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W&T Offshore, Inc. (NYSE:WTI)
Q3 2019 Earnings Call
Oct 31, 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 third-quarter 2019 conference call. [Operator instructions] This conference call 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 manager.

Al Petrie -- Investor Relations Manager

Thank you, operator, and on behalf of the management team, I would like to welcome all of you to today's conference call to review W&T Offshore's third-quarter 2019 financial and operating 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 third-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 would like to turn the call over to Tracy Krohn, W&T's chairman and CEO.

Tracy Krohn -- Chairman and Chief Executive Officer

Thanks, Al. Good morning, everyone, and thank you for joining us for our third-quarter 2019 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 chief technical officer; and Jim Hersch, vice president Geosciences. We're all available to answer questions later during the call.

So before I discuss our strong third-quarter earnings, I'd like to elaborate on our continued strategy to use free cash flow and our good balance sheet to purchase offshore asset. So as we've outlined in the past, we have a procedure for making acquisitions in the Gulf of Mexico. First thing we look for, properties that have cash flow and a good reserve base. Second thing we look for, properties that we can enhance with the drill bit.

And then the last thing we look for, are workovers, recompletions and facility upgrades that we can do to increase near-term cash flow. The answer to all those things are positive, and those are properties that we want to pursue assets that we want to pursue. So it's important to note that we've built our success by focusing on cash flow positive projects, whether that's with the drill bit or whether that's making acquisitions or both. We use the cash we generate to fund drilling and make more acquisitions to consistently grow value.

So on that note, on August 30, 2019, we closed the shallow water Gulf of Mexico Mobile Bay acquisition for $167.6 million. This is an accretive acquisition that included working interest in nine shallow water producing fields and related operatorship, as well as offshore and onshore facilities and infrastructure. W&T is now the largest operator in the Mobile Bay area. These low-decline assets are free cash flow positive and adjacent to our current operations, thereby providing us the opportunity to recognize increased scale, rationalize operations and capture cost efficiencies to further grow cash flow.

We also have the opportunity for further growth in reserves from potential field-life extensions with little additional capital, as well as through drilling and facility upgrade opportunities. So at the beginning of the year, I told you that we were looking closely at acquisition opportunities and that the current environment for acquisitions in the Gulf of Mexico is as good as I've ever seen it. We have executed a great transaction in 2019, and the market remains one of the best I've ever seen. We will continue to actively pursue any opportunities that meet our criteria and are accretive to W&T.

So turning to our third-quarter results. We're pleased with our performance, in particular, with the increases in production, closing of the Mobile Bay acquisition and our organic drilling success. We've maintained strong adjusted EBITDA of $72 million despite a weaker pricing environment, while investing $30.3 million in capital expenditures, excluding acquisitions, and maintained an active drilling program in the GOM with four rigs running. This is very important as we continue to create significant value by generating over $40 million more of adjusted EBITDA versus our capex.

One of the pillars of our success is our ability to generate positive cash flow. So in the third quarter of 2019, our production increased 17% to 41,149 barrels of oil equivalent per day or 3.8 million barrels of oil equivalent compared to the second quarter of 2019. This included one month of production from our new Mobile Bay assets. Total liquids production comprised 53% of production in the third quarter of 2019.

Production for the first three quarters of 2019 were within production guidance despite non-operated and third-party downtime issues, the impact due to weather, as well as facility downtime. For the fourth quarter of 2019, W&T's production guidance is expected to be between 49,300 and 54,500 barrels of oil equivalent per day, which includes a full quarter of production at Mobile Bay. For the third quarter of 2019, prices declined for oil, NGLs and natural gas. The average realized crude oil sales price was $59.24 per barrel, with realized NGL sales price of $15.45 per barrel and natural gas price of $2.23 per Mcf.

Crude differentials in the third quarter averaged about $2.90 per barrel higher than average WTI Cushing spot prices, which reflects increased demand for GOM oil production for coastal refineries. Revenues for the third quarter declined quarter-over-quarter slightly by about 2% to $132.2 million. Despite higher sales volumes, revenues decreased slightly due to the decline in realized commodity sales prices. So our third-quarter LOE came in at $47.2 million, which was below our guidance range, primarily due to lower workover costs and non-operated facility maintenance expense, resulting from delays in the timing of planned projects.

On a quarter-over-quarter basis, LOE costs were up due to additional costs associated with the Gulf of Mexico Mobile Bay acquisition. Our G&A cost also came in lower than guidance. Yesterday's release includes our updated production and cost guidance for the balance of this year. So we reported net income in third-quarter 2019 of $75.9 million or $0.53 per share, which includes a non-cash tax benefit of $55.5 million or $0.39 per share, primarily due to the reduction of a valuation allowance previously recorded against net deferred tax assets.

Our adjusted net income was $18.5 million or $0.13 per share. So at September 30, we had total liquidity of $179.5 million, which was comprised of $41.7 million in cash and cash equivalents and $137.8 million of availability under our $250 million revolving bank facility. We utilized our credit facility to fund $150 million of the Mobile Bay acquisition cost at closing, then subsequently paid the revolver down $45 million before the end of the quarter. In the third quarter, we received a cash refund of income taxes, totaling $16.9 million related to the carryback of NOLs in 2012 through 2014.

We received an additional $34.9 million in refunds due in early October, and there is also a $2 million refund remaining due. Turning now to operations. We continue to have strong results via the drill bit. At our Mahogany field, we followed our recently successful A-19 well, targeting the T-Sand with the Ship Shoal 359 A-6 sidetrack, which is a piece in completion.

The A-6 sidetrack was successfully drilled in the third quarter and will be brought online in the fourth quarter of 2019. At the Ewing Bank 910 deepwater fields, last year, we completed the South Tim 320 A-2 well that logged approximately 163 feet of net bay, which exceeded pre-drill estimates. We brought that well online in December, and in late June, the well was producing at a rate of approximately 7,100 barrels of oil equivalent per day. The South Tim 311 A-3 well was successfully drilled in the first quarter of 2019 and discovered two high-quality sands.

The operator completed the well in the third quarter of 2019. The well is producing approximately 5,500 barrels of oil equivalent per day. Both of these wells are in the Monza Joint Venture drilling program. So on June 5, we announced an attractive oil discovery at our first exploration well in 2019 at Gladden Deep in approximately 3,000 feet of water that accounted 201 feet of net oil pay.

W&T operated well, which is one of the 14 wells planned for the drilling program under the Monza JV. The company owns a 17.25% interest in the discovery. This well was completed and placed on production well ahead of schedule in the third quarter and is currently producing approximately 4,600 barrels of oil equivalent per day, and that's about 89% oil. In addition to that, we successfully drilled the Ship Shoal 28 #41 and the East Cameron 321 B-8 sidetrack well in third quarter.

Both wells are expected to be online by the end of the year, and both are in the JV drilling program. So W&T was recently awarded leases for two shallow water blocks, Ship Shoal 332 and 367 from the Gulf of Mexico regionwide lease sale 253 held on August 21, 2019. These two blocks cover approximately 10,300 acres, and the company paid about $0.3 million for the awarded leases, so $300,000, which reflects a 100% working interest in the acreage and a royalty rate of 12.5%. The leases will be effective November 1, 2019, with a five-year lease term and are in close proximity to current W&T acreage.

Now looking ahead to the rest of 2019 and into 2020. Our focus remains on generating significant free cash flow, which means that we will take a measured approach to drilling, while continuing to fund our capital expenditures, excluding acquisitions, with available cash and cash generated from operations. We narrowed our capital expenditure guidance range for full-year 2019 to $130 million to $150 million from our previous estimate of $125 million to $155 million, excluding acquisitions. We are well into our 2020 budget process, and we'll provide details on next year's plans early in 2020.

We still see a good market for Gulf of Mexico acquisitions, and we'll continue to review new opportunities that meet our criteria and allow us to further grow cash flow and shareholder value. So we continue to be optimistic about the future for W&T despite weak commodity prices. We've got a good balance sheet and a premier portfolio of both shallow water and deepwater properties with significant upside that will be further enhanced through acquisitions and organic drilling. We're well-positioned to generate sustainable growth within cash flows, and we believe that the Gulf of Mexico is an excellent basin in which to achieve that growth.

We remain focused on executing our long-term strategy, while maintaining our strong balance sheet and continuing to deliver near-term results by operating efficiently and mitigating risk to maximize shareholder value. So operator, with that, we can now open the lines for questions.

Questions & Answers:


Operator

Yeah. Thank you. [Operator instructions] And the first question comes from John White with ROTH Capital.

John White -- ROTH Capital Partners -- Analyst

Good morning and congratulations on a strong quarter.

Tracy Krohn -- Chairman and Chief Executive Officer

Thanks, John.

John White -- ROTH Capital Partners -- Analyst

You're running a real tight ship over there as expenses came in well below expectations. It might be a little early to ask this question, but how would you talk about Mobile Bay 2020 activity. How would you characterize that as a percentage of total activity? Or are you at that point yet?

Tracy Krohn -- Chairman and Chief Executive Officer

Sure. That's good -- that's great question. John, we're still assimilating that property. We've added several people out there.

We're still transitioning, typically with transition processes like this, you have a little bit of duplication of personnel and operations, that sort of thing. So typical with a larger acquisition of this kind. Those are all things that you overcome and smooth out. We have undertaken to go through the permitting process for one or two wells in the Mobile Bay area.

We'll -- we expect to get those permits in 2020, I don't think we'll be drilling any wells in 2020, but we'll at least be done with the permitting process or well in advance on it. So we'll just have to see, I think the state of Alabama is eager to see some more activity out there. There hasn't been any drilling activity in a long time. And then we will sort out the plants there.

We have a plant currently, Yellowhammer, that we operate at Mobile Bay and then, of course, we've now acquired the plant from Exxon, the former operator. And so we're assimilating both of those and figuring out what we're going to do with both those plants. First thought is to fill them both up that would be the ideal. And then if that's not possible, then we'll see where we need to combine and reduce those costs.

But you'll see lower costs before the end of the year here. In fact, I'm sure, well before that. You may see a few higher costs just before that while we transition. But the net fact of it is -- is it for the long run, cost will go down, we expect production to go up.

John White -- ROTH Capital Partners -- Analyst

Thanks for the details. Did you say that subsequent to September 30, you paid down $40 million on the revolver?

Tracy Krohn -- Chairman and Chief Executive Officer

That's correct. We did.

Janet Yang -- Executive Vice President and Chief Financial Officer

Prior to.

Tracy Krohn -- Chairman and Chief Executive Officer

Prior to, I'm sorry. Yeah, that's right.

Janet Yang -- Executive Vice President and Chief Financial Officer

Not subsequent.

John White -- ROTH Capital Partners -- Analyst

OK. So the balance on the balance sheet is what it is today?

Janet Yang -- Executive Vice President and Chief Financial Officer

Yeah.

John White -- ROTH Capital Partners -- Analyst

OK. Thanks very much.

Tracy Krohn -- Chairman and Chief Executive Officer

Thank you, sir.

Operator

Thank you. And the next question comes from Mike Scialla with Stifel.

Mike Scialla -- Stifel Financial Corp. -- Analyst

Good morning, Tracy.

Tracy Krohn -- Chairman and Chief Executive Officer

Hi, Mike.

Mike Scialla -- Stifel Financial Corp. -- Analyst

I wanted to ask you about your guidance for the rest of the year. It looks like the midpoint stayed pretty well unchanged, but you did reduce oil and NGL guidance a bit for the year. Just want to see what contributed to that?

Tracy Krohn -- Chairman and Chief Executive Officer

Well, part of it is that we've got -- we've added a bunch of gas reserves here. But some of it was work that we had to do out in the field, primarily associated with our Mahogany field. We had some production upset out there. We had one well that burnt up a bunch of sand.

We had to clean that out and shut the platform in for two or three days, and then get it back online. So I think that's what you're seeing, the slight reduction in oil production as a function of that.

Mike Scialla -- Stifel Financial Corp. -- Analyst

Got you. OK. And you've been real open about your desire for an acquisition, given how attractive the market looks. If, for whatever reason, you couldn't get something done there, what would -- how would you prioritize the use of the free cash flow? Would you just continue to pile up cash flow for a while until you do see the acquisition that you like? Or is there anything else you could do with that free cash flow in the meantime?

Tracy Krohn -- Chairman and Chief Executive Officer

Well, in any event, it's a quality problem. Isn't it?

Mike Scialla -- Stifel Financial Corp. -- Analyst

It is.

Tracy Krohn -- Chairman and Chief Executive Officer

Yeah, the -- it's not that we're running short on things to do, we would take a look at and see what pricing was at the time. Clearly, if the prices continue to go down and that puts a little bit of a stymie on new drill projects that if things remain static, then I would expect to see a little bit of both.

Mike Scialla -- Stifel Financial Corp. -- Analyst

Very good. Thank you.

Tracy Krohn -- Chairman and Chief Executive Officer

Thank you, sir.

Operator

Thank you. And the next question comes from Richard Tullis with Capital One Securities.

Richard Tullis -- Capital One Financial -- Analyst

Hey. Good morning, Tracy and Janet. Just a couple of quick questions. Mobile Bay, what is the daily production from that acquired asset included in the Q4 guidance? What's the associated oil percentage with those assets in Q4?

Tracy Krohn -- Chairman and Chief Executive Officer

I'm sorry, sir. I apologize, would you repeat the question, please?

Richard Tullis -- Capital One Financial -- Analyst

Yeah, sorry, Tracy. Regarding Mobile Bay...

Tracy Krohn -- Chairman and Chief Executive Officer

Yeah.

Richard Tullis -- Capital One Financial -- Analyst

How much production from that asset is included in the Q4 guidance? And what's the oil percentage associated with that production?

Tracy Krohn -- Chairman and Chief Executive Officer

I don't have that right at my hand. It's mostly gas, it's about 4,500 barrels a day of liquids, NGLs.

Richard Tullis -- Capital One Financial -- Analyst

OK.

Tracy Krohn -- Chairman and Chief Executive Officer

So roughly 25% liquids.

Richard Tullis -- Capital One Financial -- Analyst

And the rest is nat gas?

Tracy Krohn -- Chairman and Chief Executive Officer

Yeah. Yes, sir.

Richard Tullis -- Capital One Financial -- Analyst

OK. And then just over on M&A side, Tracy. What scale of the properties currently available or likely to become available over the next several quarters? Just trying to gauge what the magnitude of the potential deals could be as far as production adds go?

Tracy Krohn -- Chairman and Chief Executive Officer

Well, our assets available or the things that we imagine that are available in the Gulf of Mexico, ranges from a few million to a few billion. It's a big range. There's a lot of properties out there. So you can kind of use your imagination as to who might be selling those properties and go from there.

But I -- it's inevitable that most of these properties are going to trade hands in the Gulf of Mexico.

Richard Tullis -- Capital One Financial -- Analyst

OK. Well, that's all I have today, Tracy. Thanks so much.

Tracy Krohn -- Chairman and Chief Executive Officer

Thank you, sir.

Operator

Thank you. And the next question is a follow-up from Mike Scialla with Stifel.

Tracy Krohn -- Chairman and Chief Executive Officer

Yes, sir.

Mike Scialla -- Stifel Financial Corp. -- Analyst

I wanted to see what has happened with the -- I think you're going through a borrowing base redetermination, has that been completed yet? And if so, where does that stand?

Tracy Krohn -- Chairman and Chief Executive Officer

No. It hasn't been completed yet, but we're getting close. I should have an announcement on that in the next couple of weeks.

Mike Scialla -- Stifel Financial Corp. -- Analyst

OK. And I know you guys -- no, go ahead.

Tracy Krohn -- Chairman and Chief Executive Officer

Yeah. The bottom line is, I think we'll get what we need out of it.

Mike Scialla -- Stifel Financial Corp. -- Analyst

Yeah. OK. And you guys did a lot of work on improving the balance sheet after the price collapse in 2014. You obviously got a strong balance sheet now.

Just wondering if there's anything more you'd like to do with the balance sheet? Or is it in a spot where you're comfortable now?

Tracy Krohn -- Chairman and Chief Executive Officer

I think what we do is continue to affect the plan that we're on. We're trying to keep things cash flow positive. We're doing that in spite of some pricing negatives. So as we go through these cycles, we'll adjust accordingly.

But I see pretty good cash flow going forward. So the bigger decisions are what to do with that cash. And we're in these kind of times that present different opportunities. It's nice to have really good options in any event.

Mike Scialla -- Stifel Financial Corp. -- Analyst

Yeah. OK. And I want to ask you on Gladden Deep. The production rate there is obviously pretty nice, but I know you've been pretty cautious with some of your other wells, is that a rate that you'd anticipate kind of keeping that well at for a while? Or is there any potential to ramp that over time?

Tracy Krohn -- Chairman and Chief Executive Officer

Well, I hope that's a quality problem. I don't really have good information. We haven't been flowing the well that long. So we're cautious with these wells and what we do and tend to be as conservative as we can because wellbores and completions are -- when you think about it, they're fairly small in diameter.

They're several inches in diameter, but they're not beating diameter, OK? So they're small type of radii. And so when you draw down the wellbore, you need to be careful in how you produce that. So if you pull it too hard, you'll damage the screens and script to completion. So we're very cognizant of the delta pressure into the wellbores.

So that's kind of what really guides -- well, not kind of, that is what guides how we produce the well.

Mike Scialla -- Stifel Financial Corp. -- Analyst

Understood. And last one for me. It's probably a long shot here. I don't want to -- if it's something that would cause you to...

Tracy Krohn -- Chairman and Chief Executive Officer

It's OK, Mike. We're in the long-shot business sometimes, you know. I get it.

Mike Scialla -- Stifel Financial Corp. -- Analyst

All right. Well, great. I'll just ask -- I doubt you want to answer. But anyway you can give up any proprietary information, but Hess made an interesting looking discovery in Mississippi Canyon.

Just wonder if there's anything that you can draw from that? Is that supportive for any of the prospects that you had in that area?

Tracy Krohn -- Chairman and Chief Executive Officer

Well, I really can't comment on that just yet, because I don't really have all the details of that well in the area. But that's -- I always like to see people have success, and we tend to draw upon the success of others as well. So I'm sure that will be something that our CEOs will be looking at.

Mike Scialla -- Stifel Financial Corp. -- Analyst

Great. Thanks, Tracy.

Tracy Krohn -- Chairman and Chief Executive Officer

Thank you, sir.

Operator

Thank you. And the next question is a follow-up from Richard Tullis with Capital One Securities.

Richard Tullis -- Capital One Financial -- Analyst

Yeah, Tracy, just one more. And keeping with the exploration theme. I know you haven't prepared the budget yet, but what are you thinking on the exploration front for next year? How active could you be there? How many wells might you drill?

Tracy Krohn -- Chairman and Chief Executive Officer

Yeah. I don't have really good answers for you on that. A lot of that, Richard, is a function of the pricing. So we're trying to figure out markets and making our guesses on that and what we want to do with cash.

And certainly, one of the things that we want to preserve is liquidity. I tend to find it in these periods of down pricing that are sustained during a period of time, those usually represent really good opportunities. So if it's harder to buy properties, then we'll shift to the drill bit. If it's -- if the plethora is of opportunity standards around acquisitions, and I believe that that's probably going to be the case, I'm pretty optimistic about it.

I think I've explained that well enough in the earnings call here. But I really do believe that I think now is a good opportunity time. We're not seeing a whole lot of properties being sold here in the last couple of months. But I really believe that that's going to change, and that will represent good news for us.

Richard Tullis -- Capital One Financial -- Analyst

Well, that's helpful, Tracy. Thank you. Appreciate it.

Tracy Krohn -- Chairman and Chief Executive Officer

Thank you, sir.

Operator

And at this time, I would like to return the floor to management for any closing comments.

Tracy Krohn -- Chairman and Chief Executive Officer

Thank you, sir. That's all for now. Hopefully, we'll be talking to you in the not-too-distant future, and I think all the news is pretty good right now so hopefully, we continue that as well. Thank you so much, and we look forward to talking to you soon.

Duration: 28 minutes

Call participants:

Al Petrie -- Investor Relations Manager

Tracy Krohn -- Chairman and Chief Executive Officer

John White -- ROTH Capital Partners -- Analyst

Janet Yang -- Executive Vice President and Chief Financial Officer

Mike Scialla -- Stifel Financial Corp. -- Analyst

Richard Tullis -- Capital One Financial -- Analyst

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