Quarterly / Earnings Reports | Fourth Quarter (4Q) Update | Reserves | Financial Results | Capital Markets | Capital Expenditure - 2023

W&T Offshore Fourth Quarter, Full Year 2022 Results; 2023 Guidance

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   |    Thursday,March 09,2023

W&T Offshore, Inc. reported operational and financial results for the fourth quarter and full year 2022, including the Company's year-end 2022 reserve report. Guidance for 2023 was also provided.

2023 Capital Investment Program

W&T's capital expenditure budget for 2023 is expected to be in the range of $90 million to $110 million, which excludes acquisition opportunities. Included in this range are planned expenditures related to long-lead items, front-end engineering design and other work for one deepwater well and three shelf wells that may be drilled later this year, as well as capital costs for facilities, leasehold, seismic, and recompletions. The Company has significant flexibility to adjust its spending since it has no long-term rig commitments or near-term drilling obligations.

Plugging and abandonment expenditures are expected to be in the range of $25 million to $35 million. The Company spent $76.2 million on asset retirement obligation settlements in 2022, driven by obligations and prior deferrals on terminated leases with U.S. Bureau of Safety and Environmental Enforcement deadlines before year-end 2022.

2023 Guidance

The guidance for the first quarter and full year 2023 in the table below represents the Company's current expectations.

Looking ahead to 2023, Tracy Krohn commented, "In the first quarter of 2023, we have had several planned periodic facility and pipeline maintenance projects underway at the Mobile Bay field as well as prolonged downtime at several non-operated fields that have temporarily reduced our production volumes. Most of the non-operated fields that were shut-in are now back online and the maintenance project is nearly complete with volumes returning to normal levels. Taking into consideration the current acquisition opportunities in the Gulf of Mexico and the recent weakness in the near-term outlook for both oil and natural gas prices, we have decided to limit our capital expenditure plans for 2023 to $90 million to $110 million and are focused on building cash. We want to be fully prepared to act quickly should we see the right acquisition opportunity arise. We have built W&T over the past 40 years with a proven acquisition strategy and believe the market will afford us several attractive opportunities in 2023, particularly if prices stay lower. As a result, we will defer our drilling plans until later this year or into 2024 unless we see a sustained strengthening of commodity pricing. One of the most attractive attributes of our conventional asset base is our ability to adjust our drilling plans without a major impact on our production or lose opportunities since our leases are largely held by existing production. As a result of concentrating on building cash, we expect to see only modest declines in our 2023 production compared to 2022."

4Q and full year 2022 included:

• Increased full year 2022 production by 5% year-over-year to 40.1 thousand barrels of oil equivalent per day ("MBoe/d") (49% liquids), or 14.6 million barrels of oil equivalent ("MMBoe"), and in the fourth quarter of 2022 reported 38.6 MBoe/d (49% liquids), or 3.6 MMBoe;
• Increased year-end 2022 proved reserves at SEC pricing by 5% to 165.3 MMBoe and increased the present value of SEC proved reserves discounted at 10% ("PV-10") by 93% to $3.1 billion compared to year-end 2021;
  • Benefited from positive well performance and technical revisions of 7.3 MMBoe, 6.0 MMBoe of acquisitions and 9.0 MMBoe of positive price revisions, partially offset by 14.6 MMBoe of production, resulting in replacement of 153% of 2022 production with new reserves;
  • Continued to very efficiently replace reserves with a 2022 reserve replacement cost of $4.10 per barrel of oil equivalent ("Boe") and a 3-year reserve replacement cost average of $2.85 per Boe;
• Generated net income of $43.4 million or $0.30 per diluted share in the fourth quarter of 2022 and net income for the full year 2022 of $231.1 million or $1.59 per diluted share;
• Reported Adjusted Net Income of $15.2 million or $0.10 per diluted share in the fourth quarter of 2022, and Adjusted Net Income of $284.8 million or $1.96 per diluted share for the full year;
• Increased full year 2022 Adjusted EBITDA 156% year-over-year to $563.7 million and maintained strong Adjusted EBITDA with $66.1 million for the fourth quarter of 2022;
• Generated significant Free Cash Flow of $376.4 million for the full year of 2022, more than four times the $90.9 million of Free Cash Flow for full year 2021;
  • Generated $25.0 million of Free Cash Flow in the fourth quarter of 2022, the 20^th consecutive quarter of reporting Free Cash Flow;
• Reported strong cash and cash equivalents of $461.4 million at year-end 2022, representing an increase of $215.6 million over year-end 2021;
• Reduced Net Debt to $232.1 million at year-end 2022, down $253.0 million from $485.1 million at year-end 2021; represents a total Net Debt reduction of $455.0 million over the last three years and a Net Debt to trailing twelve months Adjusted EBITDA ratio ("Net Leverage Ratio") of 0.4x at year-end 2022;
• Closed two strategic bolt-on acquisitions of complementary oil and gas producing properties in Federal shallow waters in the central region of the Gulf of Mexico ("GOM"), with a total 100% working interest, for approximately $51.5 million (after normal and customary post-effective date adjustments) in early 2022, which were both funded using cash on hand; and
• Announced Memorandum of Understanding with Korea National Oil Corporation to jointly consider and pursue various opportunities in upstream oil and gas in North America.

Important developments following year-end included:

• Closed the previously-announced offering of $275 million in aggregate principal amount of 11.75% Senior Second Lien Notes due 2026 (the "2026 Senior Second Lien Notes") on January 27, 2023;
  • The Company used the net proceeds of the offering, along with cash on hand, to fund the redemption of all of the Company's outstanding 9.75% Senior Second Lien Notes due 2023 (the "2023 Senior Second Lien Notes"); and
• Announced 2023 guidance including capital spending budget of $90 to $110 million while maintaining focus on generating free cash flow to fund potential acquisitions and the reduction of debt.

Tracy W. Krohn, Chairman and Chief Executive Officer, stated, "We are very pleased with our ability to consistently deliver on our strategic vision focused on generating meaningful free cash flow and growing shareholder value. Our outstanding operational and financial results in 2022 and our year-end 2022 reserve report reflect the strength of our assets. We generated significant Adjusted EBITDA of $563.7 million in 2022, and Free Cash Flow of $376.4 million. We increased production by 5% in 2022 to just over 40 MBoe/d. Our ability to maintain solid production coupled with strong pricing enabled us to generate $1.59 per diluted share of net income in 2022. We also substantially reduced Net Debt, which was down by $253 million since year-end 2021, while significantly increasing our liquidity to $511 million. This placed W&T in a much stronger financial position, with cash on hand at year-end 2022 of $461 million and our Net Leverage Ratio down to 0.4 times. Entering 2023, we further strengthened our balance sheet by issuing $275 million in new 2026 Senior Second Lien Notes and using the proceeds along with our considerable cash position to repurchase all $552.5 million of the outstanding 2023 Senior Second Lien Notes. This significantly reduces our interest payments, preserves our financial flexibility and improves our balance sheet moving forward. We are increasingly better positioned to take advantage of potential business opportunities regardless what the economic situation may be this year."

"Turning to our outstanding year-end reserve results, I would like to point out that we continue to see positive well performance and technical revisions. This directly points to our ability to enhance production and our reserve base through operational excellence. In 2022, we had 7.3 MMBoe of positive performance revisions and an increase of 6.0 MMBoe due to acquisitions we made early in 2022. This nearly replaced our entire production for the year, even before you take into account the strong positive pricing revisions. We believe we have built a sustainable group of high performing GOM assets that will continue to provide meaningful cash flow to our shareholders for many years. Where you see the biggest impact of higher pricing is in the PV-10 value of our SEC proved reserves, which at year-end 2022 nearly doubled to $3.1 billion, the highest since the Company's IPO in 2005. If you compare that to our enterprise value, I believe that you will see a stock that is quite undervalued with a lot of upside potential."

"Our 2023 plans have been developed to facilitate continued success, which includes implementing organic drilling, recompletion and workover opportunities to take advantage of our substantial inventory of projects with potentially high rates of return. Additionally, with improved financial flexibility and meaningful liquidity, we will continue to evaluate accretive acquisition opportunities that meet our criteria, while continuing to focus on free cash flow generation. We are also considering opportunities to enter the carbon capture market to utilize our extensive expertise in managing GOM reservoirs as well as potentially utilizing our properties and infrastructure. We have a successful track record of executing our strategic vision and remain committed to growing shareholder value."

2022 Financials

Production, Prices, and Revenue

Production for the fourth quarter of 2022 averaged 38.6 MBoe/d. This represented a decrease of 7% compared to the third quarter of 2022, primarily driven by the impact of weather delays that were wind and/or low temperature related, and temporary pipeline downtime at Mobile Bay. Production increased 4% from the fourth quarter of 2021. Fourth quarter 2022 production was comprised of 14.9 MBbl/d of oil (39%), 4.0 MBbl/d of natural gas liquids (10%) ("NGLs"), and 117.9 million cubic feet per day ("MMcf/d") of natural gas (51%).

W&T's average realized price before realized derivative settlements was $52.82 per Boe in the fourth quarter of 2022, a decrease of 23% from $68.39 per Boe in the third quarter of 2022, and an increase of 11% from $47.70 per Boe in the fourth quarter of 2021. Average realized crude oil, NGL, and natural gas prices, before realized derivative settlements, for the fourth quarter of 2022 were $81.27 per barrel, $25.70 per barrel, and $6.12 per Mcf, respectively.

Revenues for the fourth quarter of 2022 were $189.7 million, which were lower than third quarter 2022 revenues of $266.5 million due to lower commodity pricing and lower production, and 15% higher than $165.6 million in the fourth quarter of 2021 due to higher commodity pricing and higher production.

Lease operating expense ("LOE"), which includes base lease operating expenses, insurance premiums, workovers, facilities maintenance, and hurricane repairs, was $69.0 million in the fourth quarter of 2022, which was below the midpoint of the Company's guidance range for the quarter, which was provided in W&T's last earnings release. This compared to $59.0 million in the third quarter of 2022 and $45.2 million for the corresponding period in 2021. LOE in the fourth quarter of 2022 increased compared to the third quarter of 2022 primarily due to forecasted increases in base operating expense, increased workover costs, and higher facilities expenses. Additionally, fourth quarter 2022 LOE increased compared to the fourth quarter of 2021, primarily due to the acquisition of additional oil and gas producing properties as noted above, as well as inflationary increases in base operating expense, and higher workover and facilities costs. On a component basis for the fourth quarter of 2022, base LOE and insurance premiums were $54.4 million, workovers were $6.0 million, and facilities maintenance expenses were $8.6 million. On a unit of production basis, LOE was $19.42 per Boe in the fourth quarter of 2022. This compares to $15.46 per Boe for the third quarter of 2022 and $13.22 per Boe for the fourth quarter of 2021.

Gathering, transportation costs, and production taxes totaled $8.5 million ($2.39 per Boe) in the fourth quarter of 2022, compared to $12.2 million ($3.20 per Boe) in the third quarter of 2022 and $8.2 million ($2.41 per Boe) in the fourth quarter of 2021. Fourth quarter 2022 costs were below the low end of guidance and decreased compared to the third quarter primarily due to decreases in natural gas prices in the fourth quarter as well as a decrease in production volumes.

DD&A, including accretion expense related to asset retirement obligations, was $9.64 per Boe in the fourth quarter of 2022. This compares to $8.93 per Boe and $8.65 per Boe for the third quarter of 2022 and the fourth quarter of 2021, respectively.

G&A was $22.0 million for the fourth quarter of 2022. This compares to $23.0 million in the third quarter of 2022 and $14.3 million in the fourth quarter of 2021. On a unit of production basis, G&A was $6.18 per Boe in the fourth quarter of 2022 compared to $6.04 per Boe in the third quarter of 2022 and $4.19 per Boe in the corresponding period of 2021. General and administrative expense increased in 2022 primarily due to costs for non-recurring professional services related to transitioning substantially all of the Company's information technology infrastructure and related services from the incumbent provider to new internal IT staff or to other providers as well as increased incentive compensation costs as compared to 2021.

In the fourth quarter of 2022, W&T recognized a net gain of $24.4 million related to commodity derivative activities comprised of a $53.1 million unrealized gain related primarily to the change in value of outstanding derivative contracts since the end of the third quarter of 2022 offset by a $28.8 million realized loss related to hedge settlements during the quarter. The Company recognized a net loss of $38.7 million in the third quarter of 2022 and a net gain of $3.8 million in the fourth quarter of 2021

Net interest expense in the fourth quarter of 2022 was $14.5 million compared to $16.8 million in the third quarter of 2022 and $19.6 million in the fourth quarter of 2021. The decrease in expense reflects the decrease in absolute debt.

In the fourth quarter of 2022, the Company reported net other expense of $15.5 million which primarily related to additional plugging and abandonment contingent liability related to a number of legacy GOM properties. In the fourth quarter of 2021, net other income was $7.1 million composed primarily of $11.6 million related to the release of restrictions on the Black Elk Escrow fund offset by the establishment of a $4.5 million plugging and abandonment contingent liability related to these legacy GOM properties.

W&T recognized $6.9 million in income tax expense in the fourth quarter of 2022, all of which was deferred. This compares to income tax expense of $16.4 million and $10.8 million for the quarters ended September 30, 2022 and December 31, 2021.

Balance Sheet and Liquidity

As of December 31, 2022, W&T had available liquidity of $511.4 million comprised of $461.4 million in cash and cash equivalents and $50.0 million of availability under W&T's first priority lien secured revolving facility (the "Credit Facility") with Calculus Lending, LLC ("Calculus"), an affiliated company of Mr. Krohn. At year-end 2022, the Company had total debt of $693.4 million (or Net Debt of $232.1 million, net of cash and cash equivalents), consisting of the balance of the non-recourse Mobile Bay term loan of $143.3 million and $550.1 million of 2023 Senior Second Lien Notes, net of amortized debt issuance costs for both instruments. Net Debt decreased by $253.1 million for the year ended December 31, 2022. W&T has reduced its total Net Debt by $455.0 million over the last three years. W&T sold 2.97 million shares of common stock through its at-the-market program at an average price of $5.72 per share resulting in gross proceeds of approximately $17.0 million.

On January 27, 2023 W&T closed an offering of $275 million in aggregate principal amount of 2026 Senior Second Lien Notes at par in a private offering that was exempt from registration under the Securities Act of 1933, as amended. The Company used the net proceeds of the offering, along with cash on hand, to fund the redemption of all of the Company's outstanding 2023 Senior Second Lien Notes. On the closing date of the offering of the 2026 Senior Second Lien Notes, the Company satisfied and discharged the indenture governing the existing 2023 Senior Second Lien Notes.

Additionally, in the fourth quarter of 2022, the Company entered into an amendment to its Credit Facility, which, among other things, extended the maturity date and Calculus' commitment by up to one year to January 3, 2024.

Capital Expenditures: Capital expenditures (excluding changes in working capital associated with investing activities) in the fourth quarter and full year 2022 were $11.7 million and $41.6 million, respectively. In the fourth quarter of 2022, the Company incurred $14.9 million in asset retirement costs and $76.2 million in the full year 2022. For the full year 2022, W&T spent $51.5 million on acquisitions.

Acquisitions of Producing Properties
Acquisition-related capital expenditures in 2022 are attributable to the February 2022 ANKOR acquisition of approximately 80% of the working interests in oil and gas producing properties in Federal shallow waters in the central region of the GOM at Ship Shoal 230, South Marsh Island 27/Vermilion 191, and South Marsh Island 73 fields for approximately $47 million and the assumption of related asset retirement obligations. After normal and customary post-effective date adjustments to reflect an effective date of July 1, 2021, cash consideration of approximately $34.0 million was paid to the sellers using cash on hand. Subsequent to the end of the first quarter of 2022, the Company purchased the remaining working interests in those properties from an undisclosed private seller for approximately $17.5 million and the assumption of related asset retirement obligations.

Environmental, Social, and Governance ("ESG") Commentary

W&T continues to progress its ESG reporting and transparency. In spring 2021, the Company issued its initial annual corporate ESG report and in spring 2022 issued its second annual corporate ESG report. The Company expects to release another report in the spring of 2023 that will build on the solid foundation of the previous reports as W&T remains committed to its ESG journey. In the creation of its ESG reports, the Company consulted the Sustainability Accounting Standards Board's Oil and Gas Exploration and Production Sustainability Accounting Standard, the Global Reporting Initiative's standard for the oil and gas sector, the Sustainable Development Goals promoted by the United Nations, and other reporting guidance from industry frameworks and standards.

Full Year-End 2022 Financial Review

W&T reported net income for the full year 2022 of $231.1 million, or $1.59 per diluted share, and Adjusted Net Income of $284.8 million, or $1.96 per diluted share. For the full year 2021, the Company reported a net loss of $41.5 million, or $0.29 per diluted share, and Adjusted Net Income of $24.1 million, or $0.17 per diluted share. W&T generated strong Adjusted EBITDA of $563.7 million for the full year 2022 compared to $220.3 million in 2021 due primarily to stronger commodity prices and increased oil production year-over-year. Revenues totaled $921.0 million for 2022 compared with $558.0 million in 2021. Net Cash provided by operating activities for the twelve months ended December 31, 2022 was $339.5 million compared with $133.7 million for the same period in 2021. Free Cash Flow totaled $376.4 million in 2022 compared with $90.9 million in 2021.

Production for 2022 averaged 40.1 MBoe/d for a total of 14.6 MMBoe, comprised of 5.6 MMBbl of oil, 1.6 MMBbl of NGLs, and 44.8 Bcf of natural gas. Full year 2021 production averaged 38.1 MBoe/d or 13.9 MMBoe in total and was composed of 5.0 MMBbl of oil, 1.5 MMBbl of NGLs, and 44.8 Bcf of natural gas. Capital expenditures, including some acquisitions in 2022, helped to increase production year-over-year by about 5%, which was partially offset by the natural decline of the producing assets in W&T's portfolio.

For the full year 2022, W&T's average realized sales price per barrel of crude oil was $93.59, per barrel of NGLs was $36.66, and per Mcf of natural gas was $7.23. The equivalent sales price for 2022 was $61.89 per Boe, which was 57% higher than the equivalent price of $39.36 per Boe realized in 2021. For 2021, the Company's realized crude oil sales price was $65.94 per barrel, NGL sales price was $30.59 per barrel, and natural gas price was $3.88 per Mcf.

For the full year 2022, LOE was $224.4 million compared to $174.6 million in 2021. The increase in LOE in 2022 reflects higher up-time across the asset base, increased costs from acquisitions and incremental spending on workovers and facilities during the year.

Gathering, transportation, and production taxes totaled $35.1 million in 2022, an increase from the $27.9 million in 2021. Higher realized prices for natural gas and NGLs drove severance tax expense higher year-over-year.

For the full year 2022, G&A was $73.7 million, which was an increase over the $52.4 million reported in 2021. On a per unit basis, G&A per Boe was $5.04 in 2021, up from $3.77 per Boe in 2021. The increase year-over-year is primarily due to non-recurring professional services and legal costs incurred during the second half of 2022 after a review of processes and controls within the Company's information technology department, including costs to transfer that infrastructure and related services internally or to other providers. Additionally, W&T incurred increased employee costs related to salaries, benefits and incentive compensation as a result of higher grant date fair values of stock awards, the lack of an employee retention credit provided under the CARES Act (which was received in 2021 and not received in 2022) and in response to wage and price inflation as compared to 2021.

Operations Update

Front-end Engineering and Design and permitting processes are underway on the Holy Grail well at Garden Banks 783 in the Magnolia Field.

During the fourth quarter of 2022, the Company performed no recompletions and four workovers that positively impacted production for the quarter. For the full year 2022, W&T completed $7.2 million of recompletions and $12.9 million of workovers. W&T plans to continue to perform recompletions and workovers that meet economic thresholds.

Year-End 2022 Proved Reserves

The Company's year-end 2022 SEC proved reserves grew to 165.3 MMBoe, up 5% from 157.6 MMBoe at year-end 2021. W&T recorded positive performance revisions of 7.3 MMBoe, acquisitions of reserves of 6.0 MMBoe, and 9.0 MMBoe of positive price revisions in 2022, which were partially offset by 14.6 MMBoe of production for the year. During 2022, W&T focused on reducing Net Debt and executing two attractive bolt-on acquisitions. Successful workovers and recompletions, improved reservoir performance and pricing, and acquisitions allowed W&T to replace 153% of production with new reserves. All-in reserve replacement costs for 2022 were $4.10 per Boe and the three-year average was $2.85 per Boe.

The SEC twelve-month first day of the month average spot prices used in the preparation of the report for year-end 2022 were $94.14 per barrel of oil and $6.36 per MMBtu of natural gas. Comparable prices used for the prior year report were $66.55 per barrel of oil and $3.60 per MMBtu of natural gas. The PV-10 of W&T's proved reserves at year-end 2022 grew significantly to $3.1 billion, up 93% from $1.6 billion at the end of 2021.

Approximately 36% of year-end 2022 SEC-case proved reserves were liquids (25% crude oil and 11% NGLs) and 64% natural gas. The reserves were classified as 75% proved developed producing, 13% proved developed non-producing, and 12% proved undeveloped. W&T's reserve life ratio at year-end 2022, based on year-end 2022 proved reserves and 2022 production was 11.3 years.

(1) PV-10 for this presentation excludes any provision for asset retirement obligations or income taxes.

In accordance with guidelines established by the SEC, estimated proved reserves as of December 31, 2022 were determined to be economically producible under existing economic conditions, which requires the use of the 12-month average of the first-day-of-the-month price for the year ended December 31, 2022. The WTI spot price and the Henry Hub spot price were utilized as the reference prices and after adjusting for quality, transportation, fees, energy content, and regional price differentials, the average realized prices were $91.50 per barrel for oil, $41.92 per barrel for NGLs, and $6.85 per Mcf for natural gas. In determining the estimated realized price for NGLs, a ratio was computed for each field of the NGLs realized price compared to the crude oil realized price. This ratio was then applied to the crude price using SEC guidance. Such prices were held constant throughout the estimated lives of the reserves. Future estimated production and development costs are based on year-end costs with no escalations.

The standardized measure of future net cash flows was $2,263.0 million at December 31, 2022, which is calculated as the PV-10 of $3,128.6 million less discounted cash outflows of $271.5 million associated with asset retirement obligations and $594.1 million associated with income taxes. At December 31, 2021, it was $1,156.0 million, which is calculated as the PV-10 of $1,621.9 million less discounted cash outflows of $241.1 million associated with asset retirement obligations and $224.8 million associated with income taxes.