May 5, 2016
Executives
Tracy Krohn - Chairman, Chief Executive Officer Lisa Elliott - Dennard Lascar Associates
Analysts
Jon Evans - JWEST Noel Parks - Ladenburg Thalmann
Operator
Greetings and welcome to the W&T Offshore Inc. First Quarter Earnings conference call.
At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference, please press star, zero on your telephone keypad. As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Lisa Elliott. Thank you, Ms.
Elliott. You may begin.
Lisa Elliott
Thank you, Operator, and good morning everyone. We appreciate you joining us for W&T Offshore’s call to review the first quarter of 2016 financial results and for an operational update.
Before I turn the call over to the company, I have a few items that I’d like to point out. If you wish to listen to a replay of today’s call, it will be available in a few hours via webcast by going to the Investor Relations section of the company’s website at www.wtoffshore.com, or via recorded replay until May 12.
To use the replay feature, call 201-612-7415 and dial the passcode 13635554. That information is also in the press release that was released yesterday.
As a reminder, information reported on this call speaks only as of today, May 5, 2015 and therefore time sensitive information may no longer be accurate as of the date of any replay. Please refer to the first quarter 2016 financial results announcement we released yesterday for disclosure on forward-looking statements and reconciliations of non-GAAP measures.
At this time, I’d like to turn the call over to Mr. Tracy Krohn, W&T’s Chairman and CEO.
Tracy?
Tracy Krohn
Thanks Lisa. Good morning everyone.
Joining me this morning are Jamie Vazquez, our President; Danny Gibbons, our Chief Financial Officer; Tom Murphy, our Chief Operations Officer, and Steve Schroeder, our Chief Technical Officer. Yesterday we released our financial and operations results for the first quarter and provided guidance for the second quarter and full year of 2016.
Also, we will be filing our first quarter Form 10-Q with the SEC here in a day or so, and that will have even more detailed information. This morning I’ll briefly review some key items from the release and then we’ll be glad to address your questions.
In the first quarter, we produced approximately 3.9 million of barrels equivalent for the quarter, of which about 57% was oil and liquids. Our oil production was up slightly compared to the first quarter of 2015 while our natural gas and natural gas liquids production decreased.
Our new projects over the last five years have focused almost exclusively on oil exploration and development, so we’re continuing to see a shift towards a larger percentage of total production being crude oil. Though our production in the first quarter was slightly lower than we anticipated as our largest oil producing field, Ship Shoal 349 Mahogany, was offline for three weeks during March as a result of a scheduled maintenance project on a third party pipeline that services the field.
Ship Shoal 208 was down from October through the end of February due to a fire - I believe that was at Black Bayou, and resulting outage at an onshore third party processing facility. We had a couple of other incidents that contributed to a total deferral for the quarter of about 800,000 barrels of oil equivalent; nonetheless, our full-year production guidance remains the same.
Otherwise, most of our fields performed as expected during the quarter, including the ones we brought online in 2015. The only new well brought in production in the first quarter of 2016 was the Ewing Bank 954 A-8 well, which was completed in March.
We have now de-mobbed the rig from the Ewing Bank 910 platform which impacted production as a result of moving the rig, of course, from the entire Ewing 910 field, which includes the South Ten 320 A-5 well completed last year as well as the Ewing 954 A-8 well. We did take that into account previously for purposes of developing our production guidance.
As you may recall, the A-8 well reached total depth in December and penetrated a total of 150 feet of measured depth hydrocarbon pay in two zones. We completed the well in both zones with initial production coming from the lower zone.
Although the upper zone was actually the primary and larger target, we have pre-completed that upper zone and we’ll place it on production later as the lower zone depletes. The A-8 well achieved a gross initial production rate of approximately 3,500 barrels of oil equivalent per day from the lower sand completion, which is approximately 47% oil and 6% liquids.
This is the second well in a two-well exploration program that was drilled from the Ewing 910 platform following the earlier discovery at the South Ten 320 A-5 well in May 2015. We have a 50% working interest in these wells.
We continue to believe the field offers additional opportunities for future drilling when prices recover. The Ewing 910 field has averaged around 4,200 barrels of oil per day over the last 11 days.
So in sum, the pipeline outages and maintenance-related items now resolved, plus the additional production from the Ewing 954 A-8 well, we expect to be able to keep our production volumes flat in the second quarter. Pricing in the first quarter was much lower than we expected and apparently lower than many of the analysts expected as well.
First quarter 2016 prices were as low as we have seen in a decade and February was the worst month in the quarter, when our realized crude oil price was $22.81 per barrel. Not only did we have the severe dip in February but our oil price realizations have been under the benchmark West Texas Intermediate price this year due to larger negative price differentials at several of our major oilfields, because the pipelines that serve those fields received lower pricing.
We have also been impacted by some adjustments due to lower crude quality associated with certain pipelines, and we have had substantial barging costs at two of our fields due to a pipeline outage - that was primarily at East Cameron 321 and 338. You may recall we had a ship incident out there where a ship dropped anchor and severed a pipeline.
West Texas Intermediate crude oil prices averaged $33.35 per barrel for the first quarter of 2016 while we realized an average crude oil sales price of only $26.73 per barrel during the same period. This level of negative differential is unusual for us.
As you may recall, we were realizing substantial premiums to WTI a few years ago. On a combined equivalent basis, our average realized sales price for the first quarter was $19.33 per Boe compared to $28.70 per Boe in the first quarter of 2015.
Oil prices have been particularly volatile so far this year, and we’re pleased to see them improve from the lower levels in February. We’ve focused on lowering costs where we can, which resulted in a further reduction in expenses in the first quarter compared to the same period last year.
Lease operating expenses were down 17% and G&A was down 21% with a reduced headcount, reduced contractor usage and other cost savings measures. We expect to continue to see costs trend lower as long as commodity prices remain at these depressed levels.
As reflected in our second quarter guidance, we anticipate higher LOE, which is associated with a higher level of maintenance work that we typically perform during the second and third quarters when weather conditions are better, but full-year LOE guidance is unchanged. As we reported in yesterday’s news release, adjusted EBITDA for the first quarter of 2016 was $16.6 million, down from $48.3 million in the same period last year, and our adjusted EBITDA margin was 21% versus 38% last year as the drop in commodity prices outpaced the drop in the cost of goods and services.
Our 2016 budget of $15 million funded the completion of the Ewing Bank A-8 well - of course, that’s done now. With service costs coming down, we have already seen our estimate for our planned ARO activity in 2016 fall from $84 million to $76 million, which actually includes more projects than what made up the original $84 million estimate.
In fact, we were able to revise our overall AOR obligation downward by $20 million as we looked at our previous estimates compared to the current cost environment. Hopefully, there will be more of that to come as we continue to refine work, scope and estimates.
During the month of February 2016, we borrowed $340 million under our credit agreement, and on March 31, 2016 our cash position was about $371 million. On March 23, 2016, the borrowing base under our credit agreement was reduced as part of the spring redetermination from $350 million to $150 million.
The excess amount borrowed over the new borrowing base is required to be repaid in three installments over 90 days. We repaid $52 million on March 31 and $12 million on May 2, and we have another $64 million payment due on both May 31 and June 30.
Also let me bring you up to date on our ongoing discussions with the U.S. Department of Interior’s Bureau of Ocean Energy Management - the BOEM, regarding certain supplemental bonding requirements for offshore decommissioning liabilities.
As a reminder, in February and March 2016, the company received several orders from the BOEM demanding that the company provide additional supplemental bonding on certain federal offshore oil and gas leases, rights of way, and rights of use and easement owned and/or operated by the company. Those outstanding orders totaled $260.8 million.
We have filed appeals with the Interior Board of Land Appeals regarding three of the BOEM orders, totaling $227.8 million in supplemental bonding. We have numerous discussions with the BOEM and its sister agency, the BSAE, since receiving the orders, and we continue to have further discussions with both agencies.
The objective of the company remains to reach a mutual agreement on the financial assurance requirements, and while we can’t guarantee a favorable outcome regarding an agreement, we are cautiously optimistic that an amicable solution can be reached. With our strong oil production and some recent improvement in pricing, cash flow in the second quarter should look better than in the first quarter.
Given our solid asset base of high oil producing properties, even a small improvement in oil prices can have a meaningful impact on our cash generating capabilities, so obviously $26 oil is a lot different from $45 oil, so assuming current pricing, second quarter is going to be better. With that, Operator, we’ll open it up for questions.
Operator
[Operator instructions] Our first question comes from Jon Evans with JWEST. Please state your question.
Jon Evans
Thanks for your time, Tracy. I appreciate it.
Tracy Krohn
My pleasure.
Jon Evans
Could you just answer, last quarter you had a problem with a well, you were going to do an acid--some acid issues, et cetera, and try to get it restarted and producing. Can you give us any update on that?
I don’t think you mentioned that in the script.
Tracy Krohn
That would have been Gladden. Actually it wasn’t an acid issue, it was an asphalt themed issue, that the well had lower pressures, precipitates asphalt at the well bore interface.
We had a very successful--we had some downtime, we had a very successful treatment on that using xylene through a control line, fairly novel approach. We were able to inject over about a two-week period.
We did get the well back online at acceptable pressure levels, and we’ve put the well back on at slightly reduced rates. But the good news is we’re back online and as of the first of this month--I’m sorry, excuse me, as of the first of April.
Jon Evans
Great. Then you guys have done a great job on cost.
Obviously you’ve been chasing the commodity lower. Can you just talk on the cost side?
Is there more blood to squeeze out of this turnip, or do you think we’ve kind of come to the end? Can you just help us understand kind of in SG&A and LOE?
Tracy Krohn
I think about this a lot, Jon, so the short answer is yes, the rationale is that it takes a period of time for our vendors and contractors to precipitate a lower price for their cost of goods and services as well, so their suppliers have to respond going on down the chain. That continues to act out.
We certainly saw a lowering of prices in the first quarter, so yes, the short answer is yes, that will continue as long as we have oil in these kind of price ranges.
Jon Evans
Okay, thanks so much.
Tracy Krohn
Yes sir.
Operator
Our next question comes from Noel Parks with Ladenburg Thalmann. Please state your question.
Noel Parks
Good morning.
Tracy Krohn
Good morning, Noel.
Noel Parks
First one - have you given any thoughts on how things look on the work-over and recompletion front, just what you might have in inventory at this point and what might be ahead?
Tracy Krohn
I think we have a pretty good idea what we’re going to do. There’s things that we believe that we see as lower hanging fruit.
We have some things to do at Mahogany that would certainly help us as well. It’s a matter of price.
As price continues to stay up, we’ll take advantage of those opportunities. We did our budget based on some fairly dire assumptions, and hopefully these increases in price make a big difference.
And they do - I mean, if you think about the difference between $26 and $45 oil, it doesn’t take a whole lot of rocket science to figure out the revenues are going to be much better.
Noel Parks
Right, right. Sort of along that same line, on the non-operated side, the price improvement has been us, I guess going into a couple months now, but is there anything from any of your partners, the operators--with the improvement in price, are there any stirrings of any activity maybe coming on the horizon that you didn’t originally plan with the more dire oil assumptions?
Tracy Krohn
Yes, not anything that I could really point a finger to right now. Clearly when we get into better weather months, people pick up activity levels, so we’ll have a little better read on that after this quarter, of course.
I would tell you that there’s still a lot of boats and rigs and stuff stacked up at the mouth of the river and [indiscernible] and everything else, so I’m not seeing a huge movement right now in work activity, but clearly it will get better in our better weather months.
Noel Parks
Great, thanks a lot.
Tracy Krohn
Yes sir, thank you.
Operator
I will now turn the call back to Mr. Krohn for closing remarks.
Tracy Krohn
Well thanks everyone. We appreciate you tuning in, and we’ll be talking to you next quarter, if not sooner.
Thanks so much.
Operator
Ladies and gentlemen, thank you for your participation. This does conclude today’s teleconference.
You may disconnect your lines and have a wonderful day.