W&T Offshore, Inc. (WTI) Q2 2018 Earnings Report, Transcript and Summary

Greetings and welcome to the W&T Offshore’s second quarter earnings conference call. At this time all participants are in a listen-only mode. A brief 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, Lisa Elliott with Dennard Lascar Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. We are glad to have you join us on W&T Offshore’s conference call to review financial and operational results for the second quarter of 2018. Before I turn the call over to the Company, I would like to remind you that information recorded on this call speaks only as of today, August 2, 2018, and therefore time-sensitive information may no longer be accurate as of the date of any replay. Also, please refer to the second quarter 2018 financial and operational results announcement W&T released yesterday for a 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, and thanks for joining us today. We have a lot to cover, so let’s started. With me this morning are Tom Murphy, our Chief Operations Officer, Danny Gibbons, our Chief Financial Officer; Steve Schroeder, our Chief Technical Officer, and also Janet Yang, our VP-Business and Corporate Development who are going to be available to answer questions later during the call. We had an excellent second quarter, with a really high level of cash flow generation and continued drilling success. During the quarter our production volumes came in at the mid-range of our guidance at 3.4 million barrels of oil equivalent and benefited from a 39.5% increase in our realized sales price compared to the second quarter of last year. This drove revenues up and that’s up $26.3 million to $149.6 million in the second quarter. Our percentage of production from liquids continues to rise and was over 60% in the second quarter. Similarly, our realized crude oil price was up over 50% from the second quarter last year. Sales from liquids made up almost 84% of revenues in the second quarter of this year. We are also really pleased that realized prices from our oil production from the Gulf of Mexico tracked closely to the WTI benchmark price. For the first six months of 2018, our average realized crude oil sales price was $64.93 per barrel compared to a WTI benchmark price of $65.55 per barrel. So, not much differential Gulf wide. During April 2018, we entered into four different commodity derivatives contracts for crude oil totalling 11,000 barrels per day starting in May and continuing through the end of the year. The positions include swaps, costless collars and a purchased put option. We have posted three commodity derivative positions to the investor relations section of our website under Other Reports. These crude oil commodity derivative positions have a floor of $60 per barrel. So our crude oil – our realized crude oil sales price in the first half of the year has been $65 per barrel so these hedge positions haven’t been needed, which is even better. But, we have those hedges in place if necessary and it supports a portion of our cash flow stream such that we generate the cash to enable us to reduce debt as planned and pursue acquisitions. The structure of these positions doesn’t limit much in the way of upside either and there is still production that hasn’t been hedged. We have not yet put on any positions for 2019. On the cost side of the equation, we haven’t seen any real inflation [indiscernible] and we aren’t seeing any increase in the cost of goods and services in the Gulf of Mexico like what has occurred in the Permian. We think, we continue to do an outstanding job of managing our lease operating expenses. Our base LOE during the second quarter was up a bit compared to the same period last year, but it was down slightly from the first quarter of this year. So keep in mind that we acquired an interest in the Heidelberg field in April, so we have a full quarter of additional LOE associated with that field. A majority of the increase in base LOE in the second quarter can be attributable to the Heidelberg field. So our total second quarter LOE still came in well below our guidance and we were able to successfully manage our costs and shifted a few workover and maintenance projects to later in the year. We had a 47% increase in operating income compared to the same period last year. So adjusted EBITDA for the second quarter of 2018 was $93.3 million, up $20.7 million, or 28.5% [ph] compared to the second quarter of 2017. More importantly, our adjusted EBITDA margin was 62% for the second quarter of 2018 that’s up from 59% in the second quarter of 2017. This is reflective of ongoing efforts by the company to reduce costs and increase revenues. For the first six months of 2018 our adjusted EBITDA was $170.7 million and our CapEx on an accrual basis were $31.8 million. CapEx on a cash basis was $61.1 million that includes the interest we acquired in the Heidelberg field. Robust free cash flow is positioning us to continue to manage debt obligations and through the end of the year with a much-improved balance sheet. Our Unsecured Senior Notes have a balance outstanding of $189.8 million that moved to current maturities in June 2018 as the notes are due in June 2019. As of this last Monday, we had a cash balance of $191 million. So, we have already accumulated enough cash to retire this debt. We also have a 1.5 Lien Term Loan in the amount of $75 million that is outstanding and is due in 2019. We expect that we will continue to generate excess cash and be able to pay this obligation off either in late 2018 or early 2019. Keep in mind that we expect to receive a $13 million tax refund in what is likely early September and another $52 million by December. Our forecast shows that we can pay off both of these 2019 maturities, not have to draw on our bank credit facility and have positive cash balances. So, having said all that, I am happy to tell you that we do intend to refinance a portion of the remaining debt in the very near future and reduce overall debt balances as well. I am very proud of how we have managed our capital structure through this long and difficult downturn and we have positioned ourselves to appropriately address our upcoming debt maturities. I credit this to the restructure effort along with the hard work, talent and creative thinking of our team here at W&T, as well as our great asset base that has allowed us to create value on a low CapEx budget. Our assets have generated substantial cash, and the rebound in crude oil prices has been very helpful. The JV Drilling Program has not only reimbursed us for prior expenditures but reduces our future CapEx outlays. Plus, we are not [indiscernible] from cost inflation and our crude oil price realizations aren’t being negatively impacted by location differentials like some other basins, particularly the Permian. As it relates to our third quarter production guidance you will note that we are guiding lower than second quarter. So, this is a little bit disrupting and we’ve included a factor for tropical storm downtime and outages so if these events do not occur then our third quarter production will look very similar to second quarter. Please understand, we haven’t revised full year guidance and thus we are expecting some volume increases in the fourth quarter. We have a couple of projects scheduled to come on line and some other activity that will help with full year production. So with improved oil prices and EBITDA margins above 60%, we see the opportunity for growth again and reducing debt at the same time. We’re accomplishing our growth in this direction. Our 2018 capital program is progressing well. Our Mahogany and Virgo Fields have added substantial value through successful wells, and we’re currently drilling the first well of a multi-well program in our Ewing Bank 910 core area that is a low-risk exploration project. All three of our active major capital spending project areas are opportunities in fields that have existing infrastructure that allow for quick cash flow generation and substantially shortens payback times and enhances investment rates of return. So, in June, Monza Energy LLC, a newly created drilling joint venture entity, closed off funding from additional investors. This joint venture drilling program raised $361.4 million, including my personal investment into the JV. This should be enough money to cover the cost to drill and complete the 14 identified wells in the Gulf of Mexico. We’ve made really good progress so far as two of the wells in the program are on line and producing and two more are currently being drilled. As a reminder, W&T retains a 20% working interest in each project, but we receive 30% of the “revenues less expenses” generated until certain thresholds are met. So once those thresholds are met then our interests will increase to 38.4%. The JV Drilling Program allows us to accelerate the development of our high-return inventory with reduced capital outlay. It enhances our financial flexibility and the ability to pursue accretive acquisition opportunities in the Gulf of Mexico. We believe the strategy to create the Joint Venture Drilling Program allows us to develop our drilling inventory faster, diversify our drilling opportunities, reduce the risk profile and enhance shareholder value. Not all of our 2018 drilling program is included within the JV Drilling Program. Certain wells in the inventory were not included and were retained within W&T, with particular note being at our Mahogany field. As examples, during the first quarter we completed the Ship Shoal 349 A-17 well at Mahogany, which was put on production in late March, and we recently had production contributions in the second quarter from completion stimulations conducted on the A-18 and A-8 wells that resulted in enhancements to well production characteristics and rate improvements; these are not part of the JV Drilling Program. The only Mahogany well that is part of the JV Drilling Program was the well that we just recently completed in July and brought on line which is the Ship Shoal 349 A-5 sidetrack. The A-5 sidetrack reached total depth as a western flank exploitation well and logged pay in field plays sands during the second quarter and is currently producing. It was completed as a single selective dual zone producer. It’s another outstanding well in this huge field and tested at an initial peak rate of about 2,700 barrels of oil equivalent per day, which was about 81% oil. So recently, following the completion of the A-5 ST well, the Mahogany Platform Rig was skidded over to begin drilling the A-19 well, targeting field pay sands along with an exploratory piece in our Mahogany field. W&T owns 100% of this well. At our Virgo Field, you might recall we drilled and completed the A-10 sidetrack well in the first quarter. This well is in the JV Drilling Program and was put on-line in early second quarter. It is a strong producer and reached a peak rate of over 1,200 barrels of oil equivalent per day delivering stable production and contributing materially to the field’s increase in total output during the quarter that’s about a 50% increase in total assets by the way. During the second quarter, we commenced drilling the second well in the Virgo Field program, A-12 well. Like the A-10 sidetrack well, it is also a part of the Joint Venture Drilling Program. We are currently at an intermediate casing point having recently logged productive pay in the upper part of the well. We are continuing to drill to our planned objective to test our deeper objectives and should have final well results in the third quarter. Following the A-12 well, the rig is expected to commence drilling the A-13 well, which will also be a part of the JV Drilling Program. So, in addition to these first three wells in the Virgo Field redevelopment program, we have also identified several other prospects at Virgo that we believe are relatively low risk, hold material value, and could contribute to a sizeable production impact. W&T was successful in acquiring a new lease, the VK 778 lease, that was in the recent OCS sale which we expect to also materialize into additional drilling prospects and locations, all of those are reachable from our Virgo Production platform. So, in total we were awarded nine leases in the recent Gulf of Mexico OCS lease sale and all of our newly acquired leases are in close proximity to our existing production and infrastructure, building off one of our strategic objectives to exploit low-risk short cycle time projects. At our Ewing Bank 910 field, we are currently drilling the South Timbalier 320 A-2 well from the South Timbalier 311 Platform that is all part of the Ewing Bank 910 field. We expect to lease plenty this quarter on the A-2 well and if successful, commence completion operations shortly thereafter. Following the A-2 well, the rig is expected to drill the A-3 well in South Timbalier 320 area. We believe both of the wells in this year’s Ewing Bank 910 program are low-risk exploration opportunities with multiple stacked pay sands. Both of these wells are in the Joint Venture Drilling Program. So the another well, the Flower Gardens is getting a lot of attention lately and there are so many articles out on the coral reefs, not only in the Gulf of Mexico but around the world. We just recently successfully removed the topsides of that structure and the upper part of the structure that platform in High Island 389A that straddles the Flower Gardens National Marine Sanctuary. This was a delicate operation that left the majority of the underwater sub-structure in place as part of the flourishing and healthy reef habitat. For years we have been working hand in hand with Texas Parks and Wildlife, BOEM, Office of Natural Resource Revenue, NOAA, National Oceanic and Atmospheric Administration and other agencies and were finally able to complete this work adding materially to the eco-system and benefiting many of our key stakeholders. Typically, we don’t formally announce our mid-year reserves, but I do want to mention that year-to-date, we have grown the company’s proved reserve base 5% by volume to 78 million barrels of oil equivalent and 29.5% by value to $1.3 billion. Over the same time period, we have grown our proved and probable reserve base 23% by volume and 53.4% by value. Finally, I do expect to have even more good news in the not too distant future regarding other things not discussed in today’s call. I’m looking forward to the rest of the year. And so with that operator, could you now open the lines for questions.

[Operator Instructions]. Our first question comes from John White with Roth Capital. Please go ahead.

Good morning, everybody.

Good morning, John.

Say, came in quite a bit below, what I was expecting on lease operating expense, can you talk a little bit more about that?

Yes. We continue to improve operating expenses. The things we’ve done is monitor our transportation requirements and streamline that a little bit. We have a couple of maintenance projects will show up in the fourth quarter that were deferred, but other than that I mean it’s – it really is a true drop in LOE.

Well, that’s great. Nice results all the way round. Thanks for the update on the A-12 and good luck on drilling the deeper portion.

Thank you, sir. I appreciate it.

Thank you. Our next question comes from John Aschenbeck with Seaport Global Securities. Please go ahead.

Good morning, Tracy. Thanks for taking my question, and congrats on the nice update and on the progress you’ve made over the last year.

Thank you, sir. Appreciate it.

My first one, I was going to ask about the Q3 outlook, but you addressed that in your prepared remarks. But did want to dig a little bit further into the Q4 outlook, and I was hoping you could walk us through just the projects you have coming online at the end of the year and how those will affect your growth as you exit the year? It just – it seems like you’ll be set up with some nice momentum as you exit 2018 and then enter into 2019?

Yes, you got a seasoned growth at Virgo, some increase in production, we’re going to finished with the existing A-12 well and go back to A-13 well. So we would expect to have that, of course, the A-12 well online and the A-13 well online for the end of the year. We also see some increased production at Mahogany while raising the increased production at Mahogany. We’re drilling on the A-19 well there now, which is going to test several of the field – existing field, we’ll go blow in and test it a little bit more underneath that particularly have some relatively good prospectively below that location. That’s slightly up at the existing A-14 well. So, I think that’s what you’ll see some of the increase in production and who knows, you might see an acquisition or something like that along the road.

Okay, got it. I guess we’ll just have to stay tuned. I guess kind of keeping with that topic, as you exit the year and you look into 2019, I was curious if you could provide any type of initial thoughts around your outlook. I believe, earlier in this year, you first wanted to get a better clarity on the 2019 maturities before looking out beyond this year, but it sounds like a solution is almost eminent now for the 2019. So I’d love to get any type of color you could provide on 2019 and what it could look like both from a capital standpoint and on the production side?

Yes, I appreciate it. I know that most of the investors and shareholders have been [indiscernible]. This team has worked really hard to get us to where we need to be. We’re actively looking at now in the future for the refinance of the entire debt structure and that includes, of course, some substantial reduction in that debt structure. We’ve got – fortunately, we’ve got more options that we did a year ago on how we do that, that conclude different ways to finance the existing debt. We’ve got those two maturities outstanding for the unsecured notes, $189 million, $190 million, we’ll call it, and the other $75 million in the [indiscernible]. But both notes come due in 2019, we’re going to reduce all – most of that debt if any found what else comes out in the interim that would be attracted to us. But the idea would be to substantially delever the entire structure and then refinance of it. We believe that a lot of our bondholders would be pretty pleased with that and we hope that they would join us in our future endeavors as well. So I think that solution looks pretty solid right now. So we’re endeavouring to move in that direction as quickly as we can.

Okay, great. Appreciate all the color there. That wasgreat. Last one from me. Just a follow-up on your recent drilling JV and as you’ve gone through that process and closed that transaction, I was wondering how that’s better positioned to you to move forward with another JV, specifically the acquisition JV that I know you’ve been working on for a while now. I understand that you can’t provide too much detail, but I would think that this drilling JV has helped to give you some type of framework to work off of as you progress toward an acquisition JV and I’d love to get any color you could provide on that front?

Yes. Clearly, getting the JV on the drilling side of it now was very important to us. We accomplished all of our goals in the way of, I guess, to reduce the debt and set us up for additional acquisitions, along with that will come another RBO facility, so that facility actually expires in November of it by some terms. We’re very confident that it will extend that or extend it and increase it along with the reduction debt that we received with the existing debt structure. So with that – that’s one weapon in our quiver for the – for potential acquisitions that will make it a lot easier to do the joint venture acquisition program that we see. But we think that the JV venture would be somewhat similar to what you might see in the past with the joint venture drilling program and that a lot of the framework has already laid out for [indiscernible]. We spent a lot of time and effort with the joint venture so that we got investors come with how we propose to do that. So I think that’ll make it a lot easier. And then it’s – I did proper targets that will fulfill that, and I think we’re pretty quick.

Okay, great. That’s it from me, Tracy. Thanks for the time.

I might have one other thing, John. People ask me about what our goals are on the acquisition front, I’ll tell you that it’s healthy numbers, I’m going to speculate up to $2 billion on the acquisition front.

All right. Thanks. Appreciate that.

Thank you, sir.

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

Hey, thanks, good morning, Tracy.

Good morning, Richard.

Looking at the demands of JV, just if I can get into the mechanics just a little bit, what is the estimated impact on reserves for any of the projects that were transferred into the JV, the 14 projects, Tracy? Any impact on 1P reserves and who would be esteem [ph] on 2P reserves?

Well, the impact on 1P reserves is not very much, particularly as it regards our lending facilities, most of this program has to do with exploration. So we really – we’re able to effectively monetize our exploration projects that we would not normally receive credit for in certainly, not the credit markets, but even in the capital markets. So that was a real benefit from for us. We did drill a couple of proved and developed locations that were included in the in the reserve base. The exact number on that, I don’t really have in my fingertips, but it was, I would say, was real substantial and particularly, as it relates to current price of the value in the reserve base. And even the from the release that we’ve put out that increased the reserve base, 5%, even there and also the DV [ph] considerably to about $1.3 billion. Also, the effect with that was put in revenue.

Okay. That’s helpful, Tracy. And from a follow-up – looking at Heidelberg, obviously, a nice acquisition and timing was certainly good. What are you hearing as far as potential drilling plans there, any other sort of work that may happen, say, over the next one or two years?

Right now, I think we’re pretty much in harvest mode. I think there is some additional upside there, maybe a tieback or two. So that’s important to us. But right now, the fields are performing actually better than our initial estimates.

Okay. That’s all for me. Thank you.

Thank you, sir.

[Operator Instructions]. Our next question comes from [indiscernible]. Please go ahead.

Just two questions. One is, can you please tell us a bit more about the relative value of investing in CapEx versus potential acquisitions that you can see right now?

Yes. That’s always a good question, Sebastian [ph]. Clearly, if the opportunity presents itself to purchase reserves at less than our F&D costs, that’s a real advantage. It takes some of the risk out of it. So I’m very optimistic is to how we increase the growth of the company, I think you have to have a balance of organic growth and acquisition growth as well. So – and that’s how we’ve done it for the last three decades. But clearly, where the opportunity presents itself to purchase reserves and the risk out of it, that’s a preference for us.

Thank you. And the second question is, on the capital structure, so you alluded to the fact that you can take the 2019 maturities with cash and also mentioned that you would try to be part of the remaining debt. And I was wondering if you could tell us a bit more about whether you want to refinance any layer or you want to refinance the whole of it and maybe with some other operation at the same time?

Good question. If I wasn’t clear on that, I could very clear. We’re going to refinance all of the debt. We’re going to fund some of the debt that it’ll make more attractive. We expect to get into debt ratio we said that will be very acceptable to investors in our banks and everyone else. So yes, we seek to refinance all of the debt and pay down a portion of the debt. Okay.

Okay. All right. Thank you very much. Congrats again.

Thank you, sir.

Thank you. We have a follow-up question from Richard Tullis with Capital One Securities. Please go ahead.

Yes, thanks for getting back to me. Maybe for Danny or Tracy, what’s the status of – I guess that Apache-related lawsuit that you had a judgment and a little while back, how the things stand there, Tracy?

That’s on appeal in the Fiserv [ph].

Any of them involved in there?

Yes. You can figure out how to time line what – what our course. You’re far better at it than I am, but I don’t really know how to handicap. We’ve filed the briefs in the other side as filed briefs, so I don’t really know if I – I mean, survey by it, yes, I would handicap it a year.

I understand. Thank you very much.

Yes sir.

There are no further questions, I would like to turn the call over to Mr. Krohn for closing comment.

Well, thanks everyone for being with us today. That’s all I have. Stay tuned. We’ve got more good news to come and we’ll talk to you soon. Thank you very much.