Nov 3, 2017
Executives
Lisa Elliott - Investor Relations Tracy Krohn - Chairman and Chief Executive Officer Tom Murphy - Chief Operations Officer Danny Gibbons - Chief Financial Officer Steve Schroeder - Chief Technical Officer
Analysts
Jon Evans - SG Capital
Operator
Greetings and welcome to the W&T Offshore Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce Lisa Elliott with Dennard Lascar, Investor Relations. Thank you, Ms.
Elliott. You may now begin.
Lisa Elliott
Thank you, operator and good morning everyone. We are glad to have you join us on W&T Offshore’s conference call to review financial and operational results for the third quarter of 2017.
Before I turn the call over to the company, I would like to remind you that information reported on this call speaks only as of today, November 2, 2017 and therefore, time-sensitive information may no longer be accurate as of the date of any replay. Also, please refer to the third quarter 2017 financial and operational results announcement W&T released yesterday for a disclosure on forward-looking statement 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?
Tracy Krohn
Thanks, Lisa. Good morning, everyone and thanks for joining us today.
With me this morning is Tom Murphy, our Chief Operations Officer; Danny Gibbons, our Chief Financial Officer; and Steve Schroeder, our Chief Technical Officer. They are going to be available to answer questions later on during this call.
So, we had a solid third quarter. Production averaged 36,459 barrels of oil equivalent per day, with oil and NGOs in the mid-range of our guidance and natural gas just below.
Had we not experienced an increased level of downtime and deferrals, we estimate that production would have exceeded guidance. Our third quarter production was reduced by almost 4,900 barrels oil equivalent per day from pipeline outages, platform maintenance, well performance in a few cases, and weather, both tropical and otherwise.
Many of the short-term outages we saw in the third quarter were due to storms and other issues, most of which have since been resolved and our production is currently running at around 40,000 barrels of oil equivalent per day. So at the beginning of the fourth quarter, we also experienced production deferrals as a result of Hurricane Nate, which didn’t cause any real material equipment or platform damages, but deferred our production for several days, with many of the downstream pipelines requiring several days to resume normal operations, storm also impacted our drilling operations at Ship Shoal 349 and Mahogany and are causing time delays.
So looking forward, we anticipate we will bring our premium wells online in the fourth quarter and expect our fourth quarter production to average around 40,000 barrels oil equivalent per day. So, oil and liquids represented about 60% of third quarter production.
That average has slowly grown over time as our investment focus continues to highlight and the favorable oil developments. So, on the cost side, we have done a really good job of bringing costs down to be much more aligned with the current commodity price environment.
Part of that effort is in working with our service providers and vendors to reduce the cost of goods and services. This has taken a lot longer this cycle as hedging allowed many oil and gas companies to continue to drill and produce even though the market was sending a different signal.
So finally, many of the $60 plus hedges have rolled off and the market has become better aligned. One other thing to note is that we are not seeing cost inflation in the Gulf of Mexico like the West Texas and onshore producers are experiencing rather.
There is still a pretty big overhang of boats, rigs and oil field equipments and services in our sector and there doesn’t seem to be sufficient activity or demand to put much pressure on increasing prices for these goods and services. So, we are also continuing to drive down base lease operating expense through optimization initiatives and continuing discussions with vendors.
Efforts have focused on both helicopters chemicals and logistics optimization efforts. So, P&A of wells and platforms has also helped as the number of active fields continues to be reduced, which translates to less transportation and staff needed to man the platforms had been removed.
So, total LOE in third quarter came in far below our guidance in part due to fewer work-overs and less-than-expected facilities maintenance activities as well as our optimized maintenance programs. Total LOE was higher sequentially as we performed more planned facilities work in the third quarter.
So, our focus remains on generating profitable operating margins and cash flow that can be reinvested on higher return projects that I will discuss in a few minutes. Net cash provided by operating activities in the first 9 months of this year was $130 million and adjusted EBITDA was $196 million and our adjusted EBITDA margin was right at 55%.
So for third quarter, adjusted EBITDA was $57 million, margins are sensitive to the relationship between LOE, commodity prices and production. We have clearly seen an improvement in crude oil prices lately.
So as a result, we should see margins improving a stronger cash generation in the fourth quarter less assuming we don’t have any material unexpected production downtime or deferrals. Based on the forward price curve and our outlook for production expenses, 2018 should be a pretty good year for us also.
So excluding special items, our adjusted net income for the third quarter was $6 million and our earnings per share were $0.04 per share. On a GAAP basis, we reported pre-tax income of $4.2 million, a federal income tax of $5.5 million, which is quite an anomaly.
That’s a non-cash expense, by the way. We have reported federal income tax benefits in last two quarters, but in third quarter, we reported tax expense in excess of pre-tax income.
It’s caused by the effective tax rate method that we are required to use to calculate our tax expense in interim periods. That’s something that I still think that it would take an army of accountants to come up with, but that’s the way it works.
Somewhat improvement in commodity prices and a relatively lower forecast of spend for plug and abandonment work in 2017 revised our forecast for the year. This, in turn, required us to reduce the amount of benefits previously recorded in the first half of 2017 under the effective tax rate method.
Based on current information, we expect our full year tax benefit to be around $14 million, which means that we will report a tax benefit in the fourth quarter. So keep in mind, the tax benefit is associated with our specified liability loss period back claims for plug and abandonment activities.
So, cash generation has been good so far this year and for the entire year, it’s expected to find ARO spending of $70 million, capital expenditures of $125 million and for our cash balance to increase. We have nothing drawn under the revolver and liquidity continues to be more than adequate.
Our total liquidity was $269 million on October 30 of 2017. That made up the cash balance of $119 million and revolver availability of almost $150 million.
Our plug and abandonment spending is expected to drop to around $20 million in 2018 compared to $70 million in 2017. This provides cash for other activities, whether it’s for drilling or reducing our debt levels.
Drilling within cash flow has always been our objective and we are maintaining that discipline. So, what I have just told you is that we are drilling within cash flow and increasing cash.
So during the first 9 months of 2017, over half of our CapEx was dedicated to drilling and completing 3 wells and initial drilling of a fourth well at our Ship Shoal 349 and Mahogany Field. The remainder of our expenditures were dedicated to a new drilled well at Ship Shoal 300, rig completions at several fields, including Main Pass 69 and High Island 22, drilling a new exploratory well at South Tim 224, and various other development activities.
So currently we have 4 rigs working, including the drilling of the A-17 well at Mahogany, which is nearing total depth and where we expect to have results during the fourth quarter. As mentioned previously, the A-17 wells plan to test and extend the western limits of T-sand reservoir in the Mahogany Field.
As part of the Mahogany Field prolific stacked pay reservoirs the P-sand continues to be an extraordinary producer. So with just two wells completed in that zone so far, the T-sand is producing cumulative 5.2 million barrels of oil equivalent today.
We have had minimal pressure to find the right reservoirs in producing any water. So with those conditions, that means we have a larger reservoir and much bigger than the external reservoir engineers have given us credit for thus far.
As you may recall, last quarter, we were able to book significant 3P volumes related to the T-sand. As it stands now, we expect the A-17 well to be online in December.
So, following the A-17 well, we plan to drill the A-5 sidetrack well at Mahogany, targeting the Q and P sands that were logged and evaluated in the A-18 well drilled earlier this year. We anticipate new production from the A-5 sidetrack well in Q1 2018.
So, completion operations are currently underway at our Ship Shoal 300 B-5 sidetrack, we have 79% working interest in this new well as well as drill to extend the field limits by testing an undrilled fault back in the field. We successfully encountered 173 feet of net pay in 5 stack sands.
It’s being completed as a dual producer. And in addition, it will provide the company with several behind pipe re-completed opportunities for future production and reserves.
The well was drilled from our production platform. Once we demote the rig, it will be – the well will be placed on production likely before December.
This well will have a pretty rapid payback and continues to show how much upside remains in the shelf areas of the Gulf of Mexico. So, our 2017 capital program is continuing to add value and has been developed using our 3D seismic and that substantially lowered our drilling risk and allowed us to continue our excellent success in the drill bit.
In addition to the activity at Mahogany and Ship Shoal 300, we have two others shale projects underway that are high-quality and low risk exploration opportunities. So with that, I will tell you we recently spud and are currently drilling the South Tim 224 exploration well, where we have a 39% working interest.
This is a low-risk, amplitude-supported exploration well in an open water location, where the operator is located in about 170 feet of water. So assuming success, it could be hooked up to any number of nearby platforms and placed on production in late 2018.
Success at this location may likely stimulate additional growth. So, the other well which we spud in this week is our Main Pass 286 exploratory well, where we hold a 100% working interest.
This project is also a low risk amplitude supported well being drilled from an open water location in about 300 feet of water. So assuming success, this well will be hooked up to nearby W&T operated platform.
Numerous analog fields are nearby, which reduced the risk and it substantially enhances the chance of success. We would expect this well, assuming success, to be online in early 2019.
So during the third quarter, we were able to perform and complete 5 rig completions from an aggregate contribution to production of about 1,600 barrels of oil equivalent per day at a cost per flowing barrel that is well below current markets. So, also during the third quarter, we completed two well workovers.
We just re-completed the Main Pass 69 E-1 well re-completion. This new zone IPed and rated with approximately 1,350 barrels oil equivalent per day with condensate yields richer than what we had expected.
We have other re-completes that are planned for the greater Main Pass Area in the near term. So before year end, we expect this spud to at least be mobilized and rigged to begin 2 deepwater drilling programs in existing fields.
The first drilling program was a multi-well package at our Viosca Knoll 823 Virgo field. We expect to mobilize the rig during the fourth quarter.
This program is a 3 to 4-well drilling campaign designed to exploit several low risk targets, most of which are up-dip with known log pay ramp to the 3D seismic data to find those reservoirs. These wells will be able to be brought online rapidly as they will be drilled from an existing platform.
So our second deepwater drilling program is expected to commence further at our Ewing Bank 910 field. Two exploratory wells are planned in this program and will be drilled and produced from the South Tim 311 platform.
South Tim 311 A-2 and A-3 wells are both low risk exploration opportunities with multiple stacked target sands. So again, assuming success, they can be brought online quickly via existing infrastructure.
We anticipate that we will begin mobilizing the rig in the fourth quarter of 2017, with a likely spud date in the first – or in the middle of first quarter 2018. As I indicated earlier, there is a number of projects that have been or will be started in 2017 that will carryover into 2018.
We expect the capital associated with these projects to be around $60 million in 2018. We expect to complete our 2018 planning and budget cycle by mid-December.
I am pleased with the project slate and the depth of our investment inventory. So, we are continuing to make good progress on identifying additional growth opportunities, including creation of a drilling and acquisition vehicle.
We have exchanged term sheets with various parties and we look forward to get into a documentation stage in near future. So of course, we will keep you updated about that.
On the abandonment front, during the span 2017 and ‘18, we have reaped or expect to reap for approximately 6 oil and gas platforms as part of our abandonment plans. This represents a positive environmental advantage as well as an important capital preservation movement and optimization for our company.
So with that, operator, I will open it up for questions.
Operator
Thank you. [Operator Instructions] Thank you.
Our first question comes from the line of Jon Evans with SG Capital. Please proceed with your question.
Jon Evans
Hey, Tracy. Could you just give us any kind of insight you have talked a little bit at the last conference that this was a significant find that you had.
Do you have any estimates yet about what you think it’s going to produce on a daily basis?
Tracy Krohn
I am sorry, which one were you discussing there, Jon. I’m...
Jon Evans
It was at A-17, I believe.
Tracy Krohn
No, we are still drilling on the A-17, sir. I don’t have any information to give you on that until we are finished with drilling the well.
Jon Evans
Okay. So, if you are running 40,000 a day right now, I mean, do you kind of exit that rate or can you give us any insight into some of these wells coming on and what you think your production could look like for next year?
Tracy Krohn
Yes, we are coming up with that guidance along with our budgets. I don’t quite have those numbers yet, but yes, I expect the exit rate to be 40,000 barrels a day or better.
Some of that will depend upon the timing of these completions and that’s tied up with weather as well. We often get [indiscernible].
Jon Evans
Yes, right. But when you think about next year, I mean, should we think about that you should actually be growing from that 40,000 pace.
I mean, I know you always have weather, you have issues with platforms, things out of your control, but I am just trying to get the underlying thought on production growth next year?
Tracy Krohn
Now, that’s the intent and we will revisit that with the markets once we come off of our budget process and be able to give you a little more clarity on that.
Jon Evans
Okay. So you are not going to update us on your budget potential for next year, but can you give us any estimate on the plug and abandonment?
How much do you think you will spend for that next year?
Tracy Krohn
Yes. As I said earlier, we think that will be about $20 million.
Jon Evans
Okay, got it. And then the other question that I have for you is just relative to the JV, you have talked about that on the last call that you thought you would have something signed.
Do you think you will have it by the end of the year? It’s just taking longer than anticipated?
You have had really good success drilling I assume somebody wants to partner with you. So, can you give us any kind of insight there?
Tracy Krohn
Sure. Yes, we are working on term sheets now.
And yes, I would expect to have something done by the end of the year.
Jon Evans
Okay, thank you.
Tracy Krohn
Okay, great. Thanks.
Operator
[Operator Instructions]
Tracy Krohn
Okay. Well, I appreciate it.
Wait.
Operator
We do have a question – sorry to interrupt, we do have a question, a follow-up from Jon Evans with SG Capital.
Tracy Krohn
Yes, sir.
Jon Evans
Tracy, can you – yes, can just talk about the Apache lawsuit, etcetera and I know you are going to fight it, but when we have any more clarification on that?
Tracy Krohn
We are appealing that to the Fifth Circuit. So as soon as that appeal is made, we will have more to discuss on that.
Jon Evans
Okay. And do you have any kind of timing for that when the appeal process happens?
Tracy Krohn
The wheels of justice turn very slow, Jon. I can’t really give you a date on that.
Unfortunately, that’s not something we get to control, but we have filed the appeal, it will be a period time. We are in what we would call a quiet period right now.
So, we will get there. And in the due course of justice, whatever that timing is, I wish I could give you a more – a less nebulous answer than that, but yes, we are going to appeal and we’ll go forward on that basis.
Jon Evans
And then just the last question and it’s probably for Danny, relative to the tax refund. Do you expect that in later ‘18 or early ‘18 or when do you expect the tax refund?
Danny Gibbons
We are still estimating October of 2018, Jon, but there is just no way to know. That’s our best guess at this point.
Jon Evans
Okay. Thanks so much.
Operator
Thank you. At this time, I will turn the floor back to Mr.
Krohn for closing remarks.
Tracy Krohn
I think that’s it for the day. We will talk to you in the near future, probably around the time we get our budgets complete.
Thanks so much.
Operator
Thank you. Ladies and gentlemen, thank you for your participation.
This does conclude today’s teleconference. You may now disconnect your lines and have a wonderful day.