Q2 2023 W&T Offshore Inc Earnings Call
Participants
Al Petrie
Sameer Parasnis; Executive VP & CFO; W&T Offshore, Inc.
Tracy W. Krohn; Founder, Chairman, CEO & President; W&T Offshore, Inc.
Jeffrey Woolf Robertson; MD; Water Tower Research LLC
John Marshall White; MD & Senior Research Analyst; ROTH MKM Partners, LLC, Research Division
Nathaniel David Pendleton; Associate Analyst of E&P; Stifel, Nicolaus & Company, Incorporated, Research Division
Presentation
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the W&T Offshore Second Quarter 2023 Conference Call. (Operator Instructions) This conference is being recorded, and a replay will be made available on the company's website following the call.
I would now like to turn the conference over to Al Petrie, Investor Relations Coordinator.
Al Petrie
Thank you, Joe. 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 second quarter 2023 financial and operational results.
Before we begin, I would 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 expectations expressed in these forward-looking statements.
Today's call may also contain certain non-GAAP financial measures. Please refer to the earnings release that we issued yesterday for disclosures on forward-looking statements and the reconciliations of non-GAAP measures.
With that, I'd like to turn the call over to Tracy Krohn, our Chairman and CEO.
Tracy W. Krohn
Thanks, Al. Good day, everyone, and thanks for joining us this morning. With me today are William Williford, our Executive Vice President and Chief Operating Officer; Sameer Parasnis, our new Executive Vice President and Chief Financial Officer; and Trey Hartman, our Chief Accounting Officer, will be available to answer questions later.
But before I get into the operational and financial results, I would like to welcome Sameer Parasnis, who joined us as our new CFO in earthy July. We've been working with Sameer for years. He was a trusted adviser at Stifel and instrumental in helping W&T complete some key strategic initiatives. Some of these included our drilling joint venture and corporate debt refinancing in 2018, term loan financing in 2021 and the at-the-market equity offering in 2022. Needless to say, Sameer already has a strong working relationship with our senior leadership team and his extensive capital markets and financial experience will be valuable to W&T moving forward.
So let me begin by reviewing our long-standing and successful strategic rationale. Our strategy has always been simple, generate free cash flow, maintain high-quality conventional production and opportunistically capitalize on accretive opportunities to build shareholder value. We delivered 22 consecutive quarters of free cash flow because we prioritize cash flow, prudently invest capital and have a valuable asset base that delivers strong production and generates meaningful adjusted EBITDA.
Let me put that into perspective for you. We have generated positive free cash flow for every quarter since the beginning of 2018, successfully navigating through the COVID-19 pandemic, highly volatile commodity prices and several economic cycles. So by prioritizing cash flow, we ensure we maintained a strong balance sheet and ample cash to opportunistically acquire complementary assets.
So we began 2023 by redeeming all of our outstanding 2023 senior second lien notes and issuing new 2026 second lien notes. This significantly reduced our debt and interest payments while strengthening our balance sheet. This provided us with financial flexibility in the uncertain economic environment. We've seen so far in 2023, that's included much lower natural gas prices and softer oil prices. So because of those factors, we decided to proactively reduce our current year capital budget and delay a significant portion of our drilling capital investments until 2024.
We believe that a lower pricing scenario enhances acquisition opportunities. And we have a strong cash position and balance sheet to act quickly should we see the right acquisition opportunity arise.
We feel that patience is important as we're looking for strategic value and free cash flow generation potential in all acquisition opportunities that we are currently evaluating. Over the years, we've created significant value by seamlessly integrating producing property acquisitions while maintaining strong operational excellence, and we plan to continue to do so in the future.
We foresee a number of opportunities arising to allow us to continue with that strategy. In the meantime, assuming no acquisitions for the remainder of the year, we are reducing our capital expenditure plans for 2023 from a range of $90 million to $110 million to $50 million to $70 million and are focused on maintaining cash. This will delay some production uplift from our drilling program but we will continue high rate of return recompletion and workover projects to help mitigate decline and maintain those production levels. One of the most attractive attributes of our asset base is our ability to adjust our drilling plans without losing drilling opportunities since our leases are largely held by existing production.
Now turning to second quarter results. I would like to point out some key highlights and accomplishments. We increased production by 14% to 37,000 barrels of oil per day, which was at the midpoint of our guidance. As expected, production recovered from 32,000 barrels of oil equivalent per day in the first quarter due to planned and unplanned downtime. We generated strong adjusted EBITDA of $38.8 million. We reported $26.2 million net cash from operating activities and generated $9.7 million of free cash flow, our 22nd consecutive quarter despite continued softening of commodity pricing.
But we maintained strong cash balance at the end of the second quarter with cash and cash equivalents of $171.6 million and an undrawn RBL with a $50 million base, gives us significant dry powder to continue to evaluate meaningful acquisition opportunities in the Gulf of Mexico. So overall, our net debt remains low at $231.9 million at June 30, 2023. And reducing by virtue of amortization of debt at Mobile Bay and our net debt to trailing 12 months adjusted EBITDA is just 0.9x for less than 1 turn.
We reported midyear SEC proved reserves using SEC pricing of $157.7 million barrel oil equivalent. The reserves were prepared by our third-party independent engineering reserve consultants, Netherland, Sewell & Associates. The PV-10 value of those reserves is $2.1 billion.
We clearly adhered to our strategy and delivered sustainable and consistent results. We believe that continued success is driven by the ability of both our operations and finance teams to execute at a high level and our outstanding base in the Gulf of Mexico helps with that effort. Helped with our ability to pay down debt and improve our balance sheet, we're fairly in a much stronger financial position today, and we remain focused on operational execution in 2023 and beyond to continue building on those outstanding results.
Last call, we discussed that in the first quarter of 2023, we had several planned period of facility and pipeline maintenance projects underway at the Mobile Bay field that required us to temporarily shutting the field.
We also experienced some unplanned downtime at several nonoperated fields that temporarily reduced our production volume in the first quarter. These events contributed to the lower Q1 2023 production levels. But as you saw with our Q2 production of 37,000 barrels of oil equivalent per day, an increase of 14%. Production deferrals are now behind us. Our production was in line with guidance of that being 1.3 million barrels of oil, 443,000 barrels of NGLs and 10 Bcf of natural gas for the quarter.
So taking into account the reduction of capital for 2023, we expect to see modest declines in the second half of 2023, with Q3 2023 production guidance midpoint, only down 4% compared to Q2.
We've focused on acquisitions over the last years -- last few years rather than on drilling many new wells. Our guidance reflects the low natural decline of our asset base compared with much higher declines in unconventional onshore reservoirs.
We saw the benefit of 7 workovers during the second quarter, and we'll continue to focus on high returning workover and recompletions to help mitigate production declines in the second half of 2023.
So on the cost side, we continue to see inflationary pressures in the industry, but our second quarter results were very encouraging as we were able to maintain lease operating expense nearly flat compared to the first quarter. With production increasing 14% and costs essentially flat, our per barrel LOE declined from $22.29 in Q1, 2023 to $19.60 in Q2, 2023. We remain focused on cost control and margin expansion despite the current inflationary environment. For the third quarter, our guidance for lease operating expense is expected to be lower, so between $60 million and $67 million.
We also continue to control our G&A costs. In the second quarter, cash G&A costs were $15.3 million, down 14% and $18 million in Q1 2023. For the third quarter, we are expecting cash G&A to increase modestly between $15.4 million and $17.3 million. We'll continue to manage controllable costs to help maximize our margins.
So turning to our balance sheet. During 2023, we've reduced total debt by almost $300 million from year-end 2022. At the end of the second quarter, we had net debt of $231.9 million, which was total debt of $403.6 million net of cash and cash equivalents of $171.6 million.
As I mentioned previously, the large reduction in total debt was driven by issuing new 2026 senior second lien notes in January 2023 at par, totaling $275 million in a private offering and using the proceeds, along with a portion of our considerable cash position to retire all of our outstanding 2023 senior second lien notes. But we continue to have the flexibility of dry powder to make additional acquisitions, continue to build cash, further paying down debt because we have no long-term rig commitments or near-term drilling obligations. We do have the flexibility to ramp up or defer capital opportunities. We will continue to defer capital expenditures in 2023 as we monitor current commodity pricing environment and service costs.
So in Q2 2023, we spent $15.6 million in CapEx and have invested $23 million for the first 6 months of this year. And as I mentioned, we have lowered our CapEx range for 2023 by about $40 million to now bringing the range of $50 million and $75 million -- excuse me, and $70 million. Included in this range are planned expenditures related to long lead items, capital costs for facilities, leasehold, seismic and recompletions. We expect to continue generating meaningful free cash flow, which provides us flexibility to execute on accretive opportunities quickly.
But before I close the call, I'd like to talk to you about our midyear 2022 reserve report. I'd like to point out that we continue to see positive well performance and technical revisions, which demonstrates the strength of our world-class mentioning of GOM assets. This also directly points to our ability to enhance production in our reserve base through operational excellence. So for midyear 2023, we reported SEC proved reserves of 157.7 million barrels of oil equivalent, which included 3.5 million barrels of positive performance provisions, offset by a decrease of 4.8 million barrels due to pricing revisions and production of 6.3 million barrels of oil. We're pleased with these results since over the past 18 months, we've focused on reducing net debt, while completing bolt-on acquisitions and less emphasis on drilling.
Impact of lower pricing is also seen in the PV-10 value of our SEC proved reserves, which was $2.1 billion, a decrease of 35% during 2022. Approximately 36% of midyear 2023, SEC proved reserves were liquids, with 24% crude oil and 12% NGLs, and we had 64% natural gas.
Our large natural gas reserve position has very good upside potential from future higher prices. Market is anticipating increased demand for natural gas and a related strong price recovery in the new LNG export facilities along the Gulf Coast are in line or online rather in 2024.
All of our reserves are well positioned to benefit from that increase in demand. Our reserves were classified as 71% proved developed producing, 16% proved developed non-producing and 13% proved undeveloped. Midyear 2023 proved reserves at PV-10 were based on average SEC 12-month crude oil and natural gas prices, $83.23 per barrel and $4.76 per MMBtu. Year-end 2022 prices $94.14 per barrel of oil and $6.36 per MMBtu of natural gas. We believe we've built a sustainable group of high-performing GOM assets that will continue to provide meaningful cash flow to our shareholders for many years.
So with regard to our ongoing ESG initiatives, we've made a concerted effort in addressing shareholder concerns and improving our ESG metrics. W&T's culture of success and sustainability is built on environmental stewardship. Also, sound corporate governance and contributing positively to our employees and the communities where we work and operate.
Earlier this year, we added a new Board member, Dr. Nancy Chang, who is the Chair of our Environmental Safety and Governance Committee that oversees our ESG efforts. We believe that Dr. Chang will help guide our continuous improvement and assist us in our commitment to the highest standards ESG and corporate governance. Our ongoing commitment will be demonstrated when we issue our 2022 sustainability report in the next few weeks, that's going to highlight our continued progress in our ESG efforts.
So in closing, we're very pleased with how well we performed thus far in 2023, both operationally and financially. I'd like to thank our strong team at W&T. I believe we're well positioned for continued success in the future. This strong financial position provides us with optionality and flexibility moving forward. Our liquidity and cash position enables us to continue to evaluate growth opportunities, both organically and inorganically, and we are poised to execute on accretive opportunities that meet our long-standing improvement criteria.
We believe the Gulf of Mexico is and will continue to be a world-class basin with strong producing assets. Quickly evaluating and executing on opportunities within our focus area is a pillar of our success. We have a premier portfolio of both shallow water and deepwater properties in the Gulf of Mexico that have low decline rates and significant upside. Our management team's efforts and interests are highly aligned with those of our shareholders, given our 34% stake in W&T's equity, which is one of the highest of any public E&P company. I was a shareholder, I'm very confident that W&T's bright future in 2023 and beyond is modern question.
Operator, we'll now open the lines for questions.
Question and Answer Session
Operator
(Operator Instructions) And our first question will come from John White with ROTH.
John Marshall White
I was wondering, does the reduction in capital expenditures for the remainder of the year, does that in some way reflect increased optimism about potential acquisitions?
Tracy W. Krohn
Well, in a word, yes. And as usual, John, you put your finger on a very substantial portion of the thinking. We're always going to look at for different opportunities. They ebb and flow a little bit, but yes, that is a substantial part of the thought process there.
John Marshall White
Okay. That's -- I appreciate the straightforward answer.
Operator
Our next question will come from Nate Pendleton with Stifel.
Nathaniel David Pendleton
Congrats on the strong quarter. Could you offer some more color on the service environment that you alluded to earlier in the GOM and its impact on your capital investment decisions?
Tracy W. Krohn
Sure. We are in the process -- for one, we're in the process of servicing and refurbishing a drilling rig that -- a platform rig that will go out to Magnolia to drill our Holy Grail prospect. We decided to defer on that a little bit, not only because of winter months coming up, but also because there's a good bit of uncertainty on pricing at the moment.
I hear a lot of different opinions. I have opinions of my own, and we do see some inflation in pricing, particularly in transportation, which is one of our key components, both more expensive, they're more difficult to get. A lot of this is seasonal, and that breaks a little bit in the winter time. Because of the weather, people often think that issues with drilling occur in the summer due to hurricanes, but they're really more obvious in the winter because of continued wave activity and win and whatnot that affects our vessels and helicopters out there.
I do see upward inflation pressure with personnel and the costs and in fact, in some cases, with regard to quality. I think that's a little bit more empirical, but it's still a factor for us. I think that we're seeing the supply chains get a little better. So I think as the cost of goods is concerned that we're seeing a plateau there at this point in time, services are a little bit of a different story.
So we want to make sure that we're well ahead of the curve and getting personnel and equipment where we need to have them at the right time. And so that's part of the equation plus the continued softening in commodity prices makes it more difficult for everyone.
Nathaniel David Pendleton
Thanks for the detail. And regarding your prior comments, flooring CCS, can you speak to what you see as the advantages of W&T and the potential of doing offshore CCS versus onshore?
Tracy W. Krohn
Yes, sure. I mean we've got the infrastructure to do it. What people need to be aware of with regard to underground sequestration is that -- it takes a long time to get the permits and until that changes, I don't feel the need to go out and do a great deal of effort on that. The real technology is the technology coming off flue-gas stack and how to separate that out and get it offshore. And people think that it's just CO2 and it's not. There's a whole slew of gas is in particular that come along with that. And as we separate it out over -- before you start dumping just pure CO2 in the ground, and it's doubtful that will just be pure CO2. There will probably be some other compounds, maybe [high tracking] and Sulfur dioxide. It is, of course, a compound release 2 gas emissions.
So I don't really see the value in going out and spending a great deal of money. We already have reservoirs that fit the description of what you need to be able to encapsulate huge volumes of CO2 in the ground. So the real problem again tends to be the permitting. There isn't (inaudible) in Louisiana or Texas at this point in time or Alabama for that matter. So I think that until that permit process speeds up, it's a little bit of a waste of our energy. I'd rather focus on things that generate cash flow at this point in time.
Operator
Our next question will come from Jeff Robertson with Water Tower Research.
Jeffrey Woolf Robertson
You talked a little bit about your pricing outlook and maybe some of the volatility that you see and you see other people talk about affecting your decision on capital spending. Are you seeing pricing volatility concerns play their way into valuations in the acquisition market?
Tracy W. Krohn
Yes, we are. Clearly, it's almost week by week, week, maybe even day by day factor in everything that we do. Oil and gas commodity projects are always affected by price the most. So we do see that. I can't tell you what the price is going to be a week from now, but I can tell you that we are not hedged on oil at this point in time. We're pretty heavily hedged on gas at our Mobile Bay facility. But all the rest of the corporate company gas is not hedged and the oil isn't hedged either. I don't know which way prices are going to go, but my perception is for the short term, they're going up.
Jeffrey Woolf Robertson
You all have at June 30, $170 million -- or a little over $170 million of cash on the balance sheet. Can you talk about funding considerations for an acquisition if you just assume do one with all cash, would you use debt? I'm sure it all depends on the size of the opportunity. But can you just share your thoughts around how that plays out?
Tracy W. Krohn
Yes. We look at them all as individual entities for purchase, not necessarily on a corporate basis, but as properties, we think of them as all hybrids. Some of them have more proved producing reserves. Some of them have more proved undeveloped reserves, some of them have in pipe in disproportionate numbers. Some of them have better cash flow than others. Some of them have more abandonment decommissioning liabilities. So they're all different. And of course, then there's the size, size does matter here. And I think it's important that you understand the liabilities around the properties very well. We've done over $1 billion of decommissioning over the years. We think that's an important consideration that a lot of the private equity entities that have gotten involved in this business really have not paid that much attention to. Perhaps it's more because they're concerned about -- they're not as concerned about that because they're not strategic players.
But I would tell you that the ideal situation is a property, good cash flow and something that we can consider upside with the drill bit that we might be able to drill and bring to fruition. And then the rest is workovers, recompletions, facility upgrades that we can do to generate cash flow short term. So they're all a little bit different. They're -- we've seen a bunch of different properties over the years. So we have a pretty good appreciation of the things that have value and also take away from value.
Operator
(Operator Instructions) Our next question is a follow-up from John White with ROTH MKM.
John Marshall White
Yes. I wanted to come back on and had another question, but I also wanted to offer my congratulations to Sameer on his recent appointment, and I look forward to working with him going forward.
Sameer Parasnis
Thank you, John. I appreciate it. I look forward to working with you as well.
John Marshall White
Great. Tracy, did your previous comments on Holy Grail, do those comments indicate that well has been pushed into 2024?
Tracy W. Krohn
Yes, sir. Yes, that's -- we expect to begin there around February of 2024.
Operator
This will conclude our question-and-answer session. I would now like to turn the conference back over to Tracy Krohn for any closing remarks.
Tracy W. Krohn
Thanks, operator. Look, we appreciate your attention. Hopefully, we'll have some other news before our next conference call. We look forward to talking with you again soon. Thank you very much.
Operator
The conference has now concluded. Thank you very much for attending today's presentation. And you may now disconnect your lines.
