W&T Offshore Inc

NYSE:WTI

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the W&T Offshore Third Quarter 2023 Conference Call.

[Operator Instructions]

This conference is being recorded, and a replay will be made available on the company's website following the call. I would now like to turn the conference over to Al Petrie, Investor Relations Coordinator. Please go ahead.

[Al Petrie, executive]

Thank you, Sarah. 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 Third Quarter 2023 Financial and Operational Results.

Before we begin, I would 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 financial measures.

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

[Tracy Krohn, executive]

Thanks, Al. Good day, everyone, and thanks for joining us this morning.

With me today are William Williford, our Executive VP and Chief Operating Officer; Sameer Parasnis, our Executive VP and Chief Financial Officer; and Trey Hartman, our Chief Accounting Officer. They're all available to answer questions later during the call.

So before I get into the operational and financial results, I would like to begin by reviewing our long-standing and successful strategic rationale. 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.

We've delivered 23 consecutive quarters of free cash flow because we prioritize cash flow through our operational and cost-controlling initiatives. We have a prolific asset base that delivers strong production and generates meaningful EBITDA. We have generated positive free cash flow every quarter since the beginning of 2018. And in Q3 2023, we delivered over $25 million in free cash flow.

So by prioritizing cash flow, we've built a strong balance sheet with ample cash to navigate our cyclical business, opportunistically acquire complementary assets and now be able to pay a quarterly cash dividend on our common stock. Our Board this week adopted a program to report -- to return a portion of our strong cash flow that we generate each quarter directly to our shareholders to enhance the return on their investment.

Our first dividend of $0.01 per share will be paid on December 22 to shareholders of record on November 28, 2023.

So we began 2023 by making a decision with regard to how we were going to manage our debt going forward. We have the ability to pay it all off, but we know that in times of uncertainty, maintaining liquidity is extremely important. So we redeemed all of our existing second lien notes in the amount of $552 million and did a new issuance of $275 million due in 2026, thus significantly reducing our debt and interest payments going forward, while also strengthening our balance sheet.

We have a low leverage profile of 1.2x net debt to trailing months adjusted EBITDA, which, coupled with the significant cash we have on hand, provides us with financial flexibility to act quickly should we see the right acquisition opportunity arrives.

Over the years, we've created significant value by seamlessly integrating producing property acquisitions, while maintaining strong operational excellence. In the third quarter, we were pleased to complete another acquisition. In late September, we finalized the purchase of 8 shallow water producing properties for $28.9 million, net of purchase price adjustments, that immediately added free cash flow to W&T after the closing date, while increasing our production of reserves.

These properties are in our existing areas of operation in the Central and Eastern Gulf of Mexico and met our acquisition criteria of generating free cash flow, a solid base of accrued reserves and upside potential and the ability to reduce costs. We funded the acquisition with cash on hand and still ended the quarter with nearly $150 million of cash.

We have the experience and expertise to execute and try and true acquisition strategy that allows us to grow value for our shareholders. Now we believe that we are very well positioned to continue to make acquisitions, but we also feel that patience is important as we look for strategic value and free cash flow generation potential in all acquisition opportunities that we are continuously evaluating. So we can make acquisitions that add value, and we believe that there are numerous opportunities arising that will allow us to continue with that strategy.

Now turning to our outstanding third quarter results. I'd like to point out some key highlights and accomplishments. While we reported net income of $2.1 million or $0.01 per diluted share in the third quarter of 2023 compared to a net loss of $12.1 million in the second quarter of 2023. We increased adjusted EBITDA by 45% quarter-over-quarter to $56.3 million. These increases were primarily driven by our ability to maintain production levels with highly economic workovers and cash flow associated with probable reserves that are not currently booked as proven reserves.

We also benefited in the quarter from increased realized oil and natural gas pricing. These factors helped us generate $25.4 million of free cash flow, our 23rd consecutive quarter of free cash flow.

So we adhere to our strategy to achieve 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 base in the Gulf of Mexico. Our ability to pay down debt and improve our balance sheet has put us in a favorable position today and we remain focused on operational execution in '23 and beyond to continue building on our already outstanding results.

So in the third quarter of 2023, we reported strong production of nearly 36,000 barrels oil equivalent per day. Our production was above the midpoint of guidance with 1.23 million barrels of oil, 348,000 barrels of NGLs and 10.4 Bcf of natural gas for the quarter.

We focused on acquisitions over the last few years rather than on drilling many new wells. For the fourth quarter of 2023, we expect production to be in the range of 34,000 and 38,000 barrels oil equivalent per day. This reflects the benefit of the acquisition we closed in late September that has helped mitigate the low natural production decline of our asset base compared with much higher declines in unconventional onshore reservoirs.

We saw the benefit of 6 workovers during the third quarter, and we'll continue to focus on high-returning workover and recompletions to help mitigate production decline going forward.

On the cost side, while we continue to see inflationary pressures in the industry, our third quarter results were very encouraging as we lowered our lease operating expense on an absolute basis and on a per share basis quarter-over-quarter. Our per barrel equivalent LOE declined from $19.60 in Q2 2023 to $18.72 in Q3 2023.

We remain focused on cost control and margin expansion despite the current inflationary environment. For the fourth quarter, our guidance for lease operating expense is expected to be between $60.5 million and $67 million. So we also continue to control our G&A costs in the third quarter. We reported cash G&A of $16.7 million, which was within our guidance range. For the fourth quarter, we expect cash G&A to be similar within a range of $15.4 million to $17 million.

So turning to our balance sheet. During 2023, we've reduced total debt by almost $300 million from year-end 2022. At the end of the third quarter, we had net debt of $248.2 million, which was a total debt of $397.2 million net of cash and cash equivalents of $149.0 million.

So as I mentioned previously, the large reduction in total debt was driven by issuing new 2026 senior secured lien notes in January 2023. Those were issued at par totaling $275 million in a private offering and using the proceeds along with a portion of our considerable cash position to retire all of our outstanding 2023 senior second lien notes.

We continue to have the flexibility and dry powder to make additional acquisitions, continue to build cash and all the while further paying down debt.

Now in quarter 3, 2023, we spent $8 million in CapEx and have invested $31 million for the first 9 months of this year. As I mentioned in our second quarter call, we lowered our CapEx range for 2023 by about $40 million to be in the range of $50 million and $70 million. Included in this range are planned expenditures related to long lead drilling-related items, capital costs for facilities, leasehold, seismic and recompletions.

We expect to continue generating meaningful free cash flow which provides us flexibility to execute on accretive opportunities very quickly. So as we look to next year, we plan to begin drilling again. We'll provide additional details on our 2024 capital investment plan during our year-end call in early March.

In the meantime, we plan to spud our deepwater Holy Grail prospect at Magnolia in the first quarter of 2024. We have the rig under contract and expect the well to take around 6 to 8 months to drill and complete. It will be drilled off the Magnolia platform, which will allow the well to be placed on production soon after drilling.

We identified this proved undeveloped opportunity after we acquired Magnolia in December 2019. We believe it's a low-risk opportunity with large production potential for us since we are the sole leaseholder. We are hoping to further advance our outstanding results through the recent acquisition of significant depth and breadth to our leadership team. Over the past several months, we've appointed or promoted several members to our leadership team that I believe will be great additions to help maintain W&T's successful efforts into the future.

So as I mentioned on the last call, in early July, we appointed Sameer Parasnis as our new Chief Financial Officer, and welcomed him to our senior leadership team. In early September, we promoted Ford Peters to Vice President of Land. In early October, we appointed John Poole as our new Vice President of HSE&R. John's experience will be particularly important toward enhancing our commitment to sustainability.

So before I close the call, I'd like to tell you about our 2022 ESG report that we issued in mid-August. W&T's cultural success and sustainability is built on environmental stewardship, sound corporate governance and contributing positively to our employees and the communities where we work and operate. Ongoing commitment to ESG includes making a concerted effort in reaching out to our major shareholders for feedback and addressing their concerns, while continuously improving our ESG metrics and transparency.

To assist with development, implementation and monitoring of ESG initiatives and policies, we've established an ESG committee with our newest Board member, Dr. Nancy Chang, as the Chair of the committee. 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.

So since our inaugural 2019 report, we've seen our total Scope 1 GHG emissions decreased by 20%. Our onshore facility emissions have also decreased over that same period with sulfur dioxide emissions down 54%. In addition to improvements in our reportable emissions, we've also implemented new procedures that allow us to estimate and track waste that is recycled, injected or sent to landfills.

We're also reaching out to our shareholders to elicit feedback on say-on-pay, performance alignment and ESG initiatives. In 2023, we've enacted additional substantive changes to compensation programs based on this feedback and plan to continue to engage with our major shareholders to ensure alignment. So in closing, we're very pleased with how well we performed thus far in 2023, both operationally and financially.

I'd like to thank our team at W&T as I believe we're well positioned for continued success in the future. Our strong financial position 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 creating opportunities that meet our long-standing improving criteria. We believe the Gulf of Mexico is and will continue to be a world-class basin strong producing assets. 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, deepwater properties in the Gulf of Mexico that have low decline rates and significant upside.

Our management team's interests are 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. We welcomed the positive mood and improved outlook for our industry and believe W&T will continue to build value for shareholders as we execute our strategy. We're happy to be returning value again to shareholders in cash.

With that, operator, we can open the lines for questions.

[Operator]

[Operator Instructions]

Our first question comes from Nate Pendleton with Stifel.

[Nathaniel Pendleton, analyst]

Congrats on another strong quarter and the new dividend.

[Tracy Krohn, executive]

Thanks, Nate.

[Nathaniel Pendleton, analyst]

My first question, with your continued success in the M&A market, I wanted to get your thoughts on the opportunity set and the size of the packages you are seeing on the market today?

[Tracy Krohn, executive]

Yes. The opportunity is always good. It's used to -- a matter of pricing and timing as the price of oil and natural gas float up and down, it makes it difficult for people to make decisions about how they want to move forward. We recognize that.

We're patient. We just -- we adhere to the principles that we've established over time, and that carries us through and -- but it does require some patience. I think that the company is well positioned going forward to either make acquisitions or drill. And we'll have a little bit more on that later on in the year.

[Nathaniel Pendleton, analyst]

And given your ability to optimize production and use workovers to mitigate decline rates in the quarter, can you provide us any details on what you are able to do from an optimization perspective and how much more running room you have for further initiatives?

[William Williford, executive]

Yes. This is William Williford, I'll answer that. Essentially, we kind of base it on projects that we can think we can turn cash flow around pretty quickly and get good production associated with it. That's why you can see us from a strong cash flow position, you will see a lot of expenses going out versus the cash we have going in, we kind of plan it out accordingly. So that's kind of how we said, so it can be officially spin our cash effectively.

[Operator]

Our next question comes from Jeff Robertson with Water Tower Research.

[Jeffrey Robertson, analyst]

Tracy, can you provide any update on the Cox situation in the acquisition that you all talked about that I think is just tied up in court?

[Tracy Krohn, executive]

Yes. Yes, that's a very good question. The bankruptcy process is particularly difficult one. There's a lot of emotion, there's a lot of debts that haven't been paid. Otherwise, they wouldn't be there. So the process is at best variable as to how it proceeds. We were the high bidder at the auction. And since then -- and we've actually gotten to the point where we signed the PSA with the debtor. However, there are other interests -- that weren't interested in because it didn't relay a particularly good return to them.

But it's really a hard situation for everyone. Nobody is happy. Everybody is usually in a position where they're losing money, and nobody likes to lose. I think it just will require more patience. I can't tell you that I fully understand the process.

I'm not sure if anyone fully understands the process. We've been in this position before looking for properties and through bankruptcy courts. It's a difficult situation for all. And the best thing to do is just be patient and see what develops because there's going to be changes all along the way. So I think it's going to take a little while longer to sort it out. We don't know 100% if this is something that will happen favorably toward us or how it will end up in the next several weeks.

[Jeffrey Robertson, analyst]

Tracy, the acquisition that you did close in the third quarter, can you talk about what impact, if any, that has on W&T's overall corporate decline?

[William Williford, executive]

Yes. Essentially, if you look at the press release we put out there, I think, we said, it was around 2,400 barrels associated with quarter North once we added a full production. I think when we first got the asset under our roof, we actually kind of look at it and see what we can do as far as efficient things that we get more efficient, optimize production and that sort of things.

Sometimes the -- we got to look at some of the facilities and do some -- spend some costs there to kind of look at the future and then maintaining production over time. And with that increase, that kind of helps maintain our overall decline for the company.

[Tracy Krohn, executive]

I'll add to that just a little bit, Jeff, very often when we first make these acquisitions, the seller isn't spending a lot of money on maintenance and the other things they would normally spend money on.

[Jeffrey Robertson, analyst]

And lastly, Tracy, are you willing to share an AFE for Holy Grail?

[Tracy Krohn, executive]

I don't think I have those total dollar amounts yet. We're still working on some of the longer lead items that we need to resolve. The rig will be coming from the bank to get offshore. So I'll probably be able to give you a little more clarity on that after the first few year.

[Jeffrey Robertson, analyst]

And to be clear, the longer lead items are the some of the items that would allow you to tie this in pretty quickly, right?

[Tracy Krohn, executive]

Yes.

[Operator]

[Operator Instructions]

Showing no further questions, I would like to turn the conference back over to Tracy Krohn for any closing remarks.

[Tracy Krohn, executive]

Thank you, operator. Thanks for joining us this quarter. We're happy that we're on a really good track for this year and also very happy to be returning dividends again to shareholders. So we look forward to that for a long time. And we appreciate your attendance, and we'll talk to you very soon. Thank you.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.