W&T Offshore, Inc. (WTI) Q2 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the W&T Offshore Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Lisa Elliott. Thank you, you may begin.

Thank you, Matt, and good morning, everyone. We appreciate you joining us for W&T Offshore’s conference call to review the second quarter of 2016 financial results and for an operational update. Before I turn the call over to the Company, I’d like to remind you that information reported on this call speaks only as today August 5, 2016 and therefore time sensitive information may no longer be accurate as of the date of any replay. Also please refer to the second quarter 2016 financial results announcement W&T released yesterday for disclosure on forward-looking statements and reconciliations of non-GAAP measures. At this time, I’d like to turn the call over to Mr. Tracy Krohn, W&T’s Chairman and CEO.

Thanks Lisa. Good morning, everyone. Joining me this morning are Jamie Vazquez, our President; Danny Gibbons, our Chief Financial Officer; Tom Murphy, our Chief Operations Officer, and Steve Schroeder, our Chief Technical Officer. So yesterday we released our financial and operations results for the second quarter and we also provided guidance for the third quarter and full-year of 2016. Also, we expect to file our second quarter Form 10-Q with the SEC today. This morning, I’ll briefly review some key items from the release and then we’ll take your questions. In the second quarter, we produced approximately 3.9 million barrels of oil equivalent or 42,864 barrels of oil equivalent per day about 59% nearly 60% was oil and liquids. Our production held steady compared to the first quarter of 2016 and we also produced 3.9 million barrels of oil equivalent. Our total production volume in the quarter was in the midrange of our guidance although our oil production was higher and our natural gas production was lower than our anticipated mix of production. During the second quarter we experienced production deferrals and downtime attributable to third-party pipeline outages, some operational issues, and maintenance, which we estimate resulted in production deferrals of approximately 0.5 million barrels of oil equivalent during the second quarter. Majority of those outages were attributable to equipment and facilities operated by others, unfortunately which we did not have any control. One of our third-party pipeline outages was rectified during Q2 with the installation of a new W&T owned export pipeline that allowed us to more than double production from our import in the East Cameron 321 oilfield. Pipeline was installed in May of this year and was executed slightly ahead of scheduling about 30% under budget cost, fuels production has exceeded our initial estimates so we’re pleased have been able to create a favorable solution. Also in latter half of June production from three of our major fields including Big Bend, Dantzler and Main Pass 283 was interpreted for relatively short period of time as a result of an explosion at Enterprise’s onshore gas processing facility in Pascagoula, Mississippi. That facility handles and processes a significant amount of Gulf of Mexico gas production several people on that line. The third-party pipeline the transports some of our offshore production to onshore delivery points, including that plant, were shut down when the plant was shut down. Shortly after the initial event, production was rerouted to two other export systems. So we experienced a relatively short duration shut-in in our fields and a modest curtailment in rates as the alternative export systems were established. We are currently producing at full production rates and we don’t anticipate any additional material volume impacts stemming from the Pascagoula event. Our information indicates the Pascagoula plant itself may not be operational for months, but we anticipate normal production volumes while enterprise conducts the necessary plant repairs. In total we’ve deferred only an estimated 0.37 Bcf equivalent of production linked to the event. So we are happy that we had different alternatives get production to market have been able to ultimately reduce the impact of those outages. While we typically factor in a certain amount of deferrals into our guidance, it just demonstrates there are many factors that impact our results relative to guidance. So we are fortunate that our second quarter results turned out relatively in line with our expectations, all the various parties involved in restoring production and transportation should be commended for a great job, our marketing guys and operations folks and third-parties they communicated with all did a really good job. Generally most of our fields performed as expected in the second quarter. New production from the recently completed Ewing Bank 954 A-8 well coupled with our production increase at the East Cameron 321 oilfield, helped to offset the natural production decline. We don’t have any other new wells planned to come online in the third quarter so combined with the various deferrals including the Pascagoula plant outage, we expect to see a little lower production in third quarter. Nevertheless, our full-year production guidance remains unchanged. We expect that some, if not all of the plant workover and recompletions will add to production in the fourth quarter. As usual we included provisions for tropical storm downtime in our third quarter guidance but we are hopeful that we will have a quite storm season this year. So far that’s holding true. Pricing in the second quarter was more - was actually much improved from the first quarter 2016 about 31% higher but still about 27% lower than what we realized per BOE in the second quarter of 2015. We were again negatively impacted by lower oil price realizations which have been well under the benchmark WTI price this year, due to large negative price differences at several of our major oilfields, primarily because the pipelines in some of those fields received lower pricing. Over 70% of our oil production is experiencing negative price differentials and negative crude quality adjustments. WTI crude oil prices averaged $45.46 per barrel for the second quarter 2016 compared to our average realized crude oil sales price of $39.11 per barrel. So $45 compared to $39. On a compared oil and natural gas equivalent basis our average realized sales price for the second quarter was $25 and $0.28 per BOE compared to $34.83 per BOE in the second quarter of 2015. Although, is well down from last year was a great improvement from what we saw in the first quarter and our average sale price was $19.33 per barrels of oil equivalent. Then improved pricing grow by $22 million sequential increase in revenue to $99.7 million nearly a $100 million in the second quarter. Cost reduction efforts continue to remain in really sharp focus as we work to get operating margins back to more acceptable levels. Lease operating expenses declined 19% to $36.6 million in the second quarter compared to a year-ago, which was substantially below the LOE guidance that we provided for the second quarter. Second quarter base LOE was also lower than expected as we continue to work with our contractors and vendors to manage cost in this persistently weak commodity price environment. And we continue to tackle that and try to optimize structural cost changes and reductions with a little more efficient operations. As reflected in our guidance, we anticipate LOE will be higher in the third quarter, so it’s a little lumpy during the year, due to an increase in facilities, maintenance and workovers that’s kind of weather driven. We have not revised our full-year LOE guidance as the projects that was scheduled for the second quarter are still expected to occur, but we might be pleasantly surprised if base LOE comes in lower than our full-year guidance. Second quarter G&A expenses decreased 17.8% compared to last year to $16.2 million. The substantial part of this reduction is associated with reduced headcount, contractor headcount and rates are also lower as we have reduced activity levels. Legal costs were higher, but travel and medical claims were lower. For the second quarter of 2016, our adjusted EBITDA was $40.8 million and our adjusted EBITDA margin was 41%. Comparing that to the first quarter of 2016, adjusted EBITDA increased 147%, and adjusted EBITDA margin almost doubled. The higher realized price per barrel oil equivalent in the second quarter of 2016 combined with those lower cost drove substantial improvement sequentially. So as we mentioned in our last call, we are also closely managing capital costs and our asset retirement obligation spending. We currently estimate that ARO spending in 2016 will be around $76 million which is in line with our prior estimate, but below what our initial estimate of $84 million was that we’ve published that here in 2015. We don’t have any current drilling operations, but we think we will continue - well we will recommence rig activities at Mahogany this month. So at June 30, 2016 we had a cash balance of $171.8 million and had about $1.1 million of availability remaining under our revolving bank credit facility. Our borrowings outstanding under the revolving bank credit facility are now in conformance with the borrowing base set forth by our lenders. Confirmation of the exchange offer that I will discuss in a moment would allow us to pay off all the bank debt and provide a $150 million credit line addition to cash on the balance sheet. So as we discussed on our last earnings call, that Company received several orders from the Federal Bureau of Ocean Energy Management demanding that the Company provided additional supplemental bonding on certain Federal oil, offshore oil and gas leases, rights of way, and rights of use and easement owned and/or operated by the Company. The outstanding orders totaled $260.8 million. So to update you, we filed appeals with the Interior Board of Land Appeals or the IBLA rather regarding these orders. Now acknowledging that BOEM, the Company were seeking to resolve the issue through settlement discussions. The IBLA has stayed the effectiveness of the orders a couple of times with the latest delay extended until end of this month. We continue to have discussions with BOEM regarding these matters. As we indicated in our press release, yesterday, the BOEM issued new a NTL or Notice to Lessee last month that becomes effective next month. This is the NTL on financial assurances for plug and abandon work and it describes the procedures and guidelines that BOEM Regional Directors can use to determine if and when additional security maybe required for OCS leases, ROW, and RUE. Under the new NTL there is a phased-in period for establishing compliance and lessees may seek compliance with its additional security requirements under a tailored plan. So the tailored plan must be approved by the BOEM and it requires phased-in compliance in three approximately equal installments during the one-year period from whenever the BOEM approves the tailored plan. Additional security for sole liability properties may not be phased in, so you have to handle that right away. We are very encouraged about the progress we are making with BOEM and we’ve been working with them on tailored plan for last several months. We have prolonged weakness in commodity prices; our cash flow and liquidity have been pretty dramatically reduced their by restricting our ability to fund current and future drilling activity and debt obligations. So as a result on July 25, we announced the commencement of an exchange offer to qualifying holders of our 8.5% senior notes for new secured and unsecured notes and common stock that could result in a debt reduction of as much as $580 million. Details of the transaction can be found in proxy statement and Form 8-K that was filed with the SEC on July 25, 2016 and summary can be found in the press release that we issued yesterday. We have a solid asset base with upside opportunities and an outstanding team of employees working hard to make W&T a success. Our limited liquidity seriously hampered our ability to meet our obligations and goals; currently our objective is to restructure the balance sheets that we can increase our ability to perform. We believe this exchange offers an important element in accomplishing that and we are working hard to complete that exchange. We are hearing positive feedback in the market and we believe the offer provides benefits to both the Company and bond holders. We will know the results to the early tender deadline by Tuesday, the next week. One other thing I would like to add just before open it up for questions. I have a personal note, a good friend of mine Kenny Wilcox that work with on another project for many years. His daughter was tragically killed in accident Monday. I just want to extend my personal condolences and a lot of thanks to listen this conference call, so Kenny just know that Lori and I are thinking about you.. With that, operator open it up for questions. But let me mention one thing, we are not going to take questions about the exchange offer of the statues or any other matter related to the exchange. So with that, operator would you go ahead and open up the lines.

Thank you. [Operator Instructions] Our first question comes from Neal Dingmann from SunTrust Robinson Humphrey. Please go ahead.

Hi, Tracy.

Hey, Neal, good morning.

Just two quick ones here for you, first Tracy you certainly have looking at your portfolio out there I mean I think you’d agree a number of really exciting potential deepwater projects I mean additional wells Ewing Bank 910 among other things as well as a number of things on the shelf, just kind of wondering generally what do you need to see to return, is it more to get the balance sheet showed up higher prices are all kind of all the above?

Well, it is - certainly pricing has a huge impact on us. I think that I talk about this a lot in - really what we need to see is more normal margins, our normal margins range between 60% and 70%, first quarter we were down around [27%], last quarter we were at 41%. So to really stimulate our actively, Neal it takes around 60%-ish.

Got it.

So it makes it feel comfortable about setting forth and future expenditures.

Okay. And then just lastly, infrastructure system you look like kind of you are going through a more kind of temporary nature like that enterprise and different things that happen, is that how you see that Tracy or how do you see just around your existing wells that you have there that most of those seen more just temporary in nature. How should we think about just short of the infrastructure the issues that we saw?

Yes. You should think about it is temporary just exactly that - and sometimes during the summer there will be planned outages because the weather is better and that’s when a lot of work gets done to different pipelines, infrastructure on platforms and whatnot, but generally like the thing that happened in the Pascagoula that’s pretty random. Our guys did a really good job of getting everything else around there and we are back to normal production there, so while it was - we are certainly [an aggravation fortunately nobody get heard to plant]. So I’m glad to hear that, but they are working on it and we’ve managed to rater round it, so I’ll recommend everybody was involved in that process.

Very good. Thanks, Tracy. And good luck on the exchange.

Thank you, sir.

Our next question comes from John Aschenbeck from Seaport Global. Please go ahead.

Hey, good morning. Thanks for taking my question.

Hi, John.

Tracy, obviously got a near-term in place with the balance sheet with exchange offer, congrats on that? Assuming a place out to get some leverage release, some liquidity reaching agreement with the BOEM and once we return to a higher commodity price environment you work on the margins you were talking about, what do you see is the next operational steps for the Company? Neal touched on a few of the projects you have, but I was curious to understand which one of those you would like to get to first. You mentioned Mahogany in your prepared remarks, but just curious to get an idea what else you are looking at next?

Yes. Mahogany would be a priority for us, once we get the work done there then we’ve got some work to do at potentially over the Virgo, potentially at Ewing Bank’s as well. We are looking at some of our deepwater portfolio for production enhancement and exploratory opportunity as well.

Got it. Appreciated. Thanks, Tracy.

Sir, thank you.

Our next question comes from Richard Tullis from Capital One Securities. Please go ahead.

Hey, thanks. Good morning, everyone.

Good morning, Richard.

Tracy, going back to the BOEM issue, is the main focus of the current discussions on the amount of bonding that would be required by W&T or is that kind of a settled issue and now it’s a matter of how - what timeline to provide the additional bonding?

It’s even little more intricate, it’s more structural in nature as to some of the controls over the agreements that we have in place going forward. This new NTL is pretty recent. We don’t think it really changes anything that we are already going to do. I think it has more of an effect on them with regard to timing on how many other companies they have to deal with. And it’s a daunting task for them. They have received - I mean it’s a big job before we get everything done on a timely basis. So I think it really has more to do with personal and getting things in place for over the next few years to get all this accomplished on a timely basis.

Given where we are now is there adequate bonding capacity out there to handle the ARO bonding requirements?

On the facing that you would probably say no, but on the other hand as you create a need then markets come in. However, right now I wouldn’t say that there is a substantial market for bonds. No. That does not mean it won’t change in the future, but right now it’s pretty tight.

What’s been the recent cost estimates for securing, say some level of bonding, say 10 million is an example?

I can’t give you that information sir.

Okay. And then moving away from the BOEM issues, what level of spending - CapEx spending do you think would be required in 2017 to keep production flat say with second quarter 2016 production 44,000 barrels a day?

Quite frankly, I’m just not quite there yet. I don’t really have that answer yet. It’s a function of margins not just with pricing, but the margins that you would need to have to keep it flat. I mean we are not spending the whole bunch of money. We are keeping it pretty flat right now. So we do have some work that we would like to get done for the end of the year. So that will be a function of kind of what we have on our plate to finish before the end of the year. So I don’t really have an answer for you for flat for 2017 or beyond that other than what kind of treading water right now.

Okay. That’s all for me. Thank you, Tracy.

Yes, sir.

[Operator Instructions] And our next question comes from Jeff Robertson from Barclays. Please go ahead.

Thanks. Tracy just a question on capital, some of this I guess is already been asked, if you all have any capital projects planned for the rest of this year?

Yes. We are working on that right now Jeff, but as I mentioned in the call, we are looking at Mahogany and restarting operations there. We have the rig on location. So we are working toward that goal. So we would have one well to drill there for sure, the one that we started to drill and shutdown. And then we’ve got another potential workover. And depending upon the results of the first well, we would have to see what happens. Now a little word of caution, obviously it’s price-sensitive, so if prices jumped downward than that would affect that decision.

Okay. And I know that you are sensitive around what you could say in the context of the exchange offer, but can you talk at all about the borrowing base redetermination?

Now I think that that is something that I prefer not to talk about just at this time.

Okay. Thank you.

It is a consideration, but I would just not talk about it right now.

Okay.

I don’t consider it to be an issue.

Our next question comes from Gail Nicholson from KLR Group. Please go ahead.

Good morning. I was just curious in your thoughts about potential hedges in 2017 and looking [indiscernible].

Yes. That’s a possibility Gail. We’ll look a little bit further. Right now, I think we are okay, and protecting the amounts that we’ve projected to spend for this year. So I don’t really know how to look at 2017 yet price is moving up and down and there is lot of different options about what it might be. We know kind of what the worst case scenario is that we’ve already experienced that this year, so 40 would seem like an acceptable place to start putting in hedges. However, the way we are structured right now, pretty wouldn’t make much of a difference if we hedged it 40. Our product realizations are slightly less than that, so I think we are good where we are right now.

And then just looking at kind of where deepwater costs are right now, the onshore guys have seen deflation in service cost. And I think the offshore service guys are a little bit slower to catch up on that. Do you think you plateaued on those service cost reductions or do you think there is more room to go?

I think there is more room. I like that as we get further into this cycle with prices remaining where they are or moving slightly up or down that you will continue to see reductions in OpEx and in CapEx.

Okay, great. Thank you.

Thank you.

Thank you. I’d now like to turn the floor back over to management for any closing comments.

We appreciate your attention. And we’ll talk to you next quarter if not soon. Thanks so much. Bye-bye.

This concludes today’s teleconference. Thank you for your participation. You may disconnect your lines at this time.