Feb 28, 2019
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the W&T Offshore Fourth Quarter and Full Year 2018 Conference Call.
[Operator Instructions] I would now like to turn the conference over to Al Petrie, Investor Relations Coordinator.
Al Petrie
Thank you, Pia, 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 Fourth Quarter and Full Year 2018 Financial and Operational Results. Before we begin, I'd like to remind you that our comments may include forward-looking statements, which should be noted that a variety of factors could cause W&T's actual results to differ materially from the anticipated results or expectation expressed in these forward-looking statements.
Today's call may also contain certain non-GAAP financial measures. Please refer to the fourth quarter 2018 financial and operational results announcement we released yesterday for a disclosure on forward-looking statements and reconciliations to non-GAAP measures.
At this time, I would like to turn the call over to Tracy Krohn, W&T's Chairman and CEO.
Tracy Krohn
Thanks, Al. Good morning, everyone, and thanks for joining us for our fourth quarter 2018 conference call.
So with me today are David Bump, our Executive VP of Drilling, Completions and Facilities; William Williford, our Executive VP of General Manager, Gulf of Mexico; Janet Yang, our Executive VP and Chief Financial Officer; Steve Schroeder, our Chief Technical Officer; and Jim Hersch, our VP Geosciences. They are all going to be available to answer questions later on during the call.
So over the past 35 years, we have many success significant achievements and milestones and I'm proud of how well we executed on our strategy, achieved those goals that we set for ourselves in 2018. This past year, we meaningfully grew reserves, thanks in large part to the robust drilling results we've had as well as through positive revisions for well performance that continues to exceed forecasted expectations.
Our strong, stable production base generated adjusted EBITDA of $344 million in 2018, providing us with the cash needed to fund our capital program and reduce debt to bolster our financial position. You can spell that out as cash flow positive, if you wish.
We've been looking to simplify our capital structure and we're able to accomplish that in October by completely refinancing our debt, reducing our total debt principal by over $200 million and establishing a larger revolving credit facility that further extends out all of our maturities. Finally, we also entered into a drilling joint venture that allows us to accelerate the development of our high return inventory, lower our overall risk and maximize financial flexibility.
This will enable us to achieve really and pursue additional accretive acquisition similar to the Heidelberg field acquisition that we completed in 2018. So before we review fourth quarter results and provide an operations update, I'd like to review these important achievements in a bit more detail.
Our year-end 2018 SEC proved reserves grew to 84 million barrels of oil equivalent, with 58% being liquids. This is an increase of 13% compared to 74.2 million BOE at year-end 2017.
With total 2018 production of 13.3 million BOE, we were able to achieve a pretty impressive reserve replacement rate of 174%, driven by robust drilling results as well as through significant positive revisions of our 18.8 million barrels of oil equivalent from impressive well performance that continues to exceed forecasted expectations. We also benefited from the year-over-year pricing increases.
The increase in reserves and pricing led to a meaningful increase in period-end of our proved reserve. At year-end 2018, our SEC proved reserve value increased 45% from 2017 to $1.4 billion.
So this certainly demonstrates the significant value of our premier Gulf of Mexico assets. So as most of you are aware, we had several debt maturities coming due in 2019, 2020 and 2021, with the debt principal outstanding balance of $903 million.
So to address as these items and to simplify our capital structure, we closed on a major debt refinancing and issued $625 million of new 9.75% senior second lien notes, extending our maturities to November 2023. Net proceeds from the issuance, along with cash on hand, borrowings on an updated result revolving credit facility were used to retire all of our previously outstanding notes.
So concurrently with that, we entered into a Sixth Amended and Restated Credit Agreement with a six-member bank group that primarily includes banks from the prior group, but also includes one new bank. This revolving credit facility has an increased initial borrowing base of $250 million and will mature on October 18, 2022.
So at December 31, 2018, the company had $21 million of borrowings, which is down from $61 million initially when that revolving bank credit facility, the new one, and $9.6 million of letters of credit outstanding. So as a result of this very successful debt refinancing and our continued ability to generate strong cash flow from our asset base, we're able to increase our total liquidity to $252.7 million at year-end 2018.
So our liquidity consist of an unrestricted cash balance of $33.3 million and $219.4 million of availability under our revolving bank credit facility. So this enhanced liquidity significantly improves our financial flexibility to seek additional ways to further increase shareholder value.
So in March 2018, W&T entered into a multiyear joint exploration and development agreement that secured $361 million commitments from outside investors in W&T for the development of 14 preidentified projects in the Gulf of Mexico. We initially received 30% of the net cash flows through drilling program wells for contributing 20% of the capital expenditures plus associated leases and providing access to available infrastructure.
Our net revenue increased to 38.4% upon the outside investor reaching certain returns. The joint venture allows us to continue unlocking the value of our drilling opportunities while drastically reducing our capital expenditures.
It also allows us to accelerate the development of our high-return inventory while bringing significant cash back to the corporate entity and maintaining the flexibility to manage our balance sheet and pursue additional accretive acquisition opportunities. So let's now review our operational and financial results for the fourth quarter and full year 2018.
Our production in the fourth quarter 2018 was 35,000 barrels of oil equivalent per day or 3.2 million barrels of oil equivalent, which was down about 4% compared to the third quarter of this year, primarily due to Hurricane Michael and an additional downtime totaling approximately 1,000 BOE per day. Despite this downtime, fourth quarter production came in near the midpoint of our guidance range.
We continue to have a strong liquids production with 62% of our fourth quarter production coming from oil and NGLs. The commodity prices did decline compared to the third quarter with average fourth quarter realized prices for oil at 62.94 and NGLs at 26.84 per barrel.
Crude differentials in the fourth quarter averaged roughly $4 per barrel higher than average debt WTI cushion spot prices. Revenues for the fourth quarter remained strong at $143.4 million and came in at $580.7 million for the full year 2018.
We continue to generate strong stable production and impressive revenue, especially considering that we had total capital expenditures for oil and gas properties $106.2 million for the full year 2018, excluding acquisitions, which was the same level as in 2017. Our total fourth quarter LOE came in at $43.4 million, which was higher than in the third quarter, primarily due to the increase in workovers and facilities maintenance that occurred later in the year than originally planned.
So for the full year of 2018, we incurred a lift in cost of $11.50 per BOE. And like I mentioned last quarter, we still have not seen any significant cost inflation to speak out over the Gulf of Mexico, like what's been occurring in the Permian.
We reported fourth quarter 2018 net income of $138.8 million or $0.96 per share, which was substantially greater than the net income of $23.4 million or $0.16 per share in the same period last year. So excluding the noncash gain on our debt transaction, unrealized commodity derivative gains and other items, adjusted net income in the fourth quarter of 2018 was $32 million or $0.22 per share, that's up significantly from $24.2 million or $0.17 per share in the same period last year.
So for the full year 2018, we reported net income of $248.8 million or $1.72 per share, which was substantially greater than the $79.7 million or $0.56 per share in calendar 2017. Adjusted net income for full year 2018 was $146.2 million or $1.01 per share, up more than 80% compared with $79.7 million or $0.56 per share in calendar 2017.
Adjusted EBITDA for the fourth quarter of 2018 continue to be strong at $82.3 million. And for the full year 2018, it was $344.2 million.
These amounts were 13% and 28% higher than the same periods in 2017. While the absolute growth of our adjusted EBITDA is impressive, our adjusted EBITDA margin for full year 2018 was 59%, up nicely from 55% in 2017.
Our full year 2018 cash flow from operating activities totaled $321.2 million, more than double the cash flow of $159.4 million in 2017. I keep telling markets that normal margins for us are around 60%, that's about where we are now reverting to the normal margins that we saw prior to 2014, which bodes well for our ability to generate significant cash flow moving forward.
We've always been focused on free cash flow generation and will continue to do so in the future, one of the things we like about the Gulf of Mexico. Quick update on the tax refunds.
Of the $65 million we've discussed previously, we have received $11 million due to some delays in the IRS on reviewing and finalizing the structure of agreements, we still have $54 million to be received and I hope to receive that in the first half of 2019. Turning now to operations.
Our 2018 drilling program achieved excellent results in the 3 fields where we have concentrated of our capital this past year. This activity at Mahogany, Virgo and Ewing Bank 910 where we're drilling low-risk wells of existing infrastructure is a key reason we have kept production volume steady at these fields.
These are projects that can be drilled and put online fairly quickly, which allows for quick cash flow generation and substantially shortens payback times and rates of return. So in 2018, in our Mahogany field, we put the A-17 well -- actually, we gave 5 sidetrack and most recently the A-19 well on production.
As a reminder, the A-5 sidetrack is the only well in Mahogany field that is part of the drilling -- the joint venture drilling program we established with outside investors. While we have a 100% working interest in all the other Mahogany field wells, we have a 30% interest in A-5 sidetrack and once certain thresholds from that increase of 38.4%, although we contributed only 20% of total capital expenditures for that well.
The A-19 well, which logs exceptionally high quality T-Sand were brought online in late November is updip from the T-Sand first discovered in the A-14 well. The A-19 is being completed as a T-Sand producer and will have multiple zones behind pipe for future exploitation.
The A-19 is our third producer in the T-Sand and has thus far shown significantly higher rates early production than T-Sand wells drilled to date in the field with the productivity index that is more than double the best prior completion of the field. T-Sand is cumulative production of 7.2 million barrels oil equivalent per day for reservoir.
A staged ramp up for the A-19 well is continuing with the current rate of 5,205 BOE per day. The rig conducted a planned maintenance and repair program following the completion of the A-19 well.
The platform rig will commence drilling in the second quarter with the A-20 development well, again, targeting the T-Sand. At Viosca Knoll 823 the “Virgo” field, we drove 3 wells in 2018, the A-10 sidetrack, A-12 and A-13 wells, which are all part of JV Drilling Program.
The A-10 sidetrack was put online in the second quarter. In the third quarter, we drilled and completed the A-12 well, which logs 60 feet of net pay and began production.
The A-12 well is currently offline and we're evaluating methods by which to enhance production in that well. The Virgo field platform rigs drove the A-13 well at TD in the first quarter -- fourth quarter and found 77 feet of net vertical pay in the 2.4 second and 3.4 second sand inflows.
Currently, the well is being completed as a due and will be on production in the first quarter of 2019. Plans are to demobilize the Nabors MODS 201 rig from Virgo upon completion of the A-13 well.
So at the Ewing Bank 910 field, we completed the South Tim 320 A-2 well that logged approximately 163 feet of net back, which exceeded predrill estimates. We brought the South Tim 320 A-2 online in December through the South Tim 311 platform but due to limited equipment capacity to handle big recovery on the South Tim 311 platform, the well was brought online at the curtailed rate of 3,400 BOE per day.
The issue will be resolved in the first quarter of 2019 to allow continued ramp up the A-2 well. We commenced drilling on in the South Tim 320 A-3 well following completion of the A-2 and forecast reaching target intervals by the end of March.
We believe stratigraphic information from a high-quality Miocene sand that was penetrated in offset wells has reduced the risk on that particular well to South Tim 320 A-3 prospect. So both of these wells are in the joint venture drilling program.
Looking ahead to the 2019, our capital program will continue to be focus on low-risk, high-return projects for some exploration wells as we strive to continue the greater than 90% success rate we have achieved in drilling more than 40 wells since 2010. We'll maintain our measured approach to drilling, fund all our CapEx with cash from operations and continue to generate significant free cash flow.
Our CapEx -- our capital expenditure budget for 2019 is expected to be around $120 million. We also expect to spend about $25 million on asset retirement obligations, which is in line with the $28.6 million, spend on ARO in 2018.
We believe that we will be able to increase production 2 to 3% in 2019 versus our full year 2018 production rate of around 36,500 BOE per day. This does not include acquisitions and we are anticipating more acquisitions in 2019.
We also expect our LOE G&A and gathering and transportation expenses will be similar to 2018 levels. Our release issued has more details on our 2019 first quarter and full year guidance.
We'll continue to control the cost and we can maximize margins and generate a significant cash flow from our operations. So as we implement plans for 2019, we're looking closely at acquisition opportunities, the current environment or acquisition opportunities with Gulf of Mexico is as good as I've ever seen it.
And we intend to actively pursue those that meet our criteria. We have a set formula that’s workflow with three decades.
First time we look forward to good cash flow. We need to see the potential for strong cash flow as we go along with the properties quarter.
And then the second thing is the upside to improve reserve base that we continue to the drill bit make the property more value. And then third part of it is workovers we complete and/or facility upgrades that we can implement to increase immediate cash flow near term.
With our balance sheet now much stronger and new $250 million borrowing base in place and a high level of positive free cash flow being generated, we're well positioned to focus on growth. And for W&T, the Gulf of Mexico is always an excellent basin and wish to achieve that growth.
So as in the past, we are clearly focusing on cash flow-positive projects, whether that’s with the drill bit or whether that's making acquisitions. That's very important to us and is probably been our biggest consistent accomplishment.
We make sure that we continue to focus on our cash flow model because of our equity ownership of 33% management is incentivized to grow the company's profit overtime, and mitigate risk rather than simply focusing on a shorter-term metrics and may not result in true value creation the long run. So, as you can see, we tried to do things for and with our shareholders in mind.
And since we're all significant shareholders here, as management, we intend to continue that trend. So operator, we can now open the lines for questions.
Operator
[Operator Instructions] And the first question will come from John Aschenbeck with Seaport Global.
John Aschenbeck
Good morning, Tracy. Thank you for taking my questions.
Tracy Krohn
Good morning, John. Thanks.
John Aschenbeck
So for my first one, I wanted to follow up on your Q1 production guidance, which is lower than the full year. And I was hoping you could walk us through some of the factors that are weighing down Q1 relative to the rest of the year.
Thanks.
Tracy Krohn
Barry, a number of -- I brought William Williford along with us. I’m letting run that through for you.
William Williford
Where we are right now, in Q1, we have talked about the Mahogany field right now, we doing the ramp up on production. We do have a planned downtime outage in that field due turnaround preventing downtime throughout the rest of the year.
Additional, we have downtime in Main Pass 698, 72, which is our big field. That should be up between the next, I guess, couple of days, currently down right now.
Tracy Krohn
It’s all maintenance issues.
William Williford
Yes, so that's a key portion of the downtime that we see as far as the fourth -- first quarter. 2019, which is consistent ramp up as we bring additional wells online and maintain on rest of our fields rest of the quarters.
John Aschenbeck
Okay, great. And that's helpful.
Appreciated. And then for my second one, more of a higher-level question on M&A.
I'm hoping you can entertain me here. But just as a look at W&T out into the near future and call it a year or 2 from now what is the company look like?
And how much larger is it from the size that it is today?
Tracy Krohn
That's just a little minor question, there, John. Okay, so yes, we do expect to see M&A.
Yes, we expect to increase the size of the company. Exactly how much that will be, I'm ready to forecast.
My goal is to double again in the next 5 years. I think that's fairly conservative.
John Aschenbeck
Okay. Perfect.
That’s actually -- exactly what I was looking for. I appreciate the time and thanks for taking my questions.
Tracy Krohn
Thank you, sir.
Operator
[Operator Instructions] And the next question will be from Jacob Gomolinski with Morgan Stanley.
Jacob Gomolinski
Hey, good morning. And thanks for taking the questions.
Tracy Krohn
Sure Jacob.
Jacob Gomolinski
It looks that you spent I think you said about $106 million on CapEx in 2018 and production side of I guess, production declined around 5%; total production, 9%. And then we’re talking about $120 million in 2019 with 6% liquids growth and 2 to 3% overall.
Can you help us understand maybe what make you driving that rate of change sort of given the $14 million delta in CapEx but I guess a pretty meaningful change in production?
Tracy Krohn
Yes, I think that's pretty easy to do. We have x number of dollars coming in, we have x number of dollars going out, we're trying to maintain cash flow positivity like that’s important to us so that we can take advantage of some of the other acquisitions that we see coming up.
So we want to save our dry powder as much as we can. We do see quite a bit of activity on the M&A side.
I think that’s important for us to save our dollars in that direction as well. The production that we have I think is relatively conservative, it's got some downtime or what not for hurricanes and repairs that we've seen over the last several years.
So I think we're taking a fairly conservative approach year.
Jacob Gomolinski
Okay. And apologize if I missed this, but does that $120 million, how much of that will go to the JV?
And does that include -- does that $120 million include JV capital contributions from third parties or is that just your outlet?
Tracy Krohn
No. The $120 million is the dollars that go into the W&T and somewhat into Manja.
But I don't have the exact number on the Manja portion of it. It's minor in comparison to the rest of it as W&T.
W&T owns about 20% of the Manja drilling joint venture.
Janet Yang
On the capital.
Tracy Krohn
On the capital side, that's right.
Jacob Gomolinski
Right, but 120 is just your capital, not JV partner capital or any JV capital contributions?
Tracy Krohn
Yes, that's correct.
Jacob Gomolinski
Okay, And then just a last question. It looks like operating costs are a bit higher in 2019 versus 2018 in about $1.50 over the first 3 quarters of 2018.
I know you mentioned some work over expenses in Q4. Is anything driving that increase in production caused in 2019 versus--?
Tracy Krohn
I’m sorry.
Jacob Gomolinski
Go ahead, sir.
Tracy Krohn
I'm sorry. Yes, one of the things driving that, Jacob, is Heidelberg.
We made that acquisition last year. Its Deepwater facility has little higher operating costs.
And then we do have some work related to maintenance on a couple of other platforms that we mentioned earlier, mainly Mahogany, so will be -- we'll have a little bit downtime as a result of that and little higher lease operating expenses result of that. These are planned -- this is planned work for maintenance for the structure.
So you do see that reflected prices however, are not in cost on a normalized basis are not going up with regard to this basin as opposed to other basins.
Jacob Gomolinski
Okay. That’s great.
Thanks very much. Appreciated.
Tracy Krohn
Thank you, sir.
Operator
And at this time, there are no further questions. At this time, I would like to turn the conference back over to Al for any closing comments.
Al Petrie
Tracy, any closing comments?
Tracy Krohn
No, I have nothing else. Hopefully, we'll have something for you in a not too distant future.
I think you'll all be impressed. Thank you very much.
Operator
Ladies and gentlemen, thank you for participating in today's conference call. You may now disconnect.