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W&T Offshore (NYSE:WTI)

Q4 2012 Earnings Call

February 27, 2013 10:00 am ET

Executives

Mark Brewer

Tracy W. Krohn - Co-Founder, Chairman, Chief Executive Officer and Member of Nominating & Corporate Governance Committee

John Daniel Gibbons - Chief Financial Officer, Chief Accounting Officer and Senior Vice President

Analysts

Noel A. Parks - Ladenburg Thalmann & Co. Inc., Research Division

Michael A. Glick - Johnson Rice & Company, L.L.C., Research Division

Biju Z. Perincheril - Jefferies & Company, Inc., Research Division

Patrick B. Rigamer - Iberia Capital Partners, Research Division

Richard M. Tullis - Capital One Southcoast, Inc., Research Division

Jeffrey W. Robertson - Barclays Capital, Research Division

Curtis Ryan Trimble - Global Hunter Securities, LLC, Research Division

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the W&T Offshore's Fourth Quarter Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Wednesday, February 27, 2013. I would now like to turn the conference over to Mark Brewer, Manager, Investor Relations. Please go ahead.

Mark Brewer

Thank you, operator, and good morning, everyone. We appreciate you joining us for the W&T Offshore's conference call to review the results of the fourth quarter and full year 2012. Before I turn the call over to management, I have a few items to point out. If you wish to listen to a replay of today's call, it will be available in a few hours via webcast by going to the Investor Relations section of the company's website at www.wtoffshore.com or via a recorded replay until March 6, 2013. To use the replay feature call (303)590-3030 and dial passcode 4590116#. Information recorded on this call speaks only as of today, February 27, 2013, and therefore, time-sensitive information may no longer be accurate as of the date of any replay. Please refer to our fourth quarter and full year 2012 earnings release for a disclosure on forward-looking statements.

Now I'd like to turn the call over to Mr. Tracy Krohn, W&T's Chairman and CEO.

Tracy W. Krohn

Thanks, Mark. Good morning, everyone. We appreciate you joining us on our Fourth Quarter 2012 Earnings Conference call. This morning, I have with me several members of management, including Jamie Vazquez, our President; Danny Gibbons, our Chief Financial Officer; and Tom Murphy, Chief Operations Officer.

As you can see from yesterday's press release, we had another solid year as we focused on expanding our opportunities, growing our assets and creating long-term shareholder value. During the year 2012, we grew our production, increased our reserves and expanded our operations. Our successful development program allowed us to convert 50% of our undeveloped reserves to the proved developed category, and we grew our proved developed crude oil reserves by 51% over the past year.

As we outlined in yesterday's news release, we achieved strong results financially in 2012 and maintained good liquidity and robust cash flow. We were also pleased that we ended the year with a generous cushion in our year-end ceiling test calculation, thus no impairments due to lower natural gas prices. That's kind of a byproduct of drilling within cash flow.

In 2013, our goal is to replace reserves organically. I'm going to repeat that. In 2013, our goal is to replace reserves organically. Over the past few years, we've been expanding our exploration projects to support the company's goal to achieve organic growth and be less dependent on acquisitions to accomplish our strategic objectives. Our 2013 capital expenditure budget of $450 million is currently allocated 63% to exploration and 37% to development projects. It's designed to drive production and reserve growth organically through our focus on exploration. However, we do have the flexibility to modify the plan as necessary should we choose to complete a strategic acquisition or acquisitions. The budget's expected to be funded by internally generated cash flow and as is our practice, does not include any dollars for possible acquisitions. That's what our bank credit line is for. We also maintained the flexibility to increase the budget if additional projects are identified or to redirect capital from one basin to another.

In 2013, we'll also continue to pursue a more balanced approach, meaning the balance of offshore projects that are more often characterized by high production and high internal rates of return with onshore projects that have longer life reserves but lower IRRs. And ultimately, a deepwater discovery may generate significant reserves and high cash flow many years after discovery where the onshore project may provide long-life reserves more quickly and a multi-well inventory. For example, a deepwater discovery like our Big Bend prospect, which represents a large capital commitment prior to first production or any significant booking of proved reserves, can be complemented by an onshore discovery from which we're able to book proved reserves on the discovery well and often on on-drill offset locations as well. This balanced approach allows us to main [ph] good liquidity and high cash flow. Further, it helps us manage our finding and development costs and allows us to plan for multiple years and facilitate our goal of generating a more predictable year-over-year growth rate.

Now also in 2013, we'll continue to focus on oil projects that are driven by strong full-cycle economics. As we outlined in our February 12 news release, our 2013 drilling program is heavily weighted towards oil exploration to drive that organic growth. Offshore, we have several projects of note, including our Mahogany exploration program. That's including 2 exploration wells, testing a deeper target in the field. This is a highly attractive project that allows us to test a deeper sand with significant upside. However, if that's not successful, both wells have uphold take points in the field basin that have been very productive in earlier wells. The economics of this program are very strong, and we have the potential of adding reserves and further development potential. This field just keeps getting bigger.

At our Mississippi Canyon 243 block or what we call Matterhorn, we're currently drilling a development well that is expected to have an excellent production rate of mostly oil. About 1,000 barrels per day is what we expect. We also expect to follow this well with the Mississippi Canyon 243 A-5 well, which is a water injection well that'll be used for pressure maintenance in the field. This well is expected to increase the ultimate recovery of the eastern sector of the field and assuming success, should add proved reserves to the field.

At Big Bend, our 2012 discovery with approximately 150 net feet of high-quality oil phase [ph] is targeted to be sanctioned in 2013 by the operator. The excellent reservoir and oil characteristics of this discovery give us a lot of confidence that we'll be able to realize significant value from the development and production of this resource. To date, we have not booked any proved reserves to Big Bend. That will come with the sanctioning of the project.

Deepwater exploration is a strong focus for W&T this year. We have a large number of deepwater blocks and a growing inventory of seismic and projects that are moving towards drill-ready status. We will likely have an additional exploratory drilling activity in the deepwater later this year.

We have an active drilling program planned onshore as well. As we reported in our February 12 release, we're moving forward with the horizontal drilling and vertical downspacing programs in our Yellow Rose field. At year end, the encouraging results we had allowed us to book some proved reserves from these 2 programs, but we've done so very conservatively. We believe that there's substantial upside associated with continued vertical downspacing and the drilling of additional horizontals in the Wolfcamp and testing newly identified benches. Approximately 80% of our Yellow Rose lease acreage is held by production. That's important as it allows us to develop the field prudently and take advantage of the best opportunities in the field.

In East Texas, recent results have been very encouraging and are in line with our current expectations. As outlined in yesterday's news release, prior to committing to a long-term development program, we're planning to drill one or more additional wells this year. The next well is expected to spud in March. In Terry County, West Texas, we completed 2 horizontal wells during the fourth quarter, and based on a review of all our well results and full-cycle economics, we've decided not to pursue additional development of the area at this time.

Regarding our acquisition plans for 2013, the M&A markets are heating up, and we're well positioned to make acquisitions in 2013. We continue to pursue assets that have upside and that would be accretive to the company.

So summarizing, we expect organic growth in 2013. We have good, strong cash flow and expect to be able to stay within our cash flow for our drilling program. We also have a substantial borrowing base that provides good liquidity and flexibility to take advantage of strategic acquisition opportunities that are likely to arise.

So with that, operator, we're ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Noel Parks with Ladenburg Thalmann.

Noel A. Parks - Ladenburg Thalmann & Co. Inc., Research Division

I had a couple of questions. When you were talking about or actually on the press release, there was the mention at Yellow Rose that you have a lot of the acreage held by production and that, that would help you take advantage of the best opportunities in the field. Can you talk a little bit about just the variability you're aware of across the field? And I mean, should we think of Yellow Rose as being more like a statistical play?

Tracy W. Krohn

It is. The variability that we referred to is more along lines of vertical wells and horizontal wells. Some of the acreage isn't geographically shaped so that we can do the -- what we think would be a more optimal horizontal well as opposed to a vertical well. If you -- for instance, if you got a horizontal well going one direction and another direction, you've got that space in between that may need to be taken of -- advantage of vertical.

Noel A. Parks - Ladenburg Thalmann & Co. Inc., Research Division

Got you. And with the new field acquisition, I was wondering just if they had made any contribution to proved reserves above what you had specified at the acquisition, and I wonder if anything also got moved up from callables in the proved from the new field properties.

Tracy W. Krohn

With regard to new field, the properties are actually performing slightly better than we had expected. What we've done is we've begun acquiring additional seismic. We're very encouraged by what we see. We think we see more opportunity than we originally did. It's opened up the possibilities of partnerships with other companies as well. We've had a good bit of inquiry on that. So yes, I mean, I expect that we'll be doing something to those properties later on this year.

Operator

The next question is from the line of Michael Glick with Johnson Rice.

Michael A. Glick - Johnson Rice & Company, L.L.C., Research Division

Just a couple of questions on Mahogany. I was wondering if you could provide some more color just on the upside associated with extending the known P Sand reservoir, as well as the deeper potential in that P Sand that you talked about.

Tracy W. Krohn

Yes. We keep drilling wells out there, and we keep finding new locations to drill the P Sand. We've added more seismic. We've found that our maps weren't -- were okay. They weren't accurate to the extent that we wanted. Every time we get a new generation of seismic or seismic processing out there, the field gets bigger. We're able to drill better wells and more of them. The size the field expands in that sand, the other thing that we noticed is deeper that we see some potential. In fact, one of the wells that we drilled out there -- I can't remember which number it was, Michael, but it had an additional completion in what we call the N sand. And I think that was the A-9. Yes, that was the A-9 -- had additional reserves in what we called the N sand. I'm sorry, that was not the A-9. It was A-2 well. They're writing me notes over here, "No, not the A-9, the A-2." Okay. So it was the A-2 well. Yes. We perforated a pretty thin sand that we didn't really expect a whole bunch out of. The damn thing was making 800 to 900 barrels a day and has maintained good production since. So we're excited with that. And then we've got a deeper frontier and what we call the T sand.

Michael A. Glick - Johnson Rice & Company, L.L.C., Research Division

And is the T sand is that an oil or a gas target?

Tracy W. Krohn

We think it's going to be oil. We haven't gotten to the bottom of the oil column in this field ever.

Michael A. Glick - Johnson Rice & Company, L.L.C., Research Division

And I guess just one follow-up. I mean, given the success you've had out there, how are you in terms of running or in terms of well slots?

Tracy W. Krohn

In -- I'm sorry, in terms of slots?

Michael A. Glick - Johnson Rice & Company, L.L.C., Research Division

Yes, yes.

Tracy W. Krohn

We got plenty of slots. This is a big platform. If we ran out of slots, we'd do some recovery and be able to drill some more wells.

Operator

The next question is from the line of Biju Perincheril with Jefferies.

Biju Z. Perincheril - Jefferies & Company, Inc., Research Division

Just in East Texas, can you talk about the data points that you're looking for next before getting into development there? Is it getting more comfortable with decline rates? Or are you looking to delineate more of the acreage?

Tracy W. Krohn

Well, yes, I think it's an acreage issue for us, but also, it takes a few wells to get the right formula on the completion. So we're getting better and better at it, and we're seeing what we think is very encouraging signs of wanting to make a large commitment out there.

Biju Z. Perincheril - Jefferies & Company, Inc., Research Division

Okay. And then on the acquisition markets, you mentioned, looking robust. Where do you see more opportunities? Is it still in the Gulf? Or are you equal -- seeing new equal opportunities onshore as well?

Tracy W. Krohn

Yes, we see them in both areas. For us, since we went onshore, we're seeing a lot more opportunity onshore than we did before. We think that there's some opportunities in different states other than Texas that we've looked at, and we will continue to pursue that. I still like what we've seen in East and West Texas of course. And we are seeing opportunities out in the Gulf in the deepwater as well.

Biju Z. Perincheril - Jefferies & Company, Inc., Research Division

Okay. And then just following up on your comments on new field properties. When -- any color on timing when we can see you guys getting more active in the deepwater front once you bring in some partners?

Tracy W. Krohn

Yes, I think later on this year.

Biju Z. Perincheril - Jefferies & Company, Inc., Research Division

Okay. Is that in the current CapEx numbers? Or is that something that will be incremental?

Tracy W. Krohn

I don't see that in the CapEx numbers at this time.

Operator

The next question is from the line of Patrick Rigamer with Iberia Capital Partners.

Patrick B. Rigamer - Iberia Capital Partners, Research Division

A couple of questions have been answered already, but I just wanted to ask, with the exploration budget, is that -- should we think of that as similarly 63% offshore? Or is it 80% offshore versus onshore?

Tracy W. Krohn

That's about 63%, Pat [ph] .

Patrick B. Rigamer - Iberia Capital Partners, Research Division

Well, 63% of the total budget, but is it also 63% offshore versus onshore?

Tracy W. Krohn

I'll get Danny to confirm that. He's still working on the 10-K.

John Daniel Gibbons

[indiscernible] offshore and 37% for onshore, and 63% of the budget is exploration and 37% is development. So the question is, what's the exact split.

Patrick B. Rigamer - Iberia Capital Partners, Research Division

The exploration dollars, so they're just kind of following a similar pro rata offshore versus onshore split.

John Daniel Gibbons

Hold on. We're getting that answer. Go ahead. We'll have that answer for you here momentarily.

Operator

The next question is from the line of Richard Tullis with Capital One Southcoast.

Richard M. Tullis - Capital One Southcoast, Inc., Research Division

Just a couple of quick questions I don't think have been touched on yet. Going back to the 2012 reserves, what were the total adds from acquisitions and then subtractions for divestitures for the year?

Tracy W. Krohn

We added 40-something Bcf.

John Daniel Gibbons

42.

Tracy W. Krohn

For acquisitions and I can't remember what we sold.

John Daniel Gibbons

Yes. 42 on the add and about 3 on the divestment of the small South Bend property [ph] .

Tracy W. Krohn

We'll have those exact numbers in the 10-K, which will come out in a few days.

Richard M. Tullis - Capital One Southcoast, Inc., Research Division

Okay. And then just on Yellow Rose, anything to update there on 2 recent horizontal wells, the Chamblis, [ph] ? Do you have a 30-day rate there yet? And then that UL well that was flowing back, do you have initial rate there?

Tracy W. Krohn

We haven't given that information out yet, Richard.

Richard M. Tullis - Capital One Southcoast, Inc., Research Division

So nothing to update yet at this point?

Tracy W. Krohn

We're -- we don't have an update for you on that. I'm -- I will tell you that the field production just about doubled from this time last year on a peak rate, and every trade is just slightly off of that. So rate in the field is climbing at a nice little pace right now.

Operator

[Operator Instructions] The next question is from the line of Jeff Robertson with Barclays Capital.

Jeffrey W. Robertson - Barclays Capital, Research Division

Tracy, a question on capital. If you all do find an acquisition in 2013, did I hear it right that you would consider deferring some of the exploration activity?

Tracy W. Krohn

No, I didn't explain that right. What we would be willing to do is spend more money to do the acquisition, which means that we would borrow money to make acquisitions. Okay?

Jeffrey W. Robertson - Barclays Capital, Research Division

It would be an addition to the capital budget you're talking about.

Tracy W. Krohn

I wouldn't be able to sit here and claim that we were doing our CapEx within cash flow. I would go outside of cash flow to make acquisitions.

Jeffrey W. Robertson - Barclays Capital, Research Division

And what would you be comfortable with in terms of debt metrics for the company? Can you just remind us where you'll -- what your criteria are?

Tracy W. Krohn

That's always a really good question, Jeff, and I don't have a stock answer for that. The reason is every deal is a little bit of a hybrid. So it's a function of how fast it pays down and how much concentration risk you might have to take in one different field and what the bank advance rate is and what -- of course, if we chose to do a larger acquisition and put some of it off in longer-term debt, what those metrics would be that would make it make sense. What I don't want to do is lower our credit ratings.

Jeffrey W. Robertson - Barclays Capital, Research Division

In keeping with what you all have done, Tracy, so a preferred acquisition would be one that brings a reasonable amount of cash flow in addition to drilling opportunities? As opposed to just going out and buying drilling opportunities?

Tracy W. Krohn

Yes, we're always interested in more cash flow. That's kind of have been our mantra for the last 3 decades. So yes that's more appealing to us.

Operator

The next question is from the line of Curtis Trimble with Global Hunter Securities.

Curtis Ryan Trimble - Global Hunter Securities, LLC, Research Division

I was hoping to have -- might be able to get a little bit detail on Big Bend internal reserve estimates, expectation for timing on development. I'm guessing it's still waiting on Troubadour results, but if you guys had any preliminary discussions with Noble on possible development options, whether or not Troubadour is successful, etc.?

Tracy W. Krohn

Yes. No. Troubadour is scheduled to spud this year. I don't want to take the lead away from the operator. In this case, Noble as to what they're announcing in the way of reserve and that sort of thing. I think they printed that out there. I think their gross resource has been made known in what they consider their economic cases. So rather than have differing or potential for any kind of differences in numbers or anything like that, I'd follow their lead. We haven't really sat down and talk about sanctioning yet but we will. They're in that process now. They'll have to the FEED study and get it or I'd say we -- I mean the group, meaning Noble, will lead that as operator. I know we have a meeting this week with them. So there's nothing that we want to do to slow it down. That's for sure.

Operator

There are no further questions at this time. I will turn it back over to Mr. Krohn for any closing comments.

Tracy W. Krohn

Okay, I think we had a follow-up answer on the percentage of our exploration budget going to onshore versus offshore. And so I think that was Patrick that asked that question, so if he's still available, I'll cover that. If not, we'll put it out in the 10-K anyway.

John Daniel Gibbons

Patrick, the answer to the exploration question, about 80% of the exploration is dedicated offshore. Again, if you think about the onshore, the question about -- we're talking about drilling quite a few wells onshore but most of that's development dollars. So the exploration side is offshore. So anyway, that's the question you've asked.

Tracy W. Krohn

With that, I'll shut it down. We appreciate your attendance and look forward to talking to you again soon. Thanks very much.

Operator

Ladies and gentlemen, this does conclude the conference call. If you'd like to listen to a replay of today's conference please dial (303)590-3030 and enter in the access code of 4590116#. Thank you for your participation. You may now disconnect.

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