Earnings Call: Q1 2021

May 5, 2021

Ladies and gentlemen, thank you for standing by. Welcome to the W and T Offshore First Quarter 2021 Conference Call. During today's call, all parties will be in a listen only mode. Following the company's prepared comments, the call will be opened for questions and answers. During the question and answer session, we ask that you limit your questions to 1 and a follow-up. You can always rejoin the queue. 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. Thank you, Eileen. And on behalf of the management team, I would like to welcome all of you to today's conference call to review W and T Offshore's 1st Quarter 2021 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 and 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 Q1 2021 earnings release that we issued yesterday for disclosures on forward looking statements and reconciliations of non GAAP measures. At this time, I would like to turn the call over to Tracy Krone, our Chairman and CEO. Thank you, Al. Good day to everyone and thank you for joining us for our Q1 2021 conference call. With me today are Janet Yang, our Executive Vice President and Chief Financial Officer William Williford, our Executive Vice President and General Manager, Gulf of Mexico Steve Schroeder, our Senior Vice President and Chief Technical Officer and Stuart Op Kirchner, our Director of Geosciences. They are available to answer questions later during the call. So 2020 was an extraordinary and difficult year for energy companies, but W and T proactively took measures to reduce our cost Capital spend while we maintain free cash flow generation. Those measures have carried into 2021 and with an improving global outlook, we were able Meaningfully increased our free cash flow and adjusted EBITDA in the Q1. Operationally, we performed quite well. We exceeded guidance in several areas. We were above the midpoint in production, below the midpoint in LOE and below the low end of guidance for G and A. As we look to the remainder of 2021, under the strengthening commodity price conditions, we are forecasting strong free cash flow generation And we will continue to evaluate additional accretive acquisitions and opportunistically pay down debt. Our focus remains on operational excellence and free cash flow generation. This means that we will continue to take a measured approach to drilling, while funding our capital expenditures with available cash And cash generated from operations, we expect to use our dry powder for acquisitions. We do have significant flexibility to adjust our capital spending up or down at any time since we have no long term rig contract commitments In the Q1 of 2021, we spent just $1,600,000 of our $30,000,000 to 60,000,000 2021 Capital Budget. As we mentioned in our year end call, our 2021 capital program is weighted toward the second half of the year And the corresponding production uplift will be more impactful in 2022. Turning to our operational and financial results, we had good results in the Q1 of 2021 as we have expanded margins and operated efficiently in an improved commodity price environment. We saw significant increases in our free cash flow and generated $40,000,000 in free cash flow for the Q1 of 2021. That's a 182% increase over the prior quarter. Adjusted EBITDA was higher by 63% compared to the Q4 of 2020 and totaled $57,600,000 in Q1 of 2021. This was due to higher commodity prices and increased production volumes. We reported a small net loss of $700,000 or a share, but excluding primarily a $16,300,000 unrealized commodity derivative loss, our adjusted net income was 15 $9,000,000 or $0.11 per share. So turning to production, for the Q1 of 2021, W and T produced 39,657 barrels of oil equivalent per day or 3,600,000 barrels of oil That's an increase of 4% compared to 38,261 barrels of oil equivalent per day in the Q4 of 2020. Production was above the midpoint of our guidance due to better run time efficiency despite some February downtime associated with the winter storms. Total liquids production increased slightly to 50% of production in the Q1 of 2021. Looking ahead to the Q2 of 20 We are forecasting our production to be up modestly from the Q1 and averaged 38,500 to 42,500 barrels of oil equivalent per day. Our Our operations team is doing a good job of maintaining our production despite not having any new wells coming online until late this year. Our full year 2021 production guidance range remains at 38,000 to 42,000 barrels of oil equivalent per day. For the Q1 of 2021, our average realized sales price per BOE increased about 35% compared with the Q4 of 2020, With meaningful increases in pricing for oil, NGLs and natural gas. Our first Quarter 2021 average realized crude oil sales price increased 32 percent to $56.73 per barrel from 42 point $8.4 per barrel in the Q4 of 2020. So our NGL sales price was up 47% for the Q4 of 2020 to $23.88 per barrel and our natural gas price was up 27% to 3 point $0.35 per Mcf. So excluding the effect of hedges, revenue for the Q1 increased quarter over quarter by 33% to $125,600,000 driven by higher realized pricing and increased production. So despite the improved Pricing environment, our focus will remain steadfast on capital discipline, operational excellence and most importantly free cash flow generation. Now turning to costs. With the sharp downturn in prices in the first half of twenty twenty, we quickly implemented several successful initiatives reduced our lease operating expenses. We swapped our higher cost contract personnel with full time employees, reduced transportation By lowering the number of boats and helicopters needed through operational efficiencies, cut workover and facilities costs through vendor and supplier cost reductions and increased our focus on projects that maintain and optimize production. We've not reduced our commitment to safety, Operational compliance or environmental protection with any of these actions. Combination of those proactive cost reduction measures along with reduced expenses From certain fields no longer on production and fewer facility projects and workovers resulted in LOE in the Q1 of 2021 being at the low end of guidance and down 2% compared to the Q4 of last year. G and A was $10,700,000 in the Q1 of 2021, which was below the low end of our guidance range due to lower incentive compensation and payroll expenses and employee retention credit associated with the CARES Act. While we were below our guidance range, G and A costs were up related to a settlement with the Bureau of Safety and Environmental Enforcement referred to as the BSEE that resolved some pending civil penalties Issued by that agency. Looking at cost for the balance of 2021, we reduced our full year G and A guidance of $49,000,000 to $54,000,000 from $51,000,000 to $56,000,000 as we continue to focus on cost containment. We did increase our annual LOE guidance to $158,000,000 to $174,000,000 from $153,000,000 to $169,000,000 due to increased vessel mandated costs, Higher hurricane related repair costs remaining from last year and costs associated with returning some fields to production that were previously shut in. So turning to the balance sheet. In 2020, we were able to reduce debt considerably and at a significant discount. In the Q1 of 2021, we continued to pay down our debt Increase our liquidity position. We have remained true to our strategic vision that has guided us for nearly 40 years to maximize value of our premier assets that have strong, stable production and generate solid free cash flow. We used a portion of our strong free cash flow in 2021, paid down our credit by $32,000,000 in the Q1. Our revolver balance is now at $48,000,000 Balance on our senior notes stands at $552,500,000 compared with $625,000,000 at year end 2019. This positive proved that one of the keys of our ongoing success has been our ability to generate positive free cash flow and to use that free cash wisely to fund accretive acquisitions and pay down debt. At March 31, 2021, our total liquidity stood at $91,000,000 compared to comprised of $53,400,000 cash and 137 $6,000,000 availability under our revolving credit facility. Total long term debt including $48,000,000 in revolving credit facility borrowings is $593,800,000 net of unamortized debt issuance costs. At January 2021, W and T's Bank Group completed its regularly scheduled semiannual borrowing base redetermination And the borrowing base was set at $190,000,000 We remain in compliance with all applicable covenants of our credit agreement And the 2nd senior second lien notes indenture. We believe we continue to have a strong balance sheet and have more than sufficient liquidity to meet our needs going forward and we continue to look at good opportunities that may arise. Now turning to operations during the Q1 of 2021, We performed one workover and one recompletion that in total added approximately 400 net barrels of oil equivalent per day to production. Workovers and recompletions are good near term projects that help to abate natural decline and we plan to continue to perform them as they are offering some of the best economic projects in our portfolio. The successful COTA well that we drilled last year is Currently in the development phase of the project and is expected to be on production in late 2021. We've built a tremendous group of assets Through organic growth and acquisitions, despite the higher commodity price environment, we continue to look at acquisitions that meet our criteria, especially those that provide a solid foundation for our ability to generate free cash flow. We've integrated 2 strong acquisitions over the past 18 months And we look to those types of opportunities moving forward. We believe that market conditions in the Gulf remain very favorable for accretive acquisitions Our improved balance sheet and strong cash flow generation have positioned us to actively pursue these opportunities. Now before I close out the call, I'd like to discuss our inaugural ESG report that we issued last month and is posted on our website that discloses 3 years of relevant ESG data on the company. Since day 1, we've been committed to developing and producing oil and gas resources in a safe and environmentally responsive manner, While meeting or exceeding all regulatory requirements, these core values have guided our success and provided the The foundation for W and 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. We believe that every employee has a responsibility to ensure that we operate with the highest regards to our ESG. I believe that success is achieved with empowerment. With that in mind, we've empowered our management to allocate resources and tools necessary to create a working environment focused on accomplishing our ESG objectives. We have a multi Disciplinary ESG Task Force that contributes to creating our initial ESG report Those folks have the ongoing responsibility to monitor our adherence to our ESG standards And to formally communicate their findings on to me and our Board and to suggest opportunities for further improvements. We look forward to keeping you apprised of our progress and we remain committed to empowering America safely in a more sustainable manager for another In closing, the rising pricing environment presents many opportunities for W and 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 constantly look at any that can meet our stringent criteria. Our disciplined approach to growth has allowed us to navigate many cycles in the past. We remain opportunistic and we look for ways that we can add value to W and T through control Costs and closely managing our capital spending, we remain focused on generating free cash flow by operating efficiently and executing our long term strategy to maximize shareholder value. Our management team's interests are highly aligned with those of our Shareholders given our 34% stake in W and D's Equity, which is one of the highest of any public E and P company. This alignment of interest ensures that we are truly incentivized to maximize shareholder value and mitigate risk. With that, operator, we can now open the lines for questions. We will now begin the question and answer session. Our first question today will come from John White with Roth Capital. Good morning. I wanted to offer congratulations not only on the results Thanks, John. With crude back up in the $60 range, how are the fees and Expenses for the boats and the helicopters? No, we're running about level with where we were. I'm not seeing a great deal of inflation in those costs at this point. Okay. Thanks. I will pass it on and perhaps come back. Sure. Our next question comes from Michael Scialla with Stifel. Good morning, everybody. Tracy, I was a little surprised you had some sequential growth from Q4. You mentioned the better run time. I don't know if you had any Numbers to go with that compared to what the run time was in the Q4? And then I know you mentioned last quarter, you had A little bolt on acquisition, just wondering if that contributed to the growth at all. And also just kind of wondering where the base Line rate is right now, so I guess kind of 3 questions rolled into 1. Well, let me To answer the quarter over quarter question, I don't have those figures in front of me. Obviously, it was up a little bit, But partially because of weather conditions and also The bolt on, I am sure, contributed some. We had some pretty awful weather in the 4th quarter as well. I'm sorry, in the Q1 as well. So that was disturbing to us. And I'm sorry, Michael. We have 2 questions. Pardon me. No, you answered 2 of them. I was just wondering on the Base decline rate, if you had a sense of where that is right now? Yes. I mean traditionally in the Gulf of Mexico, We're normally about 5, but our reserve strength since the norm This Rp is about 9% at this point. So that's about a 10% to 15% Decline rate. One of the things that I would point out on that that I think is very important to note And I do this in our normal presentations when we go to conferences and things like that is I pull out a slide Of our probable reserves and how much probable reserves and CapEx excuse me, How much cash flow we generate from probable reserves without having to spend any CapEx. So you're seeing some of that effect over a long period of time It reduces that decline rate and we don't get credit for those barrels as a function of our proven reserves, of course. But the cash flow comes in quite handy. So as time passes, we increase our reserves in Some of these reservoirs that have that probable reserve component to them. So That's an important part of our cash flow and reserve picture going forward. Yes. And then along those lines, I mean, you didn't spend hardly much at all in the Q1 and still had some growth. I was wondering, 2nd quarter CapEx, can you should we anticipate something similar to Q1 or is there going to be a little More on the workover and recompletion activity? No. I believe you'll see something go up and also we're working On the Kota completion as well. So you'll start to see some effects on that in 2nd and third quarters as well. Okay. And then just lastly, I wanted to ask, you talked about the ESG report. Just wondering if you see any potential economic opportunities coming out of that on the environmental side? And Maybe along those lines, if you had any thoughts, I don't know if you do on Exxon's plans for carbon capture in the Gulf region? Well, that's a fairly general question. The short answer is yes, I do see opportunity. 2nd short answer is, I'm not trying to compete with Exxon. That's good to hear. They're pretty tough competitors. But I do see possibilities in for potential sequestration in the Gulf of Mexico. Good to hear. Thanks, Tracy. Thank you, sir. Our next question is a follow-up from John White with Roth Capital. Well, In your public comments, you've made it no secret that you're actively looking for acquisitions. And With the way you're setting up the balance sheet that lines up with that objective. And I realize you probably can't talk too much about it, but want to just touch on deal activity and deal flow? Sure, John. Thanks for the question. Yes, we are actively involved in several data Right now, I expect this to be a good year for acquisitions. I can't really provide you with details. I am sure you are Sensitive to that as well. But I'm very confident the balance sheet is setting up nicely. I would point out that and I think it's very important to note this. I mean, we're We do understand the value in protecting this balance sheet and making it stronger going forward. So anything that would be of size that would really have a significant impact on us, I think you would expect to see Potential of making sure that or you would see the company taking Measures to protect our financial covenants and you might see some issuance of Equity in that case. Well, that was more detailed than I was expecting. So thank you very much. Well, you always ask pretty good questions, John. So I do appreciate it. But When you think about doing larger acquisitions, it often makes sense to sell a little bit of equity along with it. Thanks again. Thank you, sir. Our next question is a follow-up from Michael Scialla with Stifel. Yes. I just wanted to see if you were you talked about the Cota well coming on toward the end of the year. Are you still thinking kind of 3 to 4 new drills in the second half? And if so, anything you can say there as where those might be, I understand if it's too early or if you don't want to say for competitive reasons, but just anything you can say about those would be of interest? Yes. I haven't commented on additional wells yet, Michael, but certainly with Coda, One of the good things about that completion and that project is that we focused A lot on the long lead items and that one of the things we did, we were able to purchase an older Platform and we are in the process of refurbishing that now. So That's accelerated the completion and placement of that platform in the Gulf along with the Jack and then the production deck. So pipelines have tested up in good shape. So We're excited to be going forward. So we're just working on refurbishing the platform at this point in time. So I'm quite confident we'll have that out before the end of the year. Any sense of the expectations if that well turns out to be what you hope in terms of what it Could do for your production heading into next year? Yes. I think that's going to be a really nice completion. One of the things that we Saw in the reserves looking at the seismic as we thought about it, the fault complex In that area, tends to occlude the seismic signature a little bit. So we've got a bright spot that in one of those sands that actually the deeper sand that Didn't really light up the entire area in the fault block, but we think it's just because that signature has been included As a result of the faulting. So we expect to see bigger reserves than what we would What the proven reserves would indicate. Very good. Thanks, Tracy. Thank you, sir. This concludes our question and answer session. I'd like to turn the call back over to Tracy Krone for any closing remarks. Well, thank you very much operator and thank you all for listening today. I'm sure we'll be back in touch with more news as we run through the quarter and into next quarter. Thanks so much.