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W&T Offshore Second Quarter 2022 Results

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   |    Thursday,August 11,2022

W&T Offshore, Inc. reported operational and financial results for the second quarter 2022.

Highlights:

• Increased production by 12% quarter-over-quarter to 42.4 thousand barrels of oil equivalent per day ("MBoe/d") (48% liquids), or 3.9 million barrels of oil equivalent ("MMBoe"), exceeding the high end of previously disclosed quarterly guidance;
  • Raised full year 2022 production guidance mid-point by 2%;
• Generated net income of $123.4 million or $0.85 per diluted share in the second quarter of 2022, which is the third best quarterly net income in the Company's history as a public company;
  • Adjusted Net Income totaled $190.5 million, or $1.32 per diluted share in the second quarter of 2022;
• Monetized a portion of W&T's natural gas hedge position resulting in a net gain from the transaction of $138.0 million and net proceeds of $105.3 million;
  • Restructured strike prices on outstanding purchased natural gas calls covering the second half of 2022 through the first quarter of 2025 to monetize some of the value of the call options while maintaining the ability to participate in future increases in natural gas prices;
• Reported Adjusted EBITDA of $294.0 million for the second quarter of 2022;
  • Year-to-date 2022 Adjusted EBITDA of $383.7 million is equal to full year 2021 and 2020 combined;
• Expanded Free Cash Flow to $233.5 million for the second quarter 2022, which was more Free Cash Flow than full year 2021 and 2020 combined;
  • W&T has generated positive Free Cash Flow for 18 consecutive quarters;
• Increased cash and cash equivalents to $377.7 million, up 81% from $209.1 million at June 30, 2021;
  • Decreased Net Debt by 39% year-over-year to $331.4 million as of June 30, 2022;
• Realized significant improvement in the Company's leverage profile with Net Debt to trailing twelve months ("TTM") Adjusted EBITDA of 0.7 times compared to a ratio of 3.3 times one year ago;
• Acquired the remaining 20% working interests in oil and gas producing properties at Ship Shoal 230, South Marsh Island 27/Vermilion 191, and South Marsh Island 73 fields for $17.5 million; and
• Reported mid-year SEC proved reserves, based on a reserve report prepared by Netherland, Sewell and Associates, Inc. ("NSAI"), grew 7% to 168.3 MMBoe, and pre-tax PV-10 value (SEC pricing) increased 62% to $2.6 billion, compared to year-end 2021;
  • Positive performance revisions, price revisions and purchase of minerals in place totaled 17.9 MMBoe which replaced approximately 2.5 times year-to-date 2022 production of 7.3 MMBoe.

Tracy W. Krohn, Chairman and Chief Executive Officer, stated, "Our strategy has always been focused on free cash flow generation, and the combination of solid operational results and opportunistically monetizing a portion of our hedge position allowed us to deliver one of our best quarterly financial results in W&T's long history. Our second quarter production was up 12% over the first quarter and well above the high end of our guidance range. Adjusted EBITDA was $294.0 million for the second quarter and we have now generated $383.7 million during the first half of 2022. To put this in perspective, we generated $220.3 million and $163.4 million in Adjusted EBITDA in 2021 and 2020, respectively. We generated Free Cash Flow in the second quarter of $233.5 million, which marked our 18^th consecutive quarter of Free Cash Flow generation. Additionally, we decreased net debt by 39% to $331.4 million, which drove our Net Debt to TTM Adjusted EBITDA ratio down to 0.7 times which is below our stated goal of below 1.0 times by year-end 2022. During the second quarter of 2022, we took advantage of the sharp increase in natural gas forward prices and monetized the value of a portion of our natural gas hedge position resulting in a net gain from the transaction of $138.0 million and net proceeds of $105.3 million."

"We are very pleased with our mid-year reserve report that showed strong reserve growth. Positive performance and pricing revisions, combined with the acquisitions made in the first half of the year allowed us to replace about two and a half times our production. W&T has an outstanding asset base that generates meaningful cash flow and has significant long-term value, and this is very evident when you look at the mid-year 2022 PV-10 of our proved reserve base at SEC pricing. At $2.6 billion, this represents an increase of 62% compared with $1.6 billion at year-end 2021, which clearly reflects the significant upside value we have at W&T."

"The Company is well positioned with a solid balance sheet and stable production that will allow us to generate meaningful cash flow for years to come. We are able to evaluate and quickly execute on accretive acquisition opportunities that meet our long-standing and proven criteria. We'll continue to evaluate opportunities to be more active in our drilling program; however, our near-term focus is on continuing to improve our leverage profile and maintain our financial flexibility. We remain committed to growing shareholder value and are well positioned for future success."

Financial Results

Production, Prices, and Revenue

Production for the second quarter of 2022 was 42.4 MBoe/d, which surpassed the top end of the Company's guidance range provided for the quarter. W&T benefited from a full quarter of production from acquisitions announced earlier this year. This represented an increase of 12% compared to the first quarter of 2022 and an increase of 4% from 40.9 MBoe/d for the corresponding period in 2021. Second quarter 2022 production was comprised of 16.2 MBbl/d of oil (38%), 4.2 MBbl/d of natural gas liquids (10%) ("NGLs"), and 131.8 million cubic feet per day ("MMcf/d") of natural gas (52%). W&T increased its full year 2022 production guidance to 39,500 to 42,000 Boe/d from its prior estimate of 38,200 to 42,200 Boe/d, an increase of 2% at the mid-point of Company guidance.

W&T's average realized price per barrel of oil equivalent ("Boe") before realized derivative settlements was $69.55 per Boe in the second quarter of 2022, an increase of 26% from $55.29 per Boe in the first quarter of 2022 and an increase of 100% from $34.75 per Boe in the second quarter of 2021. Crude oil, NGL, and natural gas prices, before realized derivative settlements, for the second quarter of 2022 were $107.90 per barrel, $43.58 per barrel, and $7.70 per Mcf, respectively.

Revenues for the second quarter of 2022 were $273.8 million, which were 43% higher than first quarter 2022 revenue of $191.0 million and 106% higher than $132.8 million in the second quarter of 2021.

Lease operating expense ("LOE"), which includes base lease operating expenses, insurance premiums, workovers, facilities maintenance, and hurricane repairs, was $53.0 million in the second quarter of 2022, which was below the low end of the guidance range for the quarter due to certain discretionary maintenance activities being deferred until the second half of 2022. This compared to $43.4 million in the first quarter of 2022 and $47.6 million for the corresponding period in 2021. On a component basis for the second quarter of 2022, base LOE and insurance premiums were $43.7 million, workovers were $2.7 million, and facilities maintenance expenses were $6.8 million. On a unit of production basis, LOE was $13.73 per Boe in the second quarter of 2022. This compares to $12.78 per Boe for the first quarter of 2022 and $12.78 per Boe for the second quarter of 2021.

 Gathering, transportation costs, and production taxes totaled $9.2 million ($2.38 per Boe) in the second quarter of 2022, compared to $5.3 million ($1.55 per Boe) in the first quarter of 2022 and $6.8 million ($1.82 per Boe) in the second quarter of 2021.

DD&A, including accretion expense related to asset retirement obligations ("ARO"), was $8.90 per Boe in the second quarter of 2022. This compares to $9.10 per Boe and $8.32 per Boe for the first quarter of 2022 and the second quarter of 2021, respectively.

G&A was $15.0 million for the second quarter of 2022, below the midpoint of guidance for the quarter. This compares to $13.8 million in the first quarter of 2022 and $14.0 million in the second quarter of 2021. On a unit of production basis, G&A was $3.88 per Boe in the second quarter of 2022 compared to $4.05 per Boe in the first quarter of 2022 and $3.76 per Boe in the corresponding period of 2021.

In the second quarter of 2022, W&T recognized a net gain of $8.9 million related to commodity derivative activities, including the monetization of value associated with resetting strike prices on outstanding natural gas purchased call options covering the second half of 2022 through the first quarter of 2025. The Company recognized a net gain of $138.0 million and received net proceeds of $105.3 million as a result of the restriking transaction. Other realized settlements, net of option premium amortization, resulted in a loss of $58.4 million in the second quarter of 2022. The change in value of outstanding derivative contracts since the end of the first quarter of 2022 resulted in an unrealized loss of $70.8 million for the quarter ended June 30, 2022. The Company recognized a net loss of $80.0 million in the first quarter of 2022 and a net loss of $81.4 million in the second quarter of 2021 related to commodity derivative activities.

For the remainder of 2022, W&T is approximately 25% hedged for oil and is fully hedged for natural gas. As part of the monetization described above, the Company restructured its purchased call options on natural gas to increase the weighted-average strike price to $7.48 per MMBTU from $3.78 per MMBTU for the balance of 2022. These calls cover approximately 85% of its anticipated natural gas production for the balance of 2022. A significant portion of the W&T's natural gas hedges, in the form of sold swaps and purchased calls and puts, were entered into in conjunction with the non-recourse Mobile Bay term loan entered into by borrowers owned by the Company's wholly-owned subsidiary Aquasition Energy LLC and will continue through the life of that loan.

Net interest expense in the second quarter of 2022 was $18.2 million compared to $19.9 million in the first quarter of 2022 and $16.5 million in the second quarter of 2021. The increase in expense year-over-year reflects the increase in total debt due to the incurrance of the non-recourse Mobile Bay term loan by certain wholly-owned subsidiaries in May of 2021.

W&T recognized income tax expense of $31.1 million in the second quarter of 2022, a substantial majority of which was deferred. This compares to the recognition of an income tax benefit of $0.7 million and $12.7 million for the quarters ended March 31, 2022 and June 30, 2021, respectively.

Balance Sheet and Liquidity

As of June 30, 2022, W&T had available liquidity of $427.7 million comprised of $377.7 million in cash and cash equivalents and $50.0 million of borrowing availability under W&T's first priority lien secured revolving facility. At quarter-end, the Company had total debt of $709.2 million (or Net Debt of $331.4 million, net of cash and cash equivalents), consisting of the balance of the non-recourse Mobile Bay term loan of $160.3 million and $548.8 million of 9.75% Senior Second Lien Notes, net of unamortized debt issuance costs for both instruments. Total debt decreased by $11.2 million during the second quarter. Net Debt decreased by $173.4 million in the second quarter of 2022 due to the increase in cash and cash equivalents attributable to the aforementioned hedge monetization transaction and strong cash flows throughout the quarter driven by high oil and gas prices.

As of June 30, 2022, Net Debt to TTM Adjusted EBITDA was 0.7 times. Assuming recent strip pricing for the remainder of 2022, no additional acquisitions for the remainder of the year, and no equity issuances by the Company, including under the Company's existing At-The-Market Equity Distribution program, W&T estimates that Net Debt to TTM Adjusted EBITDA will decline to approximately 0.5 times.

The Company continues to monitor the debt capital markets to refinance all or a portion of the Senior Second Lien Notes.

Regarding the approaching maturity of the Company's 9.75% Senior Second Lien Notes (due November 2023), Mr. Krohn commented, "Our preference is to refinance the outstanding Second Lien Notes with financing providing longer tenors and market-based covenants at an attractive interest rate. However, should the debt market continue to be difficult to access due to market volatility, we believe there is a path for the Company to pay off those notes at maturity. Strong anticipated future cash flows, combined with our significant cash position, availability under our undrawn credit facility, and, if needed, access to our unused at-the-market equity program, give us confidence that we will be able to address those notes in the event that we are not able to access the debt markets at a reasonable cost."

Capital Expenditures and Acquisitions: Capital expenditures (excluding changes in working capital associated with investing activities) in the second quarter of 2022 were $8.1 million. Additionally, the Company spent $17.5 million to acquire the remaining 20% working interests in the Ship Shoal 230, South Marsh Island/Vermilion 191, and South Marsh Island 73 fields.

Mid-Year 2022 Proved Reserves

As calculated by NSAI, W&T's independent reserve engineering consultants, proved reserves using SEC pricing methodology totaled 168.3 MMBoe, compared with 157.6 MMBoe at year-end 2021. The increase in proved reserves is the result of positive performance revisions of 6.3 MMBoe, positive price revisions of 6.3 MMBoe, and the purchase of minerals in place of 5.3 MMBoe, partially offset by 7.3 MMBoe of production in the first half of 2022. The mid-year proved reserves, which were 88% proved developed and proved developed non-producing, were 35% liquids. Utilizing NYMEX strip pricing as of July 19, 2022, mid-year proved reserves were 164.1 MMBoe.

The pre-tax PV-10 of the mid-year 2022 proved reserves using SEC pricing was $2.6 billion (before consideration of expenditures for asset retirement obligations), an increase of 62% compared with the PV-10 of $1.6 billion at year-end 2021 using SEC pricing. Using NYMEX strip pricing as of July 19, 2022, the PV-10 the mid-year reserves was $2.3 billion.

Mid-year 2022 SEC proved reserves and PV-10 were based on an average 12-month crude oil and natural gas prices of $85.82 per barrel and $5.13 per Mcf, respectively. Prices used to determine proved reserves and PV-10 for year-end 2021 were $66.55 per barrel of oil and $3.60 per Mcf of natural gas.

2022 Capital Program

W&T's range for capital expenditures in 2022 remains unchanged at $70 million to $90 million for the full year, which excludes acquisition opportunities. Included in this range are planned expenditures related to one deepwater well and three shelf wells, 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.

Similarly, the range for plugging and abandonment expenditures remains unchanged in the range of $55 million to $75 million, driven by obligations and prior Covid-19-related deferrals on terminated leases with U.S. Bureau of Safety and Environmental Enforcement ("BSEE") deadlines before year-end 2022. The Company spent $34.3 million on ARO settlements in the second quarter of 2022.

Ops Update

The Company is continuing preparations to drill the Holy Grail well at Garden Banks 783 in the Magnolia Field. The well is expected to commence drilling in the first quarter of 2023.

During the second quarter of 2022, the Company performed two recompletions and four workovers that positively impacted production for the quarter. W&T plans to continue to perform recompletions and workovers that meet its economic thresholds.