W&T Offshore, Inc. (NYSE:WTI)

Q2 2017 Earnings Conference Call

August 4, 2017, 10:00 AM ET

Executives

Lisa Elliott - IR

Tracy Krohn - Chairman and Chief Executive Officer

Thomas Murphy - Senior Vice President and Chief Operations Officer.

Daniel Gibbons - Senior Vice President and Chief Financial Officer

Stephen Schroeder - Senior Vice President and Chief Technical Officer

Analysts

Richard Tullis - Capital One Southcoast

Aloke Agarwal - Phoenix

Operator

Greetings and welcome to W&T Offshore Incorporated Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host for todays call, Lisa Elliott. Thank you. You may begin.

Lisa Elliott

Thank you, operator and good morning, everyone. We are glad to have you join us for W&T Offshore's conference call to review the financial and operational results for the second quarter of 2017.

Before I turn the call over to the Company, I would like to remind you that information recorded on this call speaks only as of today, August 4, 2017 and therefore, time-sensitive information may no longer be accurate as of the date of any replay. Also, please refer to the Companys second quarter of 2017 financial and operational results announcement that WT released 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 Mr. Tracy Krohn, W&T's Chairman and CEO.

Tracy Krohn

Thanks, Lisa. So, good morning, everyone and thanks for joining us today. With me this morning is, Tom Murphy, our Chief Operations Officer, Danny Gibbons, our Chief Financial Officer and Stephen Schroeder, our Chief Technical Officer as they will be available to answer questions later on during the call.

So, before we review our second quarter results, Id first like to update you on the Ocean Energy Management issue which we expect to have completely resolved in a few weeks. On June 28, the BOEM filed a Motion with the Department of the Interior to rescind its four orders issued in 2016 that instructed us to provide additional supplemental bonding of $260.8 million. And on June 31 excuse me July 31, the DOI demanded the orders back or excuse me remanded the orders back to BOEM which is the first important step to the BOEM reversing or rescinding the bonding requirements.

So we anticipate that sometime this month necessary steps will have been taken to allow the BOEM to rescind the orders. When this does occur, we will make an announcement accordingly and hopefully put this behind us. So we are very pleased with both our financial and operational results in the second quarter. Production was in line with our expectations and was up modestly from last years second quarter and from the first quarter of this year.

We produced 3.9 million barrels of oil equivalent or 43,848 Boe per day. Oil and liquids represented about 58% of production which was also up slightly. Undoubtedly, weve continued to drive down our lease operating expense, or LOE rather which declined $5.1 million or 14% compared to last year and down $8.6 million or 22%, compared to the first quarter of this year.

Weve been very successful at reducing our base LOE for the last two years. So our base LOE which does not include variable operating cost such as insurance premiums workovers cost and facilities maintenance costs was $26.7 million in Q2 2017 compared to $30.7 million in Q2 of last year and $34.5 million in Q2 2015.

By driving down base LOE, weve greatly improved our operating margins. So in addition to managing our base LOE down, which weve also been able to significantly reduce our insurance premiums. Most variable element of our operating cost is our workover faculties and maintenance expenses which were much lower in the second quarter.

As a result, our LOE was well below our guidance for Q2. We may see an increase in this cost during the third quarter, but this will be somewhat weather and storm dependent because absence storm downtime weather is normally pretty good in the third quarter. So the better the weather offshore, the more work we can get done.

Regardless, we are projecting a very good operating expense outcome for the full year with the midpoint of our guidance at a $157 million for 2017, which is down a full $12 million from our expectations in guidance at the beginning of the year.

Our estimated production volumes for the third quarter include an allowance for unexpected storm and weather-related downtime of about 3,000 Boe per day. Additionally, we had anticipated that 12 million cubic feet per day recompletion of higher than 22, and oil is only generated at a rate of 2600 Mcf per day.

Third quarter production is predicted is projected to be somewhat lower than our second quarter volumes before ramping back up. In the fourth quarter, with the 87 wells behind of these other wells, will have an impact on our production. We believe this to be a conservative estimate of our production for the rest of the year.

The combination of slightly higher production volumes in Q2 along with a much reduced LOE resulting in EBITDA margins that we havent seen since oil prices were more than twice what they are now. In the second quarter, we generated adjusted EBITDA of $72.6 million, up 31.8 million over the same period in 2016, and an adjusted EBITDA margin of 59%, up from 41% in the same period last year.

So excluding special items, our adjusted net income was $31.1 million, and our earnings per share were $0.22 per share. We have clearly turned the corner this year and are generating solid bottom-line results. Our mid-year 2017 SEC proved reserves or 1P was 74.4 million barrels oil equivalent of which 56% was liquids, up slightly from the year end 2016.

The increase in proved reserves is more than sufficient to replace production proved developed producing reserves increased almost 6 million barrels oil equivalent or 13% compared to year end 2016. The present value of our reported SEC proved reserves discount at a 10% was $955 million or a 27% increase from $754.9 million at year end 2016 and thats due to upward revisions of previous estimates and higher average prices.

We continue to offset most of the natural production declines or asset base, so a substantial portion of this comes from our Mahogany Fields. In April at Mahogany we placed the A-16 well on production which reached a peak production rate of 1625 barrels of oil equivalent per day, thats about 83% oil.

At the end of the second quarter, we completed the A-8 well which is still on completion full back and we expect to in a position next quarter to talk about the A-8 well reserves.

Most of the excuse me both of these test wells were lower cost and low risk wells drilled to more fully exploit the T-sand. That continues to be an amazing another source and the main producer of Mahogany. To-date, the T-sand has contributed approximately 75% of Mahogany Field Q production of almost 45 million barrels of oil equivalent.

So our next Mahogany well, the A-17 is targeting the deeper T-sands for testing and hopefully expanding the further limits of that sand in the field. Operations have recently commenced on the oil and we are looking forward to seeing these well results which we expect in the fourth quarter.

So in addition to the primary T-sand to our A-17 holds additional opportunities with some other interesting potential for stacked pay above the deeper T-sand. The A-17 could be a high impact well for the company with the potential to materially expand the Mahogany field volumes and value. It is possible that the P-sand could prove to be an even larger and more liquid reducer than the T-sand.

So assuming success, the A-17 well could be on production during November and we expect it to make a meaningful contribution to our year-end production exit rates. So as a reminder, our A-18 well at Mahogany was completed in the T-sand and placed on production in mid-January of 2017.

So that well reached the peak initial production of around 5100 barrels of oil equivalent per day and cumulative production so far has already exceeded three quarters of a million barrels of oil equivalent production since it came on line.

The Mahogany Field 2 reservoir was the primary contributor to the meaningful increase in our mid-year 3P reserves with a 48% increase in volumes or 80 million barrels oil equivalent and a 73% increase in value or $1.3 billion from year end 2016. This significant appreciation of 3P reserves is an indication of upside potential if the nominal values exists for this field.

From the Ship Shoal area, we have mobilized the platform linked to our Ship Shoal 300 Field to commence drilling the B-5 well. This seismic led us to map some strong amplitude features in multiple stacked pay intervals in an undrilled fault block, very close to some excellent offset production wells in the field.

Assuming the B-5 well is successful, wed expect to have it on production in the October, November timeframe. W&T operates this well with a 79% working interest and we expect wells with cost of about $8.4 million to drill and complete. So in line with our project selection and hydrating criteria, we expect this well to provide fast payback of under a year and a half.

The well holds the potential for a significant stacked pay with upside cases realized and can trigger a follow-up of the further increase reserves and value. And, we assume we would in that case, we will drill the next well. So we recently added two relatively low risk exploration wells for 2017 drilling program with one at South Timbalier 224 and another at Main Pass 286.

The well at South Timbalier 224 is a shelf-exploratory opportunity located in 170 feet of water near existing infrastructure which is expected to spud in the fourth quarter. W&T operates and holds a 39% working interest, if successful, the South Timbalier 224 well can be tied back to any number of by existing production platforms and placed on production quickly and hopefully cost-effectively and they also spur additional follow-up drilling opportunities on our acreage.

The well at Main Pass 286 is also an excellent exploratory shelf. This is an open water location. It wont be drilled off with the platform. So its 300 feet of water that is near existing infrastructure owned and operated by W&T. Again the prospect exhibits strong seismic amplitude features helping to derisk the opportunity. Drilling will likely begin in the fourth quarter of 2017 and W&T holds a 100% working interest in the prospect.

So, as we previously mentioned, weve planned to commence our Phase 2 drilling program in our Ewing Banks 910 Field area which follows our very successful Phase 1 drilling program when we drilled and completed two successful wells about a year ago from our Ewing Banks 910 platform.

Phase 1 wells have contributed to the increase in production in the field. Phase 2 is scheduled to begin in the fourth quarter. We will include two new low risk exploration wells which are planned to be drilled and produce in the South Timbalier 311 platform.

These are both low-risk, stacked pay prospects that can be put on production quickly reducing cycle time and advancing project economics. The Viosca Knoll 823 "Virgo" Field, we have a two to three well program planned to commence later this year with production contributions expected in 2018.

So these low-risk exploitation wells with strong risk reducing seismic attributes coupled with nearby well control and logs, especially essentially have good adding place. These wells can be drilled from the existing platform and can be brought online again relatively quickly.

Weve made great progress and our amendment program over the last few years is assumingly complete all the projects planned for 2017. ARO expenses next year could drop to around the $10 million mark from around $80 million this year. So our total liquidity was $255 million on July of 26, 2017, that included a cash balance of $105 million.

So as we indicated in the last quarter, compared with the quality of solid growth opportunities in the Gulf of Mexico right now we will review in a number of strategies to find opportunities to enhance our growth prospects.

As we mentioned previously that we have engaged agency folks to help us create a drilling and acquisition fund. We are gaining traction in this process and expect that positive news in the not too distant future.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Richard Tullis with Capital One. Please proceed with your question.

Richard Tullis

Hey, thanks, good morning everyone.

Tracy Krohn

Good morning, Richard.

Richard Tullis

Tracy, it sounds like good news potentially on the way from the BOEM. Once that order would be rescinded regarding the supplemental bonding, where do you expect total bonding cost, say in 2018 to be versus what it is currently? Any change there?

Tracy Krohn

No, no change. We might actually see a reduction in it.

Richard Tullis

Okay, good, good. From a follow-up, WT has done a good job over the years of drilling the sub-salt wells at Ship Shoal, do you see the opportunity to kind of transfer that success and knowledge to other fields where you have sub-salt prospects?

Tracy Krohn

Absolutely.

Richard Tullis

Could you elaborate a little bit? Do you expect to start drilling some of those, say, in 2018? And where might those be?

Tracy Krohn

We are a little bit variable on the timing right now as we get a little bit close to that, I will be able to reveal that to you. We are keeping that a little closer to this right now.

Richard Tullis

All right. Thanks a bunch.

Tracy Krohn

Thank you, Richard.

Operator

Our next comes from Aloke Agarwal with Phoenix. Please proceed with your question.

Aloke Agarwal

Tracy, Danny, great quarter all around. Now that, now levels are back up, how are you guys thinking about the capital structure? You have these 2019 bonds coming due and in the past, you had talked about an exchange. I was just curious what you think here?

Tracy Krohn

I dont know exactly. I dont recall exactly what I talked about in regard to an exchange on the 2019 bonds, I believe thats exactly correct. I expect to generate enough cash to paying off.

Aloke Agarwal

Excellent. Thats good news and just as a quick follow-up, on the last call, I believe you had talked about 2017 plugging an abandonment coming in a little bit lower. Its not still the case?

Tracy Krohn

Yes, I think so. Hopefully, we dont have too many storms out here and we should be pretty close to our estimate if we have some more storm activity then naturally that will get - that will be a little bit volatile, it will be deferred into the following year.

Aloke Agarwal

And my last question is, just on the tax refund, the $69 million, is that expected to come in next year?

Tracy Krohn

Yes.

Aloke Agarwal

Thanks for taking all the questions. Good luck

Tracy Krohn

Good.

Operator

We do have another question. Its from Richard Tullis with Capital One. Please proceed with your question.

Richard Tullis

Yes, Tracy, I thought I jump back in.

Tracy Krohn

Sure.

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W&T Offshore's (WTI) CEO Tracy Krohn on Q2 2017 Results - Earnings Call Transcript - Seeking Alpha