W&T; Offshore, Inc. (WTI) Q1 2019 Earnings Call Transcript

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W&T Offshore, Inc. (NYSE: WTI)
Q1 2019 Earnings Call
May. 02, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by. Welcome to the W&T Offshore first-quarter 2019 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.

Al Petrie -- Investor Relations Coordinator

Thank you, Nicole. 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 2019 fnancial 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 first-quarter 2019 earnings release that we issued yesterday for a disclosure on forward-looking statements and reconciliations of non-GAAP measures. At this time, I'd like to turn the call over to Tracy Krohn, W&T's chairman and CEO.

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Tracy Krohn -- Chairman and Chief Executive Officer

Thanks, Al. Good morning, everyone, and thanks for joining us for our first-quarter 2019 conference call. So with me today are Janet Yang, our executive VP and chief financial officer; David Bump, our executive VP of drilling, completions and facilities; William Williford, our executive VP and general manager, Gulf of Mexico; Steve Schroeder, our chief technical officer; and Jim Hersch, our vice president, geosciences, who -- and all these folks are available to answer questions later during the call. The first quarter was -- we had a 13% lower commodity price realization compared with the fourth quarter of 2018 and substantial production curtailments due to pipeline repairs and facility maintenance at three of our largest fields.

So in spite of these challenges, we've generated $56.9 million in adjusted EBITDA, and we continued to create significant free cash flow, with net cash provided by operating activities of $84.8 million and capital expenditures of $31.6 million. And note that production guidance remains the same for the full year. The first quarter of 2019, our production was 33,350 barrels of oil equivalent per day. That was down slightly year over year, primarily due to prolonged pipeline facility downtime constraints beyond what was anticipated for the quarter.

We continue to have strong liquids production with 60% of our first-quarter production coming from oil and NGLs. Despite this downtime, first-quarter production came in near the midpoint of our guidance range. In April 2019, the majority of the pipeline facility maintenance was completed. So coupled with improved well performance and continued ramp up of new wells, we've seen our production rate in mid-April increase to over 37,000 barrels of oil equivalent per day.

As you see in yesterday's release, the midpoint of our second-quarter 2019 production guidance is up about 9% from our first-quarter actual production. We have maintained our full-year 2019 production guidance that we provided in our year-end 2018 release, so just want to repeat that everybody sees production slightly down, but we expect to be at exactly what we've predicted earlier year. So for the first quarter of 2019, the average realized crude oil sales price was $58.66 per barrel and realized NGLs sales price was $20.88 per barrel. Crude differentials in the first quarter averaged roughly $3 to $4 per barrel higher-than-average WTI Cushing spot prices.

Revenues for the first quarter were $116.1 million. The lower revenue was driven by the decrease in realized commodity sales price and lower sales volumes in the first quarter. So our total first-quarter LOE came in at $43.5 million, which was in line with the prior quarter, was up from the first quarter of 2018 due to higher workover and facility cost and the increase in base LOE associated with our Heidelberg acquisition in 2018. On a component basis for the first quarter of 2019, base lease operating expenses and insurance premiums were $34.2 million, workovers were $4.8 million and facilities maintenance expense was $4.5 million.

44% of the $4.5 million facility expense for the quarter was spent on Mahogany as we performed facility maintenance to the field to maximize our free true-up time for the Mahogany field. Note that we haven't had that -- had maintenance overhaul in the last two decades. So we reported a net loss in the first quarter of 2019 of $47.8 million or $0.34 per share. Excluding primarily a $50.5 million unrealized commodity derivative loss and other adjustments, the company's adjusted net income was $6.7 million or $0.05 per share.

So turning now to operations. In the first quarter, W&T was the apparent high bidder on 15 blocks in the Gulf of Mexico, which consisted of deepwater -- eight deepwater and seven shallow water blocks in this recent Gulf of Mexico Lease Sale 252. These include blocks and Garden Banks, Green Canyon and Mississippi Canyon in deepwater and Eugene Island, Main Pass and South Marsh Island in shallow water. These 15 blocks cover approximately 73,500 acres.

And assuming all leases are awarded, we would pay approximately $3.5 million for all of the awarded leases combined, which reflects 100% working interest in that acreage. All the blocks have a five-year lease term, with the exception of one of the deepwater blocks, which has a seven-year lease term. The royalty rate eight of the blocks is 12.5%, and the remaining seven leases are at a rate of 18.75%. So of the 30 companies participated in the lease sale, W&T ranked fourth in the number of apparent high bids.

In 2018, our drilling program continued to achieve excellent result and we've carried that success into 2019. Our activity at Mahogany, Ewing Bank 910 and Virgo are primarily low-risk wells of existing infrastructure that can be drilled and put online fairly quickly, that allows for quick cash flow generation and that substantially shortens payback times and enhances rates of return. So on the Mahogany field, we brought the A-19 well online in late November of last year. As a reminder, the A-19 well logged exceptionally high-quality T-Sand pay up-dip from the T-Sand first discovered in the A-14 well.

In February, the well reached over 5,200 barrels of oil equivalent per day production, and we're continuing to perform a staged ramp up of production. In April, the well was producing over 5,900 barrels oil equivalent per day. This well is our third producer in T-Sand and has thus far shown significantly higher rates of early production than any T-Sand well drilled to date in the field. The productivity index has more than double the best prior completion in the field.

So upon completion of the planned maintenance and repair program at Mahogany, the company began drilling the A-12 sidetrack development well in mid-April. This well was previously referred to as the A-20 well and is also targeting the T-Sand. At Mahogany, in the first quarter, we performed a recompletion on the A-6 well, as well as an acid stimulation on the A-18 well in the Mahogany field. The A-6 recompletion resulted in production uplift of about 500 barrels of oil equivalent per day and the A-18 workover doubled the well's daily production rate to over 3,200 barrels oil equivalent per day.

We have a 100% working interest in all Mahogany field wells, with the exception of A-5 sidetrack, which is part of the joint venture drilling program. OK. So at the Ewing Bank 910 field, last year, we completed the South Tim 320 A-2 well that logged approximately 163 feet of net pay, which exceeded predrill estimates. We brought that well online in December from the South Timbalier 311 platform, but due to limited equipment capacity to handle vapor recovery on the South Tim 311 platform, the well was brought online at a curtailed rate of 3,400 barrels of oil equivalent per day.

The operator has resolved the issue and is continuing to ramp-up production on the A-2 well. In mid-April, the well was producing approximately 7,000 barrels of oil equivalent per day. The South Tim 320 A-3 well was successfully drilled in first-quarter 2019 and discovered two high porosity and permeability Gulf of Mexico sand zones. Operator is currently completing the two target intervals and expects first production before the end of the second quarter of 2019.

Both of these wells are in the joint venture drilling program. So at Viosca Knoll 823, the Virgo field, we drilled the A-13 well utilizing the Virgo platform rig to TD in the fourth quarter and found 77 feet of net vertical pay in the 2.4 second and 3.4 second sand intervals. The well was brought online in the first quarter of 2019, and is currently producing out of the 2.4 second zone, with the 3.4 second zone to be brought online toward the end of the second quarter. At our Mississippi Canyon 800 Gladden deepwater prospect, we're currently drilling the first exploration well in 2019.

The well is in over 3,000 feet of water with planned depth -- total depth of over 18,000 feet. The company expects to reach total depth in the second quarter of 2019. This well is also part of the joint venture drilling program. We continue to leverage our current infrastructure to have the ability to get wells drilled, completed and online in a short period of time.

The Monza joint venture is doing very well, and we have drilled a total of seven wells in that program since inception. So looking ahead to the rest of 2019, our capital program will continue to be focused on low risk, high-return projects with some exploration wells. We're proud this greater than 90% success rate we've achieved in drilling more than 40 wells since 2010. We also continue to perform highly economic recompletion and capital workovers.

Our focus is on continuing to generate significant free cash flow, which means that we are taking a measured approach to drilling while funding all of our capital expenditures with cash from operations. I'd like to remind you, our company was built and has grown through the drill bit and through acquisitions. As we implement our plans for 2019, we're looking closely at acquisition opportunities. The current environment for acquisitions in the Gulf of Mexico is as good as I've ever seen, and we intend to actively pursue those opportunities that meet our criteria.

We have a formula that's worked for over three decades, and I've mentioned several times in the past. We look for properties with good cash flow upside that we can achieve with the drill bit and the potential to increase near-term cash flow through workovers, recompletions and/or facility upgrades. So as in the past, we're clearly focusing on cash flow positive projects, whether that's through the drill bit or whether that's making acquisitions. That's very important to us and has probably been our most notable consistent accomplishment.

We will continue to explore creative and accretive ways to fund, finance acquisitions. And that may include additional joint venture deals, partnering with other companies who are using excess free cash flow. We've been pleased with the structure of our drilling JVs since it was established early last year. We think there are ways to use similar structures for acquisitions and utilize private equity or other types of third-party equity investments that don't simply involve using W&T shares.

And of course, we also have the ability to use debt and equity within W&T to fund acquisitions as it makes sense to do so and we will stay mindful and minimize solution to shareholders, while maintaining prudent debt ratios. I would remind you that I'm the largest shareholder, so that's very important to me as well. We're focused on maintaining our strong balance sheet, delivering operationally, incorporating accretive acquisitions and creating long-term value for our shareholders. We're well-positioned to continue to focus on growth, and we believe Gulf of Mexico is an basement in which to achieve that growth.

So with that, operator, we can open the lines for questions.

Questions & Answers:


Operator

[Operator instructions] And your first question comes from the line of John Aschenbeck.

John Aschenbeck -- Seaport Global Securities LLC -- Analyst

So for my first one, I wanted to talk about the recent lease sale where you picked up 15 blocks here recently. Certainly, a non-negligible amount of leasehold. I know it's extremely early at this point, but I was just wondering is there anything you can share with us in terms of possibly a prospect or concept on one of those leases that has your interest?

Tracy Krohn -- Chairman and Chief Executive Officer

Yes. There's several of them, John. Little bit early to give you too much data on -- or not enough data. We've got seismic data that entices with regard to those leases.

Some of them are adjacent to existing production. Again kind of a common pattern of where they are close to existing infrastructure, close to step that we already own, things that we already know about. So again not so much greenfield exploration as lower risk type of exploration.

John Aschenbeck -- Seaport Global Securities LLC -- Analyst

OK. Got it. Appreciate that. So for my second one, I wanted to circle to M&A.

And in your prepared remarks, you mentioned the environment looks as good as you've ever seen it, and I would certainly agree with you there. But I was wondering as larger operators have started to take notice that the environment is pretty attractive as well, and you have a couple larger operators granted substantially larger indicating that the acquisition environment looks strong. I was just curious, do those parties in any way kind of compete at the assets you're looking at? Or are they just maybe looking at something with significantly more scale than what you'd be looking at? I was just curious how that whole dynamic would affect W&T.

Tracy Krohn -- Chairman and Chief Executive Officer

Yes. Well, I've dealt with this issue for 35 years. There's always competition wherever you go. like to complete.

That's one of the things that I think we do very well as a company. We've been doing a great deal for a long time. We're not going to get it all. We usually get what I think is our fair share, and I don't know exactly how to define that yet, but usually the deals that we do are quite accretive.

And I expect them to be cash flow positive. So sometimes, it's the smaller deal. Sometimes, it's a much larger deal. We've done deals in over $1 billion in the past.

So I think that we'll see some fairly large deals come up in the near future. And I think that the idea of W&T competing for those is, I think, that that's one of the things that we believe we can do. And I've tried to outline without specifically giving details about how that could be financed. And I don't expect to significantly change any debt ratios in order to do that.

John Aschenbeck -- Seaport Global Securities LLC -- Analyst

OK. Got it. Understood. Tracy, I appreciate all that information.

Operator

[Operator instructions]

Tracy Krohn -- Chairman and Chief Executive Officer

OK. Well, I notice that there's about 25 other today mornings -- this morning, there's about 25 other earnings conference calls for just oil and gas companies. So I'm sure everybody's got their hands full. We're going to go ahead and turn it back to the operator, and we appreciate your attention.

And we'll have another conversation in the not too distant future. Thank you very much.

Operator

[Operator signoff]

Duration: 19 minutes

Call participants:

Al Petrie -- Investor Relations Coordinator

Tracy Krohn -- Chairman and Chief Executive Officer

John Aschenbeck -- Seaport Global Securities LLC -- Analyst

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