W&T Offshore, Inc.

Good day, and welcome to the WNT Offshore Fourth Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw yourself from the question queue, press star, then two. Please also note this event is being recorded. And I would now like to turn the conference over to Brent Collins, Director of Investor Relations. Please go ahead.

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 WTE Offshore's fourth quarter and full year 2021 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 WT'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 matters. Please refer to the earnings release that we issued yesterday for disclosures on forward-looking statements and reconciliations of non-GAAP measures. With that, I'd like to turn the call over to Tracy Crone, our chairman and CEO.

Thank you, Brad. Good day to everyone, and thanks for joining us for our fourth quarter 2021 conference call. So with me today are Janet Yang, our Executive Vice President and Chief Financial Officer, William Williford, our Executive Vice President and newly appointed Chief Operating Officer. Congratulations on that, William. Steve Schrader, our Senior Vice President and Chief Technical Officer, and Stuart Opkirchner, our Director of Geosciences. They're all available to answer questions later on during the call. So these past two years have been truly extraordinary, to say the least, with everything from global COVID-19 pandemic to several active tropical storms in the Gulf to wild swings in oil and gas pricing. Through it all, we've persevered by doing what has been successful for the past four decades, maximizing cash flow generation, operating efficiently, and striving to constantly improve the profitability of our assets at any commodity price. Our operations and finance teams have done an excellent job adapting to the changing market conditions while maintaining the highest levels of safety and operational excellence. W&T finished 2021 on a particularly strong note, as evidenced by the financial and operational results we posted for the fourth quarter. In every quarter of 2021, we produced positive free cash flow, including approximately $23 million in the fourth quarter and over $90 million for the full year. In the fourth quarter, we also experienced improved pricing for all three commodities on a sequential basis. We saw our average realized price per BOE before the impact of hedges increased by 16% to $47.70, up from $41.05 in the third quarter. We also did a good job managing our key costs during the quarter. We came in at the low end of our LOE guidance, and G&A was right in the middle of the range we provided. A combination of strong production, favorable pricing, and cost control resulted in $65.7 million in adjusted EBITDA in the fourth quarter of 2021, which was a 42% increase over the third quarter of 2021. For the full year 2021, adjusted EBITDA increased by 35% to $220 million. It wasn't just our ability to generate meaningful cash that benefited us in the fourth quarter. Our operations team did an excellent job of returning the vast majority of properties that were impacted by Hurricane Ida back to production in the fourth quarter. This helped to succeed the midpoint of our production guidance. Production increased by 7% compared to the third quarter to 37.2 thousand barrels of oil per day equivalent, with 45% of our production being liquids. In the past, we've talked about our ability to generate free cash flow from our stable long-life asset base and its importance to our long-term sustainability. That is particularly evident in our outstanding year-end reserve results. So approved reserves at year-end 2021 increased 9% to 157.6 million barrels of oil compared to last year. While improving SEC pricing certainly contributed quite a bit to the increase, We've also had positive performance revisions of over 5 million barrels of oil equivalent. To me, this is a testament to our solid reserve base as it demonstrated our ability to maintain and even grow our reserve base without acquisitions or bringing online any new wells in 2021. Our solid 2P reserves are a major contributor to this result. The company's reserve life index lengthened to 11.3 years, up from 9.4 years at the end of 2020. So in addition to increasing reserves, we also saw a dramatic increase in the PV10 value of our approved reserves. The PV10 value of W&T's SEC approved reserves at year-end 2021 was $1.6 billion, an increase of 119% from year-end 2020. This was driven by improved pricing with an average realized crude oil price of $65.25 per barrel and an average realized natural gas price of $3.68 per MCF. That's using NYMEX grip prices as of March 2nd. The PV10 value of our year-end reserves increases to $2 billion. We're clearly much stronger today compared to a year ago, both operationally and financially. And in 2021, we took several definitive steps from a financial perspective that enhanced our liquidity, lowered our net debt, and improved our financial flexibility for the future. Much of this improved financial flexibility is the result of our Munich retransaction in May of 2021. As you'll recall, in 2019, we paid $167 million for our Mobile Bay Area producing assets and related gas treatment facilities. which was a great price then and looks even better now. We transferred those assets to a wholly owned special purpose vehicle in return for net cash proceeds from a $215 million first lien, non-recourse, seven-year term loan to the SPVs at a very attractive fixed interest rate of 7%. When the debts paid off, we would continue to own 100% of these assets. This was a significantly better loan-to-value ratio than any bank would give us at the time. and it allowed us to fully pay off our RBL provided by banks that were downsizing their U.S. RBL exposure due to ESG and other pressures. We now have substantial cash on the balance sheet and liquidity that permits us to move quickly when opportunities arise. While the lenders required hedging for this financing, we also utilized puts and long calls in our hedging strategy to maintain a lot of the upside on natural gas prices. which turned out to be beneficial for us as natural gas prices have increased substantially since early 2021. So in Q4, we restructured our RBL to provide us additional financial flexibility. We were seeing banks becoming increasingly aggressive last year with limitations on GOM lending and enacting more restrictive covenants. To free us from those challenges, we established a $100 million first priority lien secured revolving facility with a borrowing base of $50 million with calculus lending. While we currently have no borrowings on the facility, it provides us access to additional capital in attractive terms. These important steps that we took in 2021 to improve our financial flexibility will allow us, as we address our second lien notes that mature in 2023, to move forward. In February 22, W&T closed the previously announced ANCOR acquisition for $30.2 million. Our immediate access to cash in our balance sheet facilitated our being able to close the transaction quickly. This accretive acquisition consisted of over 50 gross producing wells at Ship Show 230, South Marsh Island, Vermillion 191, and South Marsh Island 73. W&T will operate all those properties. We estimate that this will add approved reserves of approximately 5.5 million barrels of oil equivalent, 69% of which is oil. Two pre-reserves are estimated to be approximately 7.6 million barrels of oil equivalent. I should note that acquisitions are a core pillar of how we create value here at W&T, and this is a great example of what we look for when we're evaluating an acquisition. The ANCOR assets provide a solid base of approved reserves and produce strong free cash flow. These properties are very complementary to our existing assets. Good synergies there. There are a number of opportunities, both near-term and long-term, that will allow us to maximize the value of these assets. We're generating meaningful free cash flow and methodically paying down our debt on our seven-year term loan. Total debt decreased by approximately $12 million during the fourth quarter to $730.9 million today. Net debt, which is total debt less cash and cash equivalents, stood at $485.1 million. We substantially reduced net debt, which is down about $97 million since year-end 2020 and $202 million since year-end 2019, while significantly increasing our liquidity to $296 million from $174 million at year-end 2020 and $172 million at year-end 2019. This is all despite COVID-19, negative oil prices, and meaningful downtime due to prior hurricane activity. So with a strong balance sheet and a large amount of cash on hand, we'll continue to evaluate accretive opportunities that meet our criteria while systematically paying down debt. Moving on to operations, the coated well that we drilled successfully in 2020 at East Cameron 338-349 came online earlier this week and is currently cleaning up flowing and cleaning up. Last report I got was about 1,000 barrels oil per day with a very minimal drawdown, so that rate's going to go higher. The well is in over 290 feet of water and was drilled to a total depth of over 6,000 feet, and we had counted approximately 100 feet of net oil pay during drilling. We have an initial 30% working interest, but our interest will increase to 38.4% once the well is brought online in certain performance thresholds are met. So the flex-train exploratory well in Mississippi Canyon that we discussed last quarter recently completed drilling, and it was determined that there were not sufficient quantities of hydrocarbons to develop at this time. W&T and the other working interest owners will continue to evaluate information derived from drilling the well, along with further seismic and geological analysis to determine if additional drilling is warranted. We have a 25% working interest in that well. In the fourth quarter, we were very active doing well workovers at Mobile Bay and completed 14 during the quarter that had a positive impact on our production. We plan to continue to perform workovers and recompletions in 2022 that meet economic thresholds. Capital expenditures were $16 million in the fourth quarter of 2021, and for the full year, our CapEx totaled $32 million. So looking ahead to 2022, under the strengthening commodity price conditions, we're forecasting strong free cash flow generation, and we will continue to evaluate additional accretive acquisitions while systematically paying down debt. Yesterday, we provided guidance for 2022. At the midpoint, we expect to average 39.5 thousand barrels of equipment per day in 2022, which is an increase of approximately 4% year-over-year. We've focused on acquisitions, increasing liquidity, and reducing net debt over the last few years rather than on drilling many new wells. So our guidance reflects the natural decline of the asset base offset by the addition of the ANCOR assets in the Dakota well. I'd also note that we have some downtime planned late in the year at Mobile Bay and Mahogany, and the impact of this temporary production deferral is included in our forecast. We see a lot of opportunities in 2022. to expand our organic drilling program and expect to spend between $70 and $90 million in capital this year, excluding acquisitions. That's where the major part of that going is drilling the development deep water well. We also have capital allocated for three-shelf drill wells, as well as supporting capital for facilities, leasehold, seismic, and recompletions. In addition, our P&A budget has increased compared to prior years, and is being driven by obligations and prior deferrals, mainly due to COVID-19, on terminated leases with Bessie. On the cost side, our guidance for LOE and gathering transportation production taxes includes the addition of the ANCOR properties as of February 1. The majority of the expected increase in LOE is associated with this recent acquisition. We see opportunities to reduce the operating costs of those newly acquired assets as we've done with our prior acquisitions. All of our guidance can be found in yesterday's press release. So before I close out the call, I'd like to talk to you about our ongoing ESG efforts. The elements that comprise what we now call ESG have always been important at WMT. Environmental stewardship, sound corporate governance, and contributing positively to our employees and the communities where we work and operate are cornerstones of our culture. Last year, we achieved a meaningful milestone by issuing our inaugural ESG report. It's a great base to build on. We will continue to demonstrate the importance of ESG to our sustainability by issuing reports with more disclosures and information. In the coming weeks, we'll be issuing our next annual ESG report which will demonstrate our commitment to a high-quality ESG effort as we continue to make progress on our ESG journey. We believe that ESG is not just a responsibility of the board and our executive leadership, but also extends to our employees. As such, we had ESG metrics incorporated into our 2021 short-term incentive plan, and we intend to continue with that practice moving forward. Thus, in closing, we're well-positioned with a meaningful cash position and strong liquidity in the strong current pricing environment, which presents many opportunities for W&T. We are projecting significant cash flow and EBITDA generation in 2022. We're increasing our capital spending in 2022 to evaluate some of our attractive organic drilling opportunities. Additionally, we're constantly evaluating the Gulf of Mexico's vast pool of assets for accretive acquisitions within our focus area. We are a well-established operator with a premier portfolio of both shallow water and deep water properties in the Gulf of Mexico that have low decline rates and significant upside. As you can see, our focus on generating strong cash flow throughout the past 40 years has contributed to our success. We accomplished this by operating efficiently and executing on our long-term strategy and that's centered on maximizing shareholder value. Our management team's interests are highly aligned with those of our shareholders, given our 34% stake in W&T's equity. And that's one of the highest of any public E&P company. As a shareholder, I'm very excited about what the future looks like for W&T, and we look forward to a successful 2022. With that operated, we can open the lines for questions.