Nov 3, 2016
Executives
Lisa Elliott - Investor Relations, Dennard Lascar Associates Tracy Krohn - Chairman and Chief Executive Officer Jamie Vazquez - President Danny Gibbons - Chief Financial Officer Tom Murphy - Chief Operations Officer Steve Schroeder - Chief Technical Officer
Analysts
Operator
Greetings and welcome to the W&T Offshore Third 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. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Lisa Elliott. Thank you, Ms.
Elliot, you may begin.
Lisa Elliott
Thank you, operator and good morning everyone. We appreciate you joining us for W&T Offshore’s conference call to review the third quarter of 2016 financial and operational results and for an update on planned activities for the remaining of the year.
Before I turn the call over to the company, I would like to remind you that information recorded on this call speaks only as of today, November 3, 2016 and therefore time-sensitive information may no longer be accurate as of the date at any replay. Also please refer to the third quarter 2016 financial and operational results announcement W&T released yesterday for a disclosure on forward-looking statements and reconciliations of non-GAAP measures.
At this time, I would like to turn the call over to Mr. Tracy Krohn, W&T’s Chairman and CEO.
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. So, yesterday, we released our financial and operational results for the third quarter and we’ve provided guidance for the fourth quarter and full year 2016.
We should also be filing our third quarter Form 10-Q with the SEC later today. So this morning, I will review some key items in the release and then we’ll take your questions.
All right. In the third quarter, we produced approximately 3.8 million barrels of oil equivalent or 41,500 barrels of oil equivalent per day, about 57% of which was oil and liquids.
Our production held relatively steady comparing 42,900 barrels of oil equivalent per day in the second quarter and 43,300 barrels of oil equivalent per day in the first quarter of 2016. Our total production volume in the third quarter exceeded our guidance by about 7% as the storm downtime that was included in our guidance didn’t occur.
However, we did continue to experience some production deferrals and downtime primarily attributable to the third-party pipeline outages. We estimate that about 200,000 barrels of oil equivalent of production was deferred in the third quarter.
Production has held steady despite our dramatically reduced capital expenditure program of only $24.1 million in the first nine months of this year. Most of our fields performed as expected in the third quarter.
We have seen solid production contributions from recent workover recompletion activities which is great way to bring on low-cost production and that’s aided us in maintaining a relatively stable production profile. Our average realized sales price was down about 3% to $27.97 per barrel of oil equivalent in the third quarter last year.
We were again impacted by oil price realizations that were well under the benchmark, WTI price this year due to large negative price differentials at several of our major oilfields primarily due to crude quality relative to the WTI. So, our GAAP net income for the third quarter was $45.9 million and our earnings were $0.48 per share.
So excluding special items it’d be comparable with street’s estimates. So we would have had a loss per share of $0.24 per share which is a substantial improvement compared to loss of $60 million or $0.79 per share in the third quarter of 2015.
So, before I review our operating activity in more detail, I would like to thank our shareholders, and a lot our senior note holders who support - for their support in our Exchange Transaction. If you’ll recall, on September 7, 2016, we completed an Exchange Transaction whereby approximately 79% of our 8.5% senior notes due in 2019 were converted into common stock and new secured notes.
So not only did this transaction reduced the company’s overall indebtedness, it dramatically reduced interest expense going forward. Since our second quarter 2016 interest expense were nearly $30 million and our fourth quarter interest expense is projected at approximately $11 million.
The projected annual cash savings from our reduced interest cost would be at a $50 million to $60 million range, which is money that we can use to invest back in the ground. The Pay-In-Kind or PIK Toggle feature of the new notes also provides us with additional financial flexibility in a market that continues to be uncertain.
Additionally, we closed on a new $75 million 1.5 Lien Term Loan and used those proceeds to pay transaction cost associated with the Exchange Transaction and to repay a portion of the borrowings outstanding under our revolving bank credit facility. We did used cash on hand to reduce the remaining amount outstanding under the revolver to zero.
At September 30, 2016, our total liquidity stood at $222.5 million that consisted of cash balances of $73.4 million and $149.1 million of availability under our revolving bank credit facility. The company did recognize a gain on the debt exchange of $124 million.
The actual debt reduction through the exchange of the unsecured notes for the secured notes – or excuse me – the unsecured notes for the secured notes was over $400 million. However, the carrying value of the debt has increased by the total amount of interest that would accrue over the life of the notes.
That interest plus the transaction cost served to reduce the amount of the gain. All the interest on the new notes has been recognized upfront.
So we won’t be recognizing interest expense on those notes going forward. And it’s a little bit of a departure for us.
So, we have provided a table in the earnings release. So that it might be easier to understand the exact nature of the transaction and the effect that it has on our balance sheet.
We also placed a lien to a Form 8937, I will report our organizational actions affecting basis of securities on the investor relations overview page on our website and that might be helpful to senior note holders that participated in the Exchange. We are pleased to have this transaction closed and our focus is now back to new capital projects.
So while operating margins are still below our historic levels, they have improved earlier in the year. Adjusted EBITDA for the third quarter was $52.5 million and our adjusted EBITDA margin was 49% and that’s up 41%, that’s up from 41% in the second quarter and 21% in the first quarter.
We do still believe that margins need to get back more in line with historical levels around 60% to deploy capital at more robust levels. So, we are obviously working hard to improve our margins as we continue to drive cost down everywhere we can and improving efficiencies.
We believe we have a number of capital projects that work well in today’s commodity price environment, thus we are expanding our capital program. Our capital budget for 2016 has been expanded to approximately $60 million and we are working hard on our plan for 2017.
At this time, we expect next year’s budget to include a number of new projects and the projected expenditures to be above 2016 levels. I’ll discuss few of those potential new projects here shortly.
So first, let me finish up the discussion of projects for the remainder of 2016. So starting in August, we reinitiated drilling operations of the A-18 well in our Mahogany field at Ship Shoal 349.
To-date, we have penetrated and logged potential pay in two sands, the results of which are encouraging. We are drilling towards total planned target depth of eighteen thousand seven hundred and something feet and expect to reach TD in November or December.
We are planning to complete and bring that A-18 well in line in early January 2017. Following the completion of the A-18 well, we expect to conduct workover activities on a few of our currently producing wells to further enhance field production.
That A-18 well is a project that was in progress in early 2015 before we seized operations due to rapidly declining margins from lower oil prices. The Mahogany field has continued to be an outstanding performer.
We are providing that more than ever to develop further to T Sand in that field. As you might recall, that field has historically produced primarily from the P-sand until we discovered the deeper T-Sand in mid-2013 with our A-14 well.
That well has produced over 3.8 million barrels of oil equivalent. We will be performing a minor through tubing operation on this well in early 2017, January of 2017 to optimize production rates.
In addition to the T-Sand, the A-14 well as numerous other productions stands behind the pie. Eventually, we will want to recomplete these uppers zones or optimize recovery from that well.
I think people forget the Gulf of Mexico as some of the best stack pays reservoirs in the US. With its high permeability and high porosity, it’s like the Permian Basin on steroids [ph].
During the recent industry contraction, we have remained focused on evaluating the billing and production data in certain of the other wells drilled in the field as well as interpreting the advanced seismic data we acquired to help us better understand Mahogany subsoil opportunities. We believe we may have numerous other P&T sand prospects in this field.
So, we are devoting more capital to our recompletion programs. We’ve been very successful in bringing on additional low-risk production volumes with modest capital expenditures by completing wells from fields that have substantial unproduced reserves.
We have recently finished the recompletion of the A-1 well at Viosca Knoll 823 our Virgo field and the Ewing Bank 954 A-8 well. Both of these wells are performing better than expected, total of about 4,950 barrels of oil equivalent per day gross and 3,300 barrels of oil equivalent per day in net, that’s on early testing and it should contribute nicely to our fourth quarter production levels.
So drilling opportunities and major CapEx projects that we think will make the list for 2017 include a water flood expansion project at Matterhorn, new wells at Mahogany, couple of opportunities in the Ewing Banks 910 area and other projects nearing the three in both the deepwater and on the shelf. We also have multiple recompletion opportunities at Matterhorn, Ewing Banks 910 and various shallow water fields that will likely add to our list of opportunities in 2017.
Cost of this inventory is said would be around $100 million and could increase production over 2016 levels. Again, we are in the process of developing the 2017 CapEx budgets and hope to have that further defined relatively soon.
And although we are encouraged by the improved commodity prices and our stronger financial condition, we do remain diligent about cost control. We are remaining – and we are rather maintaining a prudent approach to expenses and CapEx spending.
Our third quarter LOE declined 16.7% to $37.5 million from the third quarter of last year. LOE was well below guidance due in part to moving some of the planned workover activities in the fourth quarter, so why we are guiding LOE to be higher in the fourth quarter compared to the third quarter.
For the year, at the midpoint of our guidance for LOEs is a $161 million, which is down over $100 million from levels seen two years ago. So, operating cost and efficiency gains have been really strong focus for the company and that’s translated into reduced expenses and lower lifting cost both in absolute terms, as well in structural yield cost.
This reduction is also been aided by the sale of our Yellow Rose field. For the third quarter, G&A decreased 23.2%, $12.7 million compared to the third quarter of last year.
Part of the decrease in G&A expense was due to reclassifying transaction cost associated with the Exchange Transaction previously recorded in G&A expense to the line item gain on debt exchange. So regardless, like leased operating expenses, the full year midpoint of our guidance for G&A is $61 million which is down 30% from levels seen two years ago.
We continue to drive down the cost of goods and services wherever we can to be better in line with commodity prices obviously with a goal of improving our EBITDA margins and expanding the business. So as we have been discussing on the last several earnings calls, the company received several orders from the Federal Bureau of Ocean Energy Management demanding that the company provide additional supplemental bonding on certain federal offshore oil and gas leases rights of way and right to use and easement owned and/or operated by the company.
The outstanding orders totaled $260.8 million. As we’ve reported we filed appeals and given that we are actively seeking to resolve the BOEM through settlement discussions we have received stays for the effectiveness of the orders in a number of times.
Our most recent stay extends the effectiveness to January 31 of 2017. And we will continue to work closely with the BOEM to resolve that.
So in summary, we have some outstanding assets and a significant inventory of upside opportunities. Our objective is to maintain steady production on modest capital budget, probably in the $100 million range until we have more confidence in market conditions.
Meanwhile, we will continue to maintain capital restraint and diligent focus on our operating expenses and cost containment. Further, we are going to build our inventory projects and deploy our first tier capital in those high quality projects with the quickest payback.
With a significant portion of our acreage held by production, we have that flexibility to pursue the best opportunities whether they are organic or for an acquisition. Thus our goal is to remain optimistic and working to position the company for when we believe the time is right for more robust capital deployment.
Remember, we don’t have anything drawn on our credit line either. So not only do we have excellent organic opportunities, but we believe that the acquisition market offers exciting potentials as well.
We have a solid history of adding value through acquisitions, particularly when others aren’t seeing the value we see in the Gulf of Mexico. So, before I close, I want to discuss for a moment the Apache case and try and correct some of the misinformation that is imprinted so far.
Let me tell you what we said in the Form 8-K that we filed yesterday. In late 2014, Apache Corporation filed a lawsuit against W&T Offshore Inc., alleging that W&T breached a joint operating agreement, the contract, related to the abandonment of three deepwater wells in the Mississippi Canyon area of the Gulf of Mexico.
That lawsuit is currently pending in the United States District Court for the Southern District of Texas. In the suit, Apache contended that W&T failed to pay its proportional share of the costs associated with plugging and abandoning the three wells.
W&T contended that the costs incurred by Apache were excessive and unreasonable. The case went to the jury on October - I guess it was last Friday, what was that, the 28th of 2016.
On the same date, the jury made the following findings: W&T failed to comply with the contract by failing to pay its proportionate share of the costs to plug and abandon the Mississippi Canyon 674 wells. The amount of money to compensate Apache for W&T’s failure to pay its proportionate share of the costs to plug and abandon the MC 674 wells was $43.2 million.
The $43.2 million referred to should be offset by $17 million. Apache acted in bad faith – this is the Jury’s verdict, Apache acted in bad faith thereby causing W&T to not comply with the contract.
I have seen much disinformation in the media concerning this case. The facts in the case are clear.
No judgment has been rendered against W&T. The Jury has made its finding and the judge will now apply the Jury findings and render its judgment in due course.
W&T intends to file a motion with the trial court requesting the judgment consistent with the Jury’s finding that Apache acted in bad faith thereby causing W&T not to comply with the contract, which W&T asserts bars Apache from recovery for damages under applicable law and if damages are not barred in their entirety, that any judgment for monetary damages is offset by $17 million as determined by the jury. These words are very different than what was printed in various media applets and we just want to bring that to your attention.
So with that, operator, we can now open the lines for questions.
Operator
Tracy Krohn
Okay, well here is the – I guess, we got up a little bit too early, operator. So, we are going to go ahead and shut it down now and if there is any other news comes up for in the next quarter, we will relay that to the public.
So thank you very much and we appreciate.
Operator
Thank you sir. Ladies and gentlemen, thank you for your participation.
This does conclude today’s teleconference. You may disconnect your lines and have a wonderful day.