W&T Offshore, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the WNT Offshore First Quarter 2020 conference call. During today's call, all parties will be in a listen-only mode. Following the company's prepared comments, the call will be open for questions and answers. During the question and answer session, we ask that you limit your questions to one and a follow-up. Please note you can always rejoin the question queue. This conference is being recorded. and a replay will be made available on the company's website following the call. At this time, I'd like to turn the conference call over to Al Petrie, Investor Relations Coordinator. Sir, you may begin.

Thank you, Operator. 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's first quarter 2020 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 first quarter 2020 earnings release that we released yesterday for disclosure on forward-looking statements and reconciliations of non-GAAP measures. At this time, I would like to turn the call over to Tracy Krohn, W&T's Chairman and CEO.

Thanks, Al. Good morning, everyone, and thank you for joining us for our first quarter 2020 conference call. With me today are Janet Yang, our Executive Vice President and Chief Financial Officer, William Williford, our Executive Vice President and General Manager, Gulf of Mexico, Steve Schroeder, our Chief Technical Officer, and Jim Hirsch, our Vice President of Geosciences, they're all available to answer questions later during the call. Over the last several months, the global COVID-19 pandemic, coupled with supply and demand imbalances, have certainly created an environment of uncertainty across the oil sector. We've reacted decisively to those conditions by significantly reducing our capital expenditure budget for the remainder of 2020, Lowering our lease operating expenses without compromising safety or operational capabilities and temporarily shutting in some lower margin operated and non-operated oil-weighted properties. As always, we remain committed to the health and safety of our employees and contractors. At our corporate offices, we implemented a mandatory work-from-home policy in March and only recently reopened our corporate office. Despite being back in the office, we continue to monitor the situation and will follow the advice of government and health leaders. For our field operations, we instituted screening of all personnel prior to entry to heliports and shore bases, as well as our two gas plants in Alabama. We are conducting daily temperature screenings and implemented procedures for distancing and hygiene at our field locations. We are very pleased that thus far, none of our onshore or offshore employees have tested positive for COVID-19. For nearly 40 years, we have been able to persevere through multiple pricing cycles because our focus and strategy has always been to maximize cash flow and constantly improve the profitability of our assets at any commodity price. We expect to continue to find value in acquisitions, especially those that provide a solid foundation for our ability to generate free cash flow, even in the current pricing environment. We built W&T through the right combination of attractive property acquisitions, methodical integration, and exploitation of those acquisitions, and successful development and exploratory drilling on our legacy fields. With the well-timed Mobile Bay acquisition in 2019, our production mix has shifted, and we now produce significantly greater volumes of natural gas. We expect to experience less of an impact from the energy downturn than many of our peers, Since natural gas has not been impacted by the same market forces as crude oil and believe we could benefit from higher natural gas prices as associated natural gas production from oil wells decreases. So turning to our first quarter results, we're pleased with our performance. We've integrated our acquired assets at Mobile Bay and at Magnolia, and that's after closing the acquisition of the remaining 25% of that deepwater field. maintained a high level of production and continued generating strong adjusted EBITDA and cash flow. Our costs all came in within or below the guidance we gave for the first quarter. Adjusted EBITDA was $62.1 million, despite a weaker pricing environment, while we invested $9.5 million in 2020 CapEx and $24 million in costs related to the 2019 capital program, excluding acquisitions. This is very important because on a cash basis, we continue to create significant value by generating nearly $30 million more of adjusted EBITDA versus our CapEx, which enabled us to reduce long-term debt at a substantial discount. One of the pillars of our success is our ability to generate positive cash flow. In the first quarter of 2020, our production averaged 53,553 barrels of oil equivalent per day, or 4.9 million barrels of oil equivalent. That was up 61% compared with the first quarter of 2019 and up slightly compared to the fourth quarter of 2019. This was near the high end of our first quarter guidance range and included a full three months of production from both the Mobile Bay acquisition and the initial 75% interest acquired in the Magnolia field in 2019. Total liquids production comprised 48% of production in the first quarter of 2020. So in late April, we announced that we had temporarily shut in approximately 3,300 barrels of oil equivalent per day of net production in selected oil-weighted fields operated by us and also received notice of production curtailments from third-party operators, totaling approximately 3,400 barrels of oil equivalent per day net to W&T. Recently, about 2,900 BOE per day of those third-party shut-in volumes were returned to production, and we continue to monitor the market to determine the appropriate time to return our operated production curtailments to production. In addition, we temporarily shut in a portion of our production due to Tropical Storm Cristobal, with an estimated net impact of about 110,000 net barrels of oil equivalent of deferred production in the second quarter. We did not experience any material damage to our facilities due to the storm. As a reminder, We have withdrawn our production and cost guidance for the balance of 2020 due to the combination of ongoing uncertainty in commodity markets, production curtailments, and proactive efforts to continually reduce costs in this lower-price environment. We intend to again provide guidance once we have greater visibility in where markets are headed. So for the first quarter of 2020, our average realized sales price per barrel oil equivalent declined about 20% compared with the fourth quarter, with declines in pricing for oil, NGLs, and natural gas. Our average realized crude oil sales price was $46.33 per barrel, which once again compared favorably with average WTI pricing of $45.34 per barrel during the period. Our NGL sales price was $13.03 per barrel and our natural gas price was $1.91 per MCF. Revenues for the first quarter decreased quarter over quarter by 18% to $124.1 million. The decrease was driven by lower realized pricing despite the slight increase in sales volumes. Our first quarter LOE came in at $54.8 million. which was within guidance but higher than both the first and fourth quarters of 2019 due to additional operating costs associated with our two recent acquisitions. Since the sharp downturn in prices in the first quarter, we've developed even more ways to reduce our LOE costs. This includes actions such as reducing our contract labor costs, reducing transportation costs by consolidation of transit to offshore locations, and working with our suppliers to achieve cost savings in maintenance, work over and facility expenses. We will not reduce our commitment to safety, operational compliance or environmental protection with any of these actions. In total, we expect to reduce our LOE by about 15 to 25 percent from prior levels. We'll give you more details on the results of these efforts during our second quarter call. Our G&A expense in the first quarter of 2020 was $14 million, which was well below our guidance of $15.5 to $17 million. The decline from $17.6 million in G&A in the first quarter of 2019 was due primarily to higher fourth quarter 2019 accrual adjustments for incentive compensation and lower legal costs during the first quarter of 2020. We continue to look at how we can further reduce our G&A costs. We reported net income in the first quarter of 2020 of $66 million, or 46 cents per share, which included $52.5 million in unrealized commodity derivative gain and $18.5 million non-cash gain associated with the debt reduction transaction. Our adjusted net income was $5.8 million, or 4 cents per share. So another way that we've responded to this current environment is by Using some of our free cash flow to repurchase a portion of our outstanding nine and three quarters per senior second lien notes. In the first quarter, we repurchased $27.5 million in principle of our outstanding notes for $8.5 million, which led to the non-cash gain. Thus far in the second quarter of 2020, we've repurchased an additional $45.1 million of those same notes for $15.3 million. That's about $72.5 million of long-term debt that we've repurchased year-to-date for just under $24 million, which has reduced our annualized interest expense by over $7 million. We believe that this was a very good use of free cash and will help place WNT on an even better financial footing moving forward. WNT's bank group recently completed its regularly scheduled spring borrowing-based redetermination. The borrowing base was set by the bank group at $215 million, down modestly from $250 million. Additionally, the amended agreement provides for the suspension of the total leverage covenant and the addition of a first lien covenant of 2-1 through year-end 2021. Additional details can be found in our 10-Q. The next regularly scheduled redetermination is in the fall of 2020. We have added several oil and natural gas hedges since our last call, and a detailed schedule is in yesterday's release. So after all these actions so far this year, as of June 17, 2020, our total liquidity stood at $156 million, comprised of about $27 million in cash and $129 million in availability under our revolving credit facility. Our long-term debt remaining on our senior notes has declined to 552.5 million dollars from 625 million dollars. We believe we continue to have a strong balance sheet and have more than sufficient liquidity to meet our needs going forward and to continue to look at good opportunities that may arise in this downturn. Turning now to operations, we successfully drilled one well in the first quarter of 2020 at East Cameron 338 slash 349 but decided to suspend all other drilling activity Due to the current uncertain pricing environment, we remain confident in our extensive inventory of high-quality prospects, and we're encouraged by the recent improvement in crude oil prices and the outlook for natural gas price improvements this winter. With that said, we remain focused on cash flow generation in the near and long term, and we will continue to evaluate when it is best for W&T to resume drilling, but at this time we have no active drilling and completions operations. In the first quarter, the Cota well in the East Cameron 338-349 field was successfully drilled in over 290 feet of water and to a total depth of over 6,000 feet. We encountered approximately 100 feet of net oil pay and currently own a 20% interest in the Cota well, which will increase to 38.4% once the well is brought online and performance thresholds are met. Initial production is planned for the first half of 2021. Subject to the commodity price environment and the completion of certain infrastructure projects. So during the first quarter, we performed one well recompletion and four workovers that resulted in an additional 700 net BOE per day. As we previously announced, W&T was the apparent high bidder on two blocks in the Gulf of Mexico lease sale 254 held by the BOEM on March 18th. These two blocks cover a total of approximately 10,760 acres, and if awarded, we will pay approximately $700,000 for 100% working interest in the awarded leases combined. So in closing, we remain optimistic about the future for W&T. We have a premier portfolio of both shallow water and deep water properties in the Gulf of Mexico, with low decline rates and significant upsides. The proactive actions that we have undertaken this year to reduce capex and LOE coupled with our strong hedge book offering downside protection on commodity prices should allow us to continue to generate strong cash flow even in a lower pricing environment. We remain opportunistic in this environment and will look for ways that we can add value to W&T as we have done thus far in 2020, reducing LOE costs and closely managing our capital spending. We remain focused on operating efficiently and executing our long-term strategy while maintaining our strong balance sheet to maximize shareholder value. Our management team's 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. This alignment of interest ensures that we are truly incentivized to maximize shareholder value and mitigate risk. Shareholders should expect to see more acquisitions in the future as well. With that operator, we can open up the lines for questions.