Tracy Krohn
Analyst · Roth Capital. Please go ahead
Thank you, Al., And good day to everyone, and thanks for joining us for our second quarter 2020 conference call. With me today are Janet Yang, our Executive VP and Chief Financial Officer; William Williford, our Executive VP and General Manager Gulf of Mexico; Steve Schroeder, our Chief Technical Officer; and Jim Hersch, our Vice President of Geosciences. They are all available to answer questions later during the call. So the global COVID-19 pandemic coupled with supply and demand imbalances, have created an environment of uncertainty and temporarily reduced oil prices to unprecedented low levels in the second quarter. This isn't the first downtime -- downturn that we’ve weathered in the last 40 years. We all know this is a cyclical business. Our success has always been based on maximizing free cash flow generation, operating efficiently and striving to constantly improve the profitability of our assets at any commodity price, this time has been no different. So we've reacted decisively by suspending all drilling activities in significantly reducing our CapEx, proactively curtailing production and selected oil weighted fields operated by W&T, and lowering our lease operating expenses meaningfully, without compromising safety or operational capabilities. And we reduced G&A expense as well. Most of the reductions we've seen on the expense side is sustainable. And we believe that our lease operating cost run rate will be about 20% to 25% lower than Q1 for the remainder of 2020. And our G&A costs run rate will be about 10% to 15% lower than Q1 due to reduced incentive compensation in 2020. So as always, we remain committed to the health and safety of our employees and contractors. For our field operations, we instituted screening of all personnel prior to enter to help ensure [ph] bases, as well as our two gas plants in Alabama. We're conducting daily temperature screens and implemented procedures for distancing and hygiene at our field locations and in our corporate offices. The pandemic remains fluid and we're constantly monitoring the situation will follow the advice of government and health leaders. Okay, so another way we respond to this current environment is by using some of our free cash flow to repurchase a portion of our outstanding nine and three quarters senior second lien notes. In the first quarter, we purchased $27.5 million in principle of outstanding notes for $8.5 million. In the second quarter, we've repurchased an additional $45.1 billion of those same notes for $15.4 million. That's about $72.5 million of long-term debt that we've repurchased year-to-date for just under $24 million. That's reduced our annual interest expense by over $7 million. We believe this was a very good use of the available cash and will help place W&T on an even better financial footing moving forward. During -- turning to our second quarter results. Despite the low pricing environment we successfully integrated our acquired assets in Mobile Bay and Magnolia and continue generating good adjusted EBITDA and operational cash flow. Our costs were down significantly compared to the first quarter. Adjusted EBITDA was $42.1 million, despite a weaker pricing environment. And our CapEx -- our capital expenditures were reduced to $6.4 million. This is very important because on a cash basis, we continue to create significant value by generating nearly $36 million more of adjusted EBITDA versus our CapEx, which helped us to reduce long-term debt as substantial discount. I can't emphasize this enough. One of the keys of our ongoing success has been our ability to generate positive cash flow. So in the second quarter of 2020, our production averaged 42,037 barrels of oil equivalent per day or 3.8 million barrels of oil equivalent. That was up 20% year-over-year compared to the second quarter of 2019. Q2 production for 2020 was reduced by 22% compared to Q1 largely due to shut-ins, resulting from lower pricing, higher differentials and tropical weather. Our industry experienced the negative pricing we experience brought on by future speculations. I should also mention the total liquids production comprise 48% of production in the second quarter of 2020. We temporarily shut-in a portion of our production due to tropical storm Cristoball, with an estimated net impact of about 110,000 net barrels oil equivalent of deferred production in the second quarter. We didn't experience any material damage to our facilities do Cristoball. There was very minimal production impact and lower storm damage from the more recent storm hurricane Hanna in July. So in late April, we proactively curtailed production and selected oil weighted fields operated by us and also experienced production curtailments from third party operators due to sharp decline in oil prices. Recently, a majority of the third-party shut-in volumes will be returned to production. But we've purposely not been as quick to restore all of our oil weighted operators’ production. We're not focused on the short term but are looking at the best way to proactively manage reservoirs and maximize and preserve value over the long-term. Given that we are cash flow positive, we have the luxury to reduce [ph] maximum rates in all fields when margins are low. This allows us flexibility to produce more in higher priced environments and further drives value. We will continue to monitor the market to determine the appropriate time to return our oil weighted operator production curtailments to production. Taking into account our operated curtailment and proactive reservoir management as well as planned downtime of 41 days at Magnolia do the maintenance activities of the third party operated host platform which accounts for an estimated 1350 barrels of oil equivalent per day of impact to the third quarter of 2020. And no drilling activity or no wells coming online in the near term and natural decline we believe our third quarter production will be slightly higher than the second quarter and average between 40,900 and 45,000 barrels of oil equivalent per day. Our guidance for the full year is now 43,750 to 46,500 barrels of oil equivalent per day. For the second quarter of 2020, our average realized sale price per BOE declined about 43% compared with the first quarter with declines in pricing for oil NGLs and natural gas. Our averaged realized crude oil sales price was $21.67 per barrel. Our NGL sales price was $4.67 per barrel, and in our natural gas price was $1.78 per MCF. Excluding the effects of hedges revenues for the second quarter decreased quarter over quarter by 56% to $55.2 million from a combination of lower volumes and lower prices. Returning now to cost with the sharp downtown in prices. We quickly implemented several successful initiatives to reduce our LOE cost. This includes replacing higher costs contract personnel, with full time employees. We reduced transportation costs by lowering the number of boats and helicopters needed to operational efficiencies, cutting work on facilities costs through vendor supplier cost reduction, and increasing our focus on projects that maintain and optimize production. We have not reduced our commitment to safety, operational compliance or environmental protection with any of these actions. As a result of these cost saving activities, and other factors such as the impact of the PPP funds our total second quarter LOE came in $28.3 million down 48% compared to 55 -- excuse me $54.8 million in the first quarter. While we expect our cost cutting initiatives to continue to keep LOE low in third quarter and the rest of 2020 will be returning to a more normal level of operational activities this quarter. As a result, we're projecting third quarter cost be up compared to very low cost in quarter two. But still about 20% to 25% below first quarter. Our G&A expense in the second quarter of 2020 was $5.6 million, which was well below our first quarter of $14 million, primarily due to credits to expansion of PPP funds and lower incentive compensation. We expect our G&A cost moving forward be lower than Q1 by about 10% to 15% and be in the range of $11.5 million to $13 million. After the second quarter, we reported a net loss of $5.9 million or $0.04 per share, which included $38 million in unrealized commodity derivative loss, offset by $2.9 million non-cash gain on our debt repurchase and $8.7 million of deferred tax benefit. Our adjusted net loss was $2.2 million or $0.02 per share. As we discussed in our June call, our bank group recently completed its regularly scheduled spring borrowing based redetermination. The borrowing base was set at $215 million down modestly from 215 -- excuse me $250 million. Additional details can be found on our 10-Q next regularly scheduled redetermination will be in the fall. Additionally, we've added several oil and natural gas hedges since our last call. And detailed schedule is in the yesterday's release. Following all these actions at June 30 2020, our total liquidity stood at $165 million comprised of about $36 million in cash and $129 million of availability under our revolving credit facility. Our long-term debt remaining on our senior notes, this decline is $552.5 million at June 30th from $625 million at yearend 2019. We believe we continue to have a strong balance sheet and have more than sufficient liquidity to meet our needs going forward and to continue to look at good opportunities that may arise in this downturn. We remain confident in our extensive inventory of high-quality prospects in our asset base. This was evident with our midyear 2020 progress report, as calculated by NSAI Deputies Independent Reserve Engineering Consultants, SEC approved reserves as of June 30 2020 totaled 157.5 million barrels of oil equivalent, compared with 157.4 million barrels of oil equivalent at yearend 2019. Strong positive revisions are previous estimates from field performance of 17.6 million barrels of oil equivalent in the first six months of 2020 was offset by a combination of negative revisions due to SEC price changes of 9.9 million barrels oil equivalent and year to date 2020 production of 8.7 million barrels oil equivalent. Midyear 2020 reserves which were 85% proved developed producing and proved developed non-producing were 34% liquids. The pre-written [ph] of those proved reserves was a $1 billion, which was down compared to $1.3 billion at yearend 2019 and that's due to decreased pricing. The midyear SEC pre-written was based on average crude oil price of $48.84 per barrel, compared with $58.11 at yearend 2019, and an average natural gas price of $2.09 per MCF compared with $2.63 at year-end 2019. This report further solidifies the strength of our asset base. Turning now to operations in the first quarter Dakota Well and East Camp and 338/349 Field was successfully drilled and over 290 feet of water to counter approximately 100 feet of net oil at bay. Initial production is planned for the first half of 2021 subject to the commodity price environment and the completion of certain infrastructure projects. After drilling this well we decided to spend all of the drilling activity due to the current uncertain pricing environment. And at this time we have no active drilling or completions operations. We will continue to perform summary completions and workovers that meet economic thresholds in today's price environment. So as we previously announced, WT was the apparent had bid on two blocks in the Gulf of Mexico lease sale 254 held by BOEM on March 18. We were recently awarded both blocks which included one deepwater block and one shallow water block. We continue to believe there are still good opportunities in the Gulf of Mexico. With that mind we will continue to look at acquisitions that meet our criteria, especially those that provide a solid foundation for our ability to generate free cash flow, even in the current pricing environment. We've integrated two strong acquisitions from 2019, and we'll look for those opportunities moving forward. We built them into ease of the right combination of attractive property acquisitions, a very methodical integration and exploitation of those acquisitions and successful development and exploratory drilling on our legacy fields. Going forward, we remain optimistic about the future for W&T. We have a premier portfolio of both shallow water and deepwater properties in the Gulf of Mexico with low decline rates and significant upside. The proactive actions that we've undertaken this year to reduce CapEx merely coupled with our strong hedge book offering downside protection on commodity prices should allow us to continue to generate good cash flow, even in a lower pricing environment. We remain opportunistic in this environment and we'll look for ways that we can add value to W&T, as we have done thus far in 2020 reducing LOE costs and closely managing our capital spending. We do remain focused on operating efficiently and executing our long-term strategy. All that while maintaining our strong balance sheet to maximize shareholder value. Our management team’s interests are highly aligned with those of our show shareholders, given our 34% stake in W&T shares, which is one of the highest of any publicly E&P capital. This alignment of interests, ensures that we're truly incentivized to maximize shareholder value and mitigate risk. Shareholders should expect to see more acquisitions in the future as well. With that, operator, we can now open the lines for questions.
