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W&T Offshore, Inc. (NYSE:WTI)
Q1 2020 Earnings Call
Jun 23, 2020, 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 2020 conference call. [Operator instructions] This conference is being recorded, and a replay will be made available on the company's website following the call. At this time, I'd like to turn the conference call over to Al Petrie, investor relations coordinator.

Sir, you may begin.

Al Petrie -- Investor Relations Coordinator

Thank you, operator. 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 2020 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&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 2020 earnings release that we released 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 first-quarter 2020 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, our vice president of geosciences. They're all available to answer questions later during the call.

Over the last several months, the global COVID-19 pandemic, coupled with supply and demand imbalances, have certainly created an environment of uncertainty across the oil sector. We've reacted decisively to those conditions by significantly reducing our capital expenditure budget for the remainder of 2020, lowering our lease operating expenses without compromising safety or operational capabilities and temporarily shutting in some lower-margin operated and non-operated oil-weighted properties. As always, we remain committed to the health and safety of our employees and contractors. At our corporate offices, we implemented a mandatory work-from-home policy in March and only recently reopened our corporate office.

Despite being back in the office, we continue to monitor the situation and will follow the advice of government and health leaders. For our field operations, we instituted a screening of all personnel prior to entry to heliports and shore bases, as well as our two gas plants in Alabama. We are conducting daily temperature screenings and implemented procedures for distancing and hygiene at our field locations. We're very pleased that thus far none of our onshore or offshore employees have tested positive for COVID-19.

For nearly 40 years, we've been able to persevere through multiple pricing cycles because our focus and strategy has always been to maximize cash flow and constantly improve the profitability of our assets at any commodity price. We expect to continue to find value to acquisitions, especially those that provide a solid foundation for our ability to generate free cash flow even in the current pricing environment. We built W&T through the right combination of attractive property acquisitions, methodical integration and exploitation of those acquisitions, and successful development and exploratory drilling on our legacy fields. With the well-timed Mobile Bay acquisition in 2019, our production mix has shifted, and we now produce significantly greater volumes of natural gas.

We expect to experience less of an impact from the energy downturn than many of our peers since natural gas has not been impacted by the same market forces as crude oil and believe we could benefit from higher natural gas prices as associated natural gas production from oil wells decreases. So turning to our first-quarter results. We're pleased with our performance. We've integrated our acquired assets at Mobile Bay and at Magnolia, and that's after closing the acquisition of the remaining 25% of that deepwater field, maintained a high level of production, and continued generating strong adjusted EBITDA and cash flow.

Our costs all came in within or below the guidance we gave for the first quarter. Adjusted EBITDA was $62.1 million despite a weaker pricing environment, while we invested $9.5 million in 2020 capex and $24 million in cost related to the 2019 capital program, excluding acquisitions. This is very important because on a cash basis, we continued to create significant value by generating nearly $30 million more of adjusted EBITDA versus our capex, which enabled us to reduce long-term debt at a substantial discount. One of the pillars of our success is our ability to generate positive cash flow.

In the first quarter of 2020, our production averaged 53,553 barrels of oil equivalent per day or 4.9 million barrel of oil equivalent. That was up 61% compared with the first quarter of 2019 and up slightly compared to the fourth quarter of 2019. This was near the high end of our first-quarter guidance range, included a full three months of production from both the Mobile Bay acquisition and the initial 75% interest acquired in the Magnolia field in 2019. Total liquids production comprised 48% of production in the first quarter of 2020.

So in late April, we announced that we had temporarily shut-in approximately 3,300 barrels of oil equivalent per day of net production in selected oil-weighted fields operated by us and also received notice of production curtailments from third-party operators, totaling approximately 3,400 barrels of oil equivalent per day net to W&T. Recently, about 2,900 BOE per day of those third-party shut-in volumes will return to production, and we continue to monitor the market to determine the appropriate time to return our operated production curtailments to production. In addition, we temporarily shut in a portion of our production due to tropical storm Cristobal with an estimated net impact of about 110,000 net barrels of oil equivalent of deferred production in the second quarter. We did not experience any material damage to our facilities due to the storm.

As a reminder, we have withdrawn our production and cost guidance for the balance of 2020 due to the combination of ongoing uncertainty in commodity markets, production curtailments and proactive efforts to continually reduce costs in this lower price environment. We intend to again provide guidance once we have greater visibility in where markets are heading. So for the first quarter of 2020, our average realized sales price per barrel of oil equivalent declined about 20% compared with the fourth quarter, with declines in pricing for oil, NGLs and natural gas. Our average realized crude oil sales price was $46.33 per barrel, which once again compared favorably with average WTI pricing of $45.34 per barrel during the period.

Our NGL sales price was $13.03 per barrel, and our natural gas price was $1.91 per Mcf. Revenues for the first quarter decreased quarter over quarter by 18% to $124.1 million. The decrease was driven by lower realized pricing despite the slight increase in sales volumes. Our first-quarter LOE came in at $54.8 million, which was within guidance but higher than both the first and fourth quarters of 2019 due to additional operating costs associated with our two recent acquisitions.

Since the sharp downturn in prices in the first quarter, we've developed even more ways to reduce our LOE costs. This includes actions such as reducing our contract labor costs, reducing transportation costs by consolidation of transit to offshore locations, and working with our suppliers to achieve cost savings in maintenance, workover and facility expenses. We will not reduce our commitment to safety, operational compliance or environmental protection with any of these actions. In total, we expect to reduce our LOE by about 15% to 25% from prior levels.

We'll give you more details on the results of these efforts during our second-quarter call. Our G&A expense in the first quarter of 2020 was $14 million, which was well below our guidance of $15.5 million to $17 million. The decline from $17.6 million in G&A in the fourth quarter of 2019 was due primarily to higher fourth-quarter 2019 accrual adjustments for incentive compensation and lower legal costs during the first quarter of 2020. We continue to look at how we can further reduce our G&A costs.

We reported net income in the first-quarter 2020 of $66 million or $0.46 per share, which included $52.5 million in unrealized commodity derivative gain and $18.5 million noncash gain associated with the debt-reduction transaction. Our adjusted net income was $5.8 million or $0.04 per share. So another way that we've responded to this current environment is by using some of our free cash flow to repurchase a portion of our outstanding 9.75% per senior second-lien notes. In the first quarter, we repurchased $27.5 million in principal of our outstanding notes for $8.5 million, which led to the noncash gain.

Thus far in the second quarter of 2020, we've repurchased an additional $45.1 million of those same notes for $15.3 million. That's about $72.5 million of long-term debt that we've repurchased year to date for just under $24 million, which has reduced our annualized interest expense by over $7 million. We believe that this was a very good use of free cash and will help place W&T on an even better financial footing moving forward. W&T's bank group recently completed its regularly scheduled spring borrowing base redetermination.

The borrowing base was set by the bank group at $215 million, down modestly from $250 million. Additionally, the amended agreement provides for the suspension of the total leverage covenant and the addition of a first-lien covenant of two to one through year-end 2021. Additional details can be found in our 10-Q. The next regularly scheduled redetermination is in the fall of 2020.

Additionally, we have added several oil and natural gas hedges since our last call, and a detailed schedule is in yesterday's release. So after all these actions so far this year, as of June 17, 2020, our total liquidity stood at $156 million, comprised of about $27 million in cash and $129 million in availability under our revolving credit facility. Our long-term debt remaining on our senior notes has declined to $552.5 million from $625 million. We believe we continue to have a strong balance sheet and have more than sufficient liquidity to meet our needs going forward and to continue to look at good opportunities that may arise in this downturn.

Turning now to operations. We successfully drilled one well in the first quarter of 2020 at East Cameron 338/349 but decided to suspend all other drilling activity due to the current uncertain pricing environment. We remain confident in our extensive inventory of high-quality prospects, and we're encouraged by the recent improvement in crude oil prices and the outlook for natural gas price improvements this winter. With that said, we remain focused on cash flow generation in the near and long term.

And we will continue to evaluate when it is best for W&T to resume drilling, but at this time, we have no active drilling and completions operations. In the first quarter, the Cota well in the East Cameron 338/349 field was successfully drilled in over 290 feet of water and to a total depth of over 6,000 feet. We encountered approximately 100 feet of net oil pay and currently own a 20% interest in the Cota well, which will increase to 38.4% once the well is brought online and performance thresholds are met. Initial production is planned for the first half of 2021, subject to the commodity price environment and the completion of certain infrastructure projects.

So during the first quarter, we performed one well recompletion and four workovers that resulted in an additional 700 net BOE per day. As we previously announced, W&T was the parent high bidder on two blocks in the Gulf of Mexico Lease Sale 254, held by the BOEM on March 18, which included one deepwater block and one shallow-water block. These two blocks cover a total of approximately 10,760 acres. And if awarded, we will pay approximately $700,000 for 100% working interest in the awarded leases combined.

So in closing, we remain optimistic about the future for W&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. The proactive actions that we have undertaken this year to reduce capex and LOE, coupled with our strong hedge book offering downside protection on commodity prices, should allow us to continue to generate strong cash flow even in a lower pricing environment. We remain opportunistic in this environment, and we'll look for ways that we can add value to W&T as we have done thus far in 2020, reducing LOE costs and closely managing our capital spending.

We remain focused on operating efficiently and executing our long-term strategy, while maintaining our strong balance sheet to maximize shareholder value. Our 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 highest of any public E&P company. This alignment of interest ensures that we are truly incentivized to maximize shareholder value and mitigate risk. Shareholders should expect to see more acquisitions in the future as well.

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

Questions & Answers:

Operator

[Operator instructions] And our first question today comes from John White from ROTH Capital. Please go ahead with your question.

John White -- ROTH Capital -- Analyst

Good morning and thank you. Congratulations on the good results, Tracy. You certainly know the playbook during a downturn.

Tracy Krohn -- Chairman and Chief Executive Officer

Thanks, John.

John White -- ROTH Capital -- Analyst

I thought the buying back second lien was very opportunistic and a very good move. You mentioned -- I believe you said with regard to further 2020 activity, no new wells are planning to be spud. I just wanted to confirm that. So I take it that means most activity is going to be continued recompletions and workovers.

Tracy Krohn -- Chairman and Chief Executive Officer

Yeah. I think that's the way we see it right now. Of course, if prices creep on up, then we'll open up the pocketbook a little bit and be able to get some more work done with the drill bid.

John White -- ROTH Capital -- Analyst

And you mentioned more -- to expect more acquisitions in the future. How would you describe the deal landscape in the Gulf given the current environment?

Tracy Krohn -- Chairman and Chief Executive Officer

Well, I think there's a lot of opportunity there. Most of the companies that have had problems are going to get eliminated or absorbed. The ones that don't are going to continue to succeed.

John White -- ROTH Capital -- Analyst

OK. Well, thanks very much. I'll pass it along.

Tracy Krohn -- Chairman and Chief Executive Officer

Thank you, sir.

Operator

Our next question comes from Richard Tullis from Capital One Securities. Please go ahead with your question.

Richard Tullis -- Capital One Securities -- Analyst

Thanks. Good morning, everyone.

Tracy Krohn -- Chairman and Chief Executive Officer

Good morning, Richard.

Richard Tullis -- Capital One Securities -- Analyst

Tracy, I know you withdrew guidance for the full year and just had a couple of comments with the last caller on activity. But what do you think it takes to kind of get back to even moderate growth mode, say, in the second half of the year and into 2021? What sort of oil price would you be looking at and combination of service cost reductions?

Tracy Krohn -- Chairman and Chief Executive Officer

Well, that's a fairly complex question, Richard. It's got many moving parts to it. If I was going to guess a price, I'd tell you something around $50 would make us feel pretty comfortable. We recognize that service companies have had their issues as well.

Everybody is struggling with personnel and the pandemic, of course. But I do think that the future is pretty good long term, and that's what we're looking at. We realize that there's some things that need to happen in this basin to make it better for everyone. So we're waiting to see what pricing is going to do.

That's the biggest driver. I wish I could tell you that it isn't, but it is. I think we're adequately hedged at this point or close to it, so I'm confident that we can withstand just about anything. Of course, every time I say that, something else nasty happens, so I guess I probably ought to stop saying that.

But I think we're pretty well protected at this point.

Richard Tullis -- Capital One Securities -- Analyst

Thank you for that. That's helpful. And then for my follow-up, Tracy or Janet, what is the corporate decline rate at this point given the reduction in capex?

Tracy Krohn -- Chairman and Chief Executive Officer

Corporate decline rate, I'm not sure I understand that term. Do you mean the production decline rate or the corporate -- I don't know what corporate decline rate...

Richard Tullis -- Capital One Securities -- Analyst

Yes, yes. For the entire company's production base.

Tracy Krohn -- Chairman and Chief Executive Officer

GA is about 10.

Richard Tullis -- Capital One Securities -- Analyst

Yeah. OK, Tracy. Thank you.

Tracy Krohn -- Chairman and Chief Executive Officer

Thank you, sir.

Operator

Our next question comes from Mike Scalia from Stifel. Please go ahead with your question.

Mike Scialla -- Stifel Financial Corp. -- Analyst

Good morning, everybody. Tracy, you mentioned you'd like to see something around $50 before you got active again with the drill bid. I'm just wondering kind of along the same lines, kind of price -- or can you put in a price on what you'd need to see before you bring the shut-in volumes back online?

Tracy Krohn -- Chairman and Chief Executive Officer

Well, actually, we're starting to bring those shut-in volumes back online now. So that should give you some encouragement. Some of them -- couple of these fields that were near end of life anyway and were just kind of hanging on, those probably won't be coming back online. So I think we'll get up fairly quickly with the production of the stuff that was brought online that's not just anemic.

Mike Scialla -- Stifel Financial Corp. -- Analyst

OK. Good. And I want to get your thoughts on used free cash flow. Obviously, very opportunistic, as was pointed out on paying down the second lien.

Looking forward, would that be the preference? Or how do you balance that between paying down the revolver since now you have the covenant is just focused on first lien debt? And also any restrictions on paying down either of those two?

Tracy Krohn -- Chairman and Chief Executive Officer

Well, actually, the latter part of your question there is more conducive to what we're likely to do. We don't have the first-lien capability of going out and spending more money to buy debt. Apparently, the RBLs don't like you buying debt from other people and putting theirs at risk. So that is the covenant with regard to buying more second-lien debt.

Mike Scialla -- Stifel Financial Corp. -- Analyst

Very good. Thank you.

Tracy Krohn -- Chairman and Chief Executive Officer

Yes, sir. Thank you.

Operator

Our next question comes from Patrick Fitzgerald from Baird. Please go ahead with your question.

Patrick Fitzgerald -- Baird -- Analyst

Hi, guys. Yeah, I echo the sentiments on the debt repurchase. Well done.

Tracy Krohn -- Chairman and Chief Executive Officer

Thank you.

Patrick Fitzgerald -- Baird -- Analyst

So a lot of my questions have been asked, but I wanted to ask, I guess, Janet. Working capital for the remainder of the year, that was a nice source of cash this quarter. How do you expect that to unfold for the remainder of '20?

Janet Yang -- Executive Vice President and Chief financial Officer

I think with activity going down, I don't expect it to be -- we don't expect there -- I mean, generally speaking, we're forecasting out. We take a conservative stance on it. But yes, I think working capital should be OK. It'd be relatively flat for the rest of the year.

I think a lot of it depends on the benefits in the kind of second quarter.

Patrick Fitzgerald -- Baird -- Analyst

OK. And then on your plug and abandonment, the current portion of that on the balance sheet declined from 22 to three. Is that just a timing issue? And if you could talk about how you see that unfolding in '20 and, I guess, any further than that would be helpful. Thank you.

Janet Yang -- Executive Vice President and Chief financial Officer

It is a timing issue. And I think Tracy can comment on that a little bit more as well.

Tracy Krohn -- Chairman and Chief Executive Officer

Yes. There's no overwhelming obligation to do the ARO work as we've forecasted it so far for the rest of the year.

Patrick Fitzgerald -- Baird -- Analyst

OK. All right. Thanks a lot.

Tracy Krohn -- Chairman and Chief Executive Officer

Thank you, sir.

Operator

Our next question comes from Ray Deacon from Petro Lotus Analytics. Please go ahead with your question.

Ray Deacon -- Petro Lotus Analytics

Hey. Good morning, Tracy.

Tracy Krohn -- Chairman and Chief Executive Officer

How are you, Ray?

Ray Deacon -- Petro Lotus Analytics

I'm good. Thanks. I was wondering how the three-and-a-half-year roughly payout on repurchasing debt compares to the recompletions that you're planning to do this year in terms of what kind of return you're getting.

Tracy Krohn -- Chairman and Chief Executive Officer

You finally asked the right question. How does it compare to other things that we might want to do? Very good, right? Yes. Yes, now you got it. Do we buy more debt back or do we go out and try to make more money doing acquisitions and drilling wells? That's really the internal question for us, right?

Ray Deacon -- Petro Lotus Analytics

Yes.

Tracy Krohn -- Chairman and Chief Executive Officer

So that's exactly how we're looking at it. You got it. What makes more sense, and it's a pretty perfunctory function when you get to the bottom of it, what is more profitable. So it's really fairly -- it was a fairly easy give to say, all right, well, we're not going to buy back any more debt.

We're going to go ahead and do more work. So we're approaching that kind of marginality with that decision, which way do you go. So as the price goes up, the decision gets real easy.

Ray Deacon -- Petro Lotus Analytics

OK. Got it. And then just what's the update on the JV? I think you've drilled nine out of 14 wells was the last number I've seen. Is that kind of the first thing you go after once you get back to drilling?

Tracy Krohn -- Chairman and Chief Executive Officer

Yes.

Ray Deacon -- Petro Lotus Analytics

Great.

Tracy Krohn -- Chairman and Chief Executive Officer

Thank you, sir.

Operator

Our next question comes from Neal Dingmann from SunTrust. Please go ahead with your question.

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

Good morning, Mr. Krohn and team.

Tracy Krohn -- Chairman and Chief Executive Officer

Neal, how are you?

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

Good, good. My first question, just building on what Ray was saying. Tracy, I like the acquisition you did that, I guess, you closed in early March, where you did the purchase sale agreement to acquire that 25% remaining working interest. To me, that always seems to be the most economical when you can continue to do that.

Again, do you have other opportunities to add working interest like that? I mean, to me, obviously, you don't have to use any more expenses to do so and always seems to be the most economic. So just wondering if you have more opportunities like that in the portfolio.

Tracy Krohn -- Chairman and Chief Executive Officer

Let me see if I can explain this very concisely. You can bet your ass on it, OK?

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

That's very good to be concise. Very good. And then just my follow-up to that would be, just given what we see now in this environment, we've certainly seen onshore prices on services come down. Could you just talk color on now when you go back to work, what you're seeing in prices today versus even six or 12 months ago?

Tracy Krohn -- Chairman and Chief Executive Officer

Yeah. I commented on this last year, when people were telling me that the prices were going up, oil was $60-something a barrel and service costs were going up. And I always thought that was seasonal. And sure enough, it was not only seasonal, unfortunately, prices began to drop as well, so activity went down.

So there's certainly a point at which you can't go any lower because your suppliers just can't get their cost down any further. So we don't want to see that happen. We want people to be able to operate at a profit. On the other hand, the hard part for us is making sure that we have access to quality personnel and equipment.

And I think we're pretty close to that margin right now. So it's going to be some sort of rebalancing going along, and it really has more -- the biggest impact is transportation, boats and helicopters and insurance and then personnel.

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

Got it. Got it. Very god. Thanks.

And nice cash flow.

Tracy Krohn -- Chairman and Chief Executive Officer

Sure. Thank you.

Operator

[Operator instructions] Our next question comes from Dustin Tillman from Wells Fargo. Please go ahead with your question.

Dustin Tillman -- Wells Fargo -- Analyst

Hi. Thanks for taking this call. Tracy, I wanted to ask about the surety market. We've seen, in some instances, some of your competitors where sureties are asking for collateral, including one scenario where the company suing -- or the surety suing the company.

What do you see as the health of the surety market? Any changes that are happening there as some of your competitors are under pressure?

Tracy Krohn -- Chairman and Chief Executive Officer

Well, again, without knowing the specifics, it's hard for me to answer that. We haven't experienced any issues with our sureties. In fact, the experience has been quite the opposite. The company is in good shape.

We're meeting all of our obligations, and we'll be able to do so, hopefully, for the rest of my lifetime. So I don't really see any angst among the sureties. Markets go up and down -- rates go up and down a little bit depending upon how the markets are. But other than that, we're not experiencing any anxiety at all.

Dustin Tillman -- Wells Fargo -- Analyst

So they're not up -- and there's no calls for collateral from the surety?

Tracy Krohn -- Chairman and Chief Executive Officer

No, sir.

Dustin Tillman -- Wells Fargo -- Analyst

OK. Great. And I wanted to follow up on one of the previous questions that was asked about P&A obligations. And maybe you could just help us better understand, usually, thinking about shutting in wells and having -- you talked about some production that won't come back online.

Most people would expect that that would result in more near-term P&A spend. And it sounds like you're saying that you have the ability to push some of that off. So can you just explain or help us understand the time frame of when that P&A work would have to be done?

Tracy Krohn -- Chairman and Chief Executive Officer

Now, generally, after you cease production, you're required to plug and abandonment within a year. I'm sorry, excuse me, 18 months. So yes. So there are at least 18 months down the line.

Clearly, if you go out and you put a field back online, you got to go out and make these visits every once in a while, anyway. So if prices get up high enough, you put them back online and then you defer for yet another 18 months. But we're at least 18 months or close to that away from having to do any of those abandonments on those marginal fields.

Dustin Tillman -- Wells Fargo -- Analyst

OK. And that's why the current P&A liability was reduced because the view is that can be delayed?

Tracy Krohn -- Chairman and Chief Executive Officer

That's correct.

Dustin Tillman -- Wells Fargo -- Analyst

Thank you very much.

Operator

And ladies and gentlemen, at this time, in showing no additional questions, we'll end today's question-and-answer session. I'd like to turn the conference call back over to Tracy Krohn for any closing remarks.

Tracy Krohn -- Chairman and Chief Executive Officer

Well, thanks for listening, everyone. We appreciate it, and we'll have another conversation next quarter if not sooner. Thanks so much. Goodbye.

Operator

[Operator signoff]

Duration: 33 minutes

Call participants:

Al Petrie -- Investor Relations Coordinator

Tracy Krohn -- Chairman and Chief Executive Officer

John White -- ROTH Capital -- Analyst

Richard Tullis -- Capital One Securities -- Analyst

Mike Scialla -- Stifel Financial Corp. -- Analyst

Patrick Fitzgerald -- Baird -- Analyst

Janet Yang -- Executive Vice President and Chief financial Officer

Ray Deacon -- Petro Lotus Analytics

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

Dustin Tillman -- Wells Fargo -- Analyst

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