W&T Offshore, Inc.

Good day and welcome to the W&T Offshore First Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on your telephone keypad. To withdraw your question, please press star and then two. Please note this event is being recorded. At this time, I'd 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 W&T Offshore's first quarter 2022 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. With that, I'd like to turn the call over to Tracy Crone, our chairman and CEO.

Thanks, Brent. Good day to everyone. And thanks for joining us for our first quarter 2022 conference call. So with me today are Janet Yang, our Executive Vice President and Chief Financial Officer, William Williford, our Executive Vice President and Chief Operating Officer, and Steve Schrader, our Senior Vice President and Chief Technical Officer. You're all available to answer questions later on during the call. So I'm pleased with the very strong operational financial results in the first quarter, which provided a solid foundation for an exciting year. Our strategy is simple, generate free cash flow, maintain high-quality conventional production, and capitalize on accretive opportunities to build shareholder value. So here are all the things we delivered in the quarter. One, our production was at the high end of guidance. Two, our LOE costs were below the low end of guidance. Three, we grew adjusted EBITDA by 37%. $89.7 million and more than doubled our free cash flow to $46.9 million compared to the fourth quarter. So I would note that this marks the 17th consecutive quarter that W&T has generated free cash flow. And fourth, we paid down $10.6 million in debt. Fifth, we brought Dakota well at East Cameron Online at a gross production rate of 2,600 barrels of oil equivalent per day. And last, we closed an accretive acquisition of producing properties in February and then bought the remaining interest in those properties very shortly after the end of the first quarter. So as you can see, our operations and finance team executed at an exceptionally high level, and we believe that the rest of the year can be even better. In the first quarter, we also experienced sustained higher pricing for all three commodities on a sequential basis. Our production was up 2% over the prior quarter to almost 38,000 barrels of oil equivalent per day, and our average realized price per barrel of oil equivalent before the impact of edges increased by 16% to $55.29, up from $47.70 in the fourth quarter. We also did a good job managing our key costs during the quarter, coming in below the low end of our LOE guidance and below the midpoint of the range for G&A. The combination of strong production, favorable pricing, and cost control resulted in a 37% increase in adjusted EBITDA and allowed us to more than double our free cash flow compared to the fourth quarter of 2021. So we're clearly in a much stronger financial position today, and we remain focused on operational execution to build on these solid first quarter results. So earlier this week, we announced a memorandum of understanding with Korea National Oil Corporation that formalizes the intention for the two entities to work together to pursue various opportunities in upstream oil and gas in North America. And this could include other opportunities as well. So I'm very excited about this agreement for a couple of reasons. First, K&OC is a highly respected company in our industry. And this agreement allows us to consider opportunities that we likely wouldn't on our own due to the scale. Second, it allows us to look at opportunities and methodology that can be made even more successful by combining our respective technical strengths and working together. These projects could range from carbon capture projects to drilling opportunities and acquisitions. I'm really confident that this MOU will be mutually beneficial to both companies' respective shareholders. So a large part of our fast success and integral to our strategy is to continue to evaluate complementary and accretive acquisitions, then closing those selected opportunities quickly. In February, we closed the ANCOR acquisition, which included shallow water producing properties, providing a solid base of approved reserves, and strong free cash flow, both of which are key factors when we consider any acquisition opportunity. So in April, we purchased the remaining working interest in those properties for approximately $17.5 million, which brings W&T's total working interest in the assets to 100%. So assuming strip pricing as of April 18, 2022, we estimate year-end 2021 approved and 2P reserves for W&T's 100% working interest in the properties to be approximately 6.7 million barrels of oil equivalent with 70% oil and 9.5 million barrels of oil equivalent with 75% oil, respectively. So net production to W&T's interest at quarter end was approximately 4,500 barrels of oil equivalent per day. We believe these assets are highly accreted to W&T, and we can use our operational expertise as well as our existing infrastructure and scale to drive down costs and make these assets even more economical. So moving on to operations. The Kona well that we drilled successfully in 2020 at East Cameron 338, 349 was completed and recently turned to sales in early March. The well is performing very well with current gross production of about 2,600 barrels of oil equivalent per day. So as a reminder, we encountered approximately 100 net feet of oil pay during drilling. We have an additional 30% working interest in the well. But our interest can increase to 38.4% once certain performance thresholds are met. During the first quarter of 2022, we performed two recompletions that positively impacted production in the quarter. We plan to continue to perform workovers and recompletions in 2022 that meet economic thresholds. And with that, I'll turn the call over to Janet.

Thank you, Tracy, and good morning, everyone. Capital expenditures, excluding changes in working capital associated with investing activities, were $17.4 million in the first quarter of 2022. This is primarily attributed to completion costs for the COTA well, drilling costs for the exploratory well we discussed last quarter, and seismic costs. Even with that capital spending, we generated $46.9 million in free cash flow and paid down $10.6 million of debt in the first quarter. Net debt, which is total debt less cash and cash equivalents, was $504.8 million at the end of the first quarter. Our net debt to trailing 12 months adjusted EBITDA is about two times, which is a dramatic improvement compared to 3.4 times a year ago. Our current forecast, which assumes recent strict futures prices, no additional acquisitions this year, and no equity issuances under our ATM program, shows us exiting 2022 with net debt to TTM adjusted EBITDA below one time. With a strong balance sheet and a meaningful amount of cash on hand, we will continue to evaluate accretive opportunities that meet our criteria while systematically paying down debt. Our revolving credit facility, which was extended until January 3, 2023 during the quarter, and our ATM program, which was filed during the quarter and has not been used, provides us additional financial flexibility if we need it. As of March 31, 2022, we had available liquidity of $265.5 million comprised of $215.5 million in cash and cash equivalent and $50 million of borrowing availability under our revolving credit facility. As many of you on the call are aware, our senior second lien notes mature in November 2023, and we intend to commence discussions with potential lenders and institutional investors soon regarding the refinancing of all or a portion of those notes prior to maturity. We added some additional disclosures in our earnings release yesterday that will help facilitate those discussions. Looking ahead to the second quarter of 2022, our guidance for production is between 38.1 and 42.1,000 BOE per day, which is an increase of approximately 6% quarter over quarter at the midpoint compared with first quarter actual production. We also increased our full year production guidance to 38.2 to 42.2,000 BOE per day. which reflects the benefit of the acquisitions we have closed so far this year. For the remainder of 2022, we are hedged 28% for oil, and we're fully hedged for natural gas. The company also purchased call options with strike prices ranging from $3 to $5 for MMBTU that cover approximately 88% of its anticipated natural gas production for the remainder of the year. These call options positively offset a significant part of our other natural gas hedges, which you'll recall were entered into as part of our mobile bay transaction with Munich Reef to provide downside price protection and allow W&P to capture a substantial amount of natural gas price increases. Taking into account our recent acquisition, second quarter lease operating expense is expected to be between $59 million and $65 million, while cash G&A costs are expected to be between $13.3 million and $14.7 million. Our budget for capital expenditures in 2022 remains unchanged at $70 to $90 million for the full year, which excludes acquisition opportunities. Included in this range are planned drilling completions and long-lead cost expenditures related to deepwater and shelf wells, as well as capital costs for facilities, leaseholds, seismic, and recompletion. Similarly, the range for P&A expenditures remains unchanged at $55 to $75 million. We spent about $5.5 million on ARO settlements in the first quarter of 2022. As a reminder, all of our guidance can be found in yesterday's press release. With that, I will turn it over to Tracy again.

Thanks, Janet. So before I close out the call, I would like to talk to you about our ongoing ESG efforts. We're continuing to demonstrate strong commitment to our high-quality ESG effort with the current report. Environmental stewardship, sound corporate governance, and contributing positively to our employees in the communities where we work and operate are cornerstones of our culture. We believe that ESG is not just the responsibility of the board and our executive leadership, but also extends to our employees. So as such, we have ESG metrics incorporated into our incentive plan, and we intend to continue with that practice moving forward. So in closing, we're very pleased with how well we started 2022, both operationally and financially. W&T is well positioned with a meaningful cash position and strong liquidity in the current price environment, which presents many opportunities for W&T. We've generated significant cash flow in EBITDA in quarter one and expect that to continue throughout 2022. We have a number of organic drilling opportunities like Dakota Well that we plan to drill in 2022 and beyond. Additionally, we are constantly evaluating the Gulf of Mexico's vast pool of assets for accretive acquisitions within our focus area. So quickly evaluating and executing on opportunities like ANCOR is a pillar of our success. 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. Our success is made possible by executing on our long-term strategy, which is centered on maximizing shareholder value. So 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. So as a shareholder, I see a bright future for W&T and look forward to continued success in 2022. And with that, operator, we can now open the lines for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star and then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. We ask that you please limit yourself to one question and one follow-up, and please re-queue for additional questions. Our first question today will come from Michael Sciela with Stifel. Please go ahead.

Good morning, everybody. Even though it is just a memorandum of understanding at this point, I just wanted to ask about Tracy, what do you think it is that motivated KNOC to enter an agreement with you? Are they looking to partner with you on acquisitions in the Gulf of Mexico? Are they looking to partner with you on your drilling inventory or anything more you can say as to what motivated them to enter this deal?

Yeah, we've been talking to them. We've talked to them in the past. We've met some of their executive management. We had a very good experience with them with regard to the properties that we purchased through ANCOR, which is a sub of KNOC. And it gradually developed into a good relationship. And I think... It's good to have a relationship with an international oil company. And the fact that we've been around for a long time in the Gulf of Mexico in this basin, we've been around for a long time, period. And I think the fact that you have a management team that is highly vested in the shares of the company moving forward, I think it gives us a different perspective that we can deliver. in talking to them about technical aspects of things we might do. They are an international oil company, and they have assets in other countries, and that has some interest for us as well. So, you know, I just see a lot of synergy here with this company, and the relationships have been very good, so I think we're very fortunate to have this relationship.

We look forward to seeing how that unfolds. Janet, you mentioned the potential to refinance the second lien notes. I know you also mentioned some reference to that in the release. Maybe just any update on how you see that opportunity and anything else you might want to do with the balance sheet, given it looks like you're going to go, as you mentioned, below one times debt leverage this year. Anything else you see as an opportunity to do things with the balance sheet this year?

Sure. Yeah, we certainly are looking at refinancing our debt. I mean, we do have some time. It's 2023, but not until November of 2023. But, you know, prices are up. Our financials are strong. And so, you know, we're We're out there. We are definitely looking at opportunities to refinance those notes opportunistically. Again, we're not under the gun, so we want to make sure we do it right. And yeah, we're very excited about net leverage going down based on recent pricing without any additional acquisitions or just based on our current assumptions going forward without VATM or anything like that going under one time. Our goal is to de-lever, but we also realize that there's a lot of good opportunities that are low risk, like this Ancor acquisition and many others like that that are low risk with a lot of cash flow. So we want to also have the dry powder to be able to go out there and take advantage of those to build the company and grow in a very risk-adjusted way. So we're kind of balancing those right now.

Very good. One more related, if I could just tag onto that. Is there any option to repay the term loan early, or is that not part of the – not being considered?

We certainly can. Yeah, we certainly can do that as well. I think it's good interest rate. We don't – we're not necessarily thinking that we will do that, but we certainly can.

Very good. Thank you.

Again, to ask a question, please press star and then one. The next question comes from John White of Roth Capital. Please go ahead.

Good morning, everybody. Good morning, John. Good morning. Congratulations on the very strong results. It looks like you're firing on all cylinders. ANCOR looks strong, and the production guide looks very favorable. The The onshore companies are talking about shortage in the oil service sector, talking about shortages of equipment and personnel. Are you experiencing that in the Gulf?

Yeah, well, first, thanks, John. Yeah, the short answer is yes, we are. We're seeing it more in transportation than just about anything at this point, and we see it in personnel. So, yeah. Uh, personnel, uh, has been a little bit problematic in, in different areas. Um, mainly, mainly with our boats and, uh, uh, and, and, uh, crews for specialty work. So, uh, you know, you had COVID, you had, um, uh, some, some, some supply chain issues, but, but really it's, it's, I think more that people have adjusted and they're, they're doing other things. and may not necessarily be coming back to our business. This is not an unusual problem. We've certainly had this problem before, although for different reasons, mainly related to recessionary issues. But I think that we'll motor on through it, and generally we see about a nine-month lag when prices are going down. and about the same when prices go up for the market to adjust to personnel and materials. We've got some drilling to do later on this year that we've had to put some long – fortunately, we've done a lot of work on long lead items, so I think we'll still be good in that particular area. instance with the well we plan to drill in deepwater later on this year or early next year. So LOE and P&A and CapEx and G&A are all going to be affected by this. So the idea is to control the margins, not just the cost, but the margins, EBITDA margins.

Okay, thanks for that detail. I appreciate it and I'll pass it along. Thank you.

And again, if you would like to ask a question, please press star and then 1. Our next question is a follow-up from Michael Sciella of Stiefel. Please go ahead.

Yeah, Tracy, you mentioned the well at Magnolia around the end of the year. Are you still planning the three shelf wells this year and given the tightness that you mentioned, any sense on timing of those?

So, Michael, this is William. I'll answer that question for you. Essentially, we are doing some shelf wells, but mostly on that is associated with long lead items. We are doing platform rigs. So it's things that we have to do in order to prepare to get those rigs on those platforms in order to drill in 2023.

Okay. And, William, any sense on timing? Do you think you'll get them all done this year?

As far as the long lead items, yes, we'll get that stuff moving. We actually got it started already. We are spending dollars to prepare. Those platforms, we feel pretty confident we'll be able to get those rigs on in 2023 and get those wells drilled.

Got it. Okay. And in terms of the capital spend for this year, is that still anticipated to be fairly equally weighted across the year?

That's correct. We will see a little ramp up once we start drilling on the Holy Grail well, the water well, later in the year.

Right. And you had mentioned you initiated some re-completion opportunities with the anchor assets. Can you give any sense of the size of the opportunity set there? Is that just a couple of wells or is that something that could keep you busy for a while? Go ahead, Will.

Yeah, we started out with a couple of wells and actually we've got a few more that we're looking at right now. As you As everyone noticed in the industry, as prices go up, re-completions give us a quick opportunity to spend capital and see a return in that investment right away. So we're looking not only at Anchor, but at other opportunities as well with our portfolio.

Good. And Tracy mentioned the LOE came in at the low end of guidance. I assume you said those anchor assets had a higher LOE. Is that something you've been able to attack yet with those assets, or was that just on your legacy assets where you were able to lower the LOE?

Yeah, we are able to reduce that LOE. We just took over operations officially on May 1, so there was a transition period for those operations. Effective date, of course, was different. But now that we have our own boats and helicopters in the area, we should see positive results with regard to LOE. Now, of course, the restraint on that is inflationary and supply chains and personnel and all that stuff. But again, that's why I always try to focus people on margins. What we try to do is maintain the margins. as opposed to a specific cost. But right now, we're thinking because of our footprint in the area that we should be able to hold the line on LOE.

I guess with those assets, too, as it relates to margins, I think you, as I mentioned, when you looked at the assets, you saw an opportunity to maybe improve on some of the contracts there. Anything you can say about any work you've done there?

Yeah, we've done quite, this is William again, we basically took that head on as soon as we got it. Some of the things that we're looking at right now is definitely on the transportation costs. That's marketing transportation costs with the pipelines. We're looking at opportunities to lower that. We think we can do that in a fairly short period of time. We're also going out and looking at additional bids on selling our hydrocarbons, and we've seen opportunities to add value there as well. So, Those are things that we're looking at as far as quick hits, along with what Tracy mentioned before as far as looking at some of the lowering the cost with the LOE side of things.

Got it. And then just one last one for me. I know you have it in kind of your long-term plan for a deepwater well at Magnolia. Is there any opportunity, and I guess it would be – have to be in conjunction with, I think, if you were to, as Janet said, you're currently not looking to repay that term loan early, but with $7 or $8 gas prices now, any thoughts on maybe accelerating well in that field?

I'm sorry. Would you repeat the question, sir? I got distracted for a moment.

Sorry. Yeah, just given the high gas prices, Magnolia looks like, you know, I think you had put in a plan to drill a well there in 2028, kind of when the term loan expired. But is there any thought about, given the high gas prices, maybe trying to accelerate that?

Oh, yeah, absolutely. $8 gas makes a big difference. We had a cost prior to this. It was a pretty high cost, and certainly that makes this a lot more doable with $8 gas. The issue is, of course, we own all the interest there, and this is a very expensive well, albeit shallow water. This is a deep high-pressure well at high pressure and high temperature. And so we will have to get some pretty high-pressure equipment as well. So those are the restraints on that. At this point, it's not price.

Okay. And would you need to repay the term loan before you would want to do that, or could that be separate? Not at all. Okay. Great. Thank you, guys.

Thank you, sir. Thanks, Mike.

And ladies and gentlemen, at this time, we will conclude our question and answer session. I would like to turn the conference back over to Tracy Crone, Chairman and CEO, for closing remarks.

Thank you, Operator. Well, again, a very good quarter. We're happy to see a little bit better pricing regime and And we look forward to talking to you in the near future. Thank you very much.

The conference has now concluded. We thank you for attending today's presentation. And you may now disconnect your lines.