W&T Offshore, Inc. (NYSE:WTI) Q3 2022 Earnings Conference Call November 9, 2022 10:00 AM ET
Company Participants
Al Petrie – Investor Relations Coordinator
Tracy Krohn – Chairman and Chief Executive Officer
Conference Call Participants
John White – ROTH Capital
Derrick Whitfield – Stifel
Jeff Robertson – Water Tower Research
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the W&T Offshore Third Quarter 2022 Conference Call. During today’s call, all parties will be in a listen-only mode. Following the company’s prepared comments, the call will be open for questions and answers. [Operator Instructions] This conference is being recorded, and replay will be made available on the company’s website following the call.
I would now like to turn the conference over to Al Petrie, Investor Relations Coordinator. Please go ahead.
Al Petrie
Thank you, Gary. And on behalf of the management team, I would like to welcome all of you to today’s conference call to review W&T Offshore’s third quarter 2022 financial and operational results. Before we begin, I would like to remind you that our comments may include forward-looking statements. It should be noted that a variety of factors could cause W&T’s actual results to differ materially from the anticipated results or expectations expressed in these forward-looking statements. Additional information concerning these factors are contained in our earnings release that we issued yesterday as well as our public filings on Form 10-K, 10-Q and 8-K with the SEC.
Today’s call may also contain certain non-GAAP financial measures. Please refer to the earnings release that we issued yesterday for reconciliations of non-GAAP financial measures to our GAAP results.
With that, I would like to turn the call over to Tracy Krohn, our Chairman and CEO.
Tracy Krohn
Thanks, Al, and good day to everyone, and thank you for joining us for our third quarter 2022 conference call. So with me today are Janet Yang, our Executive VP and Chief Financial Officer; and William Williford, another Executive VP and Chief Operating Officer. They’re both going to be available to answer questions later during the call.
So we maintained our strong financial results in the third quarter and 2022 is on track to be one of the best years in our long and profitable history. Our strategy has always been very simple, generate free cash flow; maintain high-quality conventional production and opportunistically capitalize on accretive opportunities to build shareholder value. Our ability to execute and maintain strong operational excellence has been a significant driver in our outstanding financial results in 2022 and have continued in the third quarter.
So these are the key accomplishments we delivered in the quarter. We maintained solid production at 41,500 barrels of oil equivalent per day at the midpoint of guidance. We reported net income of $68.2 million or $0.47 per share and generated adjusted EBITDA of $113.9 million in the third quarter. For the 19th consecutive quarter that includes throughout the COVID and supply chain disruptions and everything, we had positive free cash flow. And in the third quarter, we produced $71.1 million of free cash flow.
Our both adjusted EBITDA and free cash flow have grown considerably in 2022. Year-to-date, we’ve totaled $497.6 million in adjusted EBITDA and $351.5 million in free cash flow. We increased cash and cash equivalents to $447.1 million, up 74% from a year ago. So hand-in-hand with our growth in cash has been a reduction in net debt. Our net debt is down almost 50% year-over-year to $254.3 million as of September 30, 2022.
And our net debt to trailing 12 months adjusted EBITDA continued to improve significantly to 0.5x or 0.5 turn compared to 2.5 turns or 2.5x a year ago, which is well below our stated goal of 1x by year-end. We’ve maintained positive momentum with another outstanding quarter, thanks in no small part, the ability of both our operations and of course, kudos to our folks offshore and finance team to execute at a high level.
In the third quarter, we also experienced sustained higher pricing and our realized price per barrel of oil equivalent before derivative settlements was $68.39, down less than 2% from the second quarter.
Our average realized price for oil was $90.23 per barrel. For NGLs, we realized $37.17 per barrel and for natural gas, $9.89 per Mcf in each case before derivative settlements. Our third quarter production of 41,500 barrels of oil equivalent per day was down only about 2% from the prior quarter. We had no new wells come online and only spent $4.5 million in CapEx in the third quarter.
Nonetheless, we experienced minimum sequential production decline, thanks to our conventional asset base and successful workover and recompletion program. The combination of strong production and continued strong pricing resulted in our outstanding adjusted EBITDA and free cash flow numbers. We’ve now generated almost $0.5 billion of adjusted EBITDA in the first nine months of 2022.
To put this in perspective, for both years 2021 and 2020 combined, we generated $383.7 million of adjusted EBITDA. Third quarter also marked the 19th consecutive quarter that we’ve generated that positive free cash flow. So our free cash flow in the first nine months of 2022 were $351.5 million, is more than double the free cash flow that we generated in all of 2020 and 2021 combined. So we’re clearly in a much stronger financial position today, and we remain focused on operational execution to build on these solid results.
Now moving on to operations. We did not drill any new wells during the quarter, but we did perform two recompletions and five workovers that positively impacted production in the third quarter. We plan to continue to perform additional workovers and recompletions in 2022 that can benefit production and pay out quickly.
So because we have no long-term rig commitments or near-term drilling obligations, we have flexibility to ramp up or defer capital opportunities. We’re anticipating timing deferrals related to capital spending and now expect drilling in early 2023 that was originally expected in late 2022. As a result, we’re reducing our CapEx range for 2022 by $10 million at the midpoint to between $65 million and $75 million.
Now in regard to future drilling, we’re currently in the permitting and FEED processes as well as buying long-term and long lead items rather in preparation despite our Holy Grail well at Garden Banks 783 in the Magnolia Field in the second quarter of 2023. This is a potentially very large production increase for us going into latter part of 2023.
So with low net debt and a meaningful amount of cash on hand, we will continue to evaluate accretive acquisition opportunities to meet our criteria, while systematically paying down debt. Our net debt decreased by $77.1 million in the third quarter of 2022 to $254.3 million due to the increase in cash and cash equivalents resulting from strong cash flows throughout the quarter, driven by stable production and higher oil and natural gas prices.
Now as of September 30, 2022, we had available liquidity of $497.1 million, comprised of $447.1 million in cash and cash equivalents and $50 million of borrowing availability under our revolving credit facility. As noted in our release yesterday, we recently amended the credit agreement for that facility and expanded or extended the maturity date and revolver commitment to January 3, 2024.
So in regard to our second – our senior second lien notes due November 2023, we continue to evaluate refinancing options. Should capital markets remain volatile, we’re confident that we’re able to repay these notes prior to maturity out of future expected free cash flows, our substantial cash on hand of $447 million and access to our unused $100 million aftermarket equity program. Additionally, we have $50 million in liquidity on our undrawn credit facility and natural gas calls that are currently worth $30 million to $40 million that can be monetized quickly.
Looking ahead to the fourth quarter of 2022, our guidance for production is between 38,000 to 42,000 barrels of oil equivalent per day and fourth quarter lease operating expense is expected to be between $67 million and $73 million, which includes increased workover and facilities expense activity.
Cash G&A costs are expected to be between $17 million and $19 million. LOE and G&A costs estimated for the fourth quarter reflects some of the same cost inflation that the entire industry has faced. Our budget for capital expenditures in 2022 was reduced to $65 million to $75 million for the full year, which excludes acquisition opportunities. Included in this range are costs already incurred with wells drilled earlier this year and planned fourth quarter expenditures related to long lead items for our Holy Grail well as well as capital costs for facilities, leasehold, seismic and recompletions.
The reduction in our capital expenditure budget for 2022 is primarily related to receiving the permit for a riser for the Holy Grail well later than we had previously anticipated. In regard to ARO expenditures, given the spending incurred to date, including $21.5 million in the third quarter, we adjusted our range for P&A expenditures to between $65 million and $75 million. Continuing to actively address our abandonment requirements is an important part of our ESG focus and leads to greater long-term sustainability. As a reminder, all of our guidance can be found in yesterday’s press release.
So in closing, 2022 has been an outstanding year for us operationally and financially. As you can see, we’re poised for continued success in this strong commodity price environment with stable production that we expect to support our positive outlook on continuing to generate free cash flow. We have generated record free cash flow and adjusted EBITDA thus far in 2022, and we expect continued growth in the fourth quarter.
Our substantial cash position of $447.1 million, ability to generate free cash flow from operations and access to an additional $150 million to $200 million in liquidity via our undrawn RBL ATM equity sales program and monetization of long calls provide clear line of sight to either eliminate or refinance our decreasing debt position. So our strong financial position provides us with optionality and flexibility moving forward. We’ll continue to evaluate growth opportunities, both organically and inorganically, and we’re poised to execute on accretive opportunities that meet our long-standing improvement criteria while continuing to prudently manage our balance sheet.
We believe the Gulf of Mexico is and will continue to be a world-class basin with strong producing assets, leveraging our nearly four decades of experience in the Gulf of Mexico to quickly evaluate and execute on opportunities within our focus area has always been a key pillar of our success. We have a premier portfolio of both shallow water and deepwater properties in the Gulf of Mexico that have low decline rates and significant upside. Our management team’s interests are highly aligned with those of our shareholders, given our 34% stake in W&T’s equity, which is one of the highest of any public E&P company.
So as a shareholder, I’m excited about the right future for W&T and look forward to continued success in 2022 and beyond. With that, operator, we can now open the lines for questions. Operator, did you hear – did you copy that?
Question-and-Answer Session
Operator
[Operator Instructions] Our first question is from John White with ROTH Capital. Please go ahead.
John White
Good morning and congratulations on a very fine quarter.
Tracy Krohn
Thanks, John.
John White
On the CapEx reduction, the minor CapEx reduction is – is that related to the lack of availability of oilfield service equipment, you had mentioned the riser for the Holy Grail?
Tracy Krohn
No, it’s really more associated with permitting. We’ve made a pretty good effort to acquire long-lead items. The riser itself is where we wanted to focus and had some concerns and Betsy in examining it took a very methodical approach to it. And I can’t disagree with the way they’ve worked to make this as safe as possible. And of course, we have the same goal.
I think that we have a very in-depth understanding of what we need to do and we’re talking about dry hole trees on a floating facility and single barrier – what are called single-barrier risers that were already in place before new regulations. So we want to make sure they’re right, and Betsy wants to make sure they’re right as well. But we’re doing relatively well on the longer-lead items.
There have been some delays, but not really more delays in that, that would have affected – being able to put a rig on location. We’re in that phase now working with Betsy to have the permits completely buttoned up and start putting a rig on location.
John White
Thanks for that detail. Back to Holy Grail. What’s your working interest there?
Tracy Krohn
100%.
John White
Fantastic. And then to the Northeast, you’ve got another one, ST 320 SS #1, your slides show that’s scheduled for fourth quarter 2023. How is that coming?
Tracy Krohn
We’re going to compare that with our available set of opportunities as we go to the year and see where that ends up at the end of the program with regard to the other commitment we made for drilling.
John White
Okay. I’ve followed the company or covered the company for a number of years. I’ve never seen you in a stronger financial position. So congratulations again.
Tracy Krohn
Thanks, John. Thank you very much.
John White
I’ll pass it back.
Operator
The next question is Derrick Whitfield with Stifel. Please go ahead.
Derrick Whitfield
Good morning, all and thanks for taking my questions.
Tracy Krohn
Thank you, sir.
Derrick Whitfield
With respect to Q4 guidance, could you offer some color on the unplanned downtime at the Neptune Field and temporary maintenance downtime at Mobile Bay field and if that is – could be reasonable before Q1?
Tracy Krohn
Yes, sure. We’re down about 1,500 barrels of oil per day at the midpoint. And again, this is planned downtime – excuse me, unplanned downtime at the outside operated Neptune Field. There’s a blockage in one of the risers there. They’re trying to generate a work plan to overcome that, and they’re having some success at doing that. It’s just taking longer than anybody would want to – would want it to take. Temporary maintenance downtime at Mobile Bay was pipeline related. That’s been resolved and the leak repaired and clamped off. So we didn’t see that as a continuing type of operation. So that’s really primarily the causes there.
Derrick Whitfield
Terrific. And with regard to the slight delay with the Holy Grail well, it sounds as though that’s primarily attributed to the regulatory side. With that, do you guys – do you guys have any – sorry about that. Do you guys have any concerns in advancing the permit? Or is it simply just taking longer to process?
Tracy Krohn
No. We’re not thinking that we have concerns with advancing it. The process is taking longer. We’ve actually got a permit approval subject to certain conditions, which we need to satisfy before we start drilling a well. So I’m not concerned about the efficacy of the permitting. At this point, I’m really – we’re ready to get started. There’s not too much that we need to do to prep the platform and to be putting the rig on site.
Derrick Whitfield
That’s helpful. Thanks for your time.
Tracy Krohn
Sure. Thank you.
Operator
[Operator Instructions] The next question is from Jeff Robertson with Water Tower Research. Please go ahead.
Jeff Robertson
Thank you. Tracy, from a conceptual standpoint, can you talk about how you think about liquidity in 2023 with respect to refinancing the second lien notes. You added $70 million in cash to the balance sheet in the third quarter. W&T is positioned to generate a lot of free cash flow in 2023. But as you look at those notes and the balance sheet and opportunities in the capital program and also perhaps in the acquisition market, just how do you think about positioning the company to with enough dry powder to take advantage of opportunities next year?
Tracy Krohn
That’s a great question, Jeff. Thank you. We’re fortunate to be or not necessarily fortunate. We’ve planned pretty hard to make sure that we were able to repay these notes. We’ve been fortunate in that we made some good choices with regard to how to hedge this and give us protection. We picked up another $150 million or so as a result of that. And what was arguably a trade for protective purposes, but it just turned out to be very successful on the long gas calls.
With regard to the refi, we’re in the enviable position of knowing that we can refi. It’s not a matter of whether we can refi. We certainly can. Markets have been in flux here lately with increases in interest rates and bondholders being somewhat hesitant and the stock market being affected by the Fed speak, if you will. So we’re being patient here and thinking that we know we can refi or worse – not a worst case, but one potential is that we just hang tight and we repay the debt over time.
And then the next one is we reload somewhat to handle any acquisitions that might come up. And so we’re fortunately blessed with the optionality. And that’s the best I can say about that. That is not a simple feat. And my kudos to our team for making that possible. It’s good to be in a position where you can do something and you’ll have to do it.
Unidentified Analyst
Yes. I think the balance sheet appears to give you all better terms to dictate what happens as opposed to being subject to the market forces. At Mahogany – at Holy Grail, can you share an estimate of what that well will cost?
Tracy Krohn
Yes. The current estimates are around 80 drilling complete.
Unidentified Analyst
And if it spuds in the second quarter, I think you said you should – you would expect it to be on in the second half of 2023. Is that correct?
Tracy Krohn
Yes, sir. Probably the fourth quarter – yes, probably fourth quarter.
Unidentified Analyst
Okay, thank you.
Tracy Krohn
Yes, sir. Thank you.
Operator
The next question is a follow-up from Derrick Whitfield of Stifel. Please go ahead.
Derrick Whitfield
Yes, guys. Just one quick follow-up question and really more of a build on Jeff’s question, I wanted to ask if you could speak to the A&D environment in the GOM at present? And similar to onshore, are you guys seeing greater deal flow as a result of relatively strong commodity prices and a less certain economic backdrop?
Tracy Krohn
Yes. I can say that. I think what we have seen is greater volatility in pricing in markets. I think that affects everybody’s thought process about how they’re going to proceed with these things. I’ve always told everyone that we make acquisitions in high pricing environments and low pricing environments. Very often, we see higher pricing environments lead to better execution on the acquisitions. Fortunately, since nearly 25, 30 years now, we’ve had the availability of being able to do hedging to help protect some of those acquisitions.
Normally, when we make a larger acquisition, we have some debt, but we also attach a little piece of equity to it. So with that, we’re very cognizant of acquisitions and making sure that they are accretive. So anything that we would do would be certainly accretive to our balance sheet in that we would also seek to protect our leverage ratios.
Derrick Whitfield
Terrific, thanks for the color.
Tracy Krohn
Yes, sir. Thank you.
Operator
Showing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Tracy Krohn for any closing remarks.
Tracy Krohn
I think it’s been a very good quarter for us. I’m looking forward to the rest of the year and the years after that. I like the way the company looks right now with our balance sheet and it feels good to be in a position where you can pay off all the debt as well or carry it further into the future with a modest amount of debt and leverage by making accretive acquisitions.
We’re very pleased to be where we are. Again, this is reflective of our operational and financial teams to make this happen. So I’m just very delighted to be still here in making this company stronger and nobody does it by themselves. So my sincere appreciation to our teams for getting that done. So with that, we’ll talk to you again soon.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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