W&T Offshore, Inc.

Good morning, and welcome to the WNT Offshore Second 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, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. 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 today to today's conference call to review W&T's second 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 those forward-looking statements. Today's call may also contain certain non-GAAP financial measures. Please refer to the earnings release that we issued this morning 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 second quarter 2022 conference call. So with me today are Janet Yang, our Executive Vice President and Chief Financial Officer, and William Williford, our Executive Vice President and Chief Operating Officer. They'll be available to help answer questions later during the call. Our financial results in the second quarter were among the best quarterly results in our history. Our strategy has always been simple. Generate free cash flow, maintain high-quality conventional production, and opportunistically capitalize on accretive opportunities to build shareholder value. Our ability to execute and maintain strong operational excellence was a significant driver in our outstanding financial results in the second quarter. Here's the key things we delivered in the quarter. Average daily production increased 12% quarter over quarter, and that was above the high end of guidance. LOE costs were below the low end of guidance. We took advantage of the sharp increase in natural gas forward prices and monetized value from a portion of our natural gas hedge position while still maintaining our ability to participate in higher natural gas prices by entering into new gas call contracts with higher strike prices. This resulted in a net gain on the transaction of $138 million and net cash proceeds of $105.3 million and was clearly significant. a big contributor to our financial results in the quarter. We generated net income of $23.4 million, or 85 cents per diluted share. Adjusted EBITDA came in at $294 million, which was over three times what we reported in the first quarter, and free cash flow was $234 million, which was almost five times our free cash flow last quarter. Cash and cash equivalents increased to $377.7 million, up over 80% from a year ago. Our net debt to trailing 12 months adjusted EBITDA improved significantly to 0.7 times from 2.0 times last quarter. We're now at our stated goal of less than one times net debt to trailing 12 months EBITDA, and we got there in about half the time anticipated. Last, our mid-year SEC pruned reserves grew by 7 percent to 168.3 million barrels oil equivalent, and pre-tax PV10 value increased 62 percent to $2.6 billion compared to year-end 2021. So, we clearly had an outstanding quarter, and it was due in large part to the ability of both our operations and finance teams to execute at a very high level. In the second quarter, we experienced sustained higher pricing for all three commodities on a sequential basis. Our average realized price for oil was $107.90 per barrel. For natural gas liquids, we realized $43.58 per barrel. And for natural gas, $7.70 per MCF. Our production was up 12% over the prior quarter to 42.4 thousand barrels of oil equipment per day. We also benefited from a full quarter production from our COTA well and from the two producing acquisitions we closed earlier this year, as well as from workovers and recompletions. We also did a good job managing our key costs during the quarter, coming in below the low end of our LOE guidance. The combination of strong production, favorable pricing, and the monetization of a portion of our natural gas edge position resulting in an adjusted EBITDA of $294 million. We have now generated $383.7 million of adjusted EBITDA in the first half of 2022. So to put this in perspective, for the full year 2021, we generated $220 million, and for the full year of 2020, we generated around $160 million. The second quarter also marks the 18th consecutive quarter that we've generated free cash flow. This has allowed us to reduce our corporate net debt to $331 million from $545.6 million a year ago. So we're in a strong financial position. We remain focused on operational execution to continue building on these solid results. We have an outstanding asset base, and the significant value of these assets is evident in our mid-year reserve report. Our independent reserve engineering consultants, Netherland Sewell, prepared W&T's mid-year reserves, SEC-approved reserves, as of January 30, 2022, totaled 168.3 million barrels of oil equivalent and were up 7% compared with 157.6 million barrels of oil equivalent at year-end 2021. So about 35% of mid-year approved reserves were liquids and the balance was natural gas. Approximately 88% were classified as approved developed produce equivalent. So strong positive performance revisions, price revisions, and purchases of minerals in place totaled 17.9 million barrels of oil equipment, which replaced approximately two and a half times year-to-date 22 production of 7.3 million barrels of oil equipment. We spent minimal drilling capital over the past 18 months, and yet we continue to see positive reserve revisions. In addition, the PV-10 of our mid-year approved reserves utilizing SEC pricing was $2.6 billion. That's an increase of 62% compared with $1.6 billion at year-end 2021. So the mid-year 2021 SEC reserves and PV-10 were based on an average crude oil price of $85.82 per barrel compared with $66.55 at year-end 2021. and an average natural gas price of $5.13 per MCF, $5.13 per MCF, compared with $3.60 that year in 2021. The Kota well that was previously drilled successfully at East Cameron 338-349 was completed and turned to sales in March of this year, and we enjoyed a full quarter of production in the second quarter. Additionally, we performed two recompletes and four workovers that positively impacted production in the quarter. So we plan to continue to perform additional workovers and recompletes that meet the economic threshold for remainder of this year. In regard to future drilling, we're moving ahead with long lead items in preparation to spud our Holy Grail well at Garden Banks 783 in the Magnolia Field in the first quarter of 2023. For the second half of 2022, we don't currently have any additional drilling plans. So, CapEx, excluding changes in working capital associated with investing activities, were $8.1 million in the second quarter of 2022. But with a strong balance sheet and a meaningful amount of cash on hand, we will continue to evaluate accretive acquisition opportunities that meet our criteria while systematically paying down debt. As of June 30, 2022, We had available liquidity of $427.7 million, comprised of $377 million in cash and cash equivalents, and $50 million of undrawn borrowing availability under our revolving credit facility. In addition to cash and the revolver, we still have the at-the-market equity facility, which remains unexercised for $100 million. Now, regarding our senior second lien notes that are approaching maturity, we continue to monitor the debt capital markets to refinance all or a portion of those notes. Our preference is to refinance the notes with financing providing longer tenders and market-based covenants and an attractive interest rate. However, should the debt market continue to be difficult to access due to market volatility, there's a path for us to pay off those notes at maturity. Strong anticipated future cash flows combined with our significant cash position, availability under our undrawn credit facility, and if needed, access to our unused ATM equity facility gives us confidence that we'll be able to address those notes in the event that we're not able to access the debt markets at a reasonable cost. Looking ahead to the third quarter of 2022, our guidance for production is between 39 and 44,000 barrels of oil equipment per day. We're increasing our full-year production guidance by 2% at the midpoint to 39.5 to 42.0 thousand barrels of oil equipment per day. And that reflects the continued strength of our production base and the benefit of the acquisitions we've closed so far this year. Third quarter lease operating expense is expected to be between $55 million and $62 million, while cash G&A costs are expected to be between $15 million and $17 million. So our budget for CapEx in 2022 remains unchanged at $70 million to $90 million for the full year. That excludes acquisition opportunities. So included in this range are costs already incurred with wells from earlier this year and planned second-half expenditures related to long-lead items for Holy Grail, as well as capital costs for facilities, leasehold, seismic, and recompletions. Similarly, the range for P&A expenditures remains unchanged, at $55 to $75 million. We spent about $34 million on ARO settlements in the second quarter of 2022. As a reminder, all of our guidance can be found in this morning's press release. So in closing, we performed very well in the first half of 22, both operationally and financially. W&T is well positioned with a large amount of cash and strong liquidity in this current price environment, which represents a lot of opportunity for the company. We've generated significant cash flow and EBITDA thus far in 2022, and we expect that that should continue throughout the year. Our improving cash position provides a clear line of sight to either pay off or refinance our second lien notes that are nearing maturity. So we have a premier portfolio of both shallow water and deep water properties in the Gulf of Mexico that have low decline rates and significant upside. In recent weeks, media has reported that several large Gulf of Mexico players plan to sell producing assets in the basin. As always, we are constantly evaluating the Gulf's vast pool of assets for accretive acquisitions within our focus area. Quickly evaluating and executing on opportunities is a pillar.

Pardon me, this is the conference operator. We've rejoined the speaker location. Sir, please go ahead.

Thank you. Unfortunately, I understand we've had some communications disruptions. We're doing this call from the Intercom Conference in Denver, Colorado. So there are thunderstorms in the area. I apologize for the inconvenience. I was just wrapping up telling you that we're evaluating – Assets in the Gulf of Mexico, as usual, we expect that over time we'll get our fair share of those anyway. Our management team's interests are very aligned with those of our shareholders, given our 34% stake in W&T's equity, which is one of the highest of any public EMP company. As a significant shareholder, I see a very bright future for W&T and look forward to continued success in 2022 and beyond. And, Operator, We can now open the lines for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 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 2. At this time, we will pause momentarily to assemble our roster. Our first question is from Mike Ciala with Stifel. Please go ahead. Good morning, Tracy.

First question, I guess, is for you or Janet. Just wanted to ask on the second lien notes you mentioned, you know, how you may address those. They are trading at a bit of a discount right now. I guess thoughts on buying back more of those notes in the open market, or do you prefer to build cash and keep your options open?

Well, I'm not out buying notes right now. We will have that option at November 1 of buying them at par. So that's a more likely time that we would go out and perhaps purchase those notes. We are in the midst of talking to folks about refinancing all those notes. The good news is that we know we can get refinancing. The question is at what terms. Markets have been a little bit unstable with interest rates going up. And some of the policies the administration has brought forth with regard to the economy. So we're not the only ones struggling with that. But the good news is that we really have a lot of cash built up. We see a real clear path, I think. to just paying the notes off if that's what we have to do. So even if they go current, I'm not terribly concerned about it. I'd prefer to get them refinanced and give us a little dry powder to do acquisitions.

I guess if they do go current, there's nothing that doesn't trigger anything with any of your other, I mean, with the term loan, there's no issue with that?

Not with the term loan, no.

Okay, good.

Separate and non-required, so. We're okay there.

Good. Okay. And just wanted to – you may have disclosed this. I might have missed it. But with the acquisition, the 20% that you closed in April, did you say what that contributed to the quarter? And I was just curious if you could maybe talk about how much the recompletions and the workover and the code of will contributed to the second quarter. You surprised a bit on the production for the quarter, so just trying to – figure out where that surprise came from.

Yeah, we didn't disclose that as a separate item. Overall, we had some downtime associated with our mobile-based stuff that was ongoing at the end of last year, as I recall, and we got a full production.

Okay, that was a little choppy, but I think I got the gist of it. I appreciate it.

Thank you, guys. Yeah, they're having a bunch of thunderstorms in the area. I think that's what's disrupting the radio signal.

Thank you, Mike.

Thanks, Mike.

Again, if you have a question, please press star, then 1. The next question is from Jeff Robertson with Water Tower Research. Please go ahead.

Thank you, Tracy. A question on Holy Grail. The long lead time items that you are ordering, I assume that will shorten the cycle times? to bring it on production, is that correct?

No, actually it's to provide the ability to get on the well itself. We had to do some modification on the substructure. This is actually a platform rig that we're putting on this floating vessel. These are dry trees and not subsea trees. So it has to do with the marine riser to adapt to the dry tree. You've got to understand that, you know, as we're drilling, the vessel is moving up and down, so we've got to make sure we compensate for that motion and that we have confirmed the integrity of the riser. So a lot of that has had to do with the parts and equipment we need to do just to get rigged up on this dry tree that's moving up and down as we're drilling.

Okay. Have you all settled on what your working interest in that well will be, or are you looking for partners?

Right now we have 100%. So, no, I'm not particularly looking for partners for this well.

Okay. And lastly on that, will it set up additional prospects at Magnolia?

We don't know yet. I'll be able to answer that question after we drill the well.

Okay. All right. And then lastly, on the notes, following up on Mike's question, given that you all look like you could probably pay them off with cash, does that give you leverage in what your refinancing options are?

Oh, you bet your ass it does.

Okay. That's what I figured.

Yeah, you're right. Thank you very much. We can get this thing refinanced, Jeff. It's not bravado that we're speaking to here. We can refinance it. Cash flow is strong. You know, if markets suddenly collapsed, then it could be a little bit more problematic. But don't forget we have that ATM out there as well as additional insurance. It's unexercised. You know, we did that to give us a little bit of another option, really.

Okay. Thanks. I appreciate the color.

Yes, sir.

The next question is a follow-up from Mike Ciara with Stifel. Please go ahead. Sure.

Yeah, again, I just wanted to ask on Holy Grail. I think you initially were talking about splitting that well in the fourth quarter. It looks like it might have slipped a little bit. Was there any capital associated with the timing of that that might have slipped into 23? And if so, is the difference there maybe attributable to inflation, or is that not the correct way to look at that?

No, it's really not inflation, Mike. It has slipped. It's just getting the parts and the regulatory side of it lined up. We'll start spending money in the fourth quarter, and we'll start drilling the well in the first quarter of next year.

Okay, so what you were planning to spend in the fourth quarter really hasn't changed any?

It really hasn't changed much. The timing has changed a little bit, but But we didn't expect that we would be having a great deal of CapEx in the fourth quarter as a function of drilling the well. You know, MOB and DMOB costs, MOB costs will be, you'll probably see that in the fourth quarter, or most of it in the fourth quarter, and hopefully we'll be on location drilling in the first quarter.

Okay. And I just wanted to ask on policy, you know, it looks like the Inflation Reduction Act is going to go through. Did you have any leases in that lease sale, 257, and just any general thoughts on that act being approved?

Yeah, really, I'm not quite sure that I'm familiar with it enough to say, yeah, I know what it is. But, yeah, we did have two leases in that last lease sale. Um, so that's, uh, hopefully we'll get those back, um, and, uh, and be able to continue. Um, we were high bidder on two leases. So, um, it, you know, dollars spent for leases wasn't that great. Uh, but, but it'd be nice to have those as, uh, as inventory.

Okay. And then just last one for me, you mentioned tracing your prepared remarks and we've talked about it every quarter, but just want to get your latest thoughts on the M&A market. It sounds like things are really, uh, moving forward pretty quickly.

Yeah, there are. We've seen some things about different properties that are being up for sale. Of course, this isn't atypical of the Gulf of Mexico. There's always another deal in the Gulf of Mexico. One of the reasons why we like it so much. But yeah, some of the larger properties are starting to shake loose and we're looking at a bunch of different properties as usual. But the volume does seem to be picking up a bit.

Sounds good. Thank you.

Thank you.

Once again, if you have a question, please press star then 1. Please stand by as we poll for questions. Showing no further questions, this concludes our question and answer session. I would like to turn the conference back over to Tracy Crone for any closing remarks.

Thank you, everybody, for joining us. I apologize for the slight interruption in communication while we battle through some thunderstorms in the Denver area. The good news is it looks like fair weather for W&T going forward. We look forward to hearing from you or talking to you again soon. Thanks so much.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.