U.S. Markets close in 34 mins

Edited Transcript of WTI earnings conference call or presentation 28-Feb-19 3:00pm GMT

Q4 2018 W&T Offshore Inc Earnings Call

HOUSTON Mar 6, 2019 (Thomson StreetEvents) -- Edited Transcript of W&T Offshore Inc earnings conference call or presentation Thursday, February 28, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Al Petrie

W&T Offshore, Inc. - IR Coordinator

* Janet Yang

W&T Offshore, Inc. - Executive VP & CFO

* Tracy W. Krohn

W&T Offshore, Inc. - Founder, Chairman, CEO & President

* William J. Williford

W&T Offshore, Inc. - Executive VP & GM of Gulf of Mexico

================================================================================

Conference Call Participants

================================================================================

* Jacob Alexander Gomolinski-Ekel

Morgan Stanley, Research Division - Analyst

* John W. Aschenbeck

Seaport Global Securities LLC, Research Division - MD & Senior Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by. Welcome to the W&T Offshore Fourth Quarter and Full Year 2018 Conference Call. (Operator Instructions) This conference is being recorded, and a replay will be made available on the company's website the following the call. I would now like to turn the conference over to Al Petrie, Investor Relations Coordinator.

--------------------------------------------------------------------------------

Al Petrie, W&T Offshore, Inc. - IR Coordinator [2]

--------------------------------------------------------------------------------

Thank you, Pia. And on behalf of the management team, I would like to welcome all of you to today's conference call to review W&T Offshore's Fourth Quarter and Full Year 2018 Financial and Operational Results.

Before we begin, I'd like to remind you that our comments may include forward-looking statements. It should be noted that a variety of factors could cause W&T's actual results to differ materially from the anticipated results or expectation expressed in these forward-looking statements.

Today's call may also contain certain non-GAAP financial measures. Please refer to the fourth quarter 2018 financial and operational results announcement we released yesterday for a disclosure on forward-looking statements and reconciliations to non-GAAP measures.

At this time, I'd like to turn the call over to Tracy Krohn, W&T's Chairman and CEO.

--------------------------------------------------------------------------------

Tracy W. Krohn, W&T Offshore, Inc. - Founder, Chairman, CEO & President [3]

--------------------------------------------------------------------------------

Thanks, Al. Good morning, everyone, and thanks for joining us for our fourth quarter 2018 conference call. So with me today are David Bump, our Executive VP of Drilling, Completions and Facilities; William Williford, our Executive VP and General Manager, Gulf of Mexico; Janet Yang, Executive VP and Chief Financial Officer; Steve Schroeder, our Chief Technical Officer; and Jim Hersch, our VP, Geosciences. They are all going to be available to answer questions later on during the call.

So over the past 35 years, we've had many success -- significant achievements and milestones, and I'm proud of how well we executed on our strategy and achieved those goals that we set for ourselves in 2018. This past year, we meaningfully grew reserves, thanks in large part to the robust drilling results we've had as well as through positive revisions for well performance that continues to exceed forecasted expectations.

Our strong, stable production base generated adjusted EBITDA of $344 million in 2018, providing us with the cash needed to fund our capital program and reduce debt to bolster our financial position. You can spell that out as cash flow positive if you wish. We've been looking to simplify our capital structure and we're able to accomplish that in October by completely refinancing our debt, reducing our total debt principal by over $200 million and establishing a larger revolving credit facility that further extends out all of our maturities.

Finally, we also entered into a drilling joint venture that allows us to accelerate the development of our high rate -- our high return inventory, lower our overall risk and maximize financial flexibility. This will enable us to achieve really and pursue additional accretive acquisitions similar to the Heidelberg field acquisition that we completed in 2018.

So before we review fourth quarter results and provide an operations update, I'd like to review these important achievements in a bit more detail. Our year-end 2018 SEC proved reserves grew to 84 million barrels of oil equivalent, with 58% being liquids. This is an increase of 13% compared to 74.2 million BOE at year-end 2017.

With total 2018 production of 13.3 million BOE, we were able to achieve a pretty impressive reserve replacement rate of 174%, driven by robust drilling results as well as through significant positive revisions of our 18.8 million barrels of oil equivalent from impressive well performance that continues to exceed forecasted expectations. We also benefited from the year-over-year pricing increases.

The increase in reserves and pricing led to a meaningful increase in the PV-10 of our proved reserves. At year-end 2018, our SEC proved reserve value increased 44% -- 45% from 2017 to $1.4 billion. So this certainly demonstrates the significant value of our premier Gulf of Mexico assets.

So as most of you are aware, we had several debt maturities coming due in 2019, '20 and '21, with the debt principal outstanding balance of $903 million. So to address those -- these items and to simplify our capital structure, we closed on a major debt refinancing and issued $625 million of new 9.75% senior second lien notes, extending our maturities to November 2023. Net proceeds from the issuance, along with cash on hand and borrowings on an updated result -- revolving credit facility, were used to retire all of our previously outstanding notes.

So concurrently with that, we entered into a Sixth Amended and Restated Credit Agreement with a sixth member bank group that primarily includes banks from the prior group, but also includes 1 new bank. This revolving credit facility has an increased initial borrowing base of $250 million and will mature on October 18, 2022. So at December 31, 2018, the company had $21 million of borrowings, which is down from $61 million initially from that revolving bank credit facility, the new one, and $9.6 million of letters of credit outstanding.

So as a result of this very successful debt refinancing and our continued ability to generate strong cash flows from our asset base, we're able to increase our total liquidity to $252.7 million at year-end 2018. So our liquidity consists of an unrestricted cash balance of $33.3 million and $219.4 million of availability under our revolving bank credit facility. So this enhanced liquidity significantly improves our financial flexibility to seek additional ways to further increase shareholder value.

So in March 2018, W&T entered into a multiyear joint exploration and development agreement that secured $361 million commitments from outside investors in W&T for the development of 14 pre-identified projects in the Gulf of Mexico. We initially received 30% of the net cash flows through drilling program wells or contributing 20% of the capital expenditures plus associated leases and providing access to available infrastructure.

Our net revenue increased to 38.4% upon the outside investor reaching certain returns. The joint venture allows us to continue unlocking the value of our drilling opportunities while drastically reducing our capital expenditures. It also allows us to accelerate the development of our high-return inventory while bringing significant cash back to the corporate entity and maintaining the flexibility to manage our balance sheet and pursue additional accretive acquisition opportunities.

So let's now review our operational and financial results for the fourth quarter and full year 2018. Our production in the fourth quarter 2018 was 35,000 barrels of oil equivalent per day or 3.2 million barrels of oil equivalent, which was down about 4% compared to the third quarter of this year, primarily due to Hurricane Michael and an additional downtime totaling approximately 1,000 BOE per day.

Despite this downtime, fourth quarter production came in near the midpoint of our guidance range. We continue to have strong liquids production with 62% of our fourth quarter production coming from oil and NGLs. The commodity prices did decline compared to the third quarter with average fourth quarter realized prices for oil at $62.94 and NGLs at $26.84 per barrel. Crude differentials in the fourth quarter averaged roughly $4 per barrel higher than average WTI Cushing spot prices.

Revenues for the fourth quarter remained strong at $143.4 million and came in at $580.7 million for the full year 2018. We continue to generate strong stable production and impressive revenue, especially considering that we had total capital expenditures for oil and gas properties of $106.2 million for the full year 2018, excluding acquisitions, which was the same level as in 2017.

Our total fourth quarter LOE came in at $43.4 million, which was higher than the third quarter, primarily due to the increase in workovers and facilities maintenance that occurred later in the year than originally planned. So for the full year 2018, we incurred a lift in cost of $11.50 per BOE. And like I mentioned last quarter, we still have not seen any significant cost inflation to speak of in the Gulf of Mexico, like what's been occurring in the Permian.

We reported fourth quarter 2018 net income of $138.8 million or $0.96 per share, which was substantially greater than the net income of $23.4 million or $0.16 per share in the same period last year. So excluding the noncash gain on our debt transaction, unrealized commodity derivative gains and other items, adjusted net income in the fourth quarter of 2018 was $32 million or $0.22 per share, that's up significantly from $24.2 million or $0.17 per share in the same period last year.

So for the full year 2018, we reported net income of $248.8 million or $1.72 per share, which was substantially greater than the $79.7 million or $0.56 per share in calendar 2017. Adjusted net income for full year 2018 was $146.2 million or $1.01 per share, up more than 80% compared with $79.7 million or $0.56 per share in calendar 2017.

Adjusted EBITDA for the fourth quarter of 2018 continued to be strong at $82.3 million. And for the full year 2018, it was $344.2 million. These amounts were 13% and 28% higher than these same periods in 2017. While the absolute growth of our adjusted EBITDA is impressive, our adjusted EBITDA margin for full year 2018 was 59%, up nicely from 55% in 2017. Our full year 2018 cash flow from operating activities totaled $321.2 million, more than double the cash flow of $159.4 million in 2017.

I keep telling the markets that normal margins for us are around 60%, and that's about where we are now, reverting to the normal margins that we saw prior to 2014, which bodes well for our ability to generate significant cash flow moving forward. We've always been focused on free cash flow generation and will continue to do so in the future, one of the things we like about the Gulf of Mexico.

Quick update on the tax refunds. Of the $65 million we've discussed previously, we've received $11 million due to some delays with the IRS on reviewing and finalizing the structuring agreements. We still have $54 million to be received, and I hope to receive that in the first half of 2019.

Turning now to operations. Our 2018 drilling program achieved excellent results in the 3 fields where we have concentrated most of our capital this past year. This activity at Mahogany, Virgo and Ewing Bank 910 where we're drilling low-risk wells of existing infrastructure is a key reason we have kept production volumes steady at these fields. These are projects that can be drilled and put online fairly quickly, which allows for quick cash flow generation that substantially shortens payback times and enhances rates of return.

So in 2018, in our Mahogany field, we've put the A-17 well and the A-15 sidetrack -- actually, the A-5 sidetrack and most recently, the A-19 well on production. As a reminder, the A-5 sidetrack is the only well in the Mahogany field that is part of the drilling -- the joint venture drilling program we established with outside investors. While we have a 100% working interest in all the other Mahogany field wells, we have a 30% interest in the A-5 sidetrack. And once certain thresholds are met, it increases 38.4%, although we contributed only 20% of total capital expenditures for that well.

The A-19 well, which logged exceptionally high-quality T-Sand pay, was brought online in late November and is up dipped from the T-Sand first discovery in the A-14 well. The A-19 is being completed as a T-Sand producer and will have multiple zones behind pipe for future exploitation. The A-19 is our third producer in the T-Sand and has thus far shown significantly higher rates for early production than any T-Sand well drilled to date in the field with a productivity index that is more than double the best prior completion of the field.

T-Sand has reached a cumulative production of 7.2 million barrels of oil equivalent to date for the reservoir. A staged ramp-up of the A-19 well is continuing with a current rate of 5,205 BOE per day. The rig conducted a planned maintenance and repair program following the completion of the A-19 well. The platform rig will commence drilling in the second quarter with the A-20 development well, again targeting the T-Sand.

Adjusting Knoll 823, the Virgo field, we drove 3 wells in 2018, the A-10 sidetrack, A-12 and A-13 wells, which are all part of JV Drilling Program. The A-10 sidetrack was put online in the second quarter. In the third quarter, we drilled and completed the A-12 well, which logged 60 feet of net pay and began production. The A-12 well is currently offline, and we're evaluating the methods by which to enhance production in that well. The Virgo field platform rigs drilled the A-13 well to TD in the first quarter -- fourth quarter and found 77 feet of net vertical pay in the 2.4 second and 3.4 second sand intervals. Currently, the well is being completed as a duo and will be on production in the first quarter of 2019. Plans are to demobilize the Nabors MODS 201 rig from Virgo upon completion of the A-13 well.

So at the Ewing Bank 910 field, we completed the South Tim 320 A-2 well that logged approximately 163 feet of net pay, which exceeded predrill estimates. We brought the South Tim 320 A-2 online in December through the South Tim 311 platform. But due to limited equipment capacity to handle vapor recovery on the South Tim 311 platform, the well was brought online at a curtailed rate of 3,400 BOE per day. The issue will be resolved in the first quarter of 2019 to allow continued ramp-up of the A-2 well.

We commenced drilling on the South Tim 320 A-3 well following completion of the A-2 and forecast reaching target intervals by the end of March. We believe stratigraphic information from a high-quality thick Miocene that was penetrated in the offset wells has reduced the risk on that particular well, the South Tim 320 A-3 prospect. So both of these wells are in the Joint Venture Drilling Program.

Looking ahead to 2019, our capital program will continue to be focused on low-risk, high-return projects for some exploration wells as we strive to continue the greater than 90% success rate we have achieved in drilling more than 40 wells since 2010. We'll maintain our measured approach to drilling, fund all our CapEx with cash from operations and continue to generate significant free cash flow.

Our CapEx -- our capital expenditure budget for 2019 is expected to be around $120 million. We also expect to spend about $25 million on asset retirement obligations, which is in line with the $28.6 million spend on ARO in 2018. We believe that we will be able to increase production 2% to 3% in 2019 versus our full year 2018 production rate of around 36,500 BOE per day. This does not include acquisitions, and we are anticipating more acquisitions in 2019.

We also expect our LOE, G&A and gathering and transportation expenses will be similar to 2018 levels. Our release issued yesterday has more details on our 2019 first quarter and full year guidance. We'll continue to control the cost as we can to maximize margins and generate a significant cash flow from our operations.

So as we implement plans for 2019, we're looking closely at acquisition opportunities. The current environment for acquisition opportunities with Gulf of Mexico is as good as I've ever seen it, and we intend to actively pursue those that meet our criteria.

We have a set formula that's worked for over 3 decades. First thing we look for is good cash flow. We need to see the potential for strong cash flows that along with the properties that we're trying to acquire. And then the second thing is the upside to improve the reserve base that we continue with the drill bit to make the property more valuable. And then third part of it is workovers we complete and/or facility upgrades that we can implement to increase the immediate cash flow near term.

With our balance sheet now much stronger and new $250 million borrowing base in place and a high level of positive free cash flow being generated, we're well positioned to focus on growth. And for W&T, the Gulf of Mexico is always an excellent basin and we wish to achieve that growth.

So as in the past, we are clearly focusing on cash flow positive projects, whether that's with a drill bit or whether that's making acquisitions. That's very important to us and has probably been our biggest consistent accomplishment. We make sure that we continue to focus on that cash flow model. Because of our own -- our equity ownership of 33% management is incentivized to grow the company profitably over time and mitigate risks rather than simply focusing on shorter-term metrics that may not result in true value creation in the long run. So as you can see, we're tied to doing the things for and with our shareholders in mind. And since we're all significant shareholders here, as management, we intend to continue that trend.

So, operator, we can now open the lines for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And the first question will come from John Aschenbeck with Seaport Global.

--------------------------------------------------------------------------------

John W. Aschenbeck, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [2]

--------------------------------------------------------------------------------

So for my first one, I wanted to follow up on your Q1 production guidance, which is lower than the full year. And I was hoping you could walk us through some of the factors that are weighing down Q1 relative to the rest of the year.

--------------------------------------------------------------------------------

Tracy W. Krohn, W&T Offshore, Inc. - Founder, Chairman, CEO & President [3]

--------------------------------------------------------------------------------

Well, there are a number of them. I brought William Williford along with us. So I'm going to let him run that through for you.

--------------------------------------------------------------------------------

William J. Williford, W&T Offshore, Inc. - Executive VP & GM of Gulf of Mexico [4]

--------------------------------------------------------------------------------

So where we are right now in Q1, we have -- let's talk about the Mahogany field. Right now, we're doing a ramp-up on production. But we do have a planned downtime outage in that field to do a turnaround, just to clean it out to prevent downtime throughout the rest of the year. Additional, we have downtime in the Main Pass 6 -- 98, 72, which is our biggest unit Dantzler field. That should be up within the next, I guess, couple of days but currently down right now.

--------------------------------------------------------------------------------

Tracy W. Krohn, W&T Offshore, Inc. - Founder, Chairman, CEO & President [5]

--------------------------------------------------------------------------------

So maintenance issues, correct, yes.

--------------------------------------------------------------------------------

William J. Williford, W&T Offshore, Inc. - Executive VP & GM of Gulf of Mexico [6]

--------------------------------------------------------------------------------

So that's a key prediction of the downtime that we see as far as the fourth -- first quarter 2019, but just the consistent ramp-up as we bring additional wells online and maintain those on the rest of our fields for the rest of the 3 quarters.

--------------------------------------------------------------------------------

John W. Aschenbeck, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [7]

--------------------------------------------------------------------------------

Okay, great. That's helpful. Appreciate it. And then for my second one, more of a higher-level question on M&A. I'm hoping you can entertain me here. But just as you look at W&T out into the near future, call it, a year or 2 from now, what does the company look like? And how much larger is it from the size that it is today?

--------------------------------------------------------------------------------

Tracy W. Krohn, W&T Offshore, Inc. - Founder, Chairman, CEO & President [8]

--------------------------------------------------------------------------------

Well, we have -- that's just a little minor question there, John. Okay. So yes, we do expect to see M&A. Yes, we expect to increase the size of the company. Exactly how much that will be, I'm reticent to forecast. My goal is to double it again in the next 5 years. I think that's fairly conservative.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

(Operator Instructions) And the next question will be from Jacob Gomolinski with Morgan Stanley.

--------------------------------------------------------------------------------

Jacob Alexander Gomolinski-Ekel, Morgan Stanley, Research Division - Analyst [10]

--------------------------------------------------------------------------------

It looks like you spent, you said, about $106 million on CapEx in 2018 and production sort of -- I guess, liquids production declined about 5%; total production, 9%. And then we're talking about $120 million in '19 with 6% liquids growth and 2% to 3% overall. Can you help us understand maybe what might be driving that rate of change sort of given that the $14 million delta in CapEx, but I guess, a pretty meaningful change in production? And...

--------------------------------------------------------------------------------

Tracy W. Krohn, W&T Offshore, Inc. - Founder, Chairman, CEO & President [11]

--------------------------------------------------------------------------------

Yes, yes, I think that's fairly easy to do. We have x number of dollars coming in, we have x number of dollars going out, we're trying to maintain cash flow positivity. I think that's important to us so that we can take advantage of some of the other acquisitions that we see coming up. So we want to save our dry powder as much as we can. We do see quite a bit of activity on the M&A side. And I think that's important for us to save our dollars in that direction as well. The production that we have, I think, is relatively conservative. It's got some downtime or whatnot in it for hurricanes and repairs that we've seen over the last several years. So I think we're taking a fairly conservative approach here.

--------------------------------------------------------------------------------

Jacob Alexander Gomolinski-Ekel, Morgan Stanley, Research Division - Analyst [12]

--------------------------------------------------------------------------------

Okay. And apologies if I missed this, but does that $120 million, how much of that will go to the Monza JV? And does that include -- does that $120 million include JV capital contributions from third parties or is that just your outlook?

--------------------------------------------------------------------------------

Tracy W. Krohn, W&T Offshore, Inc. - Founder, Chairman, CEO & President [13]

--------------------------------------------------------------------------------

No. The $120 million is the dollars that go into the W&T and somewhat into Monza, but I don't have the exact number on the Monza portion of it. It's minor in comparison to the rest of it as W&T. W&T owns about 20% of the Monza drilling joint venture.

--------------------------------------------------------------------------------

Janet Yang, W&T Offshore, Inc. - Executive VP & CFO [14]

--------------------------------------------------------------------------------

On the capital.

--------------------------------------------------------------------------------

Tracy W. Krohn, W&T Offshore, Inc. - Founder, Chairman, CEO & President [15]

--------------------------------------------------------------------------------

On the capital side, that's right.

--------------------------------------------------------------------------------

Jacob Alexander Gomolinski-Ekel, Morgan Stanley, Research Division - Analyst [16]

--------------------------------------------------------------------------------

Right. But the $120 million is just your capital, not JV partner capital or any JV capital contributions?

--------------------------------------------------------------------------------

Tracy W. Krohn, W&T Offshore, Inc. - Founder, Chairman, CEO & President [17]

--------------------------------------------------------------------------------

Yes, that's correct.

--------------------------------------------------------------------------------

Jacob Alexander Gomolinski-Ekel, Morgan Stanley, Research Division - Analyst [18]

--------------------------------------------------------------------------------

Okay. And then just the last question. It looks like operating costs are a bit higher in '19 versus '18 and about $1.50 over the first 3 quarters of '18. I know you mentioned some workover expenses in Q4. Is anything driving that increase in production costs in '19 versus kind of...

--------------------------------------------------------------------------------

Tracy W. Krohn, W&T Offshore, Inc. - Founder, Chairman, CEO & President [19]

--------------------------------------------------------------------------------

Sure. One of the things driving that is -- yes, I'm sorry.

--------------------------------------------------------------------------------

Jacob Alexander Gomolinski-Ekel, Morgan Stanley, Research Division - Analyst [20]

--------------------------------------------------------------------------------

No. Yes, go ahead, sir.

--------------------------------------------------------------------------------

Tracy W. Krohn, W&T Offshore, Inc. - Founder, Chairman, CEO & President [21]

--------------------------------------------------------------------------------

I'm sorry. Yes, one of the things driving that, Jacob, is Heidelberg. We made that acquisition last year. It's a deepwater facility, has a little higher operating costs. And then we do have some work related to maintenance on a couple of other platforms that we mentioned earlier, mainly Mahogany. So we'll be -- we'll have a little bit of downtime as a result of that, and a little higher lease operating expense as a result of that. These are planned -- this is planned work for maintenance for this structure. So you do see that reflected. Prices, however, are not -- and costs on a normalized basis are not going up with regard to this basin as opposed to other basins.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

And at this time, there are no further questions. At this time, I would like to turn the conference back over to Al for any closing comments.

--------------------------------------------------------------------------------

Al Petrie, W&T Offshore, Inc. - IR Coordinator [23]

--------------------------------------------------------------------------------

Tracy, any closing comments?

--------------------------------------------------------------------------------

Tracy W. Krohn, W&T Offshore, Inc. - Founder, Chairman, CEO & President [24]

--------------------------------------------------------------------------------

No, I have nothing else. Hopefully, we'll have something for you. In the not-too-distant future, I think you'll all be impressed. Thank you very much.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

Ladies and gentlemen. Thank you for participating in today's conference call. You may now disconnect.