W&T Offshore, Inc.

Q1 2023 Earnings Conference Call


spk03: Ladies and gentlemen, thank you for standing by and welcome to the W&T Offshore First Quarter 2023 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 questions and answers. During the question and answer session, we ask that you please limit yourselves to one and a follow-up. You can always rejoin the question queue. 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 call over to Al Petrie, Investor Relations Coordinator.
spk00: Thank you, Jamie. 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 2023 financial and operational results. Before we begin, I'd like to remind you that our comments may include far-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 hard-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 hard-looking statements and reconciliations of non-GAAP measures. With that, I'd like to turn the call over to Tracy Fromm, All right, Chairman and CEO.
spk01: Thanks, Al. Good day to everyone, and thank you for joining us this morning. With me today are Janet Yang, our Executive VP and Chief Financial Officer, William Williford, our Executive VP and Chief Operating Officer, and Trey Hartman, our Chief Accounting Officer, who will also serve as interim CFO as we search for Janet's successor. They're all available to answer questions later during the call. So we began 2023 by redeeming all of our outstanding 2023 second lien notes and issuing new 2026 second lien notes, significantly reducing our debt and interest payments moving forward while strengthening our balance sheet and moving forward our debt maturities. We also delivered another quarter of free cash flow generation and strong adjusted EBITDA generation. 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. Over the years, we have seamlessly integrated producing property acquisitions while maintaining strong operational excellence, and we plan to continue to do so ad infinitum. I would like to point out some key highlights and accomplishments for the first quarter. So we reported net income of $26 million, or 17 cents per diluted share, and generated solid adjusted EBITDA of $43.1 million. We have generated positive free cash flow for 21 consecutive quarters, and in Q1 2023, we produced 12.4 million of free cash flow, despite a downturn in both oil and natural gas pricing. We reported production of 32,500 barrels of oil equivalent per day, Production was temporarily diminished by planned facility and pipeline maintenance projects at Mobile Bay and by unplanned downtime at other non-operated fields. As I mentioned earlier in January, we pull, we fully paid off the remaining 552.5 million principal outstanding of our 2023 second lien notes and issued $275 million in 2026 second lien notes. This benefits us moving forward as it reduces annual interest payments by about $22 million and eliminates any near-term maturities in our capital structure. So we used some of our cash along with the proceeds from new notes to redeem the prior notes and still ended the first quarter with cash and cash equivalents of $177.4 million. So this decreased our overall net debt to $225.9 million at March 31, 2023. And our net debt to trailing 12 months adjusted EBITDA continued to improve significantly to 0.4 times compared to two and a half times yet a year ago, which is well below our stated goal of less than one time. So we clearly adhered to our strategy and delivered sustainable and consistent results. I believe that our continued success is driven by the ability Both our operations and finance teams to execute at a high level and our outstanding asset base in the Gulf of Mexico helps a great deal with that. So, again, the first quarter of 2023 marked the 21st consecutive quarter that we've generated free cash flow. Through record low prices, pandemics, changing geopolitical and economic conditions, we have continued to deliver free cash flow. 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 in 2023 to continue building on our outstanding results. The last call, we discussed that in the first quarter of 2023, we would have planned periodic facility and pipeline maintenance projects underway at the Mobile Bay field that required us to temporarily shut in the fields. These activities shut in production at the Mobile Bay field for 35 days compared to 25 days that we estimated in the guidance range provided for the first quarter of 2023. We also experienced unplanned downtime at some non-operated fields that also temporarily reduced our production volumes in the first quarter. These two events contributed to the lower Q1 2023 production levels. But most of the non-operated fields that were shut in are now back online, and the maintenance project at Mobile Bay was completed. Despite the local overall production, our Q1 2023 oil production of 1,350,000 barrels for the quarter was above our guidance range. Total company production has mostly recovered, and we're currently averaging approximately 38.1,000 barrels of oil equivalent per day. You see the recovery in our production numbers and our Q2 2023 production guidance, an expected midpoint at about 37,000 barrels of oil equivalent per day. We haven't changed our full year 23 guidance. We have 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. On the cost side, we continue to see inflationary pressures in the industry, but our first quarter results we're encouraging as we were below the midpoint of guidance and about 4.0% actually for 2022. We remain focused on cost control and margin expansion, and despite the inflationary environment we're in, For the second quarter, our guidance for lease operating expenses is expected to be between $63 and $70 million. We continue to control our G&A costs. In the first quarter, cash G&A costs were within our guidance range at $18 million. For the second quarter, we're expecting cash G&A to be between $16.5 and $18.5 million. Thus, the trend is downward. So, we will continue to manage controllable costs to help maximize our margins. During the first quarter of 2023, we reduced total debt by almost $300 million from year-end 2022. At the end of the first quarter, we had net debt of $225.9 million, which was total debt of $403.3 million, net of cash and cash equivalents of $177.4 million. At the same time last year, net debt was $504.8 million, so huge reduction from them. So thus, not our first rodeo, and although we have opted to pay down all $552 million of the previous second lien notes, instead we paid down 50% of the previous second lien notes and maintained significant cash liquidity. Our current opinion is that we're glad we did. As I mentioned previously, the large reduction in total debt was driven by issuing 2026 senior second lien notes at par, totaling $275 million in private offering and using the proceeds along with a portion of our considerable cash position to retire all of those 2023 senior second lien notes. So we continue to have the flexibility and dry powder to make additional acquisitions, drill our current prospects, and continue to build cash, all while further paying down debt. Because we have no long-term rig commitments or near-term billing obligations, we have flexibility to ramp up or defer capital opportunities. Last year, we focused on reducing net debt and invested $41.6 million in capital expenditures and $51.5 million in acquisitions. In Q1 2023, we spent $7.4 million in CapEx and continue to anticipate our CapEx range for 2023 to be between $90 and $110 million. Included in this range are planned capital expenditures related to long lead items, front-end engineering design for our Holy Grail prospect at Magnolia, as well as three shelf wells that we're considering drilling a little later on, and capital costs for facilities that these hold seismic and re-completions. 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 quickly execute on a degree of opportunities as they arise. So before I close the call, I'd like to provide some more information about ongoing ESG efforts, environmental stewardship, sound corporate governance, and contributing positively to our employees and the communities where we work and operate are cornerstones of our culture. ESG metrics were incorporated into our 2021 short-term incentive plan, and we're continuing with that practice moving forward. As reflected in our 2023 definitive proxy statement we recently filed, we've made a concerted effort in addressing shareholder concerns and improving our ESG metrics. Last week, we announced the addition of a new board member, Dr. Nancy Chang, whose highly successful career and broad-based experience will bring a new voice and unique perspective to our board. She is also the chair of our Environmental Safety and Governance Committee that oversees our ESG efforts. We believe that Dr. Chang will help guide our continuous improvement and assist us in our commitment to the highest standards of ESG and corporate governance. Nancy is a world-class scientist and problem solver, successful in business, and brings a unique perspective to our business as she did to the Federal Reserve Board here in Houston. So in closing, we're very pleased with how well we've started 2023, both operationally and financially. I'd like to thank our strong team at W&T, as I believe we're well positioned for continued success in 2023 and beyond. So our strong financial position, which was enhanced with our net significant debt reduction and debt maturity extension, our 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 accretive 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. So quickly evaluating and executing on opportunities within our focus area is a pillar of our success. 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. So our management team's interests are very 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. And as a shareholder, I continue to be enthralled about W&T's bright future in 2023 and beyond. Operator, we can open the lines for questions.
spk03: Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then 1 on your touch-tone telephones. If you are using a speakerphone, we ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and 2. Again, that is star and then 1 to ask a question. At this time, we'll pause momentarily to assemble the roster. Our first question today comes from John White from Roth MKM. Please go ahead with your question.
spk02: Thank you, operator, and good morning, everybody. Morning, John. Maybe getting a little ahead of things here, but let's assume if we get into august or september and uh you haven't found a deal um and you're not in the midst of working on a on a promising deal would that be a point in time where you might pick up uh drilling activity throughout the the latter part of 2023 that's a possibility yes sir okay and uh You've previously made no secret you're very active looking for acquisitions. Can you characterize the predominant sellers? Is it major oil companies selling non-core assets or is it private equity-backed E&T companies? Where do you see the most activity?
spk01: Yeah, it's all of the above, and there will also be probably some others that will present themselves in the interim. Fortunately, what we did was we opted to boost our liquidity in anticipation of these kind of opportunities. We had the opportunity to go ahead and pay out all of our debt. But that would have been at the risk of much greater liquidity. So the decision was made that liquidity would be a good thing, and I think that was the right call.
spk02: Well, you're certainly prepared for dealmaking, and you have a successful history of that. So we will stay tuned, and I will pass it back to the operator.
spk01: Thank you, sir.
spk03: And our next question comes from Derek Whitfield from Stiefel. Please go ahead with your question.
spk04: Good morning, all, and thanks for taking my questions. Thank you, Derek. Tracy, I wanted to focus on guidance with my first question. In light of the Q2 guide and your stance on reiterating 2023 guidance despite unplanned downtime impacts in Q1, I wanted to ask if you could speak to the trajectory you expected for Q3 and Q4 and if there are any material plan maintenance impacts in those quarters.
spk01: Well, let me address the maintenance first. No, we had some issues at Mobile Bay with a certain contact tower, and it had a little more corrosion than we had anticipated. You don't know until you open these things up and inspect them. This was a hydrogen sulfide amine contactor, so it was – It was very important for us to get this right. We have a little ACE2S production in that field. So we wanted to make sure that we had this repaired. The last time it was taken down was 10 years ago. So we wanted to make sure it wasn't taken down any time in the near future. So as far as ramping up in Q3 and Q4, yeah, that's kind of the expectation. I think that... What we haven't addressed here, there's a lot of other fields that we have interest in that are non-operated as well that we would hopefully see some increases in production there. It's a little bit hard to classify that quantitatively, but the overall feeling is that, yeah, that could help us as well.
spk04: Terrific. And then with regard to carbon capture market, I wanted to circle back to your remarks from Q4. Now that you've had more time to advance your efforts, could you perhaps speak to how your thoughts are evolving on the goals that you'd like to pursue with the CCUS business?
spk01: Of course, we've been keeping abreast of this and looking at it for a long time. We have numerous reservoirs in our portfolio of saltwater reservoirs, They can accommodate this kind of injection, both onshore and offshore. So we're relatively confident that this will be a part of our portfolio in the future. I don't intend to spend a great deal of money. Most of the research and effort will be the first foot from the flu stack. So that's where most of the technology is going to be. And then there will be adjustments made as to how that is done by people whose expertise is far greater than ours. We expect to be, we don't expect that W&T is a net zero company. We buy properties from other companies in the Gulf of Mexico, and we take those properties And we produce them out for a long period of time, longer than they probably would have been produced, without creating an additional carbon footprint of massive amounts of drilling, you know, cracking, flaring, that sort of thing. So we come into the idea of thinking that we will be more of a follower than a leader in that business.
spk04: Perfect. Thanks for your time and responses.
spk01: Thank you, sir.
spk03: Once again, if you would like to ask a question, you may press star and then one. To withdraw your questions, you may press star and two. Our next question comes from Jeff Robertson from Water Tower Research. Please go ahead with your question.
spk05: Thank you. Good morning. Tracy, can you talk about how the leases that you picked up, can you talk about how the leases you picked up in the most recent lease sale fit into the asset base and maybe your plans, not necessarily this year, but 2024 or 25?
spk01: Yeah, unfortunately, Jeff, that's a very good question. We haven't been awarded those leases yet. So while we were high bidder, we haven't been awarded the leases. So it's a little premature for me to talk about that. I'll be happy to talk about it as soon as they are awarded.
spk05: Do you have a feel on how long it might take BOEM to process the bids and award leases from this sale?
spk01: Yes, sir. They normally process that within about 90 days of the lease sale itself. So in the next probably 45 to 60 days, we should have a good idea about what they're going to do. Again, I apologize for not being able to elaborate on that. I just think that it would be premature to do so.
spk05: Okay. In terms of acquisitions, Tracy, with the With the balance sheet liquidity that you have, can you just talk about how you think about financing acquisitions between cash and, obviously, depending on the size, how much debt you'd want to use? Sure.
spk01: In larger transactions, and it depends on how you define large, But let's say it was a billion-dollar transaction. We would lever up a little bit, and then we would probably, you should probably expect to see, when I say lever up, we would expect to see that as a temporary leverage up that would be paying down quickly. And then we would probably sell off a little piece of equity as well.
spk05: So, obviously, in keeping with your past, you would target assets that generate a significant amount of cash flow?
spk01: Oh, yeah. The company doesn't change its policies over time that work. So, yeah, generating cash flow is quintessential for us. Levering up, we want to stay within pretty known bounds of leverage right now. It's usually around one. We would probably go a little bit higher than that to accommodate that acquisition and then temper that with selling off a bit of equity. Thank you. Thank you, sir.
spk03: And ladies and gentlemen, at this point, in showing no additional questions, I'd like to turn the floor back over to Tracy Crone, Chairman, and Steve Pope for closing remarks.
spk01: Well, thank you very much, operator. One other little minor, well, not minor, one other little detail that I'd like to do is I would like to publicly thank Janet Yang, for her service to the company as our CFO and even before that. Janet has opted to move out of the city and go somewhere else, another state actually, to facilitate some family things that she needs to deal with in her family. It's an opportunity for them going forward. We're very sad to see that she's leaving. I wish it was another way, but I wish her well. The whole company wishes her well, and we're going to miss her, and we hope that everything comes out 100% for her. Thank you very much.
spk03: Ladies and gentlemen, with that, we'll conclude today's conference call. We thank you for attending today's presentation. You may now disconnect your lines.

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