W&T Offshore Inc

NYSE:WTI

Earnings Call Transcript 2023-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the W&T Offshore First Quarter 2023 Conference Call. [Operator Instructions]. I would now like to turn the conference call over to Al Petrie Investor Relations Coordinator.

[Al Petrie, Investor Relations Coordinator]

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 forward-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 forward-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 forward-looking statements and reconciliations of non-GAAP measures

With that, I'd like to turn the call over to Tracy Krohn, our Chairman and CEO.

[Tracy Krohn, Chairman and Chief Executive Officer]

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 a Gen 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 at 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 $0.17 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 nonoperated 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 use 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 0.4x compared to 2.5x a year ago, which is well below our stated goal of less than 1x. So we clearly adhered to our strategy and delivered sustainable and consistent results. I believe that our continued success is driven by the ability of both our operations and finance teams to execute at a high level and our outstanding asset as in the Gulf asset base in the Gulf of Mexico helps a great deal with that. So again, the first quarter of 2023 marked the 21st consecutive reported that we've generated free cash flow through record low prices and changing geopolitical and economic conditions, we have continued to deliver free cash flow. So 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 period out of facility and pipeline maintenance projects underway at the Mobile Bay field that required us to temporarily shut in the field. These activities shut in production at the Mobile Bay fuel 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 nonoperated fields that also temporarily reduced our production volumes in the first quarter. These 2 events contributed to the lower Q1 2023 production levels, but most of the nonoperated fields that were shut in are now back online and the maintenance project at Mobile Bay was completed. Despite the lower overall production, our Q1 2023 oil production of 1.35 million barrels for the quarter was above our guidance range. Total company production has mostly recovered and we're currently having approximately 38,100 barrels of oil equivalent per day. You see the recovery in our production numbers in our Q2 2023 production guidance with 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 were encouraging as we were below the midpoint of guidance and about 4.0% actually, lower than quarter 4 2020. 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 expense is expected to be between $63 million 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 million and $18.5 million. That's 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 a huge reduction from them. So the net, so that's not our first rodeo. And although we have opted to pay down all $552 million in the previous second lien notes, instead, we paid down 50% of the previous second lien notes and maintain significant cash liquidity. Our current opinion is that we're glad we did. As I mentioned previously, the large reduction in held debt was driven by issuing 2026 second lien 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. Though 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 drilling obligations, we have flexibility to ramp up or defer capital opportunities. Last year, we focused on reducing net debt and invested $4.6 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 million 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 3 shelf wells that we're considering drilling a little later on and capital costs for facilities, leasehold seismic and recompletions. 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 and which provides us flexibility to quickly execute on the creative 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 our cards to 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 on 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. He 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 in how well we have started 2023, both operationally and financially. I'd like to thank our strong team at W&T as I believe we are 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 long-standing improvement 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 deepwater 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 enthrolled about M&T's right future in 2023 and beyond. Operator, we can open the lines for questions, please.

[Operator]

[Operator Instructions] Our first question today comes from John White from Roth MKM.

[John White, Roth MKM]

Thank you, operator, and good morning, everybody. -- maybe getting a little ahead of things here, but let's assume if we get into August or September, and you haven't found a deal and you're not in the midst of working on a promising deal, would that be a point in time where you might pick up drilling activity throughout the latter part of 2023?

[Tracy Krohn, Chairman and Chief Executive Officer]

That's a possibility, yes, sir. Okay. And you previously -- I mean you made no secret you're very active looking for acquisitions. Can you characterize the predominant sellers? Is it major oil companies selling noncore assets? Or is it private equity-backed E&P companies? Where do you see the most activity?

Yes, 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.

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.

[John White, Roth MKM]

Thank you, sir.

[Operator]

And our next question comes from Derek Woodfield from Stifel.

[Derek Woodfield, Stifel]

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. We ask if you could speak to the trajectory you expected for Q3 and Q4? And if there are any material planned maintenance impacts in those quarters?

[Tracy Krohn, Chairman and Chief Executive Officer]

Well, let me address the maintenance first. No, we had some issues at Mobile Bay with a certain contact power. And it had a little more corrosion than we had anticipated. You don't know until you open these things up and and inspect them. This was a hydrogen sulfide aiming contactor. So it was very important for us to get this right. We have a little H2S production in that field. So we wanted to make sure that we had this repair, the last time it was taken down it was 10 years ago. So we wanted to make sure it wasn't taken down anytime in the near future. So as far as ramping up in Q3 and Q4, yes, 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 nonoperated as well that we would hopefully see some increases in production there. It's a little bit hard to classify that as quantitatively. But the overall feeling is that, yes, that could help us as well.

[Derek Woodfield, Stifel]

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 CCS business?

[Tracy Krohn, Chairman and Chief Executive Officer]

Sure. We -- of course, we've been keeping a press on 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. The 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 No. We don't expect that W&T is a net 0 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, fracking, 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.

[Derek Woodfield, Stifel]

Perfect. Thanks for your time and responses.

[Operator]

[Operator Instructions] Our next question comes from Jeff Robertson from Jeff Robertson

[Jeff Robertson, Jeff Robertson]

Tracy, can you talk about how the pickup -- 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.

[Tracy Krohn, Chairman and Chief Executive Officer]

Yes. Unfortunately, Jeff, that's a very good question. We haven't been awarded those leases yet. So while we were a 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.

[Jeff Robertson, Jeff Robertson]

Just do you have a feel on how long it might take the OEM to process the bids and award leases from this sale?

[Tracy Krohn, Chairman and Chief Executive Officer]

Yes, sir. They normally process that within about 90 days of the lease sale itself. So we're -- in the next probably 45 to 60 days, we should have a good idea about what they're going to do.

[Jeff Robertson, Jeff Robertson]

In terms of...

[Tracy Krohn, Chairman and Chief Executive Officer]

Again, I apologize for not being able to elaborate on that. I just think that it would be premature to do so.

[Jeff Robertson, Jeff Robertson]

Okay. In terms of acquisitions, Tracy, 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?

[Tracy Krohn, Chairman and Chief Executive Officer]

Sure. In larger transactions and depends on how you define large. But let's say, it was a $1 billion transaction. We would lever up a little bit and then we would probably -- you should probably expect to see -- when I say later, we would expect to see that as a temporary leverage up that we'd be paying down quickly. And then we would probably sell off a little piece of equity as well.

[Jeff Robertson, Jeff Robertson]

So obviously, in keeping with your past, you would target assets that generate a significant amount of cash flow.

[Tracy Krohn, Chairman and Chief Executive Officer]

Yes. Yes. This is -- the company doesn't change its policies over time that work. So yes, generating cash flow is quite essential for us. levering up. We want to stay within pretty known bounds of leverage right now. It's usually around 1. We would probably go a little bit higher than that to accommodate that acquisition and then tamper that with selling off a bit of equity.

[Jeff Robertson, Jeff Robertson]

Thank you.

[Operator]

And ladies and gentlemen, at this point in showing no additional questions. I'd like to turn the floor back over to Tracy Krohn, Chairman and CFO for closing remarks.

[Tracy Krohn, Chairman and Chief Executive Officer]

Thank you very much, operator. One other little minder -- well, not minor One other little detail what 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 in other state actually to facilitate some family things that she needs to deal with and her family. It's an opportunity for them going forward. We're very sad to miss that she's leaving. I wish it was another way. But I wish you well. The whole company wishes as well, and we're going to miss her, and we hope that everything comes out 100% for her. Thank you very much.

Operartor

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.+