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W&T Offshore (NYSE:WTI)

Q1 2013 Earnings Call

May 08, 2013 10:00 am ET

Executives

Mark Brewer

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

Analysts

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

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

Dan McSpirit - BMO Capital Markets U.S.

Dan McSpirit - BMO Capital Markets Canada

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

Operator

Ladies and gentlemen, thank you for standing by and welcome to the W&T Offshore's First Quarter Earnings Conference Call. [Operator Instructions] Today's conference is being recorded, May 8, 2013. I would now like to turn the conference over to Mark Brewer, IR Manager. Please go ahead.

Mark Brewer

Thank you, operator, and good morning, everyone. We appreciate you joining us for W&T Offshore's Conference Call to review the results of first quarter of 2013. 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 recorded replay until May 15, 2013. To use the replay feature call (303) 590-3030 and dial passcode 4615599#.

Information recorded on this call speaks only as of today, May 8, 2013 and, therefore, time-sensitive information may no longer be accurate as of the date of any replay. Please refer to our first quarter 2013 earnings release for a disclosure on forward-looking statements.

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

Tracy W. Krohn

Thanks, Mark. Good morning, everyone. Thanks for joining us for our first quarter 2013 earnings conference call. This morning, there are several members of the management with me, including Jamie Vazquez, our President; Danny Gibbons, our Chief Financial Officer; Tom Murphy, our Chief Operations Officer; and Steve Schroeder, our Chief Technical Officer.

So continuing with our theme of organic growth with a focus on oil, we had another solid quarter that was largely driven by higher oil production and premium oil pricing. Cash from operations was up 33% in the first quarter compared to the first quarter of last year. This primarily reflects the success of the development projects we had underway in 2012. In particular, we saw growth in oil production from our Yellow Rose project in West Texas and from our Mahogany Field offshore. We still have a lot going on in both projects and that should drive further oil reserves and production growth.

Our oil production is up 20% year-over-year as we sold 1.8 million barrels of oil in the first quarter. Our total production was 4.5 million barrels of oil equivalent and production volumes which split 41% oil, 12% NGLs and 47% natural gas. Our improved financial results also benefited from the premium pricing we received for our production. Our oil prices averaged $107.15 per barrel for the quarter. We also saw an improvement in our natural gas price realization, which was up 27% to 3.38 per Mcf for the quarter.

We're continuing to progress our growth initiatives using a balanced approach. In the first quarter, we spent $136.6 million, of which 63% was dedicated to offshore activities and 37% to onshore activities, while approximately 54% of our first quarter capital went for development activities and 46% for exploration activities.

Our capital expenditure should become increasingly weighted toward exploration as the year progresses. Okay. So the objective for taking a more balanced approach is to develop longer life reserves and more predicable production growth, particularly in our drilling and our development program in the Permian Basin, West Texas. This serves to counterbalance our high cash flow, higher RR but relatively shorter reserved life offshore projects. We do have some high potential projects like Big Bend and the Deepwater and Mahogany Field on a shelf that can add substantial future reserves to balance the projects that have steadier and predictable development characteristics, like our 40-acre spacing and horizontal Wolfcamp programs at Yellow Rose.

Near term, we have inventory projects that could add substantial value this year and provide additional upside in 2014 and beyond. Several projects underway are expected to contribute additional production in the later part of 2013. Our second quarter guidance reflects the impact of various planned and unplanned events, including the timing of production of new wells, pipeline outages and platform downtime for maintenance, notably at our Wrigley Field.

Offshore, we're currently drilling the A-14, the salt[ph] exploratory well at our Ship Shoal 349 Mahogany Field. As you know, we've had tremendous success in this field, bringing online 6 wells since late 2011, resulting in a production increase of roughly 600% during that 18-month period. The most recent well, the A-9 had initial production of 2,700 barrels of oil equivalent per day. The A-14 well rates, our well results so far is

[Audio Gap]

which is the P-Sand, both of which are below [indiscernible]. So far, the well has drilled through the P-Sand, encountering approximately 123 feet of measured depth pay, which is thicker than we originally projected. The well also encountered over 100 feet of hydrocarbon interval in 3 additional sand above the P-Sand. We expect to reach total depth in the exploratory target P-Sand this quarter, and we will update you on those results when we can.

Assuming a successful discovery could add as many as 5 additional P-Sand targets in the field. Following the completion of the A-14 well, we plan to form -- plan do a recompletion on the A-4 well and then proceed to the A-15 well. The A-15 is another subsalt[ph] exploratory well that could add meaningful reserves in 2013 and production in 2014. That well should spud sometime during the third quarter and is targeted to reach TD near the end of the year. This exploratory opportunity will target 5 separate pay sands, including the field pay P-Sand. Again, the successful A-15 well could create additional development of new reservoirs in the Mahogany Field.

These projects have considerable near-term and long-term impacts and value to the company. Our initial estimate of the unbooked net resource, potentially the A-14 and A-15 exploration wells, amounts to roughly 7 million barrels of oil equivalent. These numbers don't account for the additional intervals in the hydrocarbon column identified above the P-Sand or the value of the PUD location P-Sand, which we've already encountered, the A-14. This is additional value. Once we know more about the productivity of P-Sand, we could again increase the field's total proved reserves. Also, let me remind you that Mahogany production is approximately 75% crude oil that earns premium pricing similar to our other Gulf Coast barrels.

At our Main Pass 108 field, we had 2 exploratory wells planned for 2013 that together have as much as 3.5 million barrels of oil equivalent of unbooked net resource potential. The Main Pass 108 B-1 well yesterday reached total depth and we have drilled through approximately 130 feet of gross pay. And it's very encouraging. We expect to begin completion shortly and head to well on production about July.

The rig will then skid over to spud the Main Pass 108 B-2 well, which, assuming success, would be on first production by year end. This natural gas production is expected to be very liquids rich, thereby substantially boosting our returns.

Looking at development projects offshore, additional development projects, I should say, we expect to bring on more oil production from Mississippi Canyon 243 Matterhorn Field. We're currently completing the A-2 sidetrack well. That's a target IP range of 500 to 1,000 barrels of oil equivalent per day. We should also see oil production reserve growth in Matterhorn, assuming success with the A-5 injection well which is expected to spud immediately following completion of the A-2 well. The A-5 well is a reservoir pressure maintenance project that is designed to extend the productive life of the field, as well as sweep oil to the A-2 well bore in the Eastern portion of the field. We believe that we've unbooked net resource potential about 1.5 million barrels of oil equivalent for this project and that there could be another 3.6 million barrels of oil equivalent with unbooked potential, assuming we conduct a similar pressure maintenance program in the Western field area, focusing on a slightly larger reserve target. That project will develop based on the results of the A-5 and probably occur in 2014 or early 2015.

We're currently drilling a High Island 21 #1 development well, where we're targeting liquids-rich natural gas and assuming success, this well should be on production sometime in the third quarter. Previous wells in this field have yielded a cumulative production of over 50 BCF equivalent.

Okay. So longer term, we have other projects in our inventory that we believe add substantial value. Most notably is the Big Bend project, which, as I said earlier, is expected to be sanctioned this year and is anticipated to generate first oil production in 2015. We estimate the unbooked net resource potential of this project to be somewhere between 5 million and 11 million barrels of oil equivalent net to our interest. We're in active discussions with other operators about W&T's participating in other Deepwater projects. This includes looking at opportunities on the Deepwater acreage we've obtained from Newfield last year and recent additions from leased sales.

In summary, our 2000 offshore drilling program could provide a huge value to W&T, with unbooked resource potential of 17 million to 23 million barrels of oil equivalent and net value between $425 million and $707 million.

So moving to the onshore, our focus has been on refining our drilling and completion process, gathering data and performing the necessary field analysis to make sure we're optimizing our exploration and development efforts.

At Yellow Rose, we're using 3D seismic, the well and lateral leg displacement or placement, rather. And we have implemented new completion techniques that have generated meaningful results. We've seen a steady improvement in 30-day IP rates with our vertical wells, with our recent wells achieving rates that are nearly doubled the rates for our mid-2012 vertical wells.

We've also seen an upward trend in the vertical EURs over the past few months and are now projecting an average growth estimated recoverable to the 130,000 barrels of oil equivalent for vertical wells. That's including oil and unprocessed gas.

We've completed 11 wells in the first quarter, with 9 on 80-acre spacing and 2 on 40-acre spacing. Our horizontal program is really just beginning and we continue to learn and gather data. Today, we drilled 6 horizontal wells and we're in the process of drilling 7. We've shared the results in our first 2 horizontals. We have 2 more wells on [indiscernible] and the last 2 are awaiting completion. We're currently operating a 2-rig drilling program, and we'll evaluate results to determine the best mix vertical and horizontal wells across the acreage to optimize our overall returns.

We're taking a very systematic approach to both the vertical and horizontal programs as we want to make sure that we properly filter that information that we gained in this early stage through our long-term operations. We believe the field could have the potential to be developed down to 20-acre spacing on the vertical program, an idea that we will probably test later this year. We also believe we could ultimately have the potential to drill several hundred horizontal wells, targeting Wolfcamp and other horizontal benches.

Our Yellow Rose project has significant upside resource potential, and W&T has identified an additional 120 million to 170 million barrels of oil equivalent, that being about 1,000 locations over and above the prudent and probable reserves [indiscernible] to date on our acreage.

In regards to our prudent and undeveloped locations, we've got plans to drill those wells within the next 5 years. We've not booked more locations because we want to remain flexible with capital dollars in 2013 and in future years. We'll apply a balanced approach lending our offshore projects, yielding high rates of returns with high cash flow through our onshore projects, which have relatively predictable unbooked reserves available for development in the future. With 85% of our acreage held by production in Yellow Rose, we have that flexibility and plan to continue to commit capital to our drilling program that will have the most impact on our production reserve goals for any given year.

We're planning to take a more measured approached to our East Texas Star Project. We have a large acreage position in excess of 140,000 acres and no near-term risk of losing leases. Currently, our plans are to commence drilling again in the third quarter. That could be modified based on what we learn and observe in the coming months.

On the acquisition front, we're seeing significant activity, both offshore and onshore, including some very attractive opportunities. We've also decided to put a package of our shelf properties on the market. It's a large package, and we think it makes sense to periodically accelerate the terms. Whether or not we sell any properties, we remain interested buyers of Gulf of Mexico properties and have excellent liquidity to complete a deal if it fits our criteria. As we announced recently, the borrowing based under our revolving credit facility was increased to $800 million from $725 million. So we have a pretty high level of activity and a balanced mix of projects underway, which supports our near-term and long-term organic growth strategy.

We're also continuing to return cash to our shareholders. And yesterday, we announced that we've increased the quarterly dividend by 12.5% to $0.09 per share per quarter. When we went public in 2006, we were paying a quarterly dividend of $0.02 per share. This is an overall increase of 350% since 2006 on our regular quarterly dividend. We've also paid special dividends about the last 6 years.

And with that, operator, we'll open the phone lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Noel Parks with Ladenburg Thalmann.

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

I wonder if you could just talk a little bit more about what the nature of the improvements has been in the Yellow Rose verticals. You said that had been occurring over the last few months.

Tracy W. Krohn

Yes. Actually, the production is going up nearly 100% on our vertical wells. It just has to do with different completion techniques that we've gotten better at. And also, we've pretty dramatically reduced the number of days it takes to drill those vertical wells.

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

Great. And when you talk about the techniques, is that more sort of, I don't know, just a frac formula-type improvement?

Tracy W. Krohn

Yes. It has more to do with the fracs than anything else and just a method of implementation.

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

Okay, great. And just looking ahead, you talked about doing some 20-acre spacing. You've already started experimenting with those. If you got to more of sort of a manufacturing mode out at Yellow Rose, do you have a sense of how much more you might be able to shave costs down?

Tracy W. Krohn

Yes. A part of that equation, Noel, is that we're drilling some more horizontal wells out there and we're trying to determine what is the most efficient method for drilling out there in that field. Do we get better, ultimate economics out of the horizontal wells where we can? Or should we drill vertical wells? And we were getting pretty efficient with the vertical wells, too. So it's just in economics consideration. And so the short answer to your question is yes, subject to better understanding of our horizontal economics.

Operator

[Operator Instructions] And our next question comes from the line of Michael Glick with Johnson Rice.

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

Just a question on the shelf package. I was wondering if you'd give kind of a little bit more color on kind of the thought process there and kind of what that means for you strategically in terms of kind of future direction in terms of maybe focusing more on the Deepwater.

Tracy W. Krohn

Well, we have focused more on the Deepwater in recent years. Occasionally, we sell properties in the Gulf of Mexico and on the shelf and in other places. I just believe that right now is a good time to be selling properties. We're also in the buying mode as well. So I don't see it as really a different strategy from what we've used in the past. It's -- we really hadn't sold anything of size in several years now, and I think sometimes you look at the tree and you need to prune it. That's all.

Operator

Our next question comes from the line of Noel Parks of Ladenburg Thalmann.

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

Just a follow-up. Sorry if you had commented on this and I missed it. It looks like the production mix was a bit oilier than the guidance suggested for first quarter. Just wondering if -- what was behind that.

Tracy W. Krohn

That was a very conscious intent. We had a goal of increasing oil production in our mix. And so we've very judiciously concentrated on development of projects that yielded oil last year, and we are continuing to drill up prospects that yield oil this year as well.

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

So just more -- mostly the Permian then, was the main contributor?

Tracy W. Krohn

The Permian and also Mahogany. Mahogany is about 75% oil. So it's a pretty -- and those are pretty high rate wells. So we've spent a lot of time and effort there to, Noel.

Operator

Our next question comes from the line of Dan McSpirit with BMO Capital Markets.

Dan McSpirit - BMO Capital Markets U.S.

I just want to go back to the shelf property divestiture. What's contemplated there? Any details that you could possibly relay on where, how much and timing?

Tracy W. Krohn

Well, we've just sent the package out, and without giving too much detail because it's not like we're sending it out to the entire world here. I will tell you that it's a pretty sizable package in the Gulf of Mexico. I don't want to commit myself to what it should be worth or what that production is but expect it to come in as a pretty large number.

Dan McSpirit - BMO Capital Markets Canada

As a follow-up to that then, regarding CapEx, you say it's -- it will be weighted towards exploration over the, I guess, over the balance of the year, if I heard that correctly. Can you share with us at all how that may be weighted by quarter over the balance of the year? And whether or not there is any plan to sell down interests in any exploration projects slated for the back half of this year that could reduce that expenditure? I asked this in light of the $450 million CapEx budget for 2013.

Tracy W. Krohn

Yes. If you look through it in -- if you look in the earnings release, I think we've detailed that pretty well, what we have coming up, I'm not sure if I can right off the top of my head and give it to you by quarter. We're moving after the B-1 well at Main Pass 108, which we just TD and we expect have online in July. We'll be drilling that well and expect to have that on by the end of the year. So you will see that across the third and fourth quarters and the Main Pass 243 A-5 will be on that shortly. We're buttoning up one of our -- the A-2 well over there now. So you'll see that starting in the second and third quarters. And then the Main -- Ship Shoal 349 A-15 you'll see as either in early third quarter or late second quarter and on into the fourth quarter. I don't have any interest in selling down any of these wells. The CapEx will be out in West Texas.

Operator

[Operator Instructions] And our next question comes from the line of Biju Perincheril with Jefferies.

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

A couple of questions as a follow-up to that previous question in the Deepwater on some of the new field properties. Can you give us sort of where you stand in terms of assessing some of those prospects? And when do you plan to test some of that and...?

Tracy W. Krohn

I don't really have a whole lot I can share with you right now other than we're very active in gathering up seismic and data and working up prospects in and amongst all that acreage. We've got -- we've been approached by several other operators to participate in different areas. So we're evaluating that as well. You build and they will come, and that's kind of what's happening. So we're encouraged. We've seen several things that we like. We've seen a few that we didn't particularly care for but mostly, it's been pretty positive.

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

So is there something that we can look forward to, say, in 2014 as far as [indiscernible]?

Tracy W. Krohn

I would tell you 2014 and beyond.

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

Okay, okay. And then in the Permian, the horizontal wells that you tested, I think they were all sort of the A zone or the upper member. Can you talk about what your plans are for testing some of the other zones there? And I think the industry sort of had probably more success into the south and, I guess, more of deeper zones. How is that different farther up north were you are?

Tracy W. Krohn

Well. that's a fairly comprehensive question, but let me break it down. Yes, we do have the intent to test different benches. I always get a little bit confused by the nomenclature because it varies across the basin with different operators. Some of them call it upper and lower Wolfcamp; some of it call it A, B; some of them call it A, B, C, D, E; and I never know what the correct nomenclature is. But clearly, we're having success in the Wolfcamp, and I don't know which zone it is for all the other operators. We'll call it either the upper or lower. And yes, we will be testing benches, probably even up the hoe before the end of the year.

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

Okay. So that's included in, I think, the 7 wells that you planned for this year? Or is that on top of that?

Tracy W. Krohn

Perhaps even more than that, Biju.

Operator

And I'm showing no further questions in the queue at this time. I'd like to turn the call back to you, Mr. Krohn, for final remarks.

Tracy W. Krohn

Okay. Well, that's all I have. Thank you very much for joining us this quarter and we'll talk to you again soon. Thanks so much.

Operator

Ladies and gentlemen, this concludes our conference for today. If you'd like to listen to the replay of today's call, please dial (303) 590-3030 and enter the access code of 461-5599 followed by the pound sign. Thank you for your participation. You may now disconnect.

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