Tracy Krohn
Analyst · ROTH Capital. Please go ahead
Thanks, Al. Good day to everyone and thanks for joining us for our second quarter 2021 conference call. So I have with me today, Janet Yang, our Executive Vice President and Chief Financial Officer; William Williford, our Executive Vice President and General Manager of Gulf of Mexico; Steve Schroeder, our Senior Vice President and Chief Technical Officer; and Stuart Obkirchner, our Director of Geosciences. They're all available to answer questions today later during the call. So we continued to deliver strong operational and financial results in the second quarter and believe that the improved commodity price environment and our commitment to expanding margins will lead to a very good second half of 2021. We continue to generate stronger adjusted EBITDA and have reported $58.7 million of free cash flow thus far in 2021. Operationally, we performed quite well and production was above the midpoint of guidance and increase quarter-over-quarter even without any newly drilled wells coming online. We're very pleased with higher commodity prices, but our focus remains on operational excellence and free cash flow generation. We have an outstanding asset base and we will continue to maximize the value of our assets. So looking at our Midyear 2020 Reserve Report prepared by Netherland, Sewell, those are independent reserve engineering consultants. W&T's reserves and PV-10 value increased meaningfully. SEC approved reserves as of June 30 2021 totaled to 158.9 million barrels of oil equivalent, compared with 144.4 million barrels of oil equivalent at year-end '20. About 36% of midyear reserves were liquids, and the balance was natural gas. Approximately 87% were classified is proved developed producing. Strong positive revisions of previous estimates from field performance of 6.5 million barrels of oil equivalent in the first six months of 2021 nearly offset year-to-date 2021 production of 7.3 million barrels of oil equivalent, without any additional drilling to date in 2021. This shows the quality and significant value of our asset base. Notably, we have spent minimal capital over the past 12 months and we continue to see positive reserve divisions. In addition, the midyear report reflected 15.3 million barrels of oil equivalent of positive revisions due to SEC price changes resulting from the significant recovery in both oil and natural gas prices. The PV-10, excluding the impact of ARO of our midyear proved reserves utilizing SEC pricing was $1 billion. That's an increase of 39% compared with $741 million at year-end 2020. The midyear 2021 SEC reserves and PV-10 were based on an average realized crude oil price $47.78 per barrel, compared with $37 78 at year-end 2020. And an average realized natural gas price of $2.50 per MCF compared with $2.05 at year-end 2020. The utilizing NYMEX strip pricing as of July 1, 2021 midyear proved reserves were 165.7 million barrels of oil with a PV-10 of $1.5 billion. Midyear 2021 NYMEX strip pricing as of July 1, 2021, was based on an average realized crude oil price of $57.80 per barrel, and an average realized natural gas price $2.96 per MCF. So turning to our operational financial results, we had good second quarter results as we continue to operate efficiently and improve commodity price environment. We reported $18.7 million in free cash flow for the second quarter of 2021 and have now generated almost $60 million in free cash flow for the first half of 2021. Adjusted EBITDA was $49.8 million in the second quarter of 2021. And we've generated $107.3 million and adjusted EBITDA in the first half of 2021. While we reported the second quarter net loss of $51.7 million, or $0.36 per share. This was largely driven by $66.1 million unrealized commodity derivative loss. Excluding primarily the unrealized derivative loss, our adjusted net income was $$2.2 million or $0.02 per share. In addition to the strong quarterly results, we also completed a financial transaction with Munich Re in May that meaningfully improved our financial flexibility by more efficiently utilizing the collateral value of our Mobile Bay Area assets. We transferred 100% of our Mobile Bay Area producing assets and related gas treatment facilities to wholly owned special purpose vehicles in return for the net cash proceeds from a $215 million, first lien, non-recourse term loan to the SPVs at a very competitive fixed interest rate of 7%. This allowed us to pay-off our existing RBL of $48 million and added significant cash to the balance sheet. Through our 100% ownership of the SPVs, we retain the upside value in the assets transferred. We still plan to drill new wells at Mobile Bay and we will benefit from the potential additional cash flow from those new wells, as we will receive quarterly dividends back to W&T after paying principal and interest on the loan, and building a debt service reserve. We enter into a series of natural gas derivative contracts to cover debt service through the term of the loan. This transaction doesn't impact us operationally, and allows us to take advantage of the long-lived nature of our Mobile Bay assets. Additionally, it provides long-term capital without maintenance covenants, or borrowing base redetermination requirements and with no covenants at the parent level. But most importantly, it provides us to dry powder we need to continue to accretively grow W&T through attractive producing property acquisitions. Over the years, we've built a tremendous group of assets through organic growth and targeted acquisitions. We're actively looking at opportunities that meet our criteria, especially those that provide a solid foundation for our ability to generate free cash flow. We've integrated two strong acquisitions over the past two years, and we'll look for more of those types of opportunities in the future. We believe that market conditions in the Gulf remain very favorable for additional accretive acquisitions. Our immediate access to significant cash balance and continued strong cash flow generation have well positioned us to actively pursue these opportunities. So turning to production for the second quarter of 2021. W&T produced 40,888 barrels of oil equivalent per day or 3.7 million barrels of oil equivalent. That's an increase of 3% compared to 39,657 barrels of oil equivalent per day in the first quarter of 2021. Production was above the midpoint of our guidance, due to better runtime efficiency and an uplift from completed workover. Liquids production comprised 45% of total production in the second quarter of 2021. So looking ahead to the third quarter of 2021, we're forecasting production to be in line with the second quarter at an average 38,500 to 42,500 barrels of oil equivalent per day. Our operations team are doing a really good job of maintaining our production despite not having any new wells coming online until later this year. We're tightening our full year 2021 production guidance range to between 39,000 and 41,000 barrels of oil equivalent per day. Our lower production decline profile allows for reductions in capital expenditures without significantly impacting near term production levels. In the second quarter, we spent $4.3 million. And for the entire first half of 2021, we've only spent $5.9 million of our $30 million to $60 million for your capital budget. We have an exciting new drilling opportunity in the second half of the year. And I'll give more details on that later in this call. So for the second quarter of 2021, our average realized sale price per barrel oil equivalent was almost unchanged for the first quarter. Our second quarter of 2021 average realized crude oil sales price increased to $65.11 per barrel from $56.73 per barrel in the first quarter of 2021 and $21.67 in the second quarter of 2020. It's great to see $70 crude today after actually going negative on NYMEX just a year ago. Our natural gas liquids sales price is also up slightly from the first quarter of 2021 to $26.18 per barrel, offset by lower natural gas prices of $2.66 per MCF compared to $3.35 in the first quarter. So excluding the effects of hedges, revenues for the second quarter increased quarter-over-quarter by 6% to $132.8 million, driven by increased production. Despite the improved pricing environment, our focus will remain steadfast on capital discipline, operational excellence and most importantly, free cash flow generation. So on March 2021, we issued our inaugural Corporate ESG report. Since day one, we've been committed to developing and producing oil and gas resources in a safe and environmentally responsible manner. All the while meeting our or exceeding all regulatory requirements. These core values have guided our success, and provided the foundation for W&T to grow into a trusted operator in the Gulf of Mexico. A generous partner to the communities where we operate, and good stewards to the environment. With that in mind, we're working on with the new administration and thus, to ensure that we have safe facilities that minimize the impact to the environment in which we operate. We've seen some reductions in operating costs and GHG emissions associated with a consolidation of our two Mobile Bay treating facilities into one plant in early 2021. However, we've seen increases in other operating expenses due not only to increased industry activity levels, but also in conjunction with ensuring that we meet or exceed regulatory requirements. Additionally, we're increasing our P&L activity this year, we'll have more capital costs associated with asset retirements. We're expecting to spend $25 million to $35 million this year of which we've spent only about $11.2 million through June. We established a multi-disciplinary ESG taskforce that contributed to creating our initial ESG report. And they had the ongoing responsibility to monitor our adherence to our ESG standards, and formally communicate their findings on to me and our board and to suggest opportunities for further improvements. We're acting on their recommendations and continue to improve on our commitment to powering America safely in a more sustainable manner for many years to come. I'm also pleased to say that their efforts in creating our first ESG report recently resulted in a meaningful improvement in one of our third-party ESG ratings by a highly regarded ESG rating agency. So turning to costs. Lease operating expense, which includes basically its operating expenses, insurance premiums, workovers, and facilities maintenance was $47.6 million in the second quarter for 2021 compared to $42.4 million in the first quarter. We'll continue to operate efficiently and to do so in a rising price environment. We may see some costs increase in the near term. Additionally, recently [Indiscernible] has prioritized certain types of maintenance repair for all Gulf of Mexico operators due to corrosion-related incidents of platforms operated by other companies. Nonetheless, we haven't changed our annual LOE guidance of $158 million to $174 million. We will remain vigilant in our cost containment initiatives, and will control the cost that we can without impacting safety or the environment. So G&A was $14 million in the second quarter of 2021, which was at the low end of our guidance range. While we were at the low end of the range, G&A costs were up compared to the $10.7 million in the first quarter of 2021, which benefited from my $2.1 million employee retention credit associated with the CARES Act. We've increased our full year 2021 guidance range for G&A a little less than 4%, which takes into account the recent Mobile Bay financing and other ongoing M&A activity. Additional details on our expense guidance on the earnings release we issued yesterday. So turning to the balance sheet and cash flow. Net cash provided by operating activities for three months ended June 30, 2021 was $1.2 million, which was reduced by $25.6 million in derivative premiums paid for hedging activities in conjunction with the new first lien secured term loan to retain the upside of higher natural gas prices, while locking in floors for natural gas prices for production from Mobile Bay properties over the next seven years. Higher AR settlements and an increased operating expenses, considering each dollar of gas price increase could cost the company $165 million in hedged losses. We believe the call and put premium to our good insurance cost to protect us over the next seven years. As I stated earlier in the second quarter, we utilized a portion of the proceeds from the Munich Re transaction to pay off the remaining $48 million RBL balance. So working with our bank groups, we recently executed an amendment and waiver that differs the spring 2021 borrowing base redetermination under RBL until early October. During the interim time period, we've agreed to not access the credit facility, which remains fully undrawn. But given our very strong cash balance of $209 million as of June 30 2021, we don't see a need to access the revolver. We're also actively monitoring the debt capital markets and intend to seek financing for the longer tenors and market-based covenants to provide even more liquidity in the future. Current total debt is $754.7 million, consisting of the balance of Munich Re term loan of $208.3 million and $546.4 million of 9.75% senior second lien notes due 2023 net of amortized debt issuance costs for both transactions. W&T is currently in compliance with all applicable covenants of the credit agreements and the senior secured second lien notes and venture. Now turning operations, during the second quarter of 2021, we performed one workover with Mahogany that in total, added approximately 700 net barrels oil equivalent per day to production. That's very strong result is both highly economic and helps us to mitigate natural decline. We plan to continue to perform workover rig completions, as they are often some of the best economic projects in our portfolio. The successful Cota well that we drilled early last year at East Cameron 338/349 is currently in development phase of the project and is expected to be on production in this year's fourth quarter. Wells in over 290-feet of water was drilled to total depth over 6000 feet, while encountering approximately 100 feet net oil at bay. We have an initial 30% working interest but our interest will increase to 38.4%, once the world is brought online in certain performance thresholds are met. So while we continue to proceed with preparing our internally generated prospects for potential drilling later this year and into 2020, our third-party operated opportunity in Mississippi Canyon recently emerged that we're excited about. So based on our assessment, we believe the well has a high potential but relatively lower risk opportunity located in the Flex Trend area where W&T has had significant experience and success. Furthermore, assuming success, it could derisk additional drilling opportunities that W&T has in the area. This prospect was identified using high quality, 3D seismic and reprocessing and has multiple objectives located beneath salt overhang. This high potential oil play ties directly to analogous fields in the area and has significant upside. We have a 25% working interest and the well has just spud. In summary, we believe this is an excellent opportunity with good upside potential that could also allow us to derisk existing organic opportunities. The rising price environment presents many opportunities 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. There are many opportunities for acquisitions in our focus area, and we're constantly looking into can meet our stringent criteria. Our disciplined approach to growth has allowed us to navigate many cycles in the past. We remain optimistic and we look for ways that we can add value to W&T. We've always focused on generating free cash flow by operating efficiently and executing our long-term strategy to maximize shareholder value. So production is up, reserves were up, prices were up over $100 per barrel since April 20, 2020. Differential spreads are down, acquisitions are likely going forward as bid ask spreads have narrowed. And we're also seeking growth organically in an area and basin that we know very well armed with better data. We're quite confident in our ability going forward to gain low cost financing when it's necessary to do so. There's plenty of cash on the sidelines looking for you. And the Gulf of Mexico is an excellent place or an excellent play for cash flow as well as a lower carbon intensity. Our management team's interests are highly aligned with those of our shareholders, given our 34% stake in W&T equity, which is one of the highest of any public E&P company. This alignment of interest ensures that we're truly incentivized to maximize shareholder value and mitigate risk. Operator. If you would, we can now last questions.
