W&T Offshore Inc

NYSE:WTI

Earnings Call Analysis

W&T Eyes 6% Production Increase in 2024

W&T has reduced its total debt by 44%, with no draws on its revolving credit facility. The company eyes marginal output improvements in Q1 2024 over Q4 2023, aiming for a 6% full-year production increase, averaging 36,900 barrels of oil equivalent per day. Cost guidance reflects inflation and extra spending for upgrading Cox assets, with lease operating expenses projected between $77.5 million and $86 million, and first quarter G&A expenses anticipated to be $15 million to $17 million. The management's significant 34% equity stake aligns with shareholder interests, and W&T is well-poised for 2024 with a strong liquidity position and growth opportunities.

Optimism Permeates 2024 Expectations Despite Near-Term Challenges

In a year that's begun with its fair share of maintenance hurdles and temporary production downtimes, we are now bracing for an uptick. While the initial quarter of the year exhibited slightly improved output compared to the latter part of the previous year, the company's confidence is not wavering. Based on comprehensive projections, a midpoint production average of 36,900 barrels per day is expected—a 6% increase from the year prior. This marks a commendable growth spurt, particularly when lined up against the relatively modest capital expenditure of $35 to $45 million earmarked for 2024. Operational excellence is touted for maintaining robust production figures, a noteworthy feat given the company's strategic pivot towards acquisitions over drilling new wells.

Navigating Inflationary Pressures and Acquisition Costs

Acknowledging the ongoing inflationary environment, guidance for lease operating expenses (LOE) and related costs takes into account these pressures extending from 2023 into 2024. The recent acquisition of Cox assets plays into the forecast, as additional spend is anticipated to assimilate these assets up to existing company standards. While this necessitates a first-quarter LOE forecast between $77.5 million and $86 million, there exists an undercurrent of opportunity to reduce operating expenses, find long-term synergies, and drive costs down without compromising safety or integrity, echoing the company's prudent approach to manage its expenditures.

Seeking Partnerships to Support Expansive Drilling Programs

The company aims to bundle multiple wells into a prospective package, giving prominence to promising locations like Holy Grail and other exploratory projects including Cayman field. Keenly aware of maintaining a balanced sheet, the potential of forging joint ventures to fund these drilling aspirations is highlighted. The envisioned multi-hundred million dollar program may attract both financial and industry partners, reflecting on past successes with similar strategic partnerships totaling $361 million. This joint venture approach appears to be a cornerstone of the company's growth strategy for drilling endeavors.

Projected Year-End Production Ramp-Up Despite Initial Setbacks

A temporary setback due to pipeline leaks and other operational disruptions has not deterred the company's outlook. With a clear line of sight towards the year's end, executives anticipate a production exit rate at around 38,100 barrels per day. This forecast factors in the production enhancements expected to come online later in the year while also underlining the dynamic nature of the sector as well as the company's ability to navigate industry volatilities and emerge stronger.

Integration and Optimization of Acquired Cox Assets

Early stages following the Cox acquisition reveal a company ardently focused on optimizing production and costs. While specific guidance is pending, the company is actively resolving legacy contract issues and transportation challenges inherited from the acquisition. Additionally, remediation for corrosion and maintenance that was deferred by the previous owners is underway. Simple fixes have already led to significant production boosts, illustrating the potential for relatively low-cost, high-impact improvements across the new assets.

Reflection on Industry Dynamics and Internal Risk Management

The industry's recent consolidation trends, epitomized by mergers among both smaller and larger players like Chevron and Hess, is perceived as a positive indicator for the sector and the company. When it comes to growth strategies, the company demonstrates a preference for a risk-averse approach by prioritizing acquisitions over organic drilling, albeit being fully equipped to execute both. This is due to the instantaneity of cash flow and proven reserves that acquisitions typically provide. The company also showcases a high historical drilling success rate in the Gulf of Mexico, topping 90% over the last decade, which is hard to contest. This, combined with a predictable regulatory environment in the region, makes for a strong case for the Gulf as an investment haven.

Earnings Call Transcript 2023-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the W&T Offshore Fourth Quarter and Full Year 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, M.J. 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 Fourth Quarter and Full Year 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, executive]

Thanks, Al. Good day all, and thanks for joining us for our year-end 2023 conference call. With me today are William Williford, our Executive Vice President and Chief Operating Officer; Sameer Parasnis, Executive Vice President and Chief Financial Officer; and Trey Hartman, our Vice President and Chief Accounting Officer. They are all available to answer questions later during the call.

So in 2023, we continued to deliver strong results while executing on our strategic vision. Our proven strategy is simple and effective. We focus on generating free cash flow, maintaining and optimizing our high-quality conventional assets and opportunistically capitalizing on accretive opportunities to build shareholder value. We have a strong balance sheet and continue to build cash on hand. We have generated positive free cash flow every quarter for the past 6 years because we know that cash flow is paramount to our success. We prioritized operational excellence, cost controlling initiatives, prudent capital spending and maximizing the value of our prolific asset base to deliver strong production and meaningful EBITDA. In addition, it's our ability to successfully and seamlessly integrate producing property acquisitions that has helped W&T grow during our 40-plus year history.

For the past year, we've accomplished many things that I'd like to highlight now. 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. So we have the ability to pay off all that debt, but we believe that liquidity would be extremely important strategically, hence the issuance. We have a low average -- a low leverage profile of 1.2x net debt to trailing 12 months adjusted EBITDA, coupled with the significant cash we have on hand, that provides us with financial flexibility to act quickly should we see additional acquisition opportunities arise. So in September 2023, we used about $27 million of cash on hand to purchase working interest in 8 shallow Gulf of Mexico fields. In January 2024, we used about $72 million of cash on hand to purchase 100% working interest in 6 shallow Gulf of Mexico fields from Cox at all, adding 18.7 million barrels of oil of proved reserves. So while we were very busy from a financial acquisition standpoint, we also executed operationally.

So for the first -- well, for the full year 2023, we generated $15.6 million in net income, $183.2 million in adjusted EBITDA and $63.3 million in free cash flow. We delivered strong production of 34,900 barrels of oil equivalent per day. And we continue to pay down debt with net debt falling to $217.3 million. We adopted a quarterly cash dividend policy paying an initial dividend in December 2023 and announced the first quarter 2024 payment will occur later this month.

So we continue to execute at a high level generating strong adjusted EBITDA and free cash flow despite decreases in pricing because it's such an integral part of our strategy, I'd like to reiterate one more time. The fourth quarter of 2023 marked the 24th consecutive quarter we have generated free cash flow. So coupled with our ability to pay down debt and improve our balance sheet, we're in a strong financial position in 2024, and we remain focused on operational execution to build on these solid results.

So over the years, we've created significant value by integrating producing properties acquisitions, but it's not as easy or straightforward as you might think. After we close on any acquisition, we take time to assess and inspect the newly acquired fields, which potentially require shutting in some of the fields in the process. We have a large footprint across the Gulf of Mexico. So we look for ways to optimize operations, increase production, utilize that large footprint where we can and reduce costs to maximize value. As we look to implement this culture of operational excellence, this can result in production deferrals and increase near-term investment to both bring fields up to our standards and increase production.

So with over 40 years of experience integrating acquisitions into our asset base, we have proven that the near-term costs are well worth it to realize the long-term potential of the newly acquired assets to generate cash flow for us for many years to come. So in September 2023, we completed yet another accretive acquisition of properties in the Central Eastern Gulf of Mexico. These fields have a solid base of proved reserves with upside potential and the ability to add production and cash flow. We funded the acquisition of cash on hand and 6 months later, these assets are exceeding their forecasted production levels.

We're in the early stages of the same type of integration process with the recent Cox acquisition. These assets were in bankruptcy, and we're spending the first part of 2024 and expecting and assessing these fields. They're located in close proximity to existing assets, and we are identifying workovers, recompletion opportunities and facility upgrades that need to be performed to increase production. We have the experience and expertise to execute a tried and true acquisition and integration strategy that will allow us to drive value from these latest property additions for our shareholders. We paid around $100 million in cash for these 2 acquisitions over the past 6 months, and we still have the flexibility and dry powder to make additional acquisitions. We will continue to generate free cash flow while paying down debt. And because we have no long-term rate commitments or near-term drilling obligations, we have the flexibility to ramp up or defer capital opportunities based on market conditions.

Now turning to year-end reserve results. I would like to point out that we continue to see positive well performance and technical revisions, which demonstrates the strength of our world-class conventional Gulf of Mexico assets. This also directly points to our ability to enhance production and our reserve base through operational excellence. For the year ended 2023, we reported SEC proved reserves of 123 million barrels of oil equivalent, which did not include the 18.7 million barrels of oil of proved reserves we acquired in early 2024. The 2023 reserves did include 4 million barrels of equivalent, positive performance revisions and an increase of 2.6 million barrels of oil equivalent due to the acquisition made in September.

While we had strong performance from the factories we can control, we did see a decrease of 36.2 million barrels of oil equivalent due to pricing revisions as we saw natural gas pricing decreased by 58% in 2022 and oil pricing declined by 17% from 2022. Additionally, we had a production of 12.7 million barrels of oil equivalent in 2023. Despite only spending $41 million on CapEx and $27 million in acquisitions in 2023, we were able to replace about 52% of our production with reserve additions. In our year-end press release issued yesterday, we showed that the reserves associated with the Cox acquisition would have added 18.7 million barrels of oil equivalent and $250 million in PV-10 on a pro forma basis to our year-end 2023 reserves. Pretty impressive numbers for the $72 million purchase we paid, and I predict these reserve numbers will continue to increase absent further price decreases.

The PV-10 value of our SEC proved reserves at year-end 2023 was $1.1 billion, approximately 41% of year-end 2022 SEC proved reserves were liquids were 30% crude oil and 11% NGLs, and we had 59% natural gas. The reserves were classified as 67% proved developed producing, 17% proved developed nonproducing and 16% proved undeveloped. W&T's reserve life ratio at year-end 2023 based on year-end 2023 proved reserves and 2023 production was 9.7 years.

So entering 2023, we strengthened our balance sheet by issuing new -- I'm sorry, that's 2024, by issuing new 2026 -- I'm sorry, 2023. We strengthened our balance sheet by issuing new 2026 senior second lien notes at par, totaling $275 million in a private offering and used the proceeds along with our considerable cash position to retire all of our 2023 senior second lien notes. This significantly reduced our interest payments, preserved financial flexibility and further improved our balance sheet. At year-end '22, the company had total debt of $693.4 million. And at year-end 2023, W&T's total debt was down 44% to $390.6 million. The total debt includes a $111.1 million balance of the nonrecourse Mobile Bay term loan. We also have nothing drawn on our $50 million secured revolving credit facility.

So yesterday, we provided our detailed guidance for 2024. In the first quarter of 2024, we had several facility and pipeline maintenance projects as well as prolonged downtime at several fields that have temporarily reduced our production volumes. We are predicting the midpoint of Q1 2024 production to be slightly better than Q4 2023. We're also predicting production to increase through time and despite only projecting to spend about $35 million to $45 million in capital expenditures in 2024, we believe the recent acquisitions will help us to offset natural decline and grow production this year.

So for the full year 2024, we expect to average 36,900 barrels of oil equivalent per day at the midpoint, which is about a 6% increase year-over-year. So we focus more on acquisitions over the last few years rather than on drilling many new wells. Our ability to maintain strong production numbers is a testament to our culture of operational excellence.

So on the cost side, our guidance for LOE and gathering transportation and production taxes includes inflationary pressures that we've seen in 2023 and expect to continue into 2024. In addition, we believe that we will have to spend additional costs to bring the former Cox assets up to our standards. With that said, we do believe that there are opportunities to reduce our operating costs, find synergies to drive lower cost long term, and we're working hard to reduce costs without impacting safety or deferring asset integrity work.

Our first quarter lease operating expense is expected to be between $77.5 million and $86 million, which reflects some of the expected inspection and upgrading work at the former Cox facilities as well as some maintenance and repair costs included with that. First quarter G&A costs are expected to be between $15 million and $17 million.

I would like to sincerely thank our team at W&T as we are well positioned to add value in 2024 and everybody has worked pretty darn hard and the results are starting to show. So even after the recent Cox acquisition, we have a solid cash position and additional liquidity that enables us to continue to evaluate growth opportunities, both organically and inorganically. We have a long track record of successfully integrating assets into our portfolio, and we continue to believe the GOM is and will continue to be a world-class basin. We do remain focused on operational excellence and maximizing the cash flow potential of our asset base.

So as the company's largest shareholder, I believe W&T is very well positioned to succeed in 2024 and beyond. Our entire 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 largest of any public E&P company.

Operator, we can now open the lines for questions.

[Operator]

[Operator Instructions] Today's first question comes from John White with ROTH Capital.

[John White, analyst]

Congratulations on the nice results. Good to see the positive reserve revisions also. You mentioned you're contemplating a deepwater joint venture similar to your previous Monza joint venture? Do you want to offer any additional comments on that?

[Tracy Krohn, executive]

Sure, John. We are, of course, going to continue those efforts. I'd like to put a multiple well package together to go forward with that, that would start with Holy Grail. That's a proved undeveloped location with -- believe it or not, a little bit of upside to it. So we have some other exploratory projects. We have another one at what we call our Cayman field that is more towards the developed side of the equation. We are, of course, mindful of our balance sheet and what we think are very good acquisition opportunities going forward. As always, that's a little bit hard to predict. But so far, we've been having good success with buying properties and those are opportunities that we would always like to pursue. But yes, the program for '24 and beyond for drilling wells will depend on putting together this joint venture as well.

[John White, analyst]

Okay. And would they be oil industry partners or more financial-type partners?

[Tracy Krohn, executive]

Yes. I think that you would see both. We put together a drilling joint venture years ago with more financial types in the amount of $361 million, and that's proven to be quite successful. So you could see a little bit of both. This will probably be a multi-hundred million dollar drilling program. So we will investigate both and see -- check the temperature on everybody and see what their tolerance is like.

[Operator]

The next question comes from Derrick Whitfield with Stifel.

[Derrick Whitfield, analyst]

Also, certainly congrats on the Cox acquisition as well. Tracy, I wanted to focus on guidance with my first question. Could you speak to the amount of shut-ins you're expecting in Q1 and perhaps provide color on where volumes could exit the year? Certainly, it sounds like a lot of things are coming into your favor towards the end of the year. But any color you could offer would be greatly appreciated.

[Tracy Krohn, executive]

Well, as you can -- as you picked up, Derrick, from the statements earlier, there's a bit of flux here. We have [ Burgo ] still shut in as a result of the Main Pass oil and gas pipeline leak that's got to show in that several million cubic feet a day. We're looking at production later on in the year exiting around 38,100 barrels of oil equivalent per day. That's kind of how we're looking at it as a function of that number that I gave you on production increase. I personally think it will be a little bit better as we get a little bit more into these assets. The bankruptcy left a lot of these fields in flux with the rapid departure of personnel and the change from Chapter 11 to Chapter 7, which Chapter 7 is forced liquidation. So some upset, we had a temporary service agreement in place that now is no longer valid because their personnel have had to depart rapidly. We've picked up a few of their employees as well. So we're catching up. I think that this is a little more chaotic than normal, but certainly not anything that we can't and won't -- and will resolve, of course. We think that it's going to be a lot better than what it looks like now, for sure. And even now, the production is still picking up. So with that, I'll just tell you to give me a few more weeks so we can get a little better handle on them, and we'll be able to give you more accuracy.

[Derrick Whitfield, analyst]

Terrific. And Tracy, I know you're still very early in your assessment, but really leaning in on the Cox acquisition. Could you offer any additional color on the measures you're taking to optimize production and cost and place any broad parameters around the degree of production and cost improvement we could see?

[Tracy Krohn, executive]

Yes. I'd really like to give you more guidance on that. Some of it has to do with old contracts that need to be resolved and -- or that were rejected rather. Well, a lot of people lost a lot of money here, and it didn't really help them very much. We've got to manage some transportation issues that we'll need to get resolved. The former owners left us rather rapidly and didn't really do a whole lot in the way of managing some of the corrosion issues. So we've been dealing with that. Nothing that I would consider to be hazardous just something that needs to be repaired, routine to repair some of these upgrades. Some of them are just valves on production vessels, and we put 1 clamp on a pipeline that had been shut in by the former operator and increased production 400 barrels a day, it was a $20,000 clamp. So some of this is pretty simple, but it takes a little bit of time. We have to get personnel coordinated around these fields from existing fields and managed transportation and logistics.

[Derrick Whitfield, analyst]

Great. And then maybe as one nonrelated follow-up. Wanted to see if you could speak to the A&D environment in the GOM present as you're clearly taking a conservative cash building position for 2024.

[Tracy Krohn, executive]

Yes, sure. Well, you're seeing a lot of mergers, not just with smaller players, but with larger players, too, notably Chevron and Hess. Hess has a lot of production in the Gulf of Mexico, too. So I see that as positive for the industry. I see this positive for this company. It's certainly indicative of investor interest in this basin as it should be. This is the second largest producing basin in the country and certainly the largest by area. We've always appreciated our ability to function in this basin. There's always another drill -- another well to drill. There's always another property to acquire. We haven't run out of enthusiasm for it. And we've been in a lot of different places. We've operated in 9 different states in the U.S. in the past, and we still keep wanting to focus in the Gulf of Mexico.

[Operator]

[Operator Instructions] The next question comes from Jeff Robertson with Water Tower Research.

[Jeffrey Robertson, analyst]

Tracy, a question just philosophically on returns. When you think about what you see with the costs to drill and complete new wells in the Gulf of Mexico across your asset base and the types of opportunities you see in the acquisition environment. Can you compare maybe the risk profile and the types of returns you think you can generate in given what appears to be your preference for acquisitions with what it might be on development drilling or greenfield drilling?

[Tracy Krohn, executive]

Sure. I think the decision for us is always risk reward based on the amount of cash we have on hand and the amount of leverage that we can apply prudently. We tend to make property acquisitions where it's available. And we'd prefer to do that. I mean, if the -- if our ability to make an acquisition is at or equal to our ability to finance and drill wells organically. And clearly, it's a risk profile that we would prefer to make the acquisitions because there's certainly a lot less risk. We know we've got a cash flow and a proven reserve base, so that's a no-brainer. Where it gets a little more difficult is when you start talking about what's exponential growth going to apply. That's more where the risk profile kind of provokes the question, do I want to roll the dice? Or do I want to spend an amount and I know I can get a certain amount of cash flow on and return. Drilling is always more risky, of course. And I've seen companies come and go and fail deciding that they were going to roll the dice and drill more wells. We certainly have the technical capability to drill in shallow water or deepwater and operate in shallow water or deepwater. We have an inventory of good drilling prospects, good exploratory prospects that would certainly attract more attention, and that's what we're going to focus on. But I don't want to do any of these things myself 100%. So we try to restrict that to around 20% to 25% participation. So that's a little bit problematic. I think part of the world is starting to wake up to our basin and understand that we have a rule of law and we have reasonable pricing parameters that we can predict. And so in regulatory, although it can appear somewhat harsh at times. We're pretty sure we're not going to get a windfall profit tax overnight that we weren't expecting. So it makes it -- takes a lot of the risk out of it when we can predict some of the more regulatory actions that could occur elsewhere in the world.

[Jeffrey Robertson, analyst]

If we think about the joint venture, Tracy, just to follow up on your comments around risk and reward. If you were able to structure a joint venture with a drilling partner, would -- I'm sorry, with another operator in the Gulf of Mexico. Would a goal of that be for W&T to contribute prospects and the partner to contribute prospects and have lessened exposure but over a broader portfolio drilling prospects over the next couple of years?

[Tracy Krohn, executive]

Yes. I mean that's an admirable goal, sometimes that happens, sometimes it doesn't. The more immediate thought process for us is to optimize that and make that occur, if that makes sense. On the other hand, we believe that the prospects that we have are pretty superior and that we have a lot of data. We've got processing, reprocessing. And I guess everybody could say, yes, our prospects are better. But our success rate in the Gulf over the last decade and almost 1.5 decades has been over 90%. So that's pretty hard to argue with.

[Operator]

At this time, we are showing no more questions in the queue. I'd like to turn the call back over to Mr. Tracy Krohn for any closing remarks.

[Tracy Krohn, executive]

Thank you, everyone. Stay tuned. There will be more to come in the next several weeks, and we look forward to presenting to you again soon. Thanks so much.

[Operator]

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