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W&T Offshore Ramps Up Capex Over 150% for 2021; Talks Q4 Results

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   |    Thursday,March 04,2021

W&T Offshore, Inc. reported results for the fourth quarter and full year 2020 including the Company's year-end 2020 reserves report and 2021 guidance.

2021 Plan

Capex: $30-60 million - up 156% at the midpoint vs. 2020 levels

• Additionally, in 2021, the Company expects to spend about $17 to $21 million on asset retirement obligations compared to $3.3 million spent on ARO in 2020.

- Production: 38-42 MBOEPD - down 5% from full year 2020 output

Q4/Full Year 2020 Results

Key highlights included:

• Produced 38,261 barrels of oil equivalent per day ("Boe/d"), or 3.5 million barrels of oil equivalent ("MMBoe") (47% liquids), in the fourth quarter of 2020, above the high end of W&T's guidance range, reflecting an 11% increase from the third quarter of 2020 as production was brought back online from hurricane and other unplanned downtime;
• Reported net income for full year 2020 of $37.8 million or $0.26 per share, and a net loss of $8.9 million or $0.06 per share in the fourth quarter of 2020;
  
  
  • Reported Adjusted Net Loss¹ of $22.9 million or $0.16 per share for full year 2020, and an Adjusted Net Loss of $6.7 million or $0.05 per share in the fourth quarter of 2020;
• Generated significant Adjusted EBITDA¹ of $159.0 million for the full year 2020, and $35.3 million for the fourth quarter of 2020, despite a difficult pricing environment and substantial production downtime associated with an extraordinarily active hurricane season;
  
  
  • Free Cash Flow¹ totaled $76.0 million for the full year 2020 and $14.2 million in the fourth quarter of 2020;
• Reported year-end 2020 proved reserves (utilizing SEC pricing) of 144.4 million barrels of oil equivalent ("MMBoe"), compared with 157.4 MMBoe at year-end 2019;
  
  
  • Upward revisions of 26.2 MMBoe in 2020 related to improved well performance and technical revisions, and 3.9 MMBoe from acquisitions and drilling, were offset by 27.7 MMBoe of reductions due to lower commodity prices, and 15.4 MMBoe of production;
  • Disclosed that year-end 2020 proved reserves (utilizing NYMEX strip pricing as of December 31, 2020) would have been 169.5 MMBoe;
• Remained focused on controlling expenses and reported fourth quarter 2020 lease operating, gathering and transportation, and general and administrative costs that were at the low end or below W&T's guidance ranges;
• Announced 2021 preliminary capital spending of between $30 million and $60 million to achieve stable production and maintain the ability to generate free cash flow to fund the reduction of debt and potential acquisitions; and
• Provided 2021 production and expense guidance.

Tracy W. Krohn, W&T's Chairman and Chief Executive Officer, stated, "I am quite pleased with our response to the extraordinary challenges that 2020 presented. We managed through a global pandemic, commodity price declines and a record number of named storms in the Gulf of Mexico. We have continued to take steps to protect our employees and contractors during the pandemic and, to-date, our people and our operations have not been materially impacted by COVID-19. In the fourth quarter, our operations team did an excellent job of returning our properties to production ahead of schedule which helped us exceed our guidance. In addition, we were able to keep our operating and overhead costs low despite the additional operational work required to restore production."

"Despite the difficulties we faced in 2020, we continued our focus on delivering free cash flow. By adjusting quickly to the changing environment early in 2020 and reducing our planned capital expenditures, we were able to generate $76.0 million in Free Cash Flow in 2020 compared with $74.0 million in 2019. We utilized a portion of our 2020 Free Cash Flow to retire $72.5 million of our senior notes for $23.9 million, with the added benefit of saving over $7.1 million in annualized interest and preserving long-term capital. Additionally, we recently completed the consolidation of our two natural gas treatment facilities that serve the Mobile Bay area into a single facility with more than enough capacity for our current operations as well as production from future natural gas drilling projects in the area. The consolidation of these facilities is expected to result in approximately $5 million per year in savings, beginning in 2021, as well as lower our Scope 1 emissions."

"It is my pleasure to announce that W&T Offshore's inaugural Environment, Social and Governance ("ESG") report will be coming out shortly with our annual report and include key metrics for the past three years. We founded W&T nearly 40 years ago with the same core values we have today that have guided our success and provided the foundation for W&T to grow into a trusted operator. We believe that every employee has a responsibility to ensure that we operate with the highest regards toward ESG and we have empowered our management to allocate resources and tools necessary to create a working environment focused on accomplishing our ESG objectives."

"Entering 2021, while market and pricing conditions are improving, our strategy remains unchanged. We have assembled a premier portfolio of conventional, low-declining producing properties that generate a solid foundation of cash flow with significant upside. While we have a substantial inventory of drilling opportunities with potentially high rates of return, we are not devoting all of our free cash flow to drilling, rather we are maximizing financial flexibility. The current price environment should allow us to generate meaningful free cash flow which we can use to reduce debt or potentially fund additional opportunities. Accordingly, our capital spending in 2021 is expected to be in the range of $30 to $60 million. The timing of our capital spending will be weighted to late 2021, which should benefit production in 2022. As a result, our 2021 production guidance of 38,000 to 42,000 Boe/d is modestly lower than our full year 2020 average, but higher than the fourth quarter of 2020. The lower decline profile of our conventional asset base allows for reductions in capital expenditures without significantly impacting near-term production levels. The energy industry is cyclical and we have faced adversity many times in the past, but our success over nearly 40 years has been because of our unwavering strategic focus that has positioned W&T to create value," concluded Mr. Krohn.

Financial Results

For the fourth quarter of 2020, W&T reported a net loss of $8.9 million, or $0.06 per share. Excluding primarily an $11.5 million unrealized commodity derivative loss, a $6.9 million non-cash tax benefit, and a $2.7 million credit related to a settlement with the U.S. Bureau of Safety and Environmental Enforcement ("BSEE"), the Company's Adjusted Net Loss was $6.7 million, or $0.05 per share. In the fourth quarter of 2019, W&T reported net income of $9.6 million, or $0.07 per share, and Adjusted Net Income of $24.4 million or $0.17 per share. In the third quarter of 2020, W&T reported a net loss of $13.3 million, or $0.09 per share. For that same period, Adjusted Net Loss was $19.9 million or $0.14 per share.

Adjusted EBITDA totaled $35.3 million for the fourth quarter 2020, which represents an increase of 81% compared to $19.5 million in the third quarter of 2020 driven by increased pricing and production, and a decrease of 55% compared to $79.0 million in the fourth quarter of 2019 driven by lower realized pricing and lower production.

Free Cash Flow for the fourth quarter of 2020 totaled $14.2 million compared with $26.8 million in the same period in 2019 and $5.9 million in the third quarter of 2020.

Production, Prices and Revenues: Production for the fourth quarter of 2020 was 38,261 Boe/d or 3.5 MMBoe, an increase of 11% compared to 34,459 Boe/d in the third quarter of 2020 and down 28% versus 52,773 Boe/d in the fourth quarter of 2019. Production for the fourth quarter of 2020 was above the high end of production guidance due to faster recovery from hurricane downtime and unplanned downtime compared to forecast. Fourth quarter 2020 production was comprised of 1.3 million barrels ("MMBbls") of oil, 0.4 MMBbls of natural gas liquids ("NGLs") and 11.2 billion cubic feet ("Bcf") of natural gas. Liquids production comprised 47% of total production in the fourth quarter of 2020.

For the fourth quarter of 2020, W&T's average realized crude oil sales price was $42.84 per barrel. The Company's realized NGL sales price was $16.30 per barrel and its realized natural gas sales price was $2.63 per Mcf. The Company's combined average realized sales price for the quarter was $25.63 per Boe, which represents a 17% decrease from $30.75 per Boe that was realized in the fourth quarter of 2019 and an increase of 16% compared to $22.16 per Boe in the third quarter of 2020.

Revenues for the fourth quarter of 2020 decreased 38% to $94.7 million compared to $151.9 million in the fourth quarter of 2019 driven by lower pricing and production, and increased 31% compared to $72.5 million in the third quarter of 2020, driven by increased production and pricing quarter-over-quarter.

Lease Operating Expenses: Lease Operating Expense ("LOE") which includes base lease operating expenses, insurance premiums, workovers, facilities maintenance and hurricane repairs was $43.3 million in the fourth quarter of 2020, at the low end of guidance, compared to $53.3 million in the fourth quarter of 2019 and $36.4 million in the third quarter of 2020. On a component basis for the fourth quarter of 2020, base lease operating expenses and insurance premiums were $33.0 million, workovers were $1.7 million, facilities maintenance expenses were $3.9 million and hurricane repairs totaled $4.7 million. On a unit of production basis, LOE was $12.31 per Boe in the fourth quarter of 2020, up 12% from $10.98 per Boe in the fourth quarter of 2019, reflecting lower production somewhat offset by lower costs, and up 7% from $11.49 per Boe in the third quarter of 2020, reflecting higher costs associated with hurricane repair.

Gathering, Transportation Costs and Production Taxes: Gathering, transportation costs and production taxes totaled $5.3 million, or $1.51 per Boe in the fourth quarter of 2020, compared to $7.7 million, or $1.59 per Boe in the fourth quarter of 2019, and $4.8 million, or $1.52 per Boe in the third quarter of 2020. Costs were slightly below the low end of guidance in the fourth quarter of 2020.

Depreciation, Depletion, Amortization and Accretion ("DD&A"): DD&A, including accretion for asset retirement obligations, was $7.54 per Boe of production for the fourth quarter of 2020 compared to $7.79 per Boe for the fourth quarter of 2019 and $7.93 per Boe for the third quarter of 2020.

General and Administrative Expenses ("G&A"): G&A was $7.7 million for the fourth quarter of 2020, well below the guidance range of $11.7 million to $12.9 million. The fourth quarter of 2020 benefitted from a $2.7 million credit related to a settlement with BSEE that resolved certain pending civil penalties issued by BSEE. G&A in the fourth quarter of 2019 totaled $17.6 million and included higher litigation and incentive compensation costs while the third quarter of 2020 totaled $14.5 million and included increased legal costs incurred in reviewing potential acquisition opportunities and higher benefits costs. On a unit of production basis, G&A declined significantly to $2.18 per Boe in the fourth quarter of 2020 compared with $3.62 per Boe in the fourth quarter of 2019, and $4.57 per Boe in the third quarter of 2020.

Derivative (Gain) Loss: In the fourth quarter of 2020, W&T recorded a net loss of $11.5 million on its outstanding commodity derivative contracts, substantially all of which was an unrealized commodity derivative loss, largely due to higher quarter-end oil and natural gas prices compared to third quarter of 2020. This compared to a net loss of $18.7 million in the fourth quarter of 2019 of which $18.1 million was an unrealized commodity derivative loss, and a net loss of $11.2 million in the third quarter of 2020 of which $13.1 million was an unrealized commodity derivative loss.

Interest Expense: Interest expense, as reported in the income statement, in the fourth quarter of 2020 was $15.4 million compared with $16.6 million in the same period in 2019 and $14.1 million in the third quarter of 2020. The reduction in expense from the prior year relates primarily to reduced interest costs following the retirement of $72.5 million in principal of W&T's 9.75% Senior Second Lien Notes in early 2020.

Income Tax: W&T recorded a non-cash income tax benefit of $6.9 million in the fourth quarter of 2020 compared to a non-cash income tax benefit of $8.2 million in the fourth quarter of 2019 and a non-cash income tax benefit of $21.1 million in the third quarter of 2020.

For the year ended December 31, 2020, the income tax benefit was positively impacted by adjustments related to the enactment of the CARES Act on March 27, 2020. Additionally, the third and fourth quarters of 2020 were impacted by the Treasury issuing regulations under IRC Section 163(j) on July 28, 2020 related to the business interest expense limitation. W&T's effective tax rate was not meaningful for the three months ended December 31, 2020 or September 30, 2020.

As of December 31, 2020, W&T's deferred tax valuation allowance was $22.4 million. The Company continually evaluates the need to maintain a valuation allowance on its deferred tax assets. Any future reduction of a portion or all of the valuation allowance would result in a non-cash income tax benefit in the period the decision occurs. W&T is not currently forecasting any cash income tax expense for the near-term.

Balance Sheet and Liquidity: Total liquidity on December 31, 2020 was $174.3 million, consisting of cash and cash equivalents of $43.7 million and $130.6 million of availability under W&T's revolving bank credit facility. At December 31, 2020, the Company had $80.0 million in borrowings on its $215 million revolving credit facility and $4.4 million of letters of credit outstanding. Total long-term debt, including $80.0 million in revolving credit facility borrowings, was $625.3 million, net of unamortized debt issuance costs.

In early 2020, W&T purchased in the open market $72.5 million of its Senior Second Lien Notes for $23.9 million, reducing the liability associated with the notes to $552.5 million, which resulted in annualized interest savings of $7.1 million.

In January 2021, W&T's bank group completed its regularly scheduled semi-annual borrowing base redetermination and the borrowing base was set at $190 million. As of March 3, 2021, the borrowings against the facility in the ordinary course of business have been reduced by $32 million to $48 million. The next regularly scheduled redetermination is in the spring of 2021. W&T is currently in compliance with all applicable covenants of the Credit Agreement and the Senior Second Lien Notes indenture.

Capital Expenditures: In March 2020, due to the uncertain commodity outlook in light of the COVID-19 pandemic, W&T suspended drilling and completion activities and significantly reduced its 2020 capital expenditure budget to $15 million to $25 million from its prior level of $50 million to $100 million. Per the Statement of Cash Flows, capital expenditures in the fourth quarter of 2020 (excluding acquisitions) were $3.0 million. Capital expenditures for full year 2020 totaled $17.6 million.

ESG Commentary and COVID-19 Response

W&T is issuing its 2020 initial corporate ESG report later this month which will communicate W&T's 2020 corporate responsibility and ESG initiatives as well as related key performance indicators. In the creation of its inaugural report, the Company consulted the Sustainability Accounting Standards Board's ("SASB") Oil and Gas Exploration and Production Sustainability Accounting Standard, the recommendations of the Task Force on Climate-related Financial Disclosures ("TCFD"), and other reporting guidance from industry frameworks and standards.

W&T is committed to the health and safety of all its employees and contractors and has taken steps to ensure their continued safety in its response to the COVID-19 pandemic. At its corporate office, W&T instituted 100% remote work on March 23, 2020, and subsequently reopened its offices and implemented actions to protect employees including temperature checks, mask wearing, social distancing, and limiting headcount to 50% or less in its offices during peak COVID-19 outbreaks in the community.

For its field operations, the Company instituted screening, which includes a questionnaire and temperature check, of all personnel prior to entry into heliports and shorebases as well as its Alabama gas treatment plant. The Company conducts daily temperature screenings at all offshore facilities, implemented procedures for distancing and hygiene at its field locations, and provides COVID-19 testing for field project crews.

W&T will continue to monitor the COVID-19 situation and follow the advice of government and health advisors. To-date, the Company's operations and its employees have not been materially impacted by COVID-19.

Full Year-End 2020 Financial Review

W&T reported net income for full year 2020 of $37.8 million, or $0.26 per share, and Adjusted Net Loss of $22.9 million, or $0.16 per share. For the full year 2019, W&T reported net income of $74.1 million, or $0.52 per share, and Adjusted Net Income of $85.9 million, or $0.60 per share. The Company generated $159.0 million in Adjusted EBITDA for the full year 2020 compared to $282.9 million in 2019, with the decline driven primarily by lower realized pricing and production mix. Revenues totaled $346.6 million for 2020 compared with $534.9 million in 2019, with the reduction due primarily to decreases in commodity prices. Net cash provided by operating activities for the twelve months ended December 31, 2020 was $108.5 million compared with $232.2 million in 2019. Free Cash Flow totaled $76.0 million in 2020 compared with $74.0 million in 2019.

Production for 2020 was 42,046 Boe/d or 15.4 MMBoe, comprised of 5.6 MMBbls of oil, 1.7 MMBbls of NGLs, and 48.4 Bcf of natural gas. Full year 2019 production averaged 40,634 Boe/d or 14.8 MMBoe and included 6.7 MMBbls of oil, 1.3 MMBbls of NGLs, and 41.3 Bcf of natural gas. While production increased year-over-year primarily due to the full year impact of additional production from the Mobile Bay and Magnolia acquisitions, 2020 production was negatively impacted by the eight named storms that entered the GOM. In addition, and to a lesser extent, the Company experienced unplanned downtime at Mobile Bay, previously-announced planned downtime at the Magnolia field and a combination of operated and non-operated production that was shut-in due to the decline in oil prices, and natural decline.

For the full year 2020, W&T's realized crude oil sales price was $38.45 per barrel, NGL sales price was $11.26 per barrel and natural gas price was $2.05 per Mcf. The combined average sales price was $21.76 per Boe, or 39% lower than $35.63 per Boe sales price that was realized for full year 2019. For the full year 2019, W&T's realized oil price was $59.89 per barrel, NGL price was $17.60 per barrel and natural gas price was $2.57 per Mcf.

For the full year 2020, LOE was $162.9 million compared to $184.3 million in 2019 with the decrease primarily due to shut-ins of certain fields during 2020 as a result of downtime events and decreases in workover and facilities expenses, partially offset by increased costs related to asset acquisitions and hurricane repairs during 2020.

Gathering, transportation costs and production taxes totaled $20.9 million, or $1.36 per Boe in 2020, compared to $28.5 million, or $1.92 per Boe in 2019. The decrease was due primarily to a larger portion of production coming from the Mobile Bay field in 2020 compared to 2019 where gathering and transportation costs per unit for natural gas are lower compared to other properties. That reduction in cost was partially offset by higher Mobile Bay production taxes.

For the full year 2020, G&A was $41.7 million, down 24% compared with full year 2019 G&A of $55.1 million. The decrease year-over-year is primarily due to lower employee benefits and salaries resulting from Payroll Protection Program ("PPP") funds received in April 2020 and lower incentive compensation awards. G&A per Boe was $2.71 in 2020, down 27% from $3.72 in 2019.

Ops Update

W&T successfully drilled one well in the first quarter of 2020 at East Cameron 338/349, the Cota well, but suspended all other drilling activity in 2020 due to the uncertain pricing environment.

The Cota well is in over 290 feet of water and was drilled to a total depth of over 6,000 feet and encountered approximately 100 feet of net oil pay. The well is currently in the development phase of the project. Initial production is expected in the latter part of 2021. The Company has an initial 30% working interest in the Cota well but the interest will increase to 38.4% once the well is brought online and certain performance thresholds are met.

W&T participated in two federal GOM lease sales in 2020 and was awarded a total of four blocks including Eugene Island block 345, Eugene Island South Addition block 389 and Ewing Banks block 979, all in shallow water, and Garden Banks block 782 in deepwater. The Company invested approximately $1.2 million in the leases.

Well Recompletions and Workovers: During the fourth quarter of 2020, the Company performed two workovers that in total added approximately 800 net Boe per day to production.

Consolidation of Onshore Natural Gas Treatment Plants Supporting Mobile Bay Assets: In January 2021, the Company completed the consolidation of its two onshore natural gas treatment facilities that service the Mobile Bay area into the Onshore Treating Facility ("OTF") which was acquired in 2019 from ExxonMobil, and closed its Yellowhammer treatment facility. The OTF has more than sufficient capacity to meet W&T's current and expected needs as it further develops its Mobile Bay and regional natural gas assets in the future. The consolidation of the facilities is expected to result in savings of approximately $5 million per year beginning in 2021.

Year-End 2020 Proved Reserves

The Company's year-end 2020 SEC proved reserves were 144.4 MMBoe, down modestly from 157.4 MMBoe at year-end 2019. W&T recorded upward revisions of 26.2 MMBoe in 2020 related to improved well performance and technical revisions, and 3.9 MMBoe from acquisitions, primarily from the purchase of additional interests in the Mobile Bay area and in the Magnolia field. These additions were offset by 27.7 MMBoe of reductions due to lower commodity prices, and 15.4 MMBoe of production. The SEC twelve-month first day of the month average realized prices used in the report for year-end 2020 were $37.78 per barrel of oil and $2.05 per Mcf of natural gas, while for year-end 2019 they were $58.11 per barrel of oil and $2.63 per Mcf of natural gas.

About 34% of year-end 2020 SEC proved reserves were liquids (22% crude oil and 12% NGLs) and 66% natural gas. At year end, approximately 83% of 2020 proved reserves were classified as proved developed producing, 8% as proved developed non-producing and 9% as proved undeveloped.

Using average realized NYMEX strip prices at year-end 2020 of $44.43 per barrel of oil and $2.66 per Mcf of natural gas, proved reserves would have been 169.5 MMBoe, comprised of 34.7 MMBbls of oil, 20.7 MMBbls of NGLs, and 684.7 Bcf of natural gas.

W&T's reserve life ratio at year-end 2020, based on year-end 2020 SEC proved reserves and 2020 production was 9.4 years, while based on NYMEX strip pricing reserves, it was 11.0 years.

The present value of W&T's reported SEC proved reserves, discounted at 10% ("PV-10"), at year-end 2020 was $741 million, down about 43% from $1.3 billion at the end of 2019. The 2020 SEC PV-10 is based on twelve-month first day of the month average realized prices of $37.78 per barrel of crude oil and $2.05 per Mcf of natural gas, both after adjustment for quality, transportation, fees, energy content, and regional price differentials. For 2019, the SEC PV-10 was based on twelve-month first day of the month average realized prices of $58.11 per barrel and an average natural gas price of $2.63 per Mcf, both after adjustments for quality, transportation, fees, energy content, and regional price differential.

Utilizing average realized NYMEX strip pricing as of December 31, 2020 of $44.43 per barrel of oil and $2.66 per Mcf of natural gas, the PV-10 would have been $1.1 billion.