W&T Offshore, Inc.

Ladies and gentlemen, thank you for standing by. And welcome to the W&T Offshore fourth quarter and full year 2022 conference call. During today's call, all parties will be in a listen-only mode. And should you need any assistance during the call, please signal a conference specialist by pressing the star key followed by zero. 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 please limit yourself to one question and one follow-up. You can always rejoin the queue if you have another question. This conference call 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, Joe. And on behalf of the management team, I would like to welcome all of you to today's conference call to review W&T Offshore's fourth quarter and full year 2022 financial and operating 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, Al. Good day to everyone, and thank you for joining us for our Urien 2022 conference call. So with me today are Janet Yang, our executive VP and chief financial officer, William Wilford, our executive VP and chief operating officer. So I'm really pleased to report that 2022 is one of the best years in our long and profitable history. Our strategy has always been pretty simple. Generate free cash flow, maintain high-quality conventional production, and opportunistically capitalize on accretive opportunities to build shareholder value. Our ability to integrate producing property acquisitions while maintaining strong operational excellence were significant drivers in our outstanding financial results in 2022. Here are the key things we've accomplished We reported full-year 2022 net income of $231.2 million, or $1.59 per share, and generated record adjusted EBITDA of $563.7 million, and a year-over-year increase of 156%. We've generated free cash flow, positive free cash flow, for 20 consecutive quarters, and in 2022, we produced $376.4 million of free cash flow, which was more than four times what we did in 2021. We completed two attractive property acquisitions, producing property acquisitions in early 2022, and we've successfully integrated them into our operations, and these acquisitions have already paid out as of August 2022. We increased full-year 2022 production to 40,100 barrels of oil equivalent per day. We grew cash and cash equivalents to $461.4 million a year in. So hand in hand with our growth in cash has been a significant reduction in net debt. Our net debt was down more than 50% year over year to $232.1 million as of December 31, 2022. Our net debt to trailing 12 months adjusted EBITDA continued to improve significantly to 0.4 times compared to 2.5 times a year ago. That's well below our stated goal of below one times per year end. And in January of this year, we paid off our 2023 second lien notes and issued new 2026 second lien notes, significantly reducing our interest payments and debt moving forward. So we clearly had an outstanding year, thanks in no small part to the ability of both our operations and finance teams to execute at a high level. This combination of strong production and continued very good pricing resulted in our outstanding adjusted EBITDA and free cash flow numbers. To put this in perspective, the $563.7 million in 2022 adjusted EBITDA was almost 50% higher than the total of full years 2021 and 2020 combined. which totaled $383.7 million. So coupled with our ability to pay down debt and improve our balance sheet, we're clearly in a much stronger financial position today, and we remain focused on operational execution to build on these solid results. So turning to our year-end reserve results, I'd like to point out that we continue to see positive wealth performance in technical revisions, which demonstrates the strength of our world-class conventional Gulf of Mexico assets. This also directly points to our ability to enhance production and our reserve base through operational excellence. For year-end 2022, we reported SEC approved reserves of 165.3 million barrels of oil equivalent, which included 7.3 million barrels of oil equivalent of positive performance revisions and an increase of 6 million barrels of oil equivalent, due to the two acquisitions we made early in 2022. We also had strong positive pricing revisions of 9 million barrels of oil equipment. So in total, we added 22.3 million barrels of oil of new reserves, which replaced 153% of our 2022 production of 14.6 million barrels of oil equivalent. So our all-in reserve replacement costs for 2022 were $4.10 $4.10 per barrel oil equivalent and have averaged a very reasonable $2.85 per barrel oil equivalent over the last three years. Let me say that again, $2.85 per BOE over the last three years. So we're particularly pleased with these results since last year we focused on reducing net debt while completing both on acquisitions and less on drilling. Where you see the biggest impact of higher pricing is in the PV10 value of our SEC-approved reserves, which at year-end 22 nearly doubled to $3.1 billion. Approximately 36% of our year-end 2022 SEC-approved reserves were liquids with 25% crude oil and 11% NGLs, and we had 64% natural gas. The reserves were classified as 75% approved developed producing, 13% approved developed non-producing, and 12% proved undeveloped. W&T's reserve life ratio at year-end 22, based on year-end 22 proved reserves in 2022 production, was 11.3 years. So ROV is 11.3 years. We believe we have built a sustainable group of high-performing GOM assets that will continue to provide meaningful cash flow to our shareholders for many years. So in February 2022, the company closed an acquisition of Central GOM Federal Shallow Water Producing Assets for approximately $34 million after taking into account normal and customary post-effective date adjustments. This acquisition consisted of an average of 80% working interest in over 50 different properties, excuse me, gross producing wells. And that was at Ship Show 230, South Marsh Island 27, Vermillion 191, and South Marsh Island 73. W&T has operated that for the past year. In April 2022, we acquired the remaining 20% working interest in these assets for $17.5 million. Acquisitions are our core pillar of how we create value. And this is another example of what we look for when we're evaluating an acquisition. These assets provide a solid base of approved reserves and produce strong free cash flow. These properties are very complimentary to our existing assets. There are a number of opportunities, both near-term and long-term, that we can undertake to maximize the value of these assets. We also see areas of upside potential that won't require significant amounts of capital realized. W&T is very well positioned for further acquisition activity. and we're continuously on the lookout for deals that meet our criteria. So we've used our substantial free cash flow to vastly improve our financial position and strengthen our balance sheet. A year in 22, our net debt to adjusted EBITDA ratio was down to 0.4 times, and we had available liquidity of $511.4 million. This was comprised of $461.4 million in cash and cash equivalents, and $50 million of borrowing availability under our revolving credit facility. In the fourth quarter of 2022, we entered into an amendment to our credit facility, which, among other things, extended the maturity date and commitment by up to one year, January 3, 2024. So at year-end 2022, the company had total debt of $693.4 million, or net debt of $232.1 million, net of cash and cash equivalents, consisting of the balance of a non-recourse mobile bay term loan of $143.3 million and $550.1 million of 9.75% senior secured lien notes, net of amortized debt issuance costs for both instruments. That's a lot of numbers. So entering 2023, we strengthened our balance sheet by issuing new 2026 senior second lien notes at par, totaling $275 million in a private offering and used the proceeds along with a considerable cash position to retire all $552.5 million of our 2023 senior second lien notes. This significantly reduces our interest payments, preserves our financial flexibility, and further improves our balance sheet moving forward. It's important to note we're very pleased that as a result of the new debt offering, We've received upgraded ratings by our two existing rating agencies and received a rating from a new agency this week that was in line with those upgraded ratings. We have the flexibility and dry powder to make additional acquisitions, drill our current prospects, continue to build cash, or pay down debt. Because we have no long-term re-commitments or near-term drilling obligations, we have flexibility to ramp up or defer capital opportunities. In 2022, we focused on reducing net debt and invested $41.6 million in CapEx and $51.5 million in acquisitions. We're currently anticipating our CapEx range for 2023 to be between $90 and $110 million. Included in this range are planned expenditures related to long-term lead items and front-end engineering design for our Holy Grail prospect at Magnolia, as well as three shelf wells that may be drilled later this year, and capital costs for facilities, leaseholds, seismic, and recompletions. As always, we'll monitor commodity prices through the year and adjust our spending plans accordingly. With our modest capital range in 2023, we expect to generate meaningful free cash flow, which provides us flexibility to execute on accretive opportunities quickly. For our 2023 P&A budget, is expected to be considerably less than in 2022, which was driven by obligations and prior deferrals on terminated leases, and that's terminated leases with B.S. Bessey. P&A expenditures in 2023 are expected to be in the range of $25 million to $35 million, compared with $76.2 million in 2022. Yesterday, we provided our detailed guidance for 2023. In the first quarter of 2023, we have had several planned periodic facility and pipeline maintenance projects underway at the Mobile Bay field, as well as prolonged downtime at several non-operated fields that have temporarily reduced our production volumes. Most of the non-op fields that were shut in are now back online, and the maintenance project is nearly complete with volumes returning to normal levels soon. We expect Q1 2023 production to average about 33,800 barrels of oil equivalent per day. For full year 2023, we expect to reduce between 37,000 and 41,000 barrels of oil equivalent per day, which is a small decrease of 3% year over year and flat compared to fourth quarter 2022. That's being impacted by lower first quarter volumes. We've focused on acquisitions over the last few years rather than on drilling many new wells. Our guidance reflects the low natural decline of our asset base compared with much higher declines in unconventional onshore reservoirs. So on the cost side, our guidance for LOE and gathering transportation and production taxes include inflationary and supply chain pressures that we've seen in 22 and expect to carry into 2023. We do believe that there are opportunities to reduce our operating costs and are working hard to reduce those future costs with an eye on safety and without deferring asset integrity work. First quarter lease operating expense is expected to be between $63 million and $70 million, which reflects some of the same cost inflation that the entire industry has faced. First quarter cash G&A costs are expected to be between $16.5 and $18.5 million. Before I close out the call, I'd like to talk to you about our ongoing ESG efforts, environmental stewardship, sound corporate governance, and contributing positively to our employees in the communities where we work and operate our cornerstones of our culture. ESG metrics were incorporated into our 2021 short-term incentive plan, and we're continuing with that practice moving forward. We plan to reduce our third sustainability report later this spring. building on the solid foundation of our previous reports. In closing, we're very pleased with how well we performed in 2022, both operationally and financially. I'd like to thank the employees working offshore and onshore at W&T for one of the most successful years in our long history. We generated great cash flow and adjusted EBITDA in 2022, and we're poised for continued success in 2023. Our strong financial position, which was enhanced with our net significant debt reduction and debt maturity extension on remaining debt from 2023 to 2026, provides us with optionality and flexibility moving forward. Our liquidity and cash position enables us to continue to evaluate growth opportunities both organically and inorganically, and we're poised to execute on a breed of opportunities that meet our longstanding and proven criteria. We believe the Gulf of Mexico is and will continue to be a world-class basin with strong producing assets. It's good to see public markets starting to better appreciate offshore assets where we've always been focused. Quickly evaluating and executing on opportunities within our focus area is a pillar of our success. 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 upsides. 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. As a shareholder, I'm excited and very encouraged about the success we had in 2022 and believe that we have a bright future in 2023 and beyond. With that offer, we can open the lines for questions.