W&T Offshore Inc. Q1 2009 Earnings Call Transcript

| About: W&T Offshore, (WTI)

W&T Offshore Inc. (NYSE:WTI)

Q1 2009 Earnings Call

May 05, 2009 9:30 am ET


Manny Mondragon - VP of Finance

Tracy Krohn - Chairman and CEO

Danny Gibbons - CFO

Steve Schroeder - COO


Noel Parks - Ladenburg Thalmann

Neal Dingmann - Wunderlich Securities

Thomas Pauly - Raymond James


Welcome to the W&T Offshore first quarter earnings conference call on May 5, 2009. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions.

(Operator Instructions)

I will now hand the conference over to Mr. Manny Mondragon, VP of Finance. Please go ahead, sir.

Manny Mondragon

Thank you, operator, and good morning, everyone. We appreciate you joining us for W&T Offshore's conference call to review the first quarter 2009 results. Before I turn the call over, I have a few items to go over.

If you'd like to be on the company's e-mail distribution list to receive future newscasts or you experiencing technical difficulty and didn't receive yours, please call DRG&E's office at 713-529-6600 and someone will be glad to help you. 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 recorded replay until May 12, 2009. To use the replay feature call 303-590-3030 and dial the passcode 4065057.

Information recorded on this call speaks only as of today, May 5, 2009 and therefore time sensitive information may no longer be accurate as of the date of any replay. Today, management is going to discuss certain topics that contain forward-looking information, which is based on management's beliefs as well as assumptions made by and information currently available to management. Forward-looking information includes statements regarding expected production expenses for 2009.

Although management believes that the expectations reflected in such forward-looking statements are reasonable, they can give no assurance that such expectations will prove to be correct. Such statements are subject to certain risks, uncertainties and assumptions including among other things, market conditions, oil and gas price volatility, uncertainties inherent in oil and gas production, operations and estimated reserves, unexpected future capital expenditures, competition, the risks, the success of risk management activities, governmental regulations and other factors described in the company's most recent annual report on Form 10-K and subsequent filings with the Securities and Exchange Commission. Should one or more of these risks materialize or should underlying assumptions prove incorrect, actual results may vary materially from those expected.

Please also note that this conference call contains references to non-GAAP financial measures. You can find reconciliations of those non-GAAP financial measures to GAAP financial measures in the Form 8-K filed by the company earlier today as well as in this morning's press release.

Now, I'd like to turn the call to Mr. Tracy Krohn.

Tracy Krohn

Thanks, Manny, and good morning, everyone. Thanks for joining us for our first quarter 2009 conference call. This morning we are going to review significant events that took place in the first quarter 2009 and will provide an update on how the company is looking for the rest of the year.

With me today here are Danny Gibbons, our CFO, Steve Schroeder, our COO, and Jamie Vazquez, our President.

Drilling and CapEx, let's talk a little bit about that. We continue to experience success with the drill bit, in the first quarter we drilled three out of four successful conventional shelf wells. Since the end of the quarter, we successfully drilled two additional wells and one non-commercial well. Steve is going to give you details behind that activity, but needless to say we are still actively drilling.

As we mentioned in our last call, our 2009 drilling program is front-end loaded. During the first quarter, we spent about half of our current capital budget, which is between $220 million and $270 million for the year, our activity level will start to slowdown towards the end of the second quarter, as we complete our current drilling programs at Main Pass, South Marsh Island and Ship Shoal 349 Mahogany and complete most of the work on the Daniel Boone project.

In the second half of the year, we'll be spending budgeted dollars on development projects like Daniel Boone, our recently successful wells. Otherwise, we'd prefer to remain flexible, build cash, and maintain the ability to pursue other strategic options, such as drilling opportunities, corporate acquisitions or asset purchases.

We believe we'll be able to find our CapEx program from internally generated cash flow, cash on hand, and/or borrowings from our revolving credit facility.

Let's talk a little bit about our credit facility and liquidity. We just completed the semi-annual redetermination of our borrowing base, which is now set at $405 million. In connection with the borrowing base redetermination, we amended the Credit Agreement, which will greatly enhance our financial flexibility.

As part of that redetermination process, we also paid-off our Term Loan B with a draw under the revolving portion of our Credit Agreement, which results in a remaining revolver availability of $200 million. So we have that $200 million available from the banks, and $227 million cash on the balance sheet as of April 30th.

By paying off the Term Loan B vis-à-vis our revolving credit facility, which had a maturity of August 2010 with the revolver, we extended maturity from August 2010 to 2012. That improves our current ratio and helps create more overall liquidity. Now that the redetermination is complete, our liquidity position is established and we can move forward on strategic opportunities.

In March, we announced the $25 million stock repurchase program during the quarter ended March 31. We purchased 1.4 million shares of our common stock for approximately $9.2 million at an average price of $6.47 per share in the open market in accordance with the repurchase program. The primary purpose of the program was more administratively driven than strategic.

When the stock price dropped, we realized that we didn't have enough share to completely fund our employee incentive plan for bonus awards related to the 2008 planed year. The lower price meant significantly new more shares were needed than were available to be issued. The Board determined the company should purchase shares in the open market rather than further dilute shareholders by issuing new shares.

For further details, I'll refer you to our recently filed proxy for a more complete description of the situation, and the planned description, but suffice to say that so far that's proven to be the right answer to that issue of stock price dropping while we were getting ready to issue shares to employees.

Now here is Danny Gibbons to expand further on the financials.

Danny Gibbons

Thanks, Tracy and good morning everyone. We put out an earnings release this morning that covers numerous financial items, so I will refer you to that release and not cover those items again.

What I would like to discuss is our cash balance and liquidity and federal income tax position. Our cash balance at March 31, 2009 was $251 million, compared to $357.6 million at the end of 2008.

Cash balances declined during the quarter as we spent $128.4 million on capital expenditures, $9.2 million to repurchase shares of our common stock, $4.6 million for interest and dividend payments, and $40.1 million in accounts payable reductions and other working capital changes.

In addition, EBITDA was $57.2 million, and was impacted by reduced commodity prices without a proportionate decrease in operating cost and reduced production volumes that were affected by hurricane damage to third party pipelines.

Cash balances benefited at the end of the quarter as we received a $17.7 million federal income tax refund. As we discussed at recent conferences, our capital expenditure budget is front end loaded, so we expected that cash balances would decline through the first half of the year, and then rebuild later in the second half of the year. We still believe that will be the case.

Also, as Tracy had just mentioned, we have amended our Credit Agreement. What we did was we changed our maximum leverage ratio which is the ratio of total debt to EBITDA, as those terms are defined in the Credit Agreement.

The amended ratio is 3.75:1 for the four quarters ended September 30, 2009, 3.5:1 for the four quarters ended December 31, 2009, 3.25:1 for the four quarters ended March 31, 2010 and 3:1 thereafter. Now with the borrowing base redetermination complete, and the completed amendment, we have great financial flexibility.

Let me move on to federal income taxes. We recorded an income tax benefit of $24 million in the first quarter of 2009. This resulted from a pre-tax loss of $255 million, but only a portion of which is expected to be available to be carried back to 2007, which is the only open tax year that is currently available.

Our annualized effective tax rate for the quarter ended March 31, 2009, was approximately 9.4%, and is primarily the result of the effective evaluation allowance attributable to our deferred tax assets.

With that, I'll turn it over to Steve Schroeder. Steve?

Steve Schroeder

Thanks, Danny. Let me start with an update on our drilling program. We currently have three rigs working, of which, all are operated; and this morning we began demobilizing the Rowan Gorilla IV. We also have one non-operated rig conducting a multi-well recomplete program.

While our only first quarter development well was unsuccessful, all three of our exploration wells were successful including the South Timbalier 320 A-7, South Marsh Island 39 C-4 and the Main Pass 283 A-3 side track.

Each of these wells were drilled from existing infrastructure, and have now been completed, and are currently online producing at a combined net rate of 2300 barrels of oil per day, and 3.6 million cubic feet per day or 17.4 million cubic feet equivalent per day net to W&T.

Of these three wells, the 65 feet of oil discovered in the Main Pass 283 A-3 side track is the most significant. This well's success confirmed the geologic model that identified several future exploration drilling locations along the same channel system.

These drilling offsets are currently planned for future drilling program, pending the long-term production results of the A-3 side track. The Main Pass 283 field also provided a second success during the second quarter, the Main Pass 279 A-5 sidetrack. This high yield gas condensate well is currently being completed with first production anticipated shortly.

Also in the second quarter, we completed the Mahogany A-12 sidetrack development well in Ship Shoal 349 field. This well drilled through the yields main oil reservoir at a structurally highest point, encountering 80 net feet of oil, sand full to base. This zone was caged-off, and we attempted to drill deeper toward additional exploratory zones.

Unfortunately, we experienced an underground blowout, and decided not to risk the completion in the fields main pay zone, and suspended drilling deeper. First production from this well is expected later this week, once the rig is a safe distance away from the platform after demobilizing.

Additionally, work continues on our future drilling program which includes a deep shelf well designed to explore Mahogany deep geological structure. The proposed well targets upper and middle Miocene age sediments to a much deeper depth of about 25,000 feet.

Difficulties were encountered by the operator of the South Marsh Island 39 B-2 side track exploration well. This is the second well of the program following the successful C-4 well earlier this year. The well has been temporarily suspended with future drilling plans contingent on developing a revised drilling plan.

Our last active platform drilling program is at South Timbalier 314 field, where we just finished drilling the non-commercial A-4 well. This well has been plugged and abandoned. Current plans call for drilling one to two additional wells in this field.

Now, to give you an update as to the progress of the Daniel Boone development project. The flow line welding is complete and Technip's Deep Blue, which is an ultra deepwater pipe lay vessel is scheduled to start mobilization this month. The pipe will be spooled and ready for installation by mid-May.

The flowline and umbilical right-of-way permits have received regulatory approval. We are encouraged with the progress made to-date, and still see this project as on schedule and on budget. We anticipate first production of oil in late third quarter of 2009.

We currently are producing about 260 million cubic feet equivalent per day. We have three wells that were completed in the first quarter, and now we're producing 17.4 million cubic feet equivalent per day.

We currently have about 26 million cubic feet equivalent per day net, shut-in from hurricane damage platforms, and shut-in third party pipelines. The majority of the production will be back online in the third and fourth quarter of this year, and has been incorporated into our guidance.

For the second quarter 2009, the company anticipates production to be between 1.6 million and 2.0 million barrels of oil, and 11.4 billion and 13.9 billion cubic feet of natural gas, or a total of between 21.1 billion and 25.8 billion cubic feet of gas equivalent. The midpoint for this quarter is 10% higher than first quarter's production. For a full year 2009, we've not changed our production guidance.

Moving on to lease operating expenses. Lease operating expenses for the first quarter of 2009 was $45.1 million, excluding hurricane repair cost, base LOE for the first quarter was $40 million, which is below the low-end of guidance. The largest driver for the difference was in workover and facility expenses, which were about $5.3 million under forecast.

There were no large workover projects operated or non-operated during the first quarter. In fact, we were able to eliminate the need for an $800,000 workover, with a much smaller $40,000 repair at our Main Pass 108 field. Facility expenses were also less than forecast. This is mainly due to the concentration of work done in hurricane remediation.

We mentioned something here about our approach to operating costs in general. We have launched a profitability initiative throughout the company, which emphasizes facility optimization, well performance reviews, wellbore utilization analysis, and reduction of cost.

On the cost cutting front, the effort is to trim as much cost as possible in this challenging commodity price environment. Please do not take this to mean that we are not performing the necessary repairs and maintenance to continue operations safely because we wouldn't compromise the integrity of our operations; however, to date, we have reduced the number of helicopters, boats and manpower.

In addition to the fewer boats and helicopters, we will benefit from lower fuel consumption and prices. We have benefited from this initiative and will continue to benefit throughout the rest of the year.

Looking to the second quarter of 2009, lease operating expenses are expected to be between $50 million and $63 million. This does not include allowance for hurricane related expenses. This is also a slight increase from the first quarter due to the normal increase in activity during the spring and summer months.

As weather improves, we ramp up our blast and paint, repairs and maintenance activity. For the year, we are forecasting lower base LOE and therefore lowering guidance to reflect what we believe are lower costs such as transportation, fuel, labor, and general overheads.

Gathering, transportation and production taxes for the first quarter were $3.3 million, which were below the low-end of guidance. This is mainly due to lower than anticipated sales in fields producing from within state waters and lower processing volumes.

Gathering, transportation and production taxes for the second quarter are expected to be between $5 million and $6 million and unchanged for the year.

Now, let me turn it back to Tracy for closing remarks. Tracy?

Tracy Krohn

Thanks, Steve. I'd like to talk a little bit about how we're currently looking at our opportunities and our use of liquidity. As you all know or should surmise, it's becoming a buyers' market and companies with good liquidity have a distinct advantage.

We don't have a crystal ball, and we don't know where commodity prices are going in the near-term or whether the capital markets will be open in 2009 or later, so while we're actively looking at opportunities, we're going to be patient, we're going to focus on paying the right price, spend conservatively and efficiently.

We continue to evaluate opportunities in various areas outside the Gulf of Mexico. That includes domestic onshore and international areas. We don't want to rush in, pay too much or pursue something that doesn't fit our objectives.

As I've said before, our ultimate criteria is does it make money? Philosophically, I don't have anything against those other areas; just the Gulf of Mexico has always provided us with the highest rates of return.

We do have two major criteria for international opportunities. First one is their rule of law. Don't really like getting shot at. Second, we need to feel secure that we'll get paid and that we'll get paid on a regular basis.

For those of you who aren't aware of it we have a very well staffed A&D team. The team includes two fully dedicated geologists, four reservoir engineers and two technical staff members. In addition, our Executive Vice President and Manager of Corporate Development Reid Lea is also a reservoir engineer.

We believe we're properly staffed to handle most of the opportunities presented to our team at any given time and I expect this to be a very busy year for them.

One of the good things about this current economic atmosphere is that our banks have made a very positive statement with regard to our borrowing base. We do have liquidity. We have cash, and we have functional options about how we want to proceed in this environment.

In 1986, we had about a $1 million in liquidity. We built a company on that. Today, we have hundreds of times more liquidity and I have to believe we'll do better this time around.

With that, that concludes our prepared remarks and we're ready to take your questions. Operator, would you please open the phone lines for Q&A?

Question-and-Answer Session


(Operator Instructions) First question comes from Noel Parks. Please state your company name followed by your question.

Noel Parks - Ladenburg Thalmann

Ladenburg Thalmann. I just have few questions. On the acquisition front as far as the Gulf itself, do you have any sense at this point whether you have much in terms of pref rights opportunities just from properties you know or you think are going to be on the market, and if you have any sense of whether that would be major or minor?

Tracy Krohn

The short answer is, yes. We always have preferential right opportunity. We have got a lot of acres and we've got a lot of leases out there. As far as what might be coming up on the horizon, we're certainly aware of properties that are being marketed. As to whether those will sell sooner or later is not something that we really have a good feel for, but in the event that we're not the purchaser.

We would have significant opportunity. I don't know that I can give you an effective timeline, whether that's going to be major or minor. It depends sometimes on how they structure these things whether it's for instance a sale of all or substantially all the assets and that may negate certain pref rights and that sort of thing. So I don't really have an accurate feel for what it would be, but feel fairly certain that [if it met] our criteria that we would be able to gather that fairly quickly.

Noel Parks - Ladenburg Thalmann

On Mahogany, as far as the deep drilling you're looking to do there, having had a few more quarters to study it, do you have any update as far as your expectations or time to drill, cost to drill that you might need out there, thinking that we've seen this pullback in cost and develop?

Tracy Krohn

The good news is costs are going down. Certainly, drilling rig costs are going down. I don't really have a good feel for a bottom-line number on what it's going to cost to drill that well. The rig costs are going down. [Boat] costs are going down. Ancillary service providers are starting to go down. They are not going down quite as quickly think. So, I don't really have an accurate number.

Certainly the reserves aren't going down other than what's being affected by price. This is a substantial prospect. This is one that would certainly move the needle pretty dramatically for us. It's a deep well and we're looking at somewhere around 25,000 feet right now, so we'll probably have a little bit more data in the next two or three months as to whether we'll be drilling that well in the near term or a little bit further out.

Noel Parks - Ladenburg Thalmann

Anything from other operators nearby that have given you a better sense either of the risk or just how to best identify the target?

Tracy Krohn


Noel Parks - Ladenburg Thalmann

Okay. Just a last thing; with the cost coming down as much as they have, do you think that we're mostly through what we're going to see as far as cost improvements, I mean, with what you've incorporated in your guidance here or do you think it's likely that we'll see a lot more? Also with Mahogany, and also some of the other drilling, have you thought about locking-in any costs and some longer term contracts now?

Tracy Krohn

I think the short answer to that question is I don't think we've seen the bottom in cost of goods and services yet. A lot of that is weather dependent. As far as I can see, there's a pretty good abundance of gas out there. I don't know if that necessarily means the price is going down. The other side of that equation is that, a number of drilling rigs out there working to drill for hydrocarbons is dropping fairly dramatically too.

At some point in time, the market will wake up and realize that that's not going to be adequate and when it does, the pricing scenarios will turnaround pretty rapidly. The other part of the question is, whether we've thought about locking in prices. We think about it all the time. If I felt like I was in danger of not being able to meet a budget, then that would be a reason to lock-in prices. We're not at that point.


Next question comes from Neal Dingmann. Please state your company name followed by your question.

Neal Dingmann - Wunderlich Securities

Tracy, a couple things. One, on the three rigs that we're running, did you say it was one of the Gorilla rig? What rigs exactly are running right now?

Tracy Krohn

Actually that wasn't one of the rigs. The Gorilla is demobilizing as we speak.

Neal Dingmann - Wunderlich Securities

Got it. Okay. Then, sort of looking at opportunities I guess, given the leases that you currently have, obviously, you've explained this year I think, and outlined that quite well as you look forward. If prices or when prices do improve, do you see yourself doing more deeper plays, more shelf? How do you see that maybe playing out beginning of next year?

Tracy Krohn

It won't have a function of deeper or shelf necessarily, Neal. It could just based on overall cost, but assuming that commodity prices improve through the year, it's going to be economically fueled by what those prices are, and how we run our economics internally. It may or may not necessitate a deeper drilled well, but normally, you would expect that without significant price improvement, you probably wouldn't drill a $50 million well that had the same economic return as you would with a $15 million well given the amount of budget that we put forward this year.

Neal Dingmann - Wunderlich Securities

Sure. Lastly; obviously you continue to generate great cash flow even with this pricing environment. Are you still looking to build up more cash versus pay down? Can you still pay down a bit more debt? Is that on option versus the share buyback? How do you sort of look at those three things?

Tracy Krohn

I think that we've put ourselves in a position to have all those options and that's the point. We've put our credit facility in a position where we can go up and down with that credit to pay that debt off as we see fit. Similarly, we can take advantage of what I think will be the most effective use of funds, and that would be finding reserves.


(Operator Instruction). The next question comes from Thomas Pauly. Please State your name.

Thomas Pauly - Raymond James

Hi, guys, I'm with Raymond James. In the fourth quarter, the bid-ask seemed to be really wide given the sudden decline in commodity prices in the market meltdown. Have you seen that gap narrow significantly since then, and when do you anticipate a pickup in the M&A activity?

Tracy Krohn

Thomas, I'm having a real hard time hearing you. Could you maybe get a little bit closer to the phone and say that one more time, please?

Thomas Pauly - Raymond James

Sure. Can you hear me right now?

Tracy Krohn

Got it.

Thomas Pauly - Raymond James

In the fourth quarter the bid-ask spread seemed to be really wide given the sudden decline in commodity prices in the market meltdown. Have you seen that gap narrow significantly since then, and do you anticipate a pick up in the M&A activity any time soon?

Tracy Krohn

Yes. The short answer to that is definitely. We're seeing data rooms all the time. We're seeing opportunities. I don't think that the bid-ask on M&A's has narrowed sufficiently to see a whole bunch of it in the Gulf of Mexico at this point, but certainly, you'd have to believe that the longer the commodity prices stay down, the quicker that gap is going to narrow.

Thomas Pauly - Raymond James

Do you anticipate remaining completely unhedged especially if you end up doing any deals?

Tracy Krohn

Again, that's a function of what we think our budget is but at this point, yes, I expect it will remain unhedged.


(Operator Instruction)

Tracy Krohn

Okay. I guess we'll wrap it up then. I want to thank everybody for participating, and I thank you for your interest, and we'll talk to you again at the latest, next quarter. Thanks so much.


This concludes today's conference call. Thank you for participating. You may now disconnect.

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