers are here for proven reserves in 2P and 3P. And I'm going to talk more about 2P and 3P later on in the presentation because it's a very important part of the W&T story. If you go to Slide 7, we've been able to reduce our debt -- a good debt during this period of COVID. We took some advantage of buying some bonds at -- some corporate bonds at a fairly low pricing at that point in time when things were looking much worse. Prices had dropped and production was suffering and whatnot as a result of that. If you think about it, we've seen the price of oil go from minus $37 to nearly $70 a barrel right now. So a price increase of, actually, $100 a barrel -- over $100 a barrel actually. We've reaffirmed our capital spending of $30 million to $60 million for this year. I get questions about what we think is a reasonable sustainability. So I'll go ahead and answer that now. Going forward, $60 million to $80 million seems to be about where we think we can keep production normalized or not reducing. So -- and we think that, that would be the story for the next few years if that were the thing that we had to be most concerned about. And of course, we expect to increase production and spend more money in the future. We've focused quite a bit on what we think our plan is going forward. So I'm sure there will be some questions with regard to ESG that I'll be happy to answer post this discussion. I've already given you an idea of where we are with Hurricane Ida on Slide 8. So look at that at your leisure. If there's any other questions, please feel free to check with us after this presentation in the question -- Q&A section. I've also gotten a lot of questions about Mobile Bay and the transaction we did with Munich Re. This is pretty much how it went down. And so feel free to peruse that at your leisure, and we'll certainly answer questions about it if you have any. So Slide 10, if you look at that, as of end of June, $209 million, still $552 million in second-lien notes. And at 0 RBL borrowings, we paid down all of our RBL. And we see a $215 million, 7% nonrecourse term loan due 2028. So with regard to Mobile Bay, we bought that field for $168 million. We generated $86 million of cash flow. We basically rented it back for $250 million -- $215 million, excuse me, and we own 100% of the equity in that entity. And so we expect that this property will have a good bit of value after we're finished paying off that mortgage. And it gave us a good bit of liquidity in a time that I felt like and we felt like was prudent to maintain cash liquidity. Turning to the next slide, we give you a little bit more study on that, and you can look at that at your leisure. But we see quite a bit of project value in this thing. We're categorizing it as $524 million. So we think this has been a very good acquisition for us, and we think it will continue to provide more value in the future. We do have some ongoing plans to drill wells out there. Let's talk a little bit more in detail about ESG. We think that as we go forward through this more regimented environmental, social and governance picture that we're seeing across the planet. I do want to point out that, again, we've done a very good job in reducing our emissions so far. We took our 2 Mobile Bay treating facilities and combined it into 1. And I've already told you our spill ratio has been very good. So all in all, 50% of our executive officers and Board members are women or minorities. We do require diversity training in our organization. We tie our ESG performance to executive and employee compensation. So we all have a responsibility in there, and we're all incentivized by it. If you we can please turn to the next slide, and we'll talk a little bit about our reserves. And as you can see, reserves have gone up mid-year. A lot of that is cutting costs, of course, and then some of it's also higher pricing, which has been very helpful, but not something we can depend on. What's important is that we've done a pretty good job of managing margins and people often ask me, well, what does the company look like when oil goes to $75 or $80 a barrel. And I said, it's really -- it's a more important question, a more important realization of what are the margins because as prices go up, of course, costs go up. So we're all about trying to maintain those margins as well as we can, and we realize there's always some slippage over time with regard to pricing and timing for all of these different acquisitions and drilling wells that we did. Let's see. You are on Slide 14 now, excuse me. And we're looking at SEC pricing. This is the SEC pricing for our proved reserves in our probable and possible reserves associated with those proved reserves. And I'm not going to spend a lot of time on that. You can read for yourself, about $1 billion in 1P reserves. And the rest is a lot of which will come to the wellbores in the form of cash flow. We also include -- in the next slide, we include NYMEX pricing at 7/1/21, so July 1. And we think that that's -- has improved somewhat since then as well. I noticed this morning that gas has ticked off at $5 an Mcf today at one point. I'm not sure if it's still the same point because I've been following it that closely, but I did notice $5 for gas. We took a lot of heat when we did the Mobile Bay transaction. Why did you change your reserve mix? Why aren't you buying oil? And my response to that is we don't really care. We're agnostic. I don't care whether it's oil or gas. What I care about is whether it makes money. And I think that's been a hallmark of the company for many, many years. I don't see any reason to change that. I think it's not a philosophical issue. It's a money issue. And -- but in spite of that, we did take some heat for changing that mix. Hopefully, this will be a little bit of rationale for why we didn't consider that to be overly important. If you would turn to Slide 16, this is a fairly straightforward way of looking at the company. We make acquisitions. We drill wells. We pay down debt as quickly as we can, and then we put the money back in the ground, try to grow the company. It's been a very solid formula for nearly 40 years. There have been some ups and downs. There have been some mistakes that we've made over time, but we're here growing the company and making money, and I think that's what's really important. And in spite of all the difficulties that mother nature and other diseases that may or may not be mother nature throwing at us and the financial markets and everything. So I'm fairly confident this company continues as long as we want to continue. And with that, we'll go into operations. Let's talk about why we like the Gulf of Mexico for the last 40 years. And the biggest reason, it doesn't specifically say that on this particular slide. But if you're a petroleum engineer, you can look at that log representation until why we've got a lot of stack paying with really good porosity and permeability qualities. So porosity and permeability are what makes the difference in the Gulf of Mexico and most of the other places in the U.S., certainly makes a difference between us and the shale plays. We are cash flow positive. It's very hard for the shale players to get cash flow positive. Only the very, very best can do that, and I congratulate them on it. It's really hard to do. I think the Gulf of Mexico offers excellent value over time. It's not necessarily for the weak and faint of heart. But it's still treasure hunting at is finest, and we believe that we're in the risk business. We understand that it's risk, but with risk comes reward. So having said that, if you would please turn to the next slide, Slide 19. This is one of my favorite slides. We generated this many years ago and others have copied it for a good reason. Basically, what you're looking at here is a 4-way closure, what we call anticline. It's a hill underground, and this is a cross section on that hill. If you look, we show you proved producing and proved undeveloped sort of components of our proven reserve category. And then we show you a probable sand thickness and a possible sand thickness, and it doesn't necessarily have to be one sand thickness. It could be one or more or less. But the point is that you've also -- we're also showing a water drive here. But the point of this is that we don't have to drill another well to prove up reserves. We could drill a well at that oil water contact and prove up all those reserves. But because of the rock qualities of reservoirs, typical in the Gulf of Mexico, high permeability, high porosity, we expect to get most of that oil that the water will drive to the wellbore. So we don't have to drill another well. We don't get those reserves booked immediately, but the cash flow comes with it. So if you turn to the next slide, Slide 20. You'll note that we show you about $1.7 million total in cash flow that we expect to come to the wellbore as a function of probable and possible reserves simply flowing through the wellbore. And then the next portion of that graph with regards to additional cash down on possibles is -- means that -- probables and possibles rather. For another $0.25 million, we generate about another $1 billion in cash flow associated with the remainder of the probable and possible reserves. So we're very confident of doing that over a period of time. And of course, it's subject to pricing and whatnot. But -- as you look through the portfolio, we have a pretty low decline rate, and that's a big reason why. We don't necessarily get them booked right away. But over time, we see them -- they come to a wellbore and they generate more cash. If you turn to Slide 21 now and look at the Mahogany T-sand in the middle of that page, you see we drilled a well in year 1. We generated 4 million barrels of proved reserves. This is actually what we call our Mahogany T-sand. Mahogany was the first subsea commercial -- commercially successful field on the planet. We were able to buy 100% of that revenue. We bought a bunch of seismic. We did some -- we had some processing done on it, of course. And then we bought more, and then we had more processing done. Then we bought more, and we had reprocessing done. Finally, able to get a pretty good image below the salt. And we felt like we had a good direct hydrocarbon indicator out of that. And so we drilled it. We found 4 million barrels in proved, 8 million barrels in probable and 22 million in possible. And flash forward 8 years later, we've drilled some more wells. We've produced a lot of cash. We found -- now we've got 30 million barrels in proved and 50 million barrels in probable and 76 million barrels in possible. We see a very similar profile with Big Bend the right on this graph. And then we also see another type of profile with Mobile Bay. We didn't drill any wells in Mobile Bay. We simply consolidated the plants. We reduced costs and our pricing helped us some as well, and we've generated more reserves there since we bought the field. And we had a very similar profile in another transaction in that same area several years before that. This is almost a lay down to the kind of performance that we had with that other field, and they're still having with it. This is a long life field. It's going to be here for another 20 years or so, I think, if we don't do anything. So -- but we do have some plans for other things that we might do there as well. Slide 22. Well, we've been doing this for a long time. We look at acquisitions. We like to see a production profile that generates cash flow or good proved producing cash base. We look for what we can do to make the field more valuable using the drill bit. So upside of the drill bit, but then we also look for workovers, recomplete, facility upgrades, things that we can do to increase cash flow near term. If the answers to all those things are positive, then that's something that we want to pursue and attempt to purchase. And then, of course, it becomes a matter of price and terms and conditions and the ability of others to transact with us as well. We've done a lot of transactions over many years, and this is an example on Page 23 of most of them or at least most of them that are of size. And I assure you, we continue to work on more transactions every day. Slide 24, all-in replacement costs. Look, in 2020, we're at $4.62, pretty good rate over a number of years here, 2019, $5.05; 2018, $6.42. So you can continue to see this come down. 2021 has been a rather unusual year for everyone. So we'll see what that ends up in 2021, but I still expect it to be a pretty good number. If you look at Slide 25, we show you areas where we're interested in. You'll note a decided interest in Flex Trend particularly on the exploration side. We've got a lot of production in that range, this so-called boundary between shelf and deepwater. Slide 26, more specific things that we're working on now. Cota, we've got coming up later on this year -- on production later on this year. And Garden Banks, we've got some production out there at Magnolia that we find pretty interesting and that we're working on as well. South Timbalier, we've got another prospect there to work on. Eugene Island same thing. Mississippi Canyon, we're drilling that well now, deepwater well. That got interrupted a little bit by the storm, but we should be back to drilling here shortly. With that, I think that as you think about what we focus on and financial strategy, we look at some things that are a little bit different. And this is kind of an example -- well, this is an example of Munich Re and Monza. And what we've done differently in creative structures to make that occur, Munich Re, we just announced recently with regard to this special financing and Monza drilling joint venture we did a few years ago, got 10 wells out of that. So we're still focusing on free cash flow. We paid down debt $1 billion in the last few years, and we funded some very accretive deals using our RBL and cash on hand. We're still generating a lot of cash flow. And that's, again, the hallmark of this corporation. These margins are still good, and we like our prospects going forward. We think about what we've done in the last couple of years, we're pretty proud of the reactions we've had and payments that we've made in the last few years with regard to the difficulties that us and others have faced. CapEx budget for '21 is $30 million to $60 million. We didn't spend much the first half. We're spending money now, certainly weighted towards the second half. P&A guidance hasn't changed anyway. We still expect to spend about $25 million to $35 million on P&A. Nothing that's bothering us about any storm-related activity in case that's a question on people's minds. But I think what's important here on this slide is to check production versus CapEx. I think the graph tells you that we've been able to keep production fairly constant with pretty minimal CapEx. And I think that's attributed to things we've done in the past, certainly, but also with regard to that probable and possible cash flow that -- and reserves that come to the wellbore without any CapEx expenditure. So I'll tell you this in closing. We've been many years, nearly 4 decades with very safe operations in the Gulf of Mexico. We -- our drilling success in the Gulf has been very good. We spent a lot of time and effort on seismic and trying not to waste any money with dry holes. They're inevitable over time, of course, but you do the best job you can. And our success rates are over 90% with drill bit. We've got a very good history of realizing probable and possible upside. I showed you those graphs. They're absolutely correct in the sense that we gain a great deal of value from our possibles and probables that are never showing our proved base. F&D costs are driven down by our existing infrastructure. We do have a lot of infrastructure in the Gulf of Mexico that make it more synergistic for our operations, but also we generate value from others bringing their production across our facilities. We're constantly working on ways that we can cut costs and improve margins. And I think it shows in the numbers. So you can evaluate that for yourselves, but we're very satisfied with what we've been able to do, particularly over these relative tumultuous times that we've gone through for the last couple of years as well as others. So with that, operator, I'll turn it over to you and -- rather, excuse me, Jeanine, and I'll turn it back to you, not the operator. And you can fire away.

Well, we've got 1 minute left, and I will use that 1 minute for a question.

Sure.

So I guess you mentioned that 82% of your acreage is federal. I was wondering if you can just remind us of the status of the regulatory environment for offshore right now?

Sure. Well, with the change in administration, the first thing that came out was a suspension or moratorium of leasing, new leases in the Gulf of Mexico. That's changed within the last 2 weeks. That sale will come up later on this year. So -- and of course, they had a ruling from a federal judge that kind of precipitated that as well. But we're certainly mindful of the fact that regimes change over time. We've seen change over the last 4 decades from many different administrations. And they all think of us a little bit differently. The good thing is the regulators, the people, the so-called bureaucrats that actually have to administer all of this regulation have been very consistent over time, and I think they've been very good. I mean nobody completely agrees with everything that they do. And I know they don't completely agree with everything that we do as an industry. But I think that over the years, that's been a very good relationship. I think there's a lot of trust that's been built up over time in this company. And plus, in fact, we've had a very good safety record. So I'm proud of that. And I think that -- at least I'm hopeful that we'll continue creating value in the Gulf of Mexico from our properties out there that the regulation won't become too strongly. And of course, we're members of API, and we monitor that as closely as we can. We think it's very important to maintain that relationship.

Okay. Great. I think we better wrap there. I want to be respectful of your time. Tracy, thanks so much. It's been a real pleasure.

Thank you, Jeanine. Thank you very much.

Take care.

Thanks. You too.