Quarterly / Earnings Reports | Third Quarter (3Q) Update | Drilling Activity

W&T Offshore Talks Q3 2019 Results

Share Print Bookmark    |    Friday,November 01,2019

W&T Offshore, Inc. reported its Q3 2019 results.

Key highlights included:

• Closed the $167.6 million Mobile Bay acquisition with ExxonMobil Corporation to acquire interests in and Operatorship of oil and gas producing properties in the eastern region of the Gulf of Mexico ("GOM"), including 74 million Boe ("MMBoe") of net proved reserves, (as of the effective date of January 1, 2019) which nearly doubled W&T's proved reserves;
  
  
• Reported net income of $75.9 million or $0.53 per share in the third quarter of 2019, which includes a non-cash tax benefit of $55.5 million ($0.39 per share) primarily due to the reduction of a valuation allowance previously recorded against net deferred tax assets. Adjusted Net Income was $18.5 million or $0.13 per share;
  
  
• Produced 41,149 net barrels of oil equivalent per day ("Boe/d"), or 3.8 MMBoe (53% liquids), in the third quarter of 2019, above the midpoint of the Company's guidance range, and a 17% increase compared with production in the second quarter of 2019;
  
  
• Brought online the Company's first exploration well in 2019 at Gladden Deep in the deepwater GOM at Mississippi Canyon block 800 at an initial rate of approximately 4,600 gross Boe per day, with 89% oil;
  
  
• Generated Adjusted EBITDA of $72.0 million for the third quarter of 2019 and invested $30.3 million in capital expenditures (excluding acquisitions), continuing an active drilling program in the GOM with four rigs running;
  
  
• Awarded two shallow water blocks in the GOM Lease Sale 253 held on August 21, 2019 adding approximately 10,300 gross and net acres.

Tracy W. Krohn, W&T's Chairman and Chief Executive Officer, stated, "We performed well in the third quarter by closing the accretive Mobile Bay acquisition, increasing production and delivering strong Adjusted EBITDA, while continuing to execute on our strategy. We will continue to look at acquiring high quality, long-life reserves that are highly accretive, similar to the Mobile Bay acquisition, that meets all of our criteria to drive shareholder value. Our drilling program resulted in several strong new wells coming online, including our first exploration success of 2019 at Gladden Deep, which is currently producing over 4,600 gross Boe per day with 89% of that production being oil."

"We are very optimistic about the future of W&T. We continue to generate significant free cash flow which allows us to add accretive acquisitions in a buyer's market. We have a premier portfolio of both shallow water and deepwater properties that generate solid and consistent results with significant upside potential. We have built strong momentum heading into 2020 and remain focused on executing our long-term strategy and continuing to deliver near-term results by operating efficiently, and always looking to maximize long-term shareholder value," concluded Mr. Krohn.

Production, Prices and Revenues

Production for the third quarter of 2019 was 41,149 Boe/d or 3.8 MMBoe, an increase of 13% compared to 36,508 Boe/d in the third quarter of 2018, and up 17% compared to 35,045 Boe/d in the second quarter of 2019. Third quarter 2019 production was above the midpoint of the Company's guidance that included one month of production for its Mobile Bay acquisition. Third quarter 2019 production was comprised of 1.7 million barrels ("MMBbls") of oil, 0.3 MMBbls of natural gas liquids ("NGLs") and 10.6 billion cubic feet ("Bcf") of natural gas. Total liquids production comprised 53% of production in the third quarter of 2019. Production for the first three quarters of 2019 was within production guidance despite non-operated and third party downtime issues, impact due to weather, as well as facility downtime.

For the third quarter of 2019, W&T's realized crude oil sales price was $59.24 per barrel. The Company's realized NGLs sales price was $15.45 per barrel, and its realized natural gas sales price was $2.23 per Mcf. The Company's combined average realized sales price for the third quarter of 2019 was $34.56 per Boe, compared with $45.32 per Boe in the third quarter of 2018, and $41.83 per Boe in the second quarter of 2019.

Revenues in the third quarter of 2019 were $132.2 million compared to $153.5 million in the third quarter of 2018, and $134.7 million in the second quarter of 2019. The revenue decline was driven by a decrease in realized commodity sales price per Boe and product mix, that was partially offset by higher sales volumes.

The Company has incorporated the production for a full quarter related to the Mobile Bay acquisition in its fourth quarter 2019 production guidance estimates. W&T's fourth quarter 2019 production guidance is expected to be between 49,300 and 54,500 Boe/d. The Company has narrowed its full year 2019 guidance range to 39,800 to 41,100 Boe/d.

Capital Expenditures

Total capital expenditures for oil and gas properties were $188.1 million for the third quarter of 2019 which included $157.7 million associated with the acquisition of properties in Mobile Bay. In the second quarter of 2019, the Company recorded a $10 million deposit on the acquisition. W&T now expects full year 2019 capital expenitures excluding acquisitions to be $130 to $150 million.

Mobile Bay Acquisition

n August 30, 2019, W&T closed the previously-announced acquisition of working interests in nine shallow water producing fields and related operatorship in the Mobile Bay area in the eastern region of the GOM, offshore Alabama from ExxonMobil along with associated onshore and offshore facilities and pipelines. The acquisition has expanded W&T's presence to become the largest operator in the area. The purchase also included ExxonMobil's onshore treating facility which, along with the Company's existing treating facility, will allow for flexibility in processing the produced gas and allow for future consolidation of operations. After taking into account customary closing adjustments and an effective date of January 1, 2019, cash consideration paid by W&T was $167.6 million which includes a previously-funded $10 million deposit. The acquisition was funded by cash on hand and borrowings on its previously-undrawn revolving bank credit facility; W&T also assumed asset retirement obligations associated with these assets. Total net proved reserves acquired were 74 MMBoe, of which 22% are liquids. Approximately 99% of the reserves are classified as proved developed producing. These reserves were determined by the third-party independent reserve engineering firm, Netherland, Sewell and Associates, Inc., as of the effective date of the acquisition, based on the October 15, 2018 NYMEX Henry Hub gas and NYMEX WTI oil prices.

Ops Update

W&T is currently operating or participating in several active drilling programs in the GOM, as described below. During the third quarter of 2019, W&T had four rigs running, which represented approximately 18% of the active rigs in the GOM.

Ship Shoal 349/359 "Mahogany" (operated, shallow water, 100% working interest): The SS 359 A-6ST well, a P-sand completion, was successfully drilled and will be brought online in the fourth quarter of 2019.

Ewing Bank 910 Field Area (non-operated, deepwater, in JV Drilling Program): The ST 320 A-2 well was completed and brought online in December 2018 and in late June was producing at a rate of approximately 7,100 Boe per day. 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 5,500 Boe per day. The Company has a 10.8% interest in the ST 320 A-3 well until certain performance thresholds are met.

Ship Shoal 28 (operated, shallow water, in JV Drilling Program): The SS 28 #41 well was successfully drilled and is expected to be brought online in the fourth quarter of 2019.

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 is expected to be online late in the fourth quarter of 2019.

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 4,600 gross Boe per day, with 89% oil. W&T is the operater of the well, which is one of the wells planned for the drilling program under the Monza JV. The Company owns a 17.25% interest in the discovery. 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.

GOM Lease Sale 253: The Company has been awarded leases for two shallow water blocks, Ship Shoal 332 and 367, from the GOM Region-wide Lease Sale 253 held on August 21, 2019. These two blocks cover approximately 10,300 acres and the Company paid $0.3 million for the awarded leases, which reflects a 100% working interest in the acreage and a royalty rate of 12.5%. The leases will be effective November 1, 2019 with a five-year lease term and are in close proximity to current W&T acreage.

Financials

For the third quarter of 2019, W&T reported net income of $75.9 million, or $0.53 per share. The Company recorded a non-cash tax benefit of $55.5 million ($0.39 per share) in the third quarter of 2019 primarily due to the reduction of a valuation allowance previously recorded against net deferred tax assets. The Company's Adjusted Net Income was $18.5 million, or $0.13 per share.

In the third quarter of 2018, net income was $46.3 million, or $0.32 per share, and Adjusted Net Income was $44.1 million, or $0.30 per share. In the second quarter of 2019, net income was $36.4 million, or $0.25 per share, and Adjusted Net Income was $36.5 million, or $0.25 per share.

The Company generated $72.0 million of Adjusted EBITDA for the third quarter 2019, compared to $92.2 million in the third quarter of 2018, and $75.0 million in the second quarter of 2019. Adjusted EBITDA Margin in the third quarter of 2019 was 54%, compared to 60% in the third quarter of 2018 and 56% in the second quarter of 2019. Net cash provided by operating activities for the three months ended September 30, 2019 was $80.3 million, compared with $179.7 million in the third quarter of 2018 and $21.5 million in the second quarter of 2019. Cash provided by operating activities in the third quarter of 2019 benefited from $16.9 million received in federal income tax refunds. An additional $34.9 million in refunds due was received in early October 2019 plus accrued interest of $4.5 million. There is a remaining balance of refund claims due of approximately $2.0 million.

Lease Operating Expenses ("LOE"): LOE, which include base lease operating expenses, insurance premiums, workovers and facilities maintenance expenses, were $47.2 million in the third quarter of 2019. On a component basis, base lease operating expenses and insurance premiums were $38.4 million, workovers were $3.8 million and facilities maintenance expenses were $5.0 million. The increase in LOE in the third quarter of 2019 compared with $37.4 million in the third quarter of 2018 was due primarily to an increase in base LOE related to the Mobile Bay acquisition. Third quarter 2019 LOE also increased from $40.3 million in the second quarter of 2019 but was below the Company's guidance primarily due to lower workover costs and non-operated faciltilies maintenance expense resulting from delays in the timing of planned projects. W&T lowered its full year 2019 LOE guidance range, as shown in the table below.

Gathering, Transportation Costs and Production Taxes: Gathering, transportation costs and production taxes totaled $6.5 million, or $1.73 per Boe in the third quarter of 2019, compared to $6.2 million, or $1.85 per Boe in the third quarter of 2018, and $7.4 million, or $2.32 per Boe in the second quarter of 2019. Year over year, these costs increased slightly due to the Mobile Bay acquisition. Gathering transportation costs and production taxes decreased quarter over quarter due to the reclassification of certain transportation expenses from operating expenses to a net reduction to revenues. W&T adjusted its full year guidance range lower, as shown in the table below, for similar reasons.

Depreciation, Depletion, Amortization and Accretion ("DD&A"): DD&A, including accretion for asset retirement obligations, was $10.26 per Boe of production in the third quarter of 2019 compared to $11.01 per Boe in the third quarter of 2018 and $11.94 per Boe in the second quarter of 2019. The DD&A rate per Boe in the third quarter of 2019 declined from both prior periods due to the addition of the Mobile Bay acquired assets and associated reserves.

General and Administrative Expenses ("G&A"): G&A was $10.1 million for the third quarter of 2019, down about 37% compared with $16.0 million in the third quarter of 2018 and down 24% compared to $13.3 million in the second quarter of 2019. The decrease was primarily due to increased charges (credits) to counterparties related to joint interest arrangements and lower compensation expenses. W&T lowered its full year 2019 G&A guidance range, as shown in the table below.

Derivative (Gain) Loss: In the third quarter of 2019, W&T recorded a net gain of $5.8 million on its outstanding commodity derivative contracts, of which $5.7 million was unrealized commodity derivative gain. In the third quarter of 2018, W&T recorded a net gain of $0.3 million on its outstanding crude oil commodity derivative contracts, of which $2.2 million was unrealized, while in the second quarter of 2019 the net gain was $1.8 million, of which $3.8 million was unrealized commodity derivative gain. In the first nine months of 2019, W&T did not enter into additional derivative contracts for crude oil and natural gas. A summary of the Company's current outstanding derivative positions is included in the tables below.

Interest Expense: Net interest expense in the third quarter of 2019 was $14.4 million compared with $10.7 million in the third quarter of 2018 and $12.2 million in the second quarter of 2019. Third quarter expense includes increased interest expense incurred following the draw down of a portion of the credit facility to fund the Mobile Bay acquisition in late August. Second quarter 2019 net interest expense included the benefit of $4.0 million of interest income recorded during the quarter related to the tax refund. Prior to the refinancing transaction in October 2018, a portion of interest expense was capitalized which lowered interest expense in the income statement from January 1 through October 18, 2018 as a result of accounting requirements related to the Company's prior debt structure. After the refinancing transaction, all interest expense incurred has been reported as expense in the income statement.

Income Tax: The Company recorded a non-cash tax benefit of $55.5 million in the third quarter of 2019 primarily due to the reduction of a portion of the valuation allowance previously recorded against net deferred tax assets.

Throughout 2019, the Company has been in a cumulative three-year pre-tax income position and continued to assess the realizeability of its deferred tax assets. During the third quarter of 2019, the Company concluded that it was more likely than not that a portion of its net deferred tax assets would be realized and released $55.8 million of the valuation allowance which is reflected as an income tax benefit in the quarter ended September 30, 2019. Consequently, the effective tax rate for W&T is not meaningful. W&T continues to forecast no cash income tax expense for the near term.

During the third quarter of 2019, the Company received a cash refund of income taxes totaling $16.9 million; at September 30, 2019, W&T had a current income tax receivable of $36.9 million, which primarily relates to the remainder of net operating loss carryback claims for the years 2012, 2013 and 2014 that were carried back to prior years. The Company received $34.9 million in refunds due in early October 2019. There is a remaining balance of refund claims due of approximately $2.0 million.

Balance Sheet, Cash Flow and Liquidity: Total liquidity on September 30, 2019 was $179.5 million, consisting of cash and cash equivalents of $41.7 million and $137.8 million of availability under W&T's $250 million revolving bank credit facility. At September 30, 2019, the Company had $105.0 million in borrowings on its revolving credit facility and $7.2 million of letters of credit outstanding. Total long-term debt was $718.9 million, net of unamortized debt issuance costs.