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W&T Offshore Reports Fourth Quarter 2019 Results; 2020 Outlook

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   |    Thursday,March 05,2020

W&T Offshore, Inc. reported operational and financial results for the fourth quarter and full year 2019 including the Company's year-end 2019 reserves report and 2020 production and expense guidance.

W&T also announced it will be acquiring the remaining 25% working interest in the Magnolia Field in early 2020.

Key highlights included:

• Increased year-end 2019 proved reserves by 87% to 157.4 million barrels of oil equivalent ("MMBoe"), from 84.0 MMBoe at year-end 2018, representing a reserve replacement ratio of nearly 600% of 2019 production;
• Closed the purchase of a 75% working interest in the Magnolia Field from ConocoPhillips in December 2019, the second of two producing property acquisitions completed in 2019 that together added meaningful production, significant reserves, and a number of future drilling opportunities;
• Announced today that it has signed a purchase and sale agreement to acquire the remaining 25% working interest in the Magnolia Field on nearly identical terms as the recent transaction with ConocoPhillips with the same effective date and proportionally reduced to reflect the lower working interest; this transaction is expected to close on March 31, 2020;
• Produced 52,773 Boe/d, or 4.9 MMBoe (45% liquids), in the fourth quarter of 2019, above the midpoint of W&T's guidance range, reflecting a 51% increase from the fourth quarter of 2018 and a 28% increase from the third quarter of 2019;
• Reported net income for full year 2019 of $74.1 million or $0.52 per share, and net income of $9.6 million or $0.07 per share in the fourth quarter of 2019;
• Reported Adjusted Net Income of $85.9 million or $0.60 per share for full year 2019, and $24.4 million or $0.17 per share in the fourth quarter of 2019;
• Generated significant Adjusted EBITDA of $79.0 million for the fourth quarter of 2019 and $282.9 million for the full year 2019, despite a lower pricing environment;
• Recorded strong cash flow from operating activities with $232.2 million generated in full year 2019;
• Achieved a 100% success rate on the six wells drilled in 2019 and invested $125.7 million in capital expenditures for the full year 2019, before acquisitions, that was below the low end of guidance; and
• Announced 2020 guidance including preliminary capital spending guidance ranging between $50 million and $100 million to better align with current market conditions and allow for additional free cash flow generation to reduce debt or opportunistically fund accretive acquisitions.

Tracy W. Krohn, W&T's Chairman and Chief Executive Officer, stated, "I am quite pleased with our achievements in 2019. We closed two significant acquisitions for approximately $188 million that meaningfully increased reserves to over 157 MMBoe and grew total production to over 50,000 Boe/d. This past year we increased production, reported positive adjusted net income for every quarter, generated significant free cash flow, excluding acquisitions, and lowered per Boe operating and overhead costs. In addition, we added nine new shallow water and eight new deepwater leases in Gulf of Mexico federal lease sales."

"Entering 2020, while market and pricing conditions are volatile and challenging, our strategy remains unchanged. We have assembled a premier set of assets with strong, stable production that generates a solid foundation of cash flow with significant upside. While we have a substantial inventory of drilling opportunities with potential high rates of return, we currently plan for our capital spending in 2020 to be in the range of $50 to $100 million to maximize financial flexibility and continue to generate free cash flow to reduce debt and potentially fund additional opportunities that we believe are available. We have significant flexibility to adjust our spending in either direction at any time since we have no long-term rig contract commitments or drilling obligations. Our 2020 production guidance of 47,100 to 52,100 Boe/d is an increase of approximately 16% to 28% compared to the full year 2019, despite the decrease in spending currently planned for 2020. We will continue to focus our drilling capital on low risk, high return projects and build on the 100% success rate that we achieved in both 2019 and 2018."

"Over the past 36 years, we have grown W&T through the right combination of attractive property acquisitions, methodical integration and exploitation of those acquisitions, and successful development and exploratory drilling on our legacy fields. We have developed significant technical experience on both the conventional shelf and in the deep waters across the Gulf of Mexico. We completed two great acquisitions in 2019 and we believe that market conditions in the Gulf remain very favorable for additional acquisitions. Our planned purchase of the balance of the Magnolia Field is a good example, and we have a couple of others in our sights now. We will continue to look at new acquisition opportunities that are accretive in terms of production, reserves and cash flow, but nonetheless remain committed to maximizing the cash flow and profitability of our existing assets. Our management team's interests are highly aligned with those of our shareholders through management's 34% stake in the Company's equity, which is the second highest of 75 public E&P companies. This alignment of interest ensures that we are truly incentivized to maximize shareholder value and mitigate risk," concluded Mr. Krohn.

2020 Capital Plans

Under current commodity pricing conditions, W&T intends to continue to generate free cash flow and focus on debt reduction and additional acquisitions. The Company's preliminary capital expenditure budget for 2020 is expected to be in the range $50 million to $100 million, which excludes acquisitions. W&T has significant flexibility to adjust its spending up or down at any time since it has no long-term rig contracts or drilling obligations. Furthermore, the lower decline profile of the Company's producing asset base allows reductions in capital expenditures without significantly impacting near-term production levels.

W&T's overall inventory of drillable projects remains strong and currently the 2020 capital program will be focused on lower-risk, high-return projects. In 2020, the Company also expects to spend about $15 to $25 million on asset retirement obligations ("ARO") compared to $11.4 million spent on ARO in 2019.

Despite the reduction in capital expenditures, W&T forecasts its full year 2020 production to be in the range of 47,100 to 52,100 Boe/d, reflecting an increase of 16% to 28% from full year 2019 average production of 40,600 Boe/d. Drilling is currently underway at East Cameron 338/349 in the Gulf of Mexico.

Operations Update

W&T is currently operating or participating in several active drilling programs in the GOM, as described below. During the fourth quarter of 2019, W&T had two rigs running and has reduced its rig count to one in the first quarter of 2020.

Ewing Bank 910 Field Area (non-operated, deepwater, in JV Drilling Program): The ST 311 A-3 well was successfully drilled in the first quarter of 2019 and discovered two high quality sands. The operator completed the well in the third quarter of 2019. The well is currently producing approximately 4,850 gross Boe/d. The A-3 well follows the success of the A-2 well that was brought online earlier in 2019. The Company has a 10.8% interest in both the ST 320 A-2 and A-3 wells. W&T's interest will increase to 13.8% once performance thresholds are met.

Ship Shoal 28 (operated, shallow water, in JV Drilling Program): The SS 28 #41 well was successfully drilled and brought online in the fourth quarter of 2019 at a gross rate of 1,440 Boe/d. The Company has a 30% interest in the well. W&T's interest will increase to 38.4% once performance thresholds are met.

East Cameron 321 (operated, deepwater, in JV Drilling Program): The B-8 S/T well was successfully drilled and logged better-than-expected net vertical pay of 84 feet. The well was brought online late in the fourth quarter of 2019 at a gross rate of 940 Boe/d. The Company has a 30% interest in the EC 321 B-8 S/T well. W&T's interest will increase to 38.4% once performance thresholds are met.

Mississippi Canyon 800 Gladden Deep Prospect (operated, deepwater, in JV Drilling Program): On June 5, 2019 W&T announced an oil discovery at its first exploration well in 2019 at Gladden Deep. The well was completed and placed on production ahead of schedule in the third quarter and is currently producing approximately 4,360 gross Boe/d, with 89% oil. W&T is the operator of the well and owns a 17.25% interest in the discovery. W&T's interest will increase to 22.1% once performance thresholds are met. Gladden Deep is located in approximately 3,000 feet of water and was drilled to a total measured depth of 18,324 feet and encountered 201 feet of net oil pay.

East Cameron 338/349 Cota (operated, deepwater, in JV Drilling Program): W&T is currently drilling its first well of 2020 in the East Cameron 338/349 Field. The well is in over 290 feet of water with a planned total depth of over 6,000 feet. The Company expects to reach total depth in the second quarter of 2020. The Company has a 20% interest in the EC 338/349 Cota well. W&T's interest will increase to 38.4% once the well is brought online and performance thresholds are met.

Well Recompletions and Workovers: During the fourth quarter of 2019, the Company performed one recompletion and six workovers that in total added approximately 1,000 net Boe per day to production.

Q4 2019 Results

For the fourth quarter of 2019, W&T reported net income of $9.6 million, or $0.07 per share. Excluding primarily an $18.1 million unrealized commodity derivative loss, the Company's Adjusted Net Income was $24.4 million, or $0.17 per share. In the fourth quarter of 2018, W&T reported net income of $138.8 million, or $0.96 per share, which included a $47.1 million non-cash gain on debt refinancing. Adjusted Net Income for the fourth quarter of 2018 was $34.2 million or $0.24 per share. In the third quarter of 2019, net income was $75.9 million, or $0.53 per share, which included a $55.8 million non-cash tax benefit due to the reduction of a valuation allowance previously recorded against deferred tax assets. For that same period, Adjusted Net Income was $18.5 million or $0.13 per share.

Adjusted EBITDA totaled $79.0 million for the fourth quarter 2019, which represents an increase of 10% compared to $72.0 million in the third quarter of 2019 and a decrease of 6% compared to $84.4 million in the fourth quarter of 2018.

Production, Prices and Revenues: Production for the fourth quarter of 2019 was 52,773 Boe/d or 4.9 MMBoe, an increase of 28% compared to 41,149 Boe/d in the third quarter of 2019 and up 51% versus 35,000 Boe/d in the fourth quarter of 2018. Production for the fourth quarter of 2019 was above the mid-point of production guidance. Fourth quarter 2019 production was comprised of 1.8 million barrels ("MMBbls") of oil, 0.4 MMBbls of natural gas liquids ("NGLs") and 16.0 billion cubic feet ("Bcf") of natural gas. Liquids production comprised 45% of total production in the fourth quarter of 2019.

For the fourth quarter of 2019, W&T's average realized crude oil sales price was $56.84 per barrel. The Company's realized NGL sales price was $16.64 per barrel and its realized natural gas sales price was $2.58 per Mcf. The Company's combined average realized sales price for the quarter was $30.75 per Boe, which represents a 30% decrease from $44.15 per Boe that was realized in the fourth quarter of 2018 and a decrease of 11% compared to $34.56 per Boe in the third quarter of 2019.

Revenues for the fourth quarter of 2019 increased 6% to $151.9 million compared to $143.4 million in the fourth quarter of 2018, and increased 15% compared to $132.2 million in the third quarter of 2019, primarily driven by the increased production associated with the Mobile Bay acquisition which was partially offset by the decrease in realized commodity sales price per Boe.

Lease Operating Expenses: Lease Operating Expense ("LOE") which includes base lease operating expenses, insurance premiums, workovers and facilities maintenance was $53.3 million in the fourth quarter of 2019 compared to $43.4 million in the fourth quarter of 2018 and $47.2 million in the third quarter of 2019. On a component basis for the fourth quarter of 2019, base lease operating expenses and insurance premiums were $44.8 million, workovers were $5.8 million and facilities maintenance expenses were $2.7 million. The increases in LOE were driven by additional costs associated with the Mobile Bay acquisition, increased repair and facility work, additional acid stimulation and coil tubing cleanouts and higher insurance premiums for increased coverage, which were partially offset by a $1.8 million Office of Natural Resources Revenue ("ONRR") credit. On a unit of production basis, LOE was $10.98 per Boe in the fourth quarter of 2019, down 19% from $13.48 per Boe in the fourth quarter of 2018, and down 12% from $12.46 per Boe in the third quarter of 2019, reflecting the benefit of the higher volumes and lower per Boe costs associated with the Mobile Bay acquisition.

Gathering, Transportation Costs and Production Taxes: Gathering, transportation costs and production taxes totaled $7.7 million, or $1.59 per Boe in the fourth quarter of 2019, compared to $7.1 million, or $2.21 per Boe in the fourth quarter of 2018, and $6.5 million, or $1.73 per Boe in the third quarter of 2019. Costs were below the low end of guidance in the fourth quarter.

Depreciation, Depletion, Amortization and Accretion ("DD&A"): DD&A, including accretion for asset retirement obligations, was $7.79 per Boe of production for the fourth quarter of 2019 compared to $10.88 per Boe for the fourth quarter of 2018 and $10.26 per Boe for the third quarter of 2019, driven by the large reserve additions relative to the purchase price associated with the Mobile Bay acquisition.

General and Administrative Expenses ("G&A"): G&A was $17.6 million for the fourth quarter of 2019, compared to $14.9 million in the fourth quarter of 2018 and $10.1 million for the third quarter of 2019. The third quarter of 2019 benefitted from increased charges (credits) to counterparties related to joint interest arrangements and lower compensation expenses. The fourth quarter of 2019 included higher litigation and incentive compensation costs than the prior quarter. On a unit of production basis, G&A was $3.62 per Boe in the fourth quarter of 2019, $4.63 per Boe in the fourth quarter of 2018, and $2.67 per Boe in the third quarter of 2019.

Derivative (Gain) Loss: In the fourth quarter of 2019, W&T recorded a net loss of $18.7 million on its outstanding commodity derivative contracts, of which $18.0 million was an unrealized commodity derivative loss. This compared to a net gain of $59.7 million in the fourth quarter of 2018 of which $55.3 million was an unrealized commodity derivative gain and a net gain of $5.8 million in the third quarter of 2019 of which $5.7 million was an unrealized commodity derivative gain. In the fourth quarter of 2019, W&T entered into additional commodity derivative contracts for crude oil and natural gas, which consisted of crude oil contracts for the period June through December 2020 and natural gas contracts for the period December 2019 through December 2022. A listing of the Company's current outstanding derivative positions is included in the tables below as well as in the Investor Relations section of W&T's web site under the "Financial Info" tab.

Interest Expense: Interest expense, as reported in the income statement, in the fourth quarter of 2019 was $16.6 million compared with $15.2 million in the same period in 2018 and $14.4 million in the third quarter of 2019. The increase was primarily driven by increased interest expense incurred following the draw-down of a portion of the credit facility to fund the Mobile Bay acquisition in late August.

Income Tax: W&T recorded a non-cash income tax benefit of $8.2 million in the fourth quarter of 2019 compared to an income tax expense of $0.2 million in the fourth quarter of 2018 and a non-cash income tax benefit of $55.5 million in the third quarter of 2019.

Throughout 2019, the Company continued to assess the realizability of its deferred tax assets. During the second quarter of 2019, the Company reversed an $11.5 million liability related to an uncertain tax position that was effectively settled with the Internal Revenue Service ("IRS") which was reflected as a non-cash income tax benefit. During the third quarter of 2019, the Company released $55.8 million of the valuation allowance which was reflected as an income tax benefit in the quarter ended September 30, 2019 having concluded, in accordance with GAAP, that it was more likely than not that a portion of its net deferred tax assets would be realized. During the fourth quarter of 2019, the Company released an additional $8.3 million of the valuation allowance which was reflected as an income tax benefit in the quarter.

During the third quarter of 2019, the Company received a cash refund of federal income taxes totaling $16.9 million. In the fourth quarter of 2019, the Company received additional federal income tax refunds totaling $34.9 million plus accrued interest of $4.5 million. There is a remaining balance of refund claims due of approximately $2.0 million.

W&T is not currently forecasting any cash income tax expense for the near-term, and a portion of the Company's deferred tax assets remain partially offset by a valuation allowance. Consequently, the effective tax rate for W&T is not meaningful.

Balance Sheet, Cash Flow and Liquidity: Total liquidity on December 31, 2019 was $171.6 million, consisting of cash and cash equivalents of $32.4 million and $139.2 million of availability under W&T's revolving bank credit facility. At December 31, 2019, the Company had $105.0 million in borrowings on its revolving credit facility and $5.8 million of letters of credit outstanding. Total long-term debt, including $105 million in revolving credit facility borrowings, was $719.5 million, net of unamortized debt issuance costs.

In early 2020, W&T paid down debt with a portion of the free cash flow that it has generated and reduced its revolving credit facility borrowings to $80 million as of February 29, 2020.

Net cash provided by operating activities for the twelve months ended December 31, 2019 was $232.2 million. In December 2019, W&T announced that the Company's bank group had completed its regularly scheduled fall borrowing base redetermination and reaffirmed the borrowing base at $250 million. The next regularly scheduled redetermination is in the spring of 2020.

Capital Expenditures: Capital expenditures for oil and gas properties in the fourth quarter of 2019 were $32.2 million (excluding acquisitions). For the full year 2019, capital expenditures (excluding acquisitions) totaled $125.7 million, which was below the low end of guidance, compared with $106.2 spent in the full year 2018. In addition, the Company made two property acquisitions in the Gulf of Mexico in 2019 for the Mobile Bay and Magnolia assets that totaled $188.0 million. During 2019, the Company achieved 100% success in its drilling program as it did in 2018 and completed three exploration wells and three development wells including the Viosca Knoll 823 ("Virgo") A-13 exploration well; the South Timbalier 320 A- 3 development well; the Mississippi Canyon 800 ("Gladden") SS002 exploration well; the Ship Shoal 028 041 development well; the East Cameron 321 B-8 ST1 development well; and the Mahogany A-6 ST1 development well. All of these wells are in the Joint Venture Drilling Program except for the Mahogany A-6 ST1 well.

Full Year-End 2019 Financial Review

W&T reported net income for full year 2019 of $74.1 million, or $0.52 per share and Adjusted Net Income of $85.9 million, or $0.60 per share. For the full year 2018, W&T reported net income of $248.8 million, or $1.72 per share, and Adjusted Net Income of $148.6 million, or $1.03 per share. The Company generated $282.9 million in Adjusted EBITDA for the full year 2019 compared to $347.1 million in 2018, with the decline driven primarily by lower realized pricing and production mix. Revenues totaled $534.9 million for 2019 compared with $580.7 million in 2018, with the reduction due primarily to decreases in commodity prices.

Production for 2019 was 40,634 Boe/d or 14.8 MMBoe, comprised of 6.7 MMBbls of oil, 1.3 MMBbls of NGLs, and 41.3 Bcf of natural gas. Full year 2018 production averaged 36,510 Boe/d or 13.3 MMBoe and included 6.7 MMBbls oil, 1.3 MMBbls of NGLs, and 32.0 Bcf of natural gas. For the full year 2019, W&T's realized crude oil sales price was $59.89 per barrel, NGL sales price was $17.60 per barrel and natural gas price was $2.57 per Mcf. The combined average sales price was $35.63 per Boe, or 18% lower than $43.19 per Boe sales price that was realized for full year 2018. For the full year 2018, W&T's realized oil price was $65.62 per barrel, NGL price was $28.40 per barrel and natural gas price was $3.11 per Mcf.

For the full year 2019, LOE was $184.3 million compared to $153.3 million in 2018 with the increase primarily due to additional costs associated with the Mobile Bay acquisition, increased insurance premiums for improved coverage and additional workover projects primarily at the Mahogany field. The acquisition of Mobile Bay contributed about 50% of the net increase in LOE in 2019 over 2018. The LOE rate per Boe in 2020 is expected to be in the range of $10.50 to $12.75 compared with $12.43 per Boe in 2019, due to the increased volumes from the acquisitions in 2019 as well as lower expected costs.

Gathering, transportation costs and production taxes totaled $28.5 million, or $1.92 per Boe in 2019, compared to $24.2 million, or $1.82 per Boe in 2018. The increase was due primarily to the Mobile Bay and Magnolia acquisitions.

For the full year 2019, G&A was $55.1 million, down 8% compared with full year 2018 G&A of $60.1 million. The decrease year-over-year is primarily due to higher overhead charged out (credits) on certain drilling projects as well as lower incentive compensation expenses, medical claims, and surety bond expenses. Reflecting the benefit of increased production associated with the acquisitions that did not proportionally increase G&A costs, G&A per Boe was $3.72 in 2019, down 18% from $4.51 in 2018.

Year-End 2019 Proved Reserves

The Company's year-end 2019 SEC proved reserves increased 87% to 157.4 MMBoe from 84.0 MMBoe at year-end 2018. About 40% of year-end 2019 reserves were liquids (24% crude oil and 16% NGLs) and 60% natural gas. The Company achieved a proved reserves replacement rate (including its two 2019 Gulf of Mexico acquisitions, positive revisions, extensions and discoveries, and the impact of negative revisions due to pricing) of nearly 600% of 2019 production of 14.8 MMBoe. At year end, approximately 78% of 2019 proved reserves were classified as proved developed producing, 7% as proved developed non-producing and 15% as proved undeveloped.

The Mobile Bay and Magnolia acquisitions in 2019 added approximately 82 MMBoe of reserves as of year-end 2019, which was higher than the 78 MMBoe combined reserve adds that were announced per the effective dates of each transaction. The acquisition of the remaining 25% working interest in the Magnolia Field announced today was not included in year-end 2019 reserves. The increase was primarily driven by synergies and operational cost savings that have been captured by W&T at Mobile Bay thus extending the overall field life, which was partially offset by lower realized pricing. W&T extended its reserve life ratio with the 2019 acquisitions and successful drilling to 8.7 years, based on year-end 2019 proved reserves and the mid-point of 2020 production guidance of 49,600 Boe/d.

The Company's all-in reserve replacement cost in 2019, including total acquisition and drilling costs and considering reserves added from acquisitions, drilling, and all revisions including the impact of negative price revisions was $4.18 per Boe. For the three-year period 2017 through 2019, W&T's all-in reserve replacement cost was $5.05 per Boe.

The present value of W&T's reported SEC proved reserves, discounted at 10% ("PV-10"), at year-end 2019 was $1.3 billion, down about 9% from $1.4 billion at the end of 2018. The 2019 SEC PV-10 is based on an average crude oil price of $58.11 per barrel and an average natural gas price of $2.63 per Mcf, both after adjustment for quality, transportation, fees, energy content, and regional price differentials. For 2018, the SEC PV-10 was based on an average crude oil price of $65.21 per barrel and an average natural gas price of $3.13 per Mcf, both after adjustments for quality, transportation, fees, energy content, and regional price differential. The total impact from the year-over-year pricing change for the legacy W&T assets and the 2019 acquired properties was a decline of approximately 10 MMBoe in proved reserves and approximately $0.5 billion in PV-10.