W&T Offshore, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the W&T Offshore second quarter 2020 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 open for question and answers. During the question and answer session, we ask that you limit your questions to one and a follow-up. You can always 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.

Thank you, Brandon. 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 second 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 second quarter 2020 earnings relief that we issued yesterday for a disclosure on forward-looking statements and reconciliations of non-GAAP measures. At this time, I would like to now turn the call over to Tracy Krohn, our chairman and CEO.

Thank you, Al. And good day to everyone, and thanks for joining us for our second quarter 2020 conference call. With me today are Janet Yang, our executive VP and chief financial officer, William Williford, our executive VP and general manager of Gulf of Mexico, Steve Schrader, our chief technical officer, and Jim Hirsch, our vice president of geosciences, They're all available to answer questions later during the call. So the global COVID-19 pandemic, coupled with supply and demand imbalances, have created an environment of uncertainty and temporarily reduced oil prices to unprecedented low levels in the second quarter. This isn't the first downturn that we've weathered in the last 40 years. We all know this is a cyclical business. Our success has always been have been based on maximizing free cash flow generation, operating efficiently, and striving to constantly improve the profitability of our assets at any commodity price. This time has been no different. So we've reacted decisively by suspending all drilling activities and significantly reducing our capex, proactively curtailing production of selected oil-weighted fuels operated by W&G, and lowering our lease operating expenses meaningfully. without compromising safety or operational capabilities. And we've reduced G&A expense as well. Most of the reductions we've seen on the expense side are sustainable. And we believe that our lease operating cost run rate will be about 20 to 25% lower than Q1 for the remainder of 2020. And our G&A cost run rate will be about 10 to 15% lower than Q1 due to reduced incentive compensation in 2020. So as always, we remain committed to the health and safety of our employees and contractors. 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're conducting daily temperature screenings and implemented procedures for distancing and hygiene at our field locations and in our corporate offices. The pandemic remains fluid, and we're constantly monitoring the situation. We'll follow the advice of government and health leaders. Okay, so another way we have responded to this current environment is by using some of our free cash flow to repurchase a portion of our outstanding 9 and 3 quarters senior second lien notes. In the first quarter, we purchased $27.5 million in principal of our outstanding notes for $8.5 million. In the second quarter, we've We've repurchased an additional $45.1 million of those same notes for $15.4 million. That's about $72.5 million of long-term debt that we've repurchased year-to-date for just under $24 million. That's reduced our annual interest expense by over $7 million. We believe this was a very good use of available cash and will help place W&T on an even better financial footing moving forward. So turning to our second quarter results, despite the low pricing environment, we successfully integrated our acquired assets at Mobile Bay and at Magnolia and continued generating good adjusted EBITDA and operational cash flow. Our costs were down significantly compared to the first quarter. Adjusted EBITDA was $42.1 million despite a weaker pricing environment, and our CapEx was Our capital expenditures were reduced to $6.4 million. This is very important because on a cash basis, we continue to create significant value by generating nearly $36 million more of adjusted EBITDA versus our CapEx, which helped us to reduce long-term debt at a substantial discount. I can't emphasize this enough. One of the keys of our ongoing success has been our ability to generate positive cash flow. So in the second quarter of 2020, our production averaged 42,037 barrels of oil equivalent per day for 3.8 million barrels of oil equivalent. That was up 20% year over year compared to the second quarter of 2019. Q2 production for 2020 was reduced by 22% compared to Q1 largely due to shut-ins resulting from lower pricing, Higher Differentials, and Tropical Weather. Our industry experienced a negative pricing experience brought on by future speculations. I should also mention that total liquids production comprised 48% of production in the second quarter of 2020. 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 equipment of deferred production in the second quarter. We didn't experience any material damage to our facilities due to crystal ball. There was very minimal production impact and no storm damage from the more recent storm, Hurricane Hannah, in July. So in late April, we proactively curtailed production in selected oil-weighted fields operated by us and also experienced production curtailments from third-party operators due to the sharp decline in oil prices. Recently, a majority of the third-party shutting volumes were returned to production, but we have purposely not been as quick to restore all of our oil-weighted operated production. We're not focused on the short term, but are looking at the best way to proactively manage reservoirs and maximize and preserve value over the long term. Given that we are cash flow positive, we have the luxury to not produce at maximum rates on all fields when margins are low. This allows us flexibility to produce more in higher price environments and further drives value. We will continue to monitor the market to determine the appropriate time to return our oil-weighted operated production curtailments to production. Taking into account our operated curtailments and proactive reservoir management, as well as planned downtime of 41 days at Magnolia due to maintenance activity at the third-party operated host platform, which accounts for an estimated 1,350 barrels of oil equipment per day of impact to the third quarter of 2020 and no drilling activity or no wells coming online in the near term and natural decline, we believe our third quarter production will be slightly higher than the second quarter and average between 40,900 and 45,100 barrels of oil equipment per day. Our guidance for the full year is now 43,750 to 46,500 barrels of oil equivalent per day. Now, for the second quarter of 2020, our average realized sales price per BOE declined about 43% compared with the first quarter, with declines in pricing for oil, NGLs, and natural gas. Our average realized crude oil sales price was $21.67 per barrel, Our NGL sales price was $4.67 per barrel and our natural gas price was $1.78 per mcf. Excluding the effect of hedges, revenues for the second quarter decreased quarter over quarter by 56% to $55.2 million from a combination of lower volumes and lower prices. Returning now to cost with the sharp downtime in prices, we quickly implemented several successful initiatives to reduce our LOE costs. This included replacing higher-cost contract personnel with full-time employees. We reduced transportation costs by lowering the number of boats and helicopters needed through operational efficiencies, cutting workover and facilities costs through vendor and supplier cost reductions, and increasing our focus on projects that maintain and Optimized Production. We have not reduced our commitment to safety, operational compliance or environmental protection with any of these actions. As a result of these cost saving activities and other factors such as the impact of the PPP funds, our total second quarter LOE came in at $28.3 million, down 48%, compared to $54.8 million in the first quarter. While we expect our cost cutting initiatives To continue to keep LOE low in the third quarter and the rest of 2020, we'll be returning to a more normal level of operational activity this quarter. As a result, we're projecting third quarter costs to be up compared to very low costs in quarter two, but still about 20% to 25% below first quarter. Our G&X expense in the second quarter of 2020 was $5.6 million, which was well below our first quarter of $14 million, and others, primarily due to credits to expense from the PPP funds and lower incentive compensation. We expect our G&A costs moving forward to be lower than Q1 by about 10% to 15% and be in the range of $11.5 to $13 million. Now, for the second quarter, we reported a net loss of $5.9 million, or $0.04 per share, which included $38 million in unrealized commodity derivative loss Offset by a $29 million non-cash gain on our debt repurchase and $8.7 million of deferred tax benefit. Our adjusted net loss was $2.2 million, or two cents per share. As we discussed in our June call, our bank group recently completed its regularly scheduled spring borrowing base redetermination. The borrowing base was set at $215 million. It's down modestly from $250 million. Additional details can be found in our 10Qs. The next regularly scheduled redetermination will be in the fall. Additionally, we've added several oil and natural gas hedges since our last call, and a detailed schedule is in yesterday's release. Following all these actions at June 30, 2020, our total liquidity stood at $165 million, comprised of about $36 million in cash, and $129 million in availability under our revolving credit facility. Our long-term debt remaining on our senior notes has declined at $552.5 million at June 30th from $625 million at year-end 2019. 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. We remain confident in our extensive inventory of high-quality prospects in our asset base. This was evident with our mid-year 2020 approved reserve report, as calculated by NSAI, W&T's Independent Reserve Engineering Consultants. SEC approved reserves as of June 30, 2020, totaled 157.5 million barrels of oil equivalent, compared with 157.4 million barrels of oil equivalent at year-end 2019. Strong positive revisions of previous estimates from field performance of 17.6 million barrels of oil equivalent in the first six months of 2020 was offset by a combination of negative revisions due to SEC price changes of 9.9 million barrels of oil equivalent and year-to-date 2020 production of 8.7 million barrels of oil equivalent. Mid-year 2020 reserves, which were 85% approved developed producing and approved developed non-producing, were 34%. The PV-10 of those approved reserves was $1 billion, which was down compared to $1.3 billion at year-end 2019, and that's due to decreased pricing. The mid-year SEC PV-10 was based on average crude oil price of $48.84 per barrel, compared with $58.11 at year-end 2019, and an average natural gas price of $2.09 per mcf, compared with $2.63 at year-end 2019. at year-end 2019. This report further solidifies the strength of our asset base. Turning now to operations in the first quarter, the Cota Well and East Cameron 338-349 field was successfully drilled in over 290 feet of water and accounted for approximately 100 feet of net oil fat. Initial production is planned for the first half of 2021, subject to the commodity price environment. and the completion of certain infrastructure projects. After drilling this well, we decided to suspend all other drilling activity due to the current uncertain pricing environment and at this time we have no active drilling or completions operations. We will continue to perform summary completions and workovers that meet economic thresholds in today's price environment. So 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. We were recently awarded both blocks, which included one deep water block and one shallow water block. We continue to believe that there are still good opportunities in the Gulf of Mexico. With that in mind, we'll continue to look at acquisitions that meet our criteria, especially those that... provide a solid foundation for our ability to generate free cash flow even in the current pricing environment. We've integrated two strong acquisitions from 2019 and will look for those opportunities moving forward. We've built W&T through the right combination of attractive property acquisitions, a very methodical integration and exploitation of those acquisitions, and successful development and exploratory drilling on our legacy fields. 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 upside. The proactive actions that we've 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 good cash flow even in a lower pricing environment. We remain opportunistic in this environment. and we'll 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 do remain focused on operating efficiently and executing our long-term strategy, all that 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 shares. which is one of the highest-to-be public E&P companies. This alignment of interest ensures that we're 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 now open the lines for questions.