Q4 2023 W&T Offshore Inc Earnings Call
Participants
Al Petrie; Investor Relations Coordinator; W&T Offshore Inc
Tracy Krohn; Chairman, President & CEO; W&T Offshore, Inc.
John White; Analyst; ROTH MKM Partners, LLC
Derrick Whitfield; Analyst; Stifel, Nicolaus & Company, Incorporated
Jeff Robertson; Analyst; Water Tower Research LLC
Presentation
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the W&T Offshore Fourth Quarter and Full Year 2023 conference call. During today's call, all parties will be in a listen only mode. Following the Company's prepared remarks, the call will be opened for questions and answers. During the question and answer session. We ask that you limit your questions to one and a follow-up. You can always then rejoin the queue. 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. Please go ahead.
Al Petrie
Thank you, MJ. And on behalf of the management team, I'd like to welcome all of you to today's conference call to review W&T Offshore Fourth Quarter and Full Year 2023 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 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 reconciliations of non-GAAP measures and with that, I'd like to turn the call over to Tracy Krohn, our Chairman and CEO.
Tracy Krohn
Thanks, Al. Good day, all. And thanks for our year-end 2023 conference call with me today are William Williford, our Executive Vice President and Chief Operating Officer, Sameer Parasnis, our Executive Vice President and Chief Financial Officer, and Trey Hartman, our Vice President and Chief Accounting Officer. They are all available to answer questions later during the call.
So in 2023, we continued to deliver strong results while executing on our strategic vision our proven strategy is simple and effective will focus on generating free cash flow, maintaining and optimizing our high-quality conventional assets and opportunistically capitalizing on accretive opportunities to build share holder value we have a strong balance sheet and continue to build cash on hand. We have generated positive free cash flow every quarter for the past six years because we know that cash flow is paramount to our success. We prioritize operational excellence, cost, controlling initiatives, prudent capital spending and maximizing the value of our prolific asset base to deliver strong production and meaningful EBITDA in addition to our ability to successfully and seamlessly integrate producing property acquisitions that has helped W&T grow during our 40 plus year history. Over the past year, we've accomplished many things that I'd like to highlight now. So we began 2023 by redeeming all of our outstanding 2023 second lien notes and issuing new 2026 second-lien notes significantly reducing our debt and interest payments moving forward while strengthening our balance sheet. So we have the ability to pay off all that debt, but we believe that liquidity would be extremely important strategically, hence the issuance, we have a low average low leverage profile of 1.2 times net debt to trailing 12 months. Adjusted EBITDA are coupled with the significant cash we have on hand that provides us with financial flexibility to act quickly should we see additional acquisition opportunities arise? So in September 2023, we used about $27 million of cash on hand to purchase working interest in eight shallow Gulf of Mexico fields. In January 2024, we used about $72 million of cash on hand to purchase 100% working interest in six shallow Gulf of Mexico fields from Cox at all, adding $18.7 million barrels of proved reserves. So while we were very busy from a financial acquisition standpoint, we also executed operationally over the first well for the full year 2023, we generated $15.6 million in net income and [$183.2 million] in adjusted EBITDA and $63.3 million in free cash flow. We delivered strong production of 34,900 barrels oil equivalent per day and we continued to pay down debt with net debt falling to $217.3 million. We adopted a quarterly cash dividend policy, paying an initial dividends in December. Joining group and announced the first quarter of 2024. Payments will occur later this month. So we continue to execute at a high level, generating strong adjusted EBITDA and free cash flow despite decreases in pricing because it's such an integral part of our strategy strategy.
I'd like to reiterate it one more time.
The fourth quarter of 2023 marked the 24th consecutive quarter, we have generated free cash flow. So coupled with our ability to pay down debt and improve our balance sheet, we're in a strong financial position in 2024, and we remain focused on operational execution to build on the solid result. So over the years, we've created significant value by integrating producing properties, acquisitions, but it's not as easy or straightforward. As you might think after we close on any acquisition, we take time to assess inspect the newly acquired fields, which potentially require shutting in some of the fields in the process we've had we have a large footprint across the Gulf of Mexico. So we look for ways to optimize operations, increased production, utilize that large footprint where we can and reduce costs to maximize value.
As we look to implement this culture of operational excellence, this can result in production deferrals and increased near-term investment to both bring fields up to our standards and increased production. So with over 40 years of experience integrating acquisitions into our asset base, we have proven that the near term costs are well worth it to realize the long-term potential of the newly acquired assets, generate cash flow for us for many years to come. So in September 2023, we completed yet another accretive acquisition of properties in the central and eastern Gulf of Mexico. These fields have a solid base of proved reserves with upside potential and the ability to add production and cash flow. We funded the acquisition with cash on hand and six months later, these assets are exceeding their forecasted production levels, but we're in the early stages of the same type of integration process with the recent the Cox acquisition. These assets were in bankruptcy and were spending the first part of 2024 inspecting and assessing these fields. They're located in close proximity to existing assets and we are identifying workovers, recompletion opportunities and facility upgrades that need to be informed to increase production. We have the experience and expertise to execute a tried-and-true acquisition and integration strategy that will allow us to drive value from these latest property additions for our shareholders. We paid around $100 million in cash from these two acquisitions over the past six months and we still have flexibility and dry powder to make additional acquisitions. We will continue to generate free cash flow while paying down debt. And because we have no long-term rig commitments or near term drilling obligations, we have the flexibility to ramp up or defer capital opportunities based on market conditions.
Now turning to urine reserve results, I would like to point out that we continue to see positive well performance and technical revisions, which demonstrates the strength of our world-class conventional Gulf of Mexico assets. This also directly points to our ability to enhance production our reserve base through operational excellence. For the year ended 2023, we reported the SEC proved reserves of 123 million barrels and barrels oil equivalent which did not include the 18.7 million barrels of proved reserves we acquired in early 2024. In 2023. Reserves did include 4 million barrels of equivalent positive performance revisions, an increase of 2.6 million barrels oil equivalent due to the acquisition made in September. While we had strong performance from the factors we can control, we did see a decrease of 36.2 million barrels oil equivalent due to pricing revisions. As we saw, natural gas prices decreased by 58% from 2022 and oil prices declined by 17% from 2022.
Additionally, we had production of 12.7 million barrels oil equivalent in 2023 despite only spending $41 million on CapEx and $27 million in acquisitions. In 2023, we were able to replace about 52% of our production with reserve additions in our year end press release issued yesterday, we showed that the reserves associated with the Cox acquisition would have added 18.7 million barrels oil equivalent and $250 million PV-10 on a pro forma basis to our year end 2023 reserves. Pretty impressive numbers for the $72 million purchase we paid and our project. I predict these reserve numbers will continue to increase absent further price decreases. Pv-10 value of our SEC proved reserves at year-end ['23] was $1.1 billion, approximately 41% year end 2022. Sec proved reserves were liquids were 30% crude oil and 11% NGLs, and we had 59% natural gas the reserves were classified as 67% proved developed producing 17% proved developed non-producing and 16% proved undeveloped guarantees reserve life ratio at year end [22] and [23] based on year end 2023 proved reserves and 2023 production was 9.7 years.
So entering 2023, we strengthened our balance sheet by issuing new I'm sorry, that's 2024, our advisory due -- I'm sorry, 2023. We strengthened our balance sheet by issuing new 2026 senior second lien notes at par totaling $275 million in a private offering and used the proceeds along with our considerable cash position, retire all of our 2023 senior second lien notes. This significantly reduced our interest payments, preserve financial flexibility and further improved our balance sheet. At year end '22, the company had total debt of $693.4 million. And at year end 2023, W & T's total debt was down 44% to $390.6 million with total debt includes a $111.1 million balance of the non-recourse mobile bank term loan. We also have nothing drawn on our $50 million secured revolving credit facility. So yesterday, we provided our detailed guidance through 2024. In first quarter of 2024. We had several facility and pipeline maintenance projects as well as prolonged downtime at several fields that have temporarily reduced our production volumes. We are predicting a midpoint of Q1 2024 production to be slightly better than Q4 2023. We're also predicting production increase with time. And despite only projecting to spend about $35 million to $45 million in capital expenditures in 2024, we believe the recent acquisitions will help us to offset naturally natural decline and grow production this year on solar for the four following full year 2024, we expect to average [36.9000] barrels oil equivalent per day at the midpoint, which is about a 6% increase year over year. So we focus more on acquisitions over the last few years rather than on drilling many new wells. Our ability to maintain strong production numbers is testament to our culture of operational excellence.
So on the cost side, our guidance for LOE and gathering transportation and production taxes includes inflationary pressures that we've seen in 2023 and expect to continue into 2024. In addition, we believe that we will have to spend additional costs to bring the former Cox assets up to our standards. With that said, we do believe that there are opportunities to reduce our operating costs, find synergies to drive lower cost long term and we're working hard to reduce costs without impacting safety or deferring assets integrity work.
Our first quarter lease operating expense is expected to be between $77.5 million and $86 million, which reflects some of the expected inspection and upgrading work at the former cost facilities as well as some maintenance and repair costs.
Included with that first quarter G&A costs are expected to be between $15 million and $17 million.
I would like to sincerely thank our team at W&T as we are well positioned to add value in 2024 everybody's work pretty darn harden and the results are starting to show. So even after the recent Cox acquisition, we have a solid cash position and additional liquidity that enables us to continue to evaluate growth opportunities, both organically and inorganically. We have a long track record of successfully integrating assets into our portfolio, and we continue to believe GOM is and will continue to be a world-class basin. We do remain focused on operational excellence and maximizing the cash flow potential of our asset base. So as the company's largest shareholder, I believe WD. is very well positioned to succeed in 2024 and beyond. Our entire management team's interests are highly aligned with those of our shareholders. Given our 34% stake in WD's equity with [20], which is one of the largest of any public E&P company.
Operator, we can now open the lines for questions.
Question and Answer Session
Operator
Thank you. Will now begin the question and answer session to ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the case to withdraw your question, please press star then two. We will now pause momentarily to assemble our roster. Today's first question comes from John White with Roth Capital. Please go ahead.
John White
Good morning and congratulations on the nice results. Alicia, good to see the positive reserve revisions.
Also, you had mentioned you're contemplating a deepwater joint venture similar to your previous Monza joint venture do you want to offer any additional comments on?
Tracy Krohn
Sure, John, we are we are, of course, going to continue those efforts.
So I'd like to put a multiple well package together to go forward with that, that would start with Holy Grail at, say, a proved undeveloped location with a nice we'll believe it or not alone will add upside to it. So we have some other exploratory projects. We have another one at depth, what we call our Cayman field that that is more towards the developed side of the equation. We are of course, mindful of our balance sheet and what we think are very good acquisition opportunities going forward. As always, that's that's a little bit hard to predict. But so far, we've been having good success with buying properties. And those are those are opportunities that we would always like to pursue. But yes, the program for '24 and beyond for drilling wells will depend on putting together this set.
It's joint venture as well.
John White
Okay, thanks. And would they be oil industry partners or more financial type partners?
Tracy Krohn
So I think that you would see both we put together a drilling joint venture years ago with that with more financial types of the amount of $361 million.
And that's proven to be quite successful.
So you could see a little bit of both. This will probably be a multi-hundred million dollar drilling program. So we will investigate both in C check attempt, John, everybody and see what their what their tolerances are.
John White
Okay.
Thanks for the additional detail. I'll pass it back to the operator.
Tracy Krohn
Thank you, sir.
Operator
Thank you. The next question comes from Derrick Whitfield with Stifel. Please go ahead.
Derrick Whitfield
Good morning all and thanks for taking my questions. Also, certainly Congrats on the Cox acquisition as well. Tracy, I wanted to wanted to focus on guidance with my first question, could you speak to the amount of shut-ins you're expecting in Q1 and perhaps provide color on where volumes could exit the year? Certainly sounds like a lot of things are coming into your favor towards the end of the year.
But any color you could offer would be greatly appreciated.
Tracy Krohn
As you can as you picked up there from from the statements earlier others, there is a bit of flux here. We have Virgo still shut in as a result of the Main Pass Oil and Gas Pipelines leak that discount has shown that several million cubic feet a day. We're looking at now production later on in the year, exiting around 38,100 barrels of oil equivalent per day.
Per day.
That's kind of how we're looking at it as a function of that number that I gave you on production increase. I personally think that it will be a little bit better as we get a little bit more into these assets of the bankruptcy left, a lot of these fields and in flux with the rapid departure of personnel and the change from Chapter 11 Chapter seven, which Chapter seven is forced liquidation. So some some upset. We had a temporary service agreement in place that that now is no longer valid because of their personnel who had to depart rapidly. We've picked up a few of their employees as well.
So we're catching up.
I think that this is a little more chaotic than normal, but certainly not anything that we can't we can't and won't and will resolve. Of course, we say that it's going to be a lot better than than what it looks like now for sure, and even now that the prime production still picking up. So So with that, I'll just tell you to give me a few more weeks. So we can we can get a little better handle on when we'll be able to give you more accuracy.
Derrick Whitfield
Terrific. And Tracy, I know you're still very early in your assessment, but really leaning in on the Cox acquisition. Could you offer any additional color on the measures you're taking to optimize production and cost in place? Any broad parameters around the degree of production and cost improvement we could see.
Tracy Krohn
Yes, I'd really love to give you more guidance on that.
Some of it has to do with with old contracts that need to be resolved and on or that were rejected. Rather some fallout of people lost a lot of money here and it didn't really help them very much. We've got to manage some US and transportation issues that that will when these get resolved on the former owners left this rather rapidly. And and I didn't I didn't really do a whole lot in the way of managing some of the corrosion issues. So we've been dealing with that. But nothing that I would consider to be hazardous to something that needs to be repaired routine to repair some of these upgrades, some emergency valves on production vessels, and we put one clamp on a pipeline of that had been shut in by the former operator and increased production [400] barrels a day was $20,000 clamp. So we also saw some of this is pretty simple, but it takes a little bit of time. We have to get the personnel on coordinated around around these fields from the existing fields and in managed transportation in that logistics.
Derrick Whitfield
Great. And then maybe one non-related follow-up. Wanted to see if you could speak to the A&D environment, the government present, as you've clearly taken a conservative cash position for 2024?
Tracy Krohn
Yes, sure. Well, you're seeing a lot of some mergers are not just with some smaller players, larger players to notably from Chevron and test on asset loan production in the Gulf of Mexico to So so on. I see that as positive for the industry as it is positive or for this company. It is certainly indicative of investor interest in this basin. As you should read, this is the second largest producing basin in the country and certainly the largest by area. We've always we've always appreciated our ability to to function in this basin. There's always another drill another well to drill or there's always another property to acquire. We haven't run out of enthusiasm for it, and we've been in a lot of different places.
We've we've operated in nine different states in the U.S. in the past, and we're still we still people wanted to focus in the Gulf of Mexico.
Derrick Whitfield
Thanks, Tracy, and thanks for the color.
Tracy Krohn
Thank you, sir.
Operator
Thank you.
As a reminder, to ask a question you may press star then one next question comes from Jeff Robertson with Water Tower Research. Please go ahead.
Jeff Robertson
Thank you.
Good morning, Tracey. A question just philosophically on returns. When you think about what you see with the costs to drill and complete new wells in the Gulf of Mexico across your asset base and the types of opportunities you see in the acquisition environment, can you compare maybe the risk profile and the types of returns you think you can generate in a given what appears to be your preference for acquisitions with what it might be on development drilling or greenfield drilling?
Tracy Krohn
Sure. I think the decision for us is always risk reward based on on the amount of cash we have on hand and the amount of leverage that we can apply prudently, we tend to make property acquisitions where it's available. I would prefer to do that. I mean, if if the if the if our ability to make an acquisition is at or equal to our ability to finance and and drill wells organically. And clearly, it's a risk profile that we would prefer to us to make the acquisitions because there's certainly a lot less risk. We know we've got that cash flow and a proven reserve base. So that's a that's a no-brainer. Our gets a little more difficult is when you start start talking about what's what's exponential growth, kind of going to apply on that, that's more where the risk profile is. I've kind of kind of provokes the question, if we don't want to roll the dice or do I want to spend the spend that amount that I know I can I can get a certain amount of our cash flow on and return drilling is always more risky, of course, and I've seen I've seen companies come and go and fail deciding that they were going to roll the dice and drill more wells. We certainly have the technical capability to drill in shallow water or deepwater and operate in shallow water or deepwater. We have an inventory of good drilling prospects, good exploratory prospects that would certainly attract more attention. And that's what we're going to focus on. But I don't want to do any of these things myself, 100%.
So we tried to restrict that to around 20% to 25% participation.
So that's a little bit problematic. I think part of the of the world is starting to wake up to our basin and understand that we have rule of law and we have reasonable pricing parameters that we can we can predict. And so and regulatory, although it can appear somewhat harsh at times, we're pretty sure we're not going to get a windfall profits tax overnight that we weren't expecting. So it makes it takes a lot of the risk out when we can. We can predict some of the more more regulatory actions that could occur elsewhere in the world.
Jeff Robertson
If we think about the joint venture, Tracy just follow up on your comments around risk and reward. If you are able to structure a joint venture with a drilling partner would I'm sorry, with the with another operator in the Gulf of Mexico with a goal of that be for W&T to contribute prospects and the partner to contribute prospects and have it lessened exposure. But over a broader portfolio of drilling prospects over the next couple of years?
Tracy Krohn
Yes.
I mean that's that's a that's an admirable goal.
Sometimes that happens.
Sometimes it doesn't the the more immediate thought process for us is to optimize that and make that occur if that makes sense. On the other hand, we believe that the prospects that we have are pretty superior and that we have a lot of data.
We've got processing reprocessing.
I guess everybody could could tell you what our prospects are better. But our success rate in the Gulf, we went over the last decade and almost decade and a half has been over 90%.
So that's pretty hard to argue with.
Jeff Robertson
Thank you.
Tracy Krohn
Thank you, sir.
Operator
Thank you. At this time we are showing no more questions.
In the queue, I'd like to turn the call back over to Mr. Tracy Krohn for any closing remarks.
Tracy Krohn
Thank you everyone. Stay tuned there will be more to come next several weeks, and we look forward to presenting to again soon. Thanks so much.
Operator
Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
