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

Good morning, everybody. Next up, we have W&T Offshore, and we're fortunate to have the Chairman and CEO, Tracy Krohn. I will pass the baton to Tracy, who's going to walk through a presentation to tell you about what's going on at W&T.

Thanks, Gregg. With me today, I have Janet Yang, our CFO. So if you have any additional financial questions, you can help answer that as well. Let's skip on to Slide 4. I'll go past the normal disclaimer with the idea that if I didn't, it's your fault, if you didn't, it's your fault, if anybody else didn't, it's also your fault. With that, on Slide 4, very rudimentary slide here. I want you to be aware that we've always focused on generating additional cash flow. That has been the [ correction of the corporation ] free cash flow, pay the debt off as quick as we can, put it back in the ground and go do it again. We have maintained over the years an asset base that's been very low decline. And I remember when people actually thought it was high decline before they started drilling shale wells and horizontals. Now you drill a horizontal well, and it's an 80% decline or so in the first year. So if you don't make the money in the first year, you're not likely to necessarily get it back. But with ours, we're looking at a decline rate around 12% to 15%. [indiscernible] is about 9%. So pretty good reason to be enthusiastic about the decline base or the bench rate of our decline. We have done some unusual steps to maintain liquidity this year, and I'm going to go into that later on in the presentation. We've also put out our first ESG report. So you'll be informed of that, and I'll cover that too. We go to Slide 5 and look at the management ownership as a function of about 35 public companies or so. You'll see that W&T has very high vested interest in the corporation as a management team about 34%, which I think you'll find that unusual in the public energy space. But we're always aligning with shareholders as a function of our ownership of the company. If you would move on to Slide 6, a snapshot here, if you will. Third quarter average production was about 34,800 barrel of oil per day. Of course, we had a rather large hurricane hit us in the Gulf [indiscernible], made a mess of things that -- in South Louisiana where a lot of our oil and gas comes onshore. We didn't have a lot of damage to our structures offshore virtually, very little damage. But the onshore infrastructure was affected. They didn't have electricity for a good while. In fact, my father-in-law lives in that part of the world. He didn't get electricity for over 30 days. So we did have some issues with that. We expect that almost all -- well, I think we expect to have all of our production on by the end of this month. We do have a couple of fields that are off that will be somewhat meaningful as we put them back on this month. The other thing I'd like for you to take away is that the split between Gulf of Mexico Shelf and Deepwater around the Gulf of Mexico. We have some detail here on that. Production is maybe in the federal waters about 60%, and net acreage is about 78% in the federal waters as well. First, we have a very large producing field in Mobile Bay that is in -- a lot of that is in state waters as well. So we've been in this basin for about nearly 40 years -- 38 to 40 years now. So we think that we have a pretty good handle on what conditions are in different parts of the Gulf, and we've utilized that over the years now. I do consider that to be an advantage for us and that we've seen a lot of different parts of this basin. We break the basin into 3 components, that's shallow water new shore, shelf that goes out to about 500 feet, that's about the maximum depth that you can put a jack-up rig on. Anything over 500 feet, we consider to be deepwater. If you'll skip to Slide 7, I give you some facts here about the third quarter and debt for the company over the year. Debt's down a couple of hundred million dollars from end of December 2019 to September 30, 2021. Got a -- we've obtained a $215 million first-lien nonrecourse in a separate entity vis-a-vis Munich Re. That was one of the things that we did in replacing our bank credit lines, our traditional RBL. The RBLs have been coming under increasing pressure, particularly in Europe with regard to shareholdings in energy space. That seems to be a bit more political than actually economic, but it is -- that is the state of the world at this particular moment in Europe. Again, we focus on delivering free cash flow and adding value to the reserve base. Converting probable and possible and undeveloped reserves into cash -- into cash is a significant part of what the company does. If I turn to Page 8, I'll give you a little bit more detail with regard to the transaction that we get with Munich Re and we detail it for you right there. And certainly, if you have any questions about that as we go through this today, and I don't know if we have time to end this, Gregg, or not to answer questions. So I'm not quite sure of the format, but if we did not, we have some one-on-one setup and you can certainly call us to contact us on that as well. Term loan interest rate on that note is 7%. It's carried out for 7 years, and we're successfully paying that down as we speak. So we're fortunate that we had some good things happened in the way of pricing. We've lost a little bit on the derivatives or rather did get -- take advantage of those opportunities. However, we also bought some calls along the way that have helped mitigate some of that near-term pain. If you would turn to Page 9, and give you a little idea of the capital structure at the end of the third quarter. And I know you can read, I'm not going to read this for you. Significantly, we reduced that debt quite a bit. But also, we noted there, we repurchased about $73 million second lien for about $24 million of cash in 2020, which helped improve our debt situation as well. We also -- as a function of getting rid of or changing our lending structure from RBL to a structure that's more representative of what we think is -- we'll see in the future. And that is first-lien facilities amortizing. And also, we picked up vis-a-vis a separate company that I happened to control, another line of credit vis-a-vis Calculus Lending that replaces a more traditional RBL. We haven't drawn on it, and I don't necessarily expect that we will. But it's there if we need it, just a month of liquidity. So over to Page 10 on Mobile Bay, if you'll turn to Slide 10, we acquired it for $168 million. We generated $84 million in cash flow. That's through the middle part of the year through June 30th. Of course, we've generated more than that now. Mid-year, 2P PV-10 was $440 million, and that gives you a project value of about $524 million. We're not bad for a $168 million investment. We were able to consolidate a couple of the plants in the area into one plant. So we reduced our carbon footprint as well as reduced our costs. So a win-win there for the environment and also for our costs. 1P reserves currently 81.8 million barrels of oil equivalent; 2P, 92.9 million; and 3P 100.4 million. So most of it is PDP. So a good cash flow source for us. And of course, after we pay off the note -- the advertising note, we have tremendous residual value there as well. So you'll see that in our portfolio for a long time. If you would turn to Page 11, we talk about ES&G a little bit. Again, as I mentioned before, we consolidated the plants into 1 plant, reducing our emissions and our spill ratio was really, really good in the Gulf as it has been throughout several decades. 0.03 spill ratio is practically nothing. I would point out that 50% of our executive officers and Board members are women or minorities. We have required diversity training in this corporation. I don't tolerate dignitary or racism within the corporation. I never have and I never will. And I'm certainly focused on that in the past as a function of what we think about people. I don't try to differentiate anyone other than on their own ability. And that's the biggest differentiator of all [indiscernible] how you perform and what you do when you get here. So we've been very pleased with the makeup of the corporation for a long time. We tie some of our compensation to ES&G. And I believe that that's a fairly substantial portion of what we think of as incentive compensation. We did elect 1 new Board member in May 2021, Danny Conwill. Danny has been around in corporation for a long time, having helped us finance some things in the past from other companies that he's worked for. And now we're proud to have him on our Board of Directors in a front capacity. So if you would turn to Slide 12, I'll let you read that yourself. This is the SEC pricing. Of course, if we hold it up to a more normal price forecast at the market, it gets better. But PDP is $808 million. Total 1P is $1.31 billion. And of course, 2P is $1.863 billion and 3P is $3.272 billion. A very strong component of our 2P reserves, we will get as a function of zero CapEx. So a lot of this cash flow will come to the wellbore without additional spending. And I'll probably cover that -- we'll cover that here as we go forward. If you turn to Page 13, you get the same type of chart with NYMEX strip as of July 1. And of course, it's increased remarkably at [indiscernible] for PDP and $1.5 billion for 1P, again a substantial portion of net. So NYMEX strip prices of 57.8%, average $57.80 and $2.96 for gas, and of course, it's more than that now. I'll skip over Slide 14. I think we've already explained that. We buy all the properties, we cash flow, we pay that debt down, we put it back in the ground and do it again. Let's talk about operations a little bit. Let's go to Slide 16, talk about why we like the Gulf of Mexico so much. And one of the better reasons is stacked pay. We see a lot of stacked pay in the Gulf of Mexico around different plays that we have ready to do. We have just a single target objective. So that's always helped us in arresting the decline curves as we go through the life of the single well or field. We see a lot of natural drive mechanisms in the Gulf, a lot of water drive that helps with recovery as well. We utilize that to our advantage. And I'll turn -- I'll focus you on Page 17, this is a slide that I put together many, many years ago, and talk about why we can get incremental reserves at no additional cost. So if you look at the diagram or the picture that we have, the illustration shows you a 4-way of focus [indiscernible] basically a hill underground and we take a cross-section of it. We show you where the proved producing reserves are here in the green sand. And then below that, we detail a probable sand thickness of 1 and a possible second sand thickness of the same distance. And then we show you an active water drive that's driving this oil to the wellbore. We could certainly drive -- we could certainly drill a little well at the oil-water interface and prove up more reserves. That's expensive. There's no real reason to do it. Fortunately, mother nature will help us with our recoveries and we don't have to drill another well. We don't get those reserves booked initially. We get them more over time. But more importantly, we'll pick up that cash flow without additional CapEx. So that's one of the things that helps sustain our low decline rates. If you'll turn to Page 18, we'll give you a monetary presentation what that really means to us. So if you look at the first bar graph there, you see $300 million in PV-10 associated with our producing reserves that are probable and possible that will come to the wellbore without expense. So we're talking about $300 million there. And then if you look at the next bar graph, these are the reserves that are associated with the probable and possible reserves that will come to the wellbore also. That's another $1.4 billion. So about $1.7 billion in reserves that we expect -- that we reasonably expect will come to the wellbore. We will be able to produce over time without any additional capital expenditures. It doesn't mean that we won't have a lease operating expense, of course, we will. But -- and then if you look at Slide 3, you see another $962 million that we would need to invest. About a quarter will be in -- to recover as well. So total reserve base 3Ps $2.713 billion, only $250 million of which we would have to -- or only $250 million would be required to recover in our mines or those reserves. So pretty good value for the money. One of the reasons why we like the Gulf of Mexico, we're going to show you another slide on 19, give you some examples. Mahogany T sand in the middle of the page there, initial discovery there. Well, this was in our Mahogany field. By the way, Mahogany was the first commercial subsalt field on the planet. We now own 100% of it. We're still reaching cash flow from that. We've increased it over the years, increased the reserves over the year. We bought some more seismic, did some more interpretation, reprocessing in-house to help us with that. And we made discovery there. The first discovery yielded about 4 million barrels. Skip forward 8 years, and now we're at about 30 million barrels of proved reserves, 59 million barrels of probables as opposed to $8 million initially and then $76 million of 3P as opposed to '22. So this is a field that keeps on getting -- giving us reserves. We show you other examples of Big Bend, a greenfield opportunity that we were able to successfully convert into actual proved reserves and probables and possibles. And then we also showed you Mobile Bay, which is a field that we acquired over a couple of different transactions. And those reserves have continued to increase over time without drilling a single well. So just getting more efficient in running the field on a little lower cost and being able to squeeze more gas out of the field. So if you would turn to Page 20. So one of the other reasons we've been around is we've been able to do this over and over again. We look for fields that have cash flow. We look for fields that we can increase or enhance value with the drill bit. And then we also look for things that we can do near term such as workovers, recompletes, facilities upgrades or lower cost and enhance -- increase cash flow near term. And if all those things are present in the acquisitions that we look at and [indiscernible] we chase and it just becomes a matter of price. Page 21 gives you an example of some of the figures that we've acquired over the last 10 or 11 years. Pretty good -- well, actually really good results. They've all been successful. And then these are from majors and larger independents over time, and we've had very good success with all of these approaches. And of course, that's not all the acquisitions we've made, we're just giving you some of them over the last 11 years. Over time as well on Page 22 or Slide 22, if you would, look at this graph. I think it's an interesting anthology, if you will, of rolling reserve replacement cost. That reserve replacement cost has gotten to a pretty low number around less than $5 a barrel, $4.62 in 2020. And then if you would, please turn to Page 23. We'll give you an idea here where we are in the Gulf of Mexico, where we see a lot more opportunity. You'll see a lot of that along the Flex Trend, which is the gateway between shallow water and deepwater in the Gulf of Mexico. We had very good success along that trend as well as some of our other deepwater leases. So basically, this slide gives you 45 different opportunities with 19 platform wells and 26 subsea tiebacks, all less than 15 miles and that fuels a 3P resource of greater than [ 200 million ] of barrels of oil. So if you turn on Page 24, we show you what we're doing. We're actually -- we've actually got a rig on location at our East Cameron 349 Cota doing a completion there. We had previously said we'd have that done by the end of the year. We've had some rig delays, had to swap out a rig from Mexico. And then -- so we'll get that done probably by the end of January would be my guess. Garden Banks, we're working on some exploratory potential there. Right now, we're drilling a well out in Mississippi Canyon area, and water depths around 600 feet. We've announced that earlier. We've got some more activity in the South Tim and Eugene Island area in the not-too-distant future in the way of exploration. So we're excited about our programs, working on our budget as we speak, and we'll have more to tell you about that in the first quarter. So with that, we'll go in our financial review -- our financial overview, rather. If you'll turn to Page 26, it gives you a little bit of a representation of what we're looking at, again, focusing on free cash flow, paying the debt down and finding accretive acquisitions. And we show you some examples over on the right-hand side of the page, Monza Drilling JV for $361 million and Munich Re SPV at $215 million. So monies we've raised that weren't necessarily a conventional RBL or other capital raising structure. So we've had good success with raising money in those 2 ventures. So I have been asked the question [indiscernible] RBL. Well, we've been functioned with and without an RBL for our entire existence. So not unusual for this company not to have an RBL in place, but we have plenty of liquidity. We still got over $200 million in cash on -- in our [ buffers ] there. So -- and that ample liquidity that hasn't been drawn as well. So when I talk about generating significant free cash flow, if you turn Page 27, this gives you an idea of what we've been able to do with adjusted EBITDA and our spending profile. Pretty minimal expenditures to adjust to just find an adjusted EBITDA far in excess of CapEx. So -- and we produced that along the way as well. So we're proud of that. We've got some other things that we're working on. We've actively hedged natural gas and oil. We have taken some calls on the gas. The oil hedges expire at the end of 2022, but the good news is we have sufficient volumes to cover all of our production. So I wish we would have been able to hedge it at a slightly different time. We just didn't get to take advantage of that upside on the pricing of second product production, but the remaining oil production we have been take advantage of, so that's helped us as well. CapEx expenditure in 2021, the guidance was $30 million to $60 million. Year-to-date at the end of the third quarter, it was about $16 million. We're out spending money now on completion and drilling. So expect that to fill up a good bit for the remainder of the year. P&A guidance for 2021 was $25 million to $35 million so far in '20 -- as of the end of the third quarter, we were about $20 million. So we're right on target there as a function of our [indiscernible] obligations. If you would turn to Slide 30, again a kind of an overview of where we have been with the company over a long period of time, 38 years, safe operations in the Gulf of Mexico. And by safe, I mean, we're very conscious of our personnel. I don't ask any of our personnel anything that I wouldn't do personally. I spend a lot of my life in the Gulf of Mexico. I think I have a pretty good idea of what's dangerous and what isn't. We've never lost a soul in the Gulf of Mexico. We've never had a serious life-ending event for anyone in the Gulf of Mexico. So I think that's important to note [indiscernible] a little bit. It doesn't mean it can't happen, but I think we've done a very good job of minimizing that over nearly 40 years. We do pretty rigorous technical valuations when we talk about spending our money. We have a peer review. We do -- we use a rose distribution to figure out how we're going to spend those monies and risk those funds. We've got a very good history of upside realization in probable and possible reserves that keeps repeating itself over time. And we're very happy, this is one of the reasons why we really like the Gulf of Mexico, it's good cash flow. And we're -- it's a very large basin. This is second largest basin. It's the largest basin by area, second largest basin by production. So that's one of -- those are the reasons why we enjoy this area, Gulf of Mexico. We've got a lot of experience in it. I'm -- I have enough ego to think that if we can drill a well from a flowing rig, this produces to a flowing vessel that produces to ensure that we can probably drill well in West Texas or anywhere else for that matter. So we don't use the F words in the Gulf of Mexico. We don't frac and we don't flare. So that's another advantage that we have in the back -- in the Gulf of Mexico as far as an environmental impact, and I think that's important to note. We've done a very good job of managing our margins. People always ask me, well, what's the price of oil that you need to have to make things successful? It's really about margins and not just pricing. So with that, I'm done with that. If there's room for any questions, we ask that.

Tracy, I'll just ask a few here. We are at the half an hour. Just a few things I thought to touch on briefly. The first one being, so how are you thinking about your capital structure going forward? You have a bond that's maturing in a few years. How are you thinking about tackling that?

Yes. Well, we got a couple of years, you're right. I mean we're starting to surge around and see what's going to work the best. The market is in a bit of a flux. There is -- certainly, there's concern with the virus and how that's going to affect markets, and we've seen some of the results of that in the next couple of days. But yes, we're not oblivious too. Fortunately, we've got good cash on the balance sheet and we could refinance now. It's not a matter what we can do, it's just a matter of how much it's going to cost. So we're going to look around for the best deal that we can buy. And we certainly -- [indiscernible] we could do that. We have been agreed recently at 7% payer.

And it's your plan to refinance that and not necessarily pay down some?

Well, maybe a little bit of both, Gregg.

Got it. And then the replacement of the RBL with new capital was -- congrats on that. Obviously, you contributed to that. So what I'm trying to figure out is, how does that impact your ability to hedge going forward? Does it limit you to having more of a put strategy just because of the collateral requirements with swaps? Or is it -- or is there -- do you have something built into your facility that allows for you to hedge with that collateral posting?

No. Actually, it -- if you'll know, we don't have any hedges on our oil beyond 2022. The additional buffer liquidity we have has no restrictions with regard to hedging at all. And with regard to the gas that we hedged at Mobile Bay to make that transaction happen, we did do a much of slots, we did some puts, and we did some -- we purchased some calls as well to protect it. So I think we've done a pretty good job of managing that portfolio.

But is it fair to say you prohibited from hedging going forward?

Not at all.

At least with swaps, is it no?

No, there's no provision on hedging.

Does it concern you that you would potentially have to close more collateral to hedge?

No. I don't see any reason to hedge at this point in time, Gregg. That's kind of what you're trying to get through. Actually, I would prefer not to add. So that's why we got the facility set up by fact this lending doesn't have a requirement to hedge.

Got it. And then -- so we spoke about this months ago, there were several -- at our last conference. We had several Gulf of Mexico focused guys talking about the M&A environment and the 3 different Gulf of Mexico focused producers were there. Each one of them, including yourself, talked about the M&A environment heating up. And I haven't necessarily seen much materialize since June. So I'm curious what happened. Was it something just delayed? And is there still a vibrant M&A opportunity out there?

Yes, I believe there is. I mean, we don't know when we were going to make an acquisition. The deals are always hard to do. But volatility has been pretty high in the market in the last couple of years. So it has made it a little bit more problematic. But here, you should expect to see some transactions occur with W&T in the not-too-distant future. And I've said that before in this year, and I actually expect it to have more than one by this time. But the market's been pretty fickle and prices have changed dramatically a couple of times, which has made it much more difficult. It doesn't mean these things go away. They just take more time to develop and get right. People don't really want to sell, and it's really low. And then when it gets up higher and things change, and that makes it more difficult as well. But M&A, yes, you're going to see more of that in the Gulf because it's just a normal part of what we do in our life cycle. And incidentally, you mentioned about hedging and collateral. I don't have any collateral requirements with regard to our hedges at all. We did some hedging with BP in particular. They don't have any collateral requirements for us at all.

Okay. Is there -- I was just coming back to your last comment there on the hedging. Just my understanding is, there is some limit that a counterparty would absorb but that assuming you aren't buying puts, right? If you do swaps that without collateral and historically that was one of the advantages of having an RBL with banks. So I'm just trying to figure out if there's a mechanism that you have in place? Or just how some of your counterparties are more open to it? If it's too late, you're restricted from hedging as much as you could have, right, with an ABL.

No, there's no real issue for us with regard to the hedging. Of course, the advantage that we have is we have real production and BP is collateralized by the credit facility. So there's no issue with what we need to do in the way of hedging. Right now, we're just rolling the hedges off because there's no new hedging going on in W&T.

Got it. And then just the last question. You paid a dividend in the past. Obviously, we're -- despite the reduction in oil prices in the last couple of several weeks. Still a very strong price. I'm curious, are you thinking about growing some returning to paying a dividend? Or is your excess cash flow probably more for M&A? How are you thinking about returning back to your shareholders and obviously yourself as a very large equity holder?

Quite frankly, Gregg, we're thinking about it in both ways. We think we can make accretive acquisitions and get to a dividend-paying status again.

Got it. And do you think that means, how do you think about growth? Is it a function of return on capital or are you actually trying to manage towards a growth number?

No. We are at -- well, both really. We're trying to make sure that we make acquisitions that are accretive. We are going to be -- well, I mean, we're drilling right now on an exploration basis. You're going to see more activity with the drill bit as well. That -- if you're doing the deepwater, you do have to be careful, you might screw up buying something. But then you have to go finance it, right? So -- and that's a good thing too, because along with the acquisitions, you mentioned what are we going to do with regard to our refi on the longer term debt. It makes it easier. If you can pay a little bit and develop and you got another deal that will come forward, that can make it more tracking pricing. And so these are all quality problems that we expect to have.

All right. Look, I really appreciate you taking the time here. Tracy, I actually do have one question. Somebody just drew me a question here and it's about the RBL financing. So obviously, you said it yourself. [indiscernible] is asking about your views of how difficult is it to find capital from commercial banks? And was that the main driver here? Obviously, you have the ability to support this. But that's a question from an investor that is listening to this webcast?

Well, I think that's a fair question. Yes, I mean it's gotten difficult to do RBLs with traditional RBL lenders. And it's mainly driven, we think, by ESG considerations of their shareholders. We've seen it particularly with the European banks and of course with our Canadian banks. So it's not punitive to us. It's kind of funny because we never had an RBL until about the mid-90s. And we've been in business for quite some time, about 12 years before we ever got an RBL. So we just had regular advertising loans and did we make an acquisition. We generated a bunch of cash flow. We paid down as soon as possible. We didn't have any prepayment penalties. And then we find something that made sense and we put it back in the ground to do it again. And that's how we grew the company. So I'm -- there's no concern about with me about liquidity. There's a lot of money out there. And if you've got something that makes sense and you can't find financing, it's your own fault. There's a lot of money on the sidelines. And particularly, when you start talking about going into any kind of inflationary periods, well, having got commodities like oil and gas, pretty good place to be despite some of the product stations that you might hear otherwise regard to the hydrocarbons, I still love hydrocarbons.

Look, but definitely got over the allotted time. I appreciate you staying on to answer some of these questions. And we look forward to talking to you at our next conference. Hopefully, our plan is to be back in Boca next year. Hopefully, you can attend and we can have drink afterwards.

I look forward to that. Yes. Thanks so much, Gregg. I appreciate it.

Thank you. Thank you. And operator, we can end the call here.

Thanks.