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

Welcome you to our fireside chat today with W&T Offshore. With us from W&T is the company's Founder, Chairman, Chief Executive Officer, and President. Our discussion today will include forward-looking statements. I would refer people to W&T's disclosures regarding forward-looking statements, which can be found in the company's latest corporate presentation under the Investor Relations tab of its website. We will refer to some of the slides in that presentation today. So it might be useful if you -- but we won't have it on this webcast. So if you -- people would like to pull it up, feel free. By way of background, W&T is an offshore exploration and production company whose business strategy concentrates on acquiring and developing oil and natural gas properties in the U.S. Gulf of Mexico. As of year-end 2022, proved reserves totaled 165 million BOE from 47 producing fields. Nearly 85% of your proved reserves are located on the shelf in the Gulf of Mexico, which also accounted for about 75% of first quarter 23%. Tracy, I'd like to thank you for joining us today and taking the time.

Great to be here, Jeff. Thanks for having me.

Tracy, you started your career as a petroleum engineer out of LSU in the Gulf of Mexico. And since you founded W&T, your strategy has almost entirely been focused on Gulf of Mexico assets. Why are you growing to the Gulf as a producing basis?

There are several reasons. The first is this is a huge basin. And it's the second largest producing basin but also the largest basin by area. As a young man, I started in the Gulf literally working on a drilling rig before I went to college. And I left that experience with the idea that this was the treasure hunting business and that I wanted to be part of it. So with that in mind, I've come to find out over the years that the Gulf of Mexico gets reinvented all the time, primarily is a function of better data, I've always noticed that there's another deal to do in the Gulf of Mexico because it is a big basin. There's always another well to drill or another acquisition to make, I haven't run out of things to do for the last 40 years, and I don't think I will.

Do you think the reservoir quality in the Gulf is -- and maybe even the opportunity set is misunderstood by many investors?

No, it really is, we think of the vast oil fields in West Texas and the Bakken and other parts of the world, this rock in the Gulf of Mexico is superior to most places on the planet. Great porosity, great permeability. Permeability is often measured in darcy's as opposed to nonedarcy's, what we see in West Texas. So that means on the face at about 1 billion times better than permeability in West Texas. We don't use the efforts. We don't frac. We don't flare. I know that sounds simplistic, but we don't have to because the rock buffers are good and statutorily, we have to put the gas in the pipeline and send it to the bank, except for a few small exceptions for testing and equipment upsets. No matter what the stuff that we see in these unconventional basins still is geologically dependent. So the better producing wells are in better geology. And the Gulf has vastly better geology in rock properties than what we see in West Texas.

So you have some first-hand experience in the Northern Midland Basin when W&T spent a couple of years working in the northern part of the Midland Basin in the early days of the unconventional shale plays. Can you talk about the return profiles of unconventional wells based on your experience and what you see in the Gulf of Mexico?

Yes, it's pretty astounding. In West Texas, and I don't mean to belittle that at all, it's a great discovery, and there's always something to do there as well. The unfortunate part about it is it's very, very sensitive to pricing and market timing. So as I think about West Texas and decline rates, first year decline rates are usually very large. A lot of times on the order of 70% to 80% decline in the first year. In the Gulf of Mexico, we may see 12% to 15% decline over a number of years at very high rates. So I tend to believe that that's a better formula for us. We see longer lived reserves in the Gulf of Mexico as well that returns sustainably.

Do you think one area is maybe any more scalable than the other? Maybe just for a company W&T size?

Yes. I don't -- extensively, when you think about deepwater, you think about higher costs, and of course, they are. So typically, we don't take more than about 25% if we drill well there. We prefer to operate, we see acquisitions, and we'll take higher percentages on the acquisitions, of course, because that's proved production.

As I mentioned, in terms of crude reserves, W&T's year-end 2022 proved reserves were about 165 million BOEs. You will have a case where W&T has approximately 80 million BOE of probable reserves and another 100 million BOE of possible reserves that are associated with the existing asset base, which brings the total resource potential of the company to roughly 345 million BOE. Tracy, I believe the vast majority of your probable reserves are booked to existing producing wells, can you talk about the capital cost to convert those probable reserves to proved reserves?

Yes. Well, very often, the capital cost is 0 because of the way these reserves are initially booked. We have a category called probable and possible that aren't including improved reserves, of course, but the likelihood of recovery is very high. And we've seen this over a number of years in these reservoirs, very often their water drive reservoirs, active [indiscernible] that oil to the wellbore, the existing producing reserves from a down-dip location at the oil water contact. We don't have to drill as many wells, mother nature helps us a good deal. Typically, we'll see recovery rates in the 60% to 65% range in oil reservoirs, with active water drive similar with depletion drive reservoirs, because of such good rock properties, we can see recoveries at 90%.

Over time, should investors then expect that the probable reserves will be reflected in W&T's reserve report through positive performance revisions?

You bet. And we do see that. And eventually, we do book those reserves. And we've got some examples about that in the presentation that show that reality. Right now, based on reserves at the end of the year, we're sitting on about $3.2 billion of cash that will come to us without having to do any CapEx. Now we will have ordinary lease operating expenses, of course, but not -- it doesn't require any additional CapEx to capture those reserves over time.

So is it fair to say that 1 aspect of that is putting the take point in terms of the wells is in the right spot on the structure to be able to have that backlog of probable reserves?

Yes. In fact, a lot of times, we'll target that, of course, in greenfield, which we don't do a lot of greenfield exploration. We do some. But based on what we see in the seismic, we will try to do that, and clearly, when we drill a well, we log it, we'll try to locate where those contacts are and appropriately position those wells so that we can make those maximum recoveries.

Acquisitions have been a key building block to W&T's asset base over the years. Since 2010, the company has closed 10 acquisitions for a combined acquisition price of roughly $900 million. Last year, W&T acquired interest from 2 sellers in the Central Gulf were about $48 million. Can you outline the characteristics of an ideal asset package or asset that fits W&T's profile?

Sure. The first thing we look for is cash flow. How much cash flow are we looking at over time? The second thing we look for is what can we do to improve the properties for the drill bit? So we usually have pretty good data. If we don't, we will purchase the data post purchase. And then we also -- in the data rooms, we look for workovers, recompletions, facilities upgrades, things that we can do to increase tax -- excuse me, cash flow prior to taking over the field. We'll look at all these things. And if the answers are all good, and we can reduce cost and increase production. And we've got existing cash flow and a good reservoir base, that's kind of ideal. Then it's just a matter of price and what is a reasonable amount to pay for these properties.

Can you talk about the economics of adding reserves through acquisitions versus perhaps drilling either development or exploration wells in the Gulf at the moment?

Sure. Right now and not just now really, I mean, over time, we've always found it to be a better choice to make acquisitions as opposed to drilling wells, although we have a very good success rate. We're normally about 90% on successful wells. But I will tell you that when we think about acquisition versus drilling, acquisitions bring some other advantages with it as well. We do enhance the production by reducing costs. We do this in an environmental friendly and safe manner. We've got an excellent safety record. I think that you reduce risk with acquisitions. You also create other possibilities with these acquisitions because data changes over time. We get better data over time, and that's been the experience for the last 40 years is better data. And by that, I mean seismic data generally. So because of that, the Gulf refreshes, and that's what I say when I hear this mantra, the Gulf is dead, the Gulf is dead, long live the Gulf. The reason that the Gulf continues to live is because of this new data. Occasionally, we'll get a breakthrough in technology that is more oriented towards drilling and completion, but that's really not the basis for continuing this very sustainable basin. It's generally data-driven with seismic.

As the seismic data in terms of generational improvements, I guess it's partly due to new data acquisition techniques, but also probably equally as important, new processing techniques on the existing data to get more information out of what's in the day stack. Is that correct?

Man, computers have made such a big difference. In a 3D survey, you just got so many different rate paths and that have to be calculated. Now we're working subsalt at deeper depths, which requires even more data and more processing to image properly. And we've had very good success for that. Mahogany is a great example. We bought that field from 3 different owners, we had pay sands at about 15,000 feet. We imaged over time about 3,000 feet below that. We made a large discovery there, and the reserves have gotten bigger over time, and because of that data, we were actually able to image hydrocarbon indicators below salt. So -- and that data has gotten better over time, and companies have figured out ways to process it even better.

W&T's acquired interest from variety different companies from the likes of ExxonMobil down to smaller private independent companies. Is the acquisition opportunity in the Gulf very deep as some of the owners and maybe in particular the larger companies continue to look to rationalize their portfolios?

Absolutely. I mean that's been the cycle for as long as I've been in the Gulf. The Exxons and Shells and Chevrons of the world, Conoco and larger independents, they all make these discoveries. And over time, they produce a lot of products, and then it becomes apparent to them that maybe they should sell and rationalize that portfolio, take those funds and use them somewhere else. And what they look for is somebody who can, of course, pay what they want for it, but also manage that property in a responsible and environmentally sensitive methodology.

Tracy, you mentioned W&T safety record a moment ago, is an operator's reputation a key part of the willingness to -- for the bigger companies to do business to transact with smaller companies?

Yes. I firmly believe that if you're an Exxon or Chevron or any one of the larger companies, I think it's very important to note that that you don't have to be concerned with it 20 years from now. The properties are going to be properly decommissioned. You're going to meet your obligations, they don't want it back, and we don't want to get it back. So I think that's important. And I think that we're well known for having a really good operational team. Jeff, I've lost sound.

Tracy, can you hear me now?

There is. No, I got you.

Accidentally got muted.

No problem.

Talk that again. Slides 15 through 17 of W&T's most recent corporate presentation highlighted some case studies illustrating how the company has added value to acquired assets through the combination of incremental drilling and facilities improvements. Cumulative net cash flow on the case study assets through year-end 2022 was about $1.6 billion compared to a total purchase price of about $461 million, and at year-end 2022, the remaining PV-10 of the assets, including retirement obligations totaled about $2.7 billion to bring the total project value to roughly $4.4 billion. So it's quite a history over a number of different assets of adding value from the time of acquisitions, as you alluded to a minute ago, Tracy. Is it common to find significant incremental value add opportunities on assets once the owner has decided to rationalize an asset?

We've had very good luck and we spend a lot of time analyzing these properties over long periods of time. Again, it's data driven. Sometimes, we'll see it even in the production data, where we find out things about some of these wellbores that weren't necessarily apparent at the start. For instance, in some areas, we've seen increases in production over time just because some of these reservoirs are segmented. We think of these reservoirs as being homogeneous, and we can figure out based on the reservoir characteristics of a very small sample of that reservoir, what it's going to be doing 2,000 feet away, and that's not necessarily true. So we've had good success with that. I think, again, this is price driven as well. So what we've tried to do is make sure that we don't do anything that prematurely abandons that production. So we do cut costs. We do manage the properties, and we will focus on spending money on that particular project, whereas a larger company has bigger fish to fry, if you will, they can take that money and make a greater return on it. It is somewhat of a food chain, and we recognize that over a long period of time, but it's not generally because they're not aware that there's upside here. You don't want to just sell something with this, no meat on the bone or no value. Otherwise, you don't get anything for it. It's just an abandonment liability. So these companies are very sophisticated, very intelligent, they have excellent engineers, excellent operational people. But we laser focus on these projects and spend a great deal more time and effort and have the advantage of looking at this over a long period of time and being able to be a little more patience with the data that we can process over time and reprocess and even shoot again.

You mentioned the data set that opened up new opportunities at Mahogany, but I think you all W&T has also been quite successful on the facility side, working on the Mobile Bay complex to add value. So as you alluded to, it's really more than one way to add value to an acquisition or maybe a combination of both between drilling and really focusing on costs. Is that the way people should think about it?

I believe so. I mean when we bought these properties from Exxon, they recognize that there was the possibility of reducing cost by closing 1 of the plants. In fact, that's how we originally started talking about it. So we already had production in the area, and ended up in a high bid for those properties from us. But I don't -- I never dilute myself thinking that larger companies are ignorant about their operations or what it costs. They're certainly not. I like my properties from larger companies because they're generally better taken care of.

W&T announced memorandum -- excuse me, of understanding with Korean National Oil Corporation in May of 2022 to jointly consider opportunities in upstream oil and gas, along with potential opportunities of just along the energy value chain in North America. Can you talk a little bit about how the relationship with Korean National Oil company started. And can you talk at all about what types of projects might fit the joint business opportunity?

Sure. I mean they were -- they had made a decision to sell these properties over time. I was familiar with some of them because I worked for the company that sold them to them originally at one point. That was many years ago. So most of the properties weren't germane, but certainly, the company name was. The idea that we structured a memorandum of understanding with Korean National Oil company was a little bit unique. They -- I think they recognize that we had some expertise in operations. And we -- this didn't happen overnight. It happened over a period of time. They did their due diligence. They did their due diligence on us as well and got comfortable with us as operators and caretakers in the long-term. This is a sovereign oil company. So a state-run sovereign oil company. We talked about a number of things. We talked about acquisitions, further acquisitions. We talked about drilling in different parts of the Gulf and perhaps other parts of the world. We talked about carbon capture, underground storage. We talked about even alternative forms of energy and what they were doing and what their observations have been elsewhere. So there's no real set procedure that we have for things that we might do together. We're busy, they're busy. The world has changed a lot since then, now particularly with the idea of COVID and other things. So we've all had to adjust, but I'm very happy for the relationship. We're working on some other things with them now that are more to do with some of the issues they've had in some of their other properties. So I think we both have benefited from that relationship and expect to do so more in the future.

Clear for people who may not be familiar with them, is it right that they entered the Gulf when they acquired or maybe partnered with some of the producing assets of Taylor Energy, a private company that I think you worked for?

That is exactly right. Yes. Yes. They bought those assets from Taylor and did pretty well with them. And typical of larger companies, they got a little bit later on in life and decided they wanted to rationalize that portion of their portfolio.

You touched on a couple of things. We briefly mentioned the W&T's experience in the Northern Midland Basin. But are there other producing regions that would fit W&T skill set?

Jeff, there are, we prefer conventional assets as opposed to unconventional, not because I don't think there's value in unconventional assets, I think there is, it's just our expertise runs more towards the conventional side of it. I think that in other parts of the world, I mean, I've seen some excellent opportunities in the North Sea, but if you've noticed lately, they've slapped with pretty big windfall profit tax on that. And I noticed a long time ago, they could change the tax basis within 48 hours just by agreement with the exchequer and the Prime Minister. So that introduces a little bit more political instability for us, not that they don't have rule of law, they do. But political instability is a concern. We've looked in Africa and Nigeria that the geology is very similar, West Coast of Africa, geology can be very similar to what we're seeing in the Gulf of Mexico, big fat juicy Miocene sands, that produce a lot of products. They have great rock properties, good variety, good permeability. We've looked in Guatemala and the job goes in Guatemala. And there was always -- unfortunately, at that point in time, there was a civil war going on. So that made it a little trickier. We've looked in the middle of China and couldn't figure out how we were going to get paid, and how we were going to be taxed, and nobody could tell us how that was going to be. And it wasn't that they weren't reserves there. There certainly they were. But we've been close in some other things. We've been closing some other things in West Africa. It's not that we don't look, we do. I keep coming back to the Gulf of Mexico because there is excellent rule of law. We understand the Gulf and the basin very well. It's not a philosophical issue. It's always an economic issue that steers us back toward the Gulf of Mexico, but I haven't given up.

I think as long as I've known you, Tracy, the underlying or maybe the driving factor of W&T's business philosophy is to focus on assets that generate cash and cash flow, can create excess cash flow that you can then take and reinvest in the business. So I would think that if you did look at another opportunity, it would fit that overarching characteristics?

Well, you're right. I mean, we've been positive free cash flow for the last 21 quarters through thick and thin of a pandemic, economic collapse, political upheaval, war in Eastern Europe, and even massive inflation here at home. So we're -- and we still managed to make money. I wish I had a little bit more input into how things get run, but I don't. And I'm not necessarily certain that's not a bad thing. I think that there's a lot of opportunity in this space and there will continue to be. I love it when people tell me it's dead because that means there's a lot more opportunity.

W&T produced about 32,500 BOE a day in the first quarter of 2023 and generated adjusted EBITDA of $43 million. As you said, the first quarter was the 21st consecutive quarter in which the company generated free cash flow. Cash on the balance sheet at the end of the quarter was $177 million, and that was after the company successfully refinanced some notes that were due in 2023. I believe net debt to trailing 12 months EBITDA was about 0.4x compared to about 2x a year ago. The budget this year includes some long lead time items for the Holy Grail well that could be drilled in 2024. When you think about the capital program, Tracy, how flexible is it to reallocate capital to either fund an acquisition or maybe other development opportunities that are -- that people are looking for partners on in the Gulf?

No, Jeff, that's almost a daily discussion. We're flexible enough that the management on this is fairly vertical. The doors are open for discussion. We can get to decisions very quickly. I don't really care whether we drill for it or whether we buy it. What I care about is whether it's economic and whether it's going to benefit our shareholders, which one is going to benefit our shareholders the most. We've got a very good record of managing that over a long period of time. And I think that's important. I like the idea that we can almost predictably look forward to better data over time, particularly with the advent of AI and the things that are going to happen with that. I think it's going to open up a lot of different doors going forward. And I hope to see W&T as a part of that.

So when you think about it -- or I'm sorry, just investment opportunities, whether it's an acquisition or development well or an exploration well. How important is cycle time on those projects given your focus on cash flow?

It's so important. The acquisitions, you have a predictable cash flow that makes you feel good. Drilling, even if it's proved reserves, there's still that problem that you're dealing with things that are intangible until you drill away. And I haven't had a whole lot of surprises in my life with regard to proved reserves, but there have been a few over the last 40 years that disappointed me. I think that as we go forward and we think about what's going to happen in the Gulf of Mexico, people are still drilling in the Gulf of Mexico. People are still going to sell properties in the Gulf of Mexico. We're still going to have those opportunities; shareholders are going to benefit from that. We're a substantial shareholder in the company. We own, as a management team and myself, about 34% of the shares, which is unusual for a public company. And I'm pretty sure as a public company in the Gulf of Mexico, we're leading that category. So I like the upside, I don't really worry too much about the downside. It seems like over the years, we've had -- we certainly had political interruption. We've certainly had actual moratoriums on production in the Gulf of Mexico as a result of an unfortunate blowout incident, whose name I will not repeat. And then there's also -- there's the fact that price swings are things we don't get to control. We can try to plan for it, and we can certainly utilize hedging tools to do that. But the upside is and always has been, there's always another deal in the Gulf of Mexico. It's a huge basin. People are still drilling wells. We're still finding reserves. Production is as high or nearly as high as it's ever been in the Gulf. So -- and these are low carbon intensity barrels. So other than the Saudis, were we have a very decided advantage on the carbon content of our barrels. So -- and we don't frac, we don't flare. So I think those are all very positive things for this basin. And I tell people all the time that we're not just in the treasure hunting business. We're in the treasury finding business, and that's what sustained us.

You mentioned the managements inside ownership. I think you own 34% of the outstanding common stock and have been a very significant shareholder since W&T obviously became public and before when it was private. How does your ownership stake and guide the risk appetite of the company?

You think of it like it's your own pocketbook because it is. A lot of people will tell you working for other companies. Well, I treat the company's money as if it was my own, there is a difference when it really is your own. So you think about decisions differently because it affects you personally. And that's a major advantage that we have. It also tempers you and not doing any one thing that's going to bring the company down.

Tracy, W&T last paid a common stock dividend in the fourth quarter of 2015. Are there any circumstances that the Board might consider to reinstate or reinstitute a return of capital to shareholders strategy?

Yes, you bet. I mean, we -- in 2014, '15, '16 time frame, we got to the point where we had too much debt. And we've spent many years paying that down. We went from $1.5 billion to having to make a decision whether we were going to take on a new issuance or we were going to retire the debt. We decided that we would take on a new issuance mainly for liquidity purposes. So now we're sitting here with a pile of cash and opportunities that I think are pretty deep. So I don't think too much about the concept of what our sustainability is going to be going forward.

Basically, we've touched on acquisitions. We've touched on development. We've touched on the upside W&T has been able to add to acquisitions. Can you summarize for people what you think the value proposition is for investors today?

Man, I have a big list for that, Jeff. And it's kind of like the Letterman list, okay, when he was doing the broadcast everything, here's the top 10 not necessarily in ascending or descending order. We are aligned with shareholders because of the large amount of shares that we hold and control and that's a really big difference. And I think that that's hard to find. It's rare in this business. We are in a risk business. We're -- sometimes we take fairly high risk. And I think that people should recognize that this business contributes to the -- not just the economy, but our lifestyle and our health as a function of what we produce out of the Gulf of Mexico. We've always been focused on free cash flow. That's been a hallmark of the corporation. We enjoy that, as a function of our labors. And the team is compensated by how well we perform. And so they get to take a personal part of that. And I understand that we've done this through a pandemic. We've done it through economic upheaval, this war in Ukraine, climate change, ESG considerations, changes in political ideology, inflation, higher interest rates, and dramatic swings in product pricing, that we can't necessarily predict. We made a pretty good call last year on hedges and buying some long calls, and that proved to be fairly prophetic, added a lot to the bottom line. Debt credit lines have certainly tightened a lot over the last couple of years. It's been very difficult. And we -- I remember in April of 2020, where we went to a minus $37 price at $70 a barrel, we're over $100 a barrel better than we were then. So I like the aspect that this is a very resilient basin, and there's always something new to do. We've -- again, we've reduced that debt from $1.5 billion to about 0.4x on that debt to EBITDA, and we would like to manage that debt and we will manage it going forward. That's been one of the things, I don't think investors have really appreciated as much as we have because we needed to control that debt and we did. We took some risk, and it didn't work out, the way we hoped it would. And a lot of that was due to timing, but we don't get to control the time. You still have to make sure you don't do anything that doesn't bring your company down, that's been a hallmark for us. One of the other really important things, our personnel, we've got an older workforce. And I like that for a couple of reasons. One, it's a lot of experience. There's a lot of maturity level. They come to us as capable, and they leave more capable through the training and experience that we can provide as well great safety record. We're sitting on a pile of cash and liquidity totaling about $177 million with a lot of opportunity sets going forward. We've become very good at doing plug and abandonments in the Gulf of Mexico. In fact, we've done about $1 billion work so far. And I would argue that that's more than any other major in the Gulf of Mexico is done, over time, generally because they're smart enough to sell them to guys like us, and we take care of it and we manage that. We have a pretty good inventory of high impact drilling opportunities. We're going to give you some more information on that going forward. I expect to have some more news on that before the end of the year. We have 40 years in this basin, again, the second largest producing basin in the U.S. and the largest basin by area. And we've been out here for 4 decades, and we keep finding things to do. This is a great place to not just hunt for treasury, but to find it. And we don't really care whether we do we drill bid or acquisitions where we can take properties and make it more valuable.

I think we'll leave it there for today. I look forward to hosting another fireside chat as W&T's offshore business continues to evolve over the next several months.

Well, great talking to you, Jeff, and thanks for listening to us today and great questions. We're very excited about this company and what we're going to be doing going forward. And we think now is the time. We've got cash and a minor amount of debt, and it's a really good feeling for us.

Great. Thank you so much for your time today.

Thank you, sir. Bye-bye. Bye.