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

Hello, everybody. We've got 2 more presentations before the cocktail. And our next presenter is one of the more colorful presenters, including his tie. We're lucky to have Tracy Krohn, he's the CEO -- President and CEO of W&T Offshore, but I think you're also the Founder. There's probably some other title in there, I'm missing. But we'll bring Tracy to talk about W&T Offshore, and I'll hand over the mic.

Thanks, Gregg. Thank you all for coming this afternoon. I'm inspired by the view out the back where -- I'll try to stay on track here but that's one of the great views in the country and the world, by the way. So W&T has been in the business now for almost 40 years as an entity. I've been in this business for 50 years. I started out roughnecking in the Gulf of Mexico before I went to college and decided, well, maybe I would like to do something different than work as a roughneck for the rest of my life, but I like to be in the offshore business. Went to school, got a degree in petroleum engineering, went to work for Mobil Oil. I worked in one of the fields that I'm going to tell you about here later on as a young engineer. It was a pretty significant transaction for us later on. But suffice to say, we are a pure play in the Gulf of Mexico -- excuse me, one moment. We are primarily on the shelf. We do have operations in the deepwater Gulf of Mexico as well. So we operate on the shelf and in the deepwater. About 24% of our production is in the deepwater. It is the reason why we went public many years ago in 2005. In 2005, there weren't any other private equity players in that market. The banks were a little bit scared to do commercial lending on deepwater transactions. We did manage to buy some properties. We did about a $1.3 billion transaction with Kerr-McGee in 2006 shortly after we went public. Did have some deepwater properties in it as well, so that was our start in the deepwater. So after turn of the century, hard to talk about, 2000 as the turn of the century, but we saw the possibility of that. We are primarily an acquisition entity in the Gulf of Mexico. We buy properties in the premise of 3 different things. First thing we think about is we think about cash flow. What's the proved reserve base? The second thing we think about is what can we do to affect the value of those properties with the drill bit? How can we increase the upside? And the third thing we think about is what kind of workovers, recompletions and facility upgrades can we do to increase the cash flow near term? If the answers to all those questions are positive, that's something we want to pursue, and then it becomes a matter of price. We don't get everything we look at, in fact, we get a small piece of everything that we look at as a percentage. But we do get our fair share and we've managed to get our fair share over the years. So with that, I would tell you that over a long period of time, we have looked at, I don't know, how many hundreds of properties, but they've all had a very similar characteristics. They have a proved reserve base. They have upside with the drill bit and then they have a good cash flow for things that we can do near term. When I think about the company and what we can do to fairly brand ourselves with other people in this space. The thing that I think sets us apart from many of our competitors is the fact that we have a significant ownership in this country -- in this company. This management team owns between 30% and 35% of the shares. We have in recent past purchased some of our notes that were discounted during the pandemic. We got beat up by Moody's for doing that. Apparently, that's a bad thing to do is to improve the credit of your property at the rest of being in some sort of Moody default ratio that I still don't quite understand. But in any event, we retired some of that debt by purchasing it at $0.33 on the dollar or less. Just by way of information, I bought 6 million shares in the company in the last few years. I'm a significant owner of the bonds. Many of them have bought at a significant discount. I have an interest in a joint venture that we did with the company and several other industry and family offices for $361 million on about $14 million of that. Recently, we took our RBL facilities vis-a-vis a transaction with Munich Re at our Mobile Bay facility, I would tell you a little bit about Mobile Bay as we go forward here. But that was $215 million transaction. We bought the properties for $171 million. We mortgaged them for 2015, we cash flowed to $136 million. The properties today are worth arguably close to $1 billion at current pricing. So we thought we made a pretty good transaction there. We thought we had a pretty good reason for taking our banks out. We got dinged again because we took on more credit for doing that. And even though this was nonrecourse, we felt like it was the right thing to do and we did. I would tell you that we've looked at what's coming up of interest to some of you out here. We have a refi facing this coming up over the -- goes current November 1, 2023. The notes come due on -- I'm sorry. Yes, current November 1, 2022, and the [indiscernible] at November 1, 2023. So currently, the company stands with over $200 million in cash on the balance sheet. We have an ATM out in the market. We have not exercised on it, I have no immediate plans to do so. I won't say that we won't exercise on it, but being a significant shareholder and not wishing to dilute my own shares, that's not necessarily attractive to me, although the shares have gone up in recent weeks, fairly significantly from where we started off with the ATM but again, as I told Jim, also a significant bondholder in the top 10 of the holders of the bonds of the company. So that being said, we also have some long calls on the gas. We were required as a part of the transaction with Munich Re to take out some rather long hedges, so long in duration rather long tenure. 7 years -- we were slightly overhedged when we made that transaction occur, including our production with the parent entity, we did this in an SPV called Aquasition I and II as opposed to acquisitions. These are aquasitions. They were all the water. We thought it was an appropriate monocle for those entities. And it put us in a position where we were slightly over hedged to the extent that we were concerned that get prices really took off, and this is when prices were around $5, $6 max on the gas, and actually, it was even a little bit before that because we had some long-dated calls that were out of the money at the time. So we looked at it as insurance. So we paid $20 million to buy the long calls. Those calls today are worth $200 million to $250 million, depending upon what the price of gas is today. So $200 million in cash, $100 million ATM, $200 million to $250 million on recalls and, by the way, I have an RBL entity that holds on a borrowing base that hasn't been exercised yet for $50 million to the company as well. So with that, the company is able to pay off the notes to-date. We're proud to say that these things have changed in the last several weeks. So our real concerns going forward, not concerned, but opportunity going forward is that do we refi? Do we pay it off? Do we do a little bit of transition, maybe pay some of it off, make an acquisition? The one thing that we won't do is we won't do anything to follow up our credit metrics. We're expecting to be at 1x by the end of this year -- onetime debt-to-EBITDA by the end of this year and probably 0 before the end of next year. So by the time we get to our bullet date, we will have paid it off one way or the other. That's the intent. There is -- in the market today, we're seeing a lot of properties come on to the market that are for sale. You may not be aware of them we are -- we've been in this space for a long time. Some of them are being publicly marketed, some of them are being privately marketed. Some of them are larger than others. We did a couple of smaller transactions earlier this year that have been very accretive. But we did it with a company called ANKOR Energy, which is a subsidiary of Korean National Oil Company, KNOC. We also signed a Memorandum of Understanding with KNOC to do other things with them. I'm not quite ready to give you full details as to what we may be planning, but sufficed to say that we are thinking about things in the future to do with this company, KNOC, it is a government energy company in South Korea. I would direct your attention to rendering of some of our reserve type traps in the Gulf of Mexico, this is very indicative of some of the things we look at. This happens to be a full way closure. And anticline basically a hill underground. This is a cross-section of that. And I'm trying to -- I think that's Slide #8. It's really hard to see from here but anyway...

I was very impressed that you are able to see it. I can't see it that well.

Yes. Well in any event, what we show you here is proved producing reserves at the level where we show you the wellbore going through the sand colored in green there. We show you proved undeveloped reserves up dip from that, and we show you probable and possible reserves approximately one sand thickness thick, they can be larger than that. They could be smaller than that. Then we show you an active water drive. So Mother Nature will drive those reserves to the wellbore. We could drill another well at that oil water interface and prove up those reserves for independent engineering purposes, but it's an expense that you don't have to do. It will come due in the wellbore up dip over time. But what it does do -- we don't book the reserves, but what it does do is create a bunch of additional cash flow to us with 0 CapEx. So that's the positive side of that. We don't get them booked immediately, but we certainly enjoy the benefit of the cash flow. You'll see this as a repeating theme in the company over a long period of time. That's why through the pandemic, we didn't lose a whole lot of rate and we certainly didn't lose a whole lot of reserves as a result of this. We were able to pay down debt. We were able to continue operations. We had some that we shut in and some that we deferred abandonment on during that time. But in any event, it served us well, having this kind of reserve base and going forward with cash flow. We have cash flowed positive for the last, I don't know 17 quarters. Right James, is it 17? Yes, 17 quarters, going on 18, hopefully, and beyond that, hopefully, we will cash flow positive this next quarter as well. I think I can say that with a few days left in June. So the next slide, Slide 9, we show you the bar graph on cash flow that we expect to see from these probables and possible reserves, about $1.8 billion in CapEx -- in capital coming to the wellbore without CapEx. We will have normal LOE expense. We'll have about another $740-or-so million with an expenditure of around $400 million to recover the remaining reserves that total up 3P in excess of actually $3 billion of the current pricing. Okay. So another bar graph for you. I'm an engineer, I like graph, I can't help it. We show you one of our fields, Mahogany, which is -- Mahogany was the first commercial subsalt discovery on the planet. It was out 350 feet of water that will shift through 349 to 359. We took -- well, we purchased this from several different producers. We own 100% of it. We began to gather up seismic. We bought more seismic. We did processing, and then we did reprocessing. We have the expertise in-house to do that reprocessing. A lot of older gray hair guys that unfortunately have hairstyles like mine as well. So, a lot of experienced guys that can actually do the algorithms. So we benefited that by that because we can actually image direct hydrocarbon indicators below salt, which is a rarity. But the field sands producing about 15,000 feet subs. The discovery well that we drilled on this direct hydrocarbon it was about 3,000 feet deeper and about 18,000 feet. We made the discovery. We booked 4 million barrels initially and we booked -- trying to remember because I can't see the graph here, I want to say, 22-or-so, 24 probables in 30-year 40. So possible for 3P. And flash forward 8 years, we drilled some more wells. We made the properties more value. Remember, I told you, we like to buy properties that have upside to the drill bit. Reserves now around 30 million barrels proved and slightly under 40 million barrels 3P. So when I think about it in totality, this is something that repeats. We saw the same kind of behavior at one of our deepwater discoveries that Big Bend and Dantzler and nearly 7,000 feet of water, very similar behavior. And then if you look over on the left side of this slide, you see another example, that's from our Mobile Bay area. We bought these properties again, as I told you before, from Munich -- excuse me, from Exxon, we refied with Munich Re. But we've managed to increase reserves there, never drilled the well. We still haven't drilled well. We've done 2 separate transactions there. We did the first one in 2011 with Shell Oil Company and very similar characteristics, increased the reserves, increase the production, cut the cost. We're able to do that as a result of our knowledge in the Gulf of Mexico and the ability to accelerate production and also cut costs. So repeating thing in that same area, increased reserves without drilling any more wells. So slightly different examples in different areas of the Gulf of Mexico and also in shallow water Gulf of Mexico. So been doing this for about 40 years, seems to work. The formula is not complex. It sounds a little sensible than it is. I get this question quite a bit, well, too, you guys are out looking for acquisitions right now? I mean what's the bid spread? The bid spread is narrowing. And the reason is because during the upcycles, people tend to be of the attitude that they want to sell these properties now whereas before, they really didn't want to sell them. I knew they had value, but -- and they knew they were going to be doing other things later on. So they're deferred. We benefit from that. We don't have a lot of competitors in the Gulf of Mexico. We have some but this is the second largest producing basin in the United States. It is the largest producing basin by area, by far, but it's a pretty fertile playground for us. It's really difficult for the onshore guys to go out and drill wells in deepwater from a floating vessel, producing to a floating vessel that then pipes it in onshore. So the expertise level for this is a little bit higher. The operating standards are much higher. We've been in West Texas. We've operated in 9 states before. Believe me, these wells aren't as complicated onshores as they are offshore. The good news is that it opens up a source of continuing opportunity for us. And that's been very much the story over a number of different decades. The formula remains the same. This is some of the examples. We had many more before 2010. We just shut it off at about 2010 because it was difficult to go back and go through all the calculation, but also for one other reason. In 2010, we started to change the way that we thought about drilling for reserves in the Gulf of Mexico. We had pretty good success around 75% to 80% success rate. Now granted, we weren't doing a lot of real high-risk drilling. We were doing infield drilling, a pretty good place to find oil and gas. It's still oil and gas fields. We've been very successful with that. We will do development and drilling in one block over type situations where we may have probable or very lower risk exploration reserves. So these transactions -- these purchases that we did, again, they all accomplished a familiar theme where we could accomplish adding more value with the drill bit. So in 2010, we undertook to increase our success percentage. Since then, we drilled about 50 wells in the Gulf, our success rate is over 90%. So we revamped our ability to risk these things, and we took a lot of risk out of it by being able to do the reprocessing in-house and run it on our own algorithm. So it does work. It doesn't seem like a whole lot of difference between 75% and 80%. But believe me it's a lot of difference when you're drilling wells that are millions and millions of dollars each. This is just a slide to give you kind of an idea of where we are right now, where we've had recent asset acquisitions over in South Marsh Island, central areas of the Gulf of Mexico, not far off the Louisiana Coast. So I told you about Mahogany a little bit before and what it did and how we've generated more cash flow. We spent $175 million there. Net cash flow after CapEx, well over $700 million and counting. This is a $1 billion field at project completion, we'll increase that even more currently worth on the order of probably $1 billion or so. We've got more activity on that -- in that area. We bought more seismic. We're interested in that area still. Matterhorn, Virgo feels very similar story. We bought these properties from a French company years ago. We've managed to increase the production there. We've done some drilling, and we've also been able to increase the efficiency and reduce costs. Again, Mobile Bay as I told you about before. We've been able to cut costs there. As I told you before, we bought it for around $170 million. PV10 is several hundred million dollars now. This is a $1 billion project as well at a cost of around $171 million. Year-end reserves and PV-10 prices help a lot. Prices going up, make a look a lot smarter. On the other hand, EBITDA margins are remaining very consistent, heavy increase from the pandemic somewhat. So we do monitor costs, and we do monitor margins. People ask me all the time and ask us, what's your breakeven price? Breakeven price is a function of those margins. If I had to answer today, probably 45-ish, maybe less depending upon how fast cost of goods and services are going to go up. We are seeing some cost creep, particularly in transportation, both transportation, primarily, not so much in the helicopter. There's plenty of helicopters out there still. They are having some pains with regard to personnel pilots, in particular, but the boat industry offshore service vessel industry has many more problems with that with regard to boat captains. A lot of them left during the last 2 or 3 years left our business we did other banks. And now getting them back has been a little bit problematic. The crews have dispersed. We're having some of the same problems that West Texas is having with truck drivers. So these are bigger trucks and they float. All our reserve replacement costs have been excellent over the years. You're seeing it as a step function downward, downward and to the right is what we want to see on reserve replacement costs. We're very competitive with anybody out there. And we're approaching the kind of numbers that you expect to see coming out of some of the larger foreign producers. Strip pricing. I'll let you read this for yourself, but sufficed to say that now we're in the billions of dollars of value for proved reserves and 2P and 3P reserves, free cash flow generation. So again, indicative of what I told you before, for free cash flow in the last 17 quarters or so, very proud of that, and we expect to see that continue. This is through all kinds of different scenarios with economic parameters, pandemic parameters, I didn't see that one coming and also through other natural catastrophes, including hurricanes and things like that. We did have some downtime last year and early into this year with regard to Hurricane Ida in South Louisiana. I spent a little time down there personally rendering aid to some folks, and they had a pretty tough time of getting back on their feet. But the company, although, we did have some damage to platforms that we didn't own -- although our production went down, fortunately, we were able to keep enough of it to stay profitable pricing coming up later in the year has certainly made it a lot better as well. So the idea is to continue to increase cash flow. My assignment every morning is like Groundhog Day. I hit the alarm button at 7 a.m. and -- or actually earlier than that. And my assignment is to increase production, increase reserves, increase cash flow, cut costs. And I woke up the next morning the same -- it is the same. So offshore, it's a little bit more difficult than it is onshore. It's a little less predictable with regard to geopolitics, growth, pricing, whereas onshore, you're not required to have a significant upfront stock cost to put the thing online. But once you get it online, you get return on investment very quickly. I always point out to people that when you're talking about shale basins and God bless them, we have all the mother frackers out there doing their job. By the way, in the Gulf of Mexico, we don't use the F word. We don't frac we don't flare. We're -- the statutory requirements for gas in the Gulf of Mexico is you don't flare, you have to put it in the pipeline and sell if you can't do it, too bad, you can't develop it. We are allowed to flare for a minimum period of time such as when we bring a new well on or when we have a system upset. But it's for a limited period of time, and we have to keep track of the volumes, otherwise, they penalize us for it and fine us. So it's a requirement. I noticed one of our competitors the other day sent out a little press blurb bar about, well, we don't do routine flaring in the Gulf of Mexico. Well, yes, no kidding, because you can't. You can't do it by law. So I thought it was a bit disingenuous, and I didn't say anything about it until now. But yes, we actually do have to put the gas in the pipeline and sell it. We don't frac because the rock properties are really good. Permeability is a measure of connectivity between pore spaces, floor spaces, simply the [indiscernible] space in the formation. So in West Texas, it is measured in the unit called Darcy. In West Texas, it's measured as nano-Darcy or billionths of a Darcy. In the Gulf of Mexico, we often measure in Darcy. So usually about 1x billion better permeability in the Gulf of Mexico with significantly higher porosity. So we don't need to frac. Rock -- are great. That's one of the things about the Gulf of Mexico, we've always liked. We have -- normally, we have stack base. It's usually difficult to justify a well in the Gulf of Mexico just based on one sand, unless you know a lot about it. It takes a lot of risk down out of it if you're targeting more than one sand. And that's very frequently the case on these structural traps. So we're talking about very structural geology in the Gulf of Mexico, whereas onshore, you're talking about very large stratigraphic traps over wide spaces, very tight, very hard to get out of the ground, but very large in area. So the Gulf of Mexico, once you put it on, it comes back to you very quickly. And that's one of the reasons why we like it there. That's one of the reasons why we're still there. That's one of the reasons why we continue to succeed there. So capital structure at March 31, when we think about really what our task is here, we do have this high-yield refi coming up this year and into next, if that's what it turns out to be. But suffice to say that currently, we have the ability to do that with our own balance sheet and with things -- with our own assets. So that's a nice place to be. That's not necessary what we're advocating here, but it's nice to know you have that as a backup. I think I've talked enough about capital allocation plan so far. We are in the business of acquiring assets in the Gulf of Mexico. That is the lifeblood of the company. We do drill wells. We do drill exploration wells. Occasionally, we'll take a little swing for the fences, but we don't do it for 100%, we'll take a part of the deal and either ride with others or promote it out to others such that our capital expenditures are fairly minimal. When I think about going forward into different areas, we give you a slide up here about select opportunities and potential spot dates going forward. We do have one well at our Magnolia field. It's a platform rig, but it will be placed on a floating facility. That will come up later on this year. We'll get the rig out there and we'll drill and complete first quarter of next year. This is a multi-thousand barrel completion. It is proven reserves. These reserves were not present when -- or not included in the purchase price when we first bought it, we proved them up subsequent to the acquisition without having to drill those that well. So with that, I would just tell you, I like the long-term effects that we're having here from pricing, of course. But we survived and thrived through all kinds of different pricing scenarios and also with different kinds of natural catastrophes, pandemic in this case, hurricanes, financial disasters. And the reason is because we are best in the corporation, we've managed debt pretty well over a long period of time, I see that as a key inward going forward for us. So if there's any questions, I'll be happy to answer.

So we'll go over a little bit here just with some, but if anyone has a question, please raise your hand and I'll pass you a microphone. So M&A, you've said the bid and ask is closer today. So how do you think about funding that? And really, how big of a transaction could you do?

Yes, that's a really great question. They're all hybrids, Gregg. It's really more of a function of what is the total cash flow they can bring to the table in that acquisition. Clearly, if you have more of your reserves and proved developed producing status as opposed to proved undeveloped, it makes it a lot easier. Size-wise, I mean, we've done transaction -- one transaction we did at $1.3 billion several years ago. That was covering these assets in the Gulf of Mexico. We bought all of their Gulf of Mexico assets and Anadarko bought the rest of that in the chemical company. I don't think they really wanted chemical company as it turned out later on, but in any case, M&A as a function of the company now, it's really -- we've been approached to do mergers. Usually, we get approached and it's is gee, let's do a merger. We don't have any real stock in our company, but we think you ought to merge with us and give us all your stock, and I'll run it for you, that doesn't work at any price ready for me and for our management team. But to put a number on it, we go out and do a $2 billion transaction and merger, yes, we could do that.

And do you think that -- you think you would access some of the nontraditional markets that you've gone to over the last year?

We think so similar type of transaction. I don't really know quite what Munich Re status is with regard to things they might want to finance. But these things do lend themselves to leverage finance. I want to be a little bit careful in thinking about it because clearly, in a larger transaction, you need to bring more equity to the table and how do we do that? Well, we would probably use our own. We still have our stock as our own currency, depending on the size of the transaction. If you're talking about a straight merger as opposed to an acquisition, then maybe we bring in some other financial partners as well to help us follow the equity portion of that.

And I'll ask one more question. So obviously, you have the ability to fund the repayment of your bond yourself, as you pointed out. It's a great position to be in. Have you -- and obviously, you've been in the higher bond market before. I'm curious that the growth in private credit, is that something that's being presented to you? And is it just more costly or is it -- possibly another way to go?

Short answer is no. It's not more expensive. It has been presented to us. It is something that's under consideration.

All right, Tracy, I always love hearing your insights. And I want to thank you again for coming. I'd like to have a round of applause. Thank you so much.

Thanks all. Thanks for staying for a late presentation too.