An independent oil and natural gas producer, focused in the Gulf of Mexico in the US, W&T Offshore has weathered the pandemic and is well positioned in the market. Armed with over $250m in cash, an inventory of high-quality development and exploration opportunities, and a track record of making accretive acquisitions, the company is well placed to navigate a changing operating environment in the US. The Chairman and CEO at W&T Offshore, Tracy W. Krohn, discussed getting through a pandemic, incorporating ESG, and the future of the industry, with World Finance.
By focusing on the Gulf of Mexico for over 35 years, the company has developed the ability to operate efficiently and effectively in the basin amid various shocks like commodity price fluctuations and hurricanes. Currently, W&T is active in 41 producing fields in federal and state waters and has under lease approximately 611,000 gross acres, including approximately 424,000 gross acres on the Gulf of Mexico shelf and approximately 187,000 gross acres in the Gulf of Mexico deepwater. A majority of the company’s daily production is derived from wells it operates. Krohn commented, “Our focus on the Gulf of Mexico has been the key to our success. Due to our expertise, other operators seek us out when looking for partners. We have attracted and maintained an excellent technical team with deep experience in the Gulf. We have also developed good relationships with state and federal regulatory agencies and have an excellent safety record. All of these elements contribute to our leadership position in the Gulf of Mexico.”
For the oil and gas industry, changes and adaptation have been part of its evolution. In the Gulf of Mexico, W&T has witnessed significant changes to its peers in the basin. Years ago, the area was mainly a reserve of larger corporations that were focused on shallow waters. Those operators then transitioned to drilling to greater depths and in deeper waters. This was driven by huge amounts of capital and technology required to pursue those higher risk, higher potential opportunities. Today, the players are fewer and the large independents and majors are focused primarily on ultra-deep waters or onshore, and W&T has prospered as others exited the Gulf of Mexico. “Throughout our history, W&T has capitalised on opportunities that arose in the Gulf. We have built the company through a combination of two main strategies. First, opportunistic, accretive acquisitions and the successful exploitation of those acquired properties. And second, a very successful exploratory and development drilling programme. Moving forward, we will continue to look at both and the relative benefits each offers,” said Krohn.
New policies from President Biden’s administration have also presented changes for the oil and gas industry. In January, the administration announced a moratorium on new oil and gas leasing on federal lands and waters (which was subsequently blocked by a federal judge in Louisiana in June). Despite such political challenges, Krohn is optimistic. He noted, “W&T has successfully operated during both Republican and Democratic administrations for decades. The officials and regulators we work with on a daily basis are good, pragmatic people. Rules and regulations change but we’ve always been able to find a way to work together.” W&T is not losing sight of the need to remain relevant amid widespread calls for changes to the energy mix in the US. When asked about the transition away from fossil fuels, Krohn offered a pragmatic perspective. “People will have different views on what our energy mix should look like in the future and how quickly we need to make changes to achieve that mix. However, any transition will take time and the oil and gas industry should play a role in managing that change successfully. That should not be a controversial statement. I do think there will be ramifications if renewable sources of energy can’t deliver on their promises and if proven, reliable sources of energy like oil and gas continue to be starved of investment to such a degree that they can’t make up the demand gap. Political leaders should consider the unintended consequences of that type of scenario.”
We have actually been successfully managing ESG elements for a long time; we just communicate about them differently today
Similarly, companies are now learning to navigate a growing focus on sustainability. The company understands that environmental, social, and governance (ESG) is becoming increasingly important to many of its stakeholders. To successfully access the credit or equity markets today, ESG is an important consideration. Krohn continued, “We have actually been successfully managing ESG elements for a long time; we just communicate about them differently today. For example, we have an excellent track record of operating in a responsible and safe way that respects the environment and protects workers. That didn’t start recently because of ESG. What has changed is that our processes and reporting are now more formalised and we are communicating more effectively with our stakeholders.”
W&T issued its inaugural ESG report this year and has demonstrated its commitment to improving its ESG performance and transparency by adding ESG targets to its executive compensation programme. The industry is recovering from the impacts of COVID-19 that ignited a collapse in prices, slowed activity and adversely impacted the financial position of numerous companies. W&T was able to work through the situation more effectively than most. “In the early days of the pandemic, when oil prices went negative, we adjusted our capital spending and temporarily shut-in properties that weren’t economic at very low prices. This wasn’t the first time we have seen a rapid and precipitous fall in prices. We knew what we had to do and quickly took action. Our properties are all conventional fields. They have shallower declines and we can reduce spending for a period of time without a major financial impact,” said Krohn.
Battling a hurricane
In November, the company released its third quarter results showing strong operational and financial results reflective of the improving economy. During the third quarter of 2021, the company saw an 85 percent increase in revenues for the quarter to $133.9m compared to $72.5m in the same period last year. Production for the quarter stood at 3.2m barrels of oil equivalent comprising 1.1m barrels of oil, 0.4m barrels of natural gas liquids, and 10.5bn cubic feet of natural gas. Production for the period was reduced by approximately 5,500 barrels per day as a result of deferred production related to Hurricane Ida, with approximately 80 percent of the company’s production shut-in at one point due to the storm. Fortunately for W&T, its assets and infrastructure did not suffer any significant damage. This emanates from the fact that the company has operated in the Gulf of Mexico for years and has seen – and dealt – with many hurricanes. “Hurricane Ida was the biggest weather event in the Gulf of Mexico this year. When it became clear that it was going to be coming into the Gulf and would be near our assets, we did what we always do in those situations: temporarily shut-in production, secure facilities to greatly reduce the potential of an environmental incident, and evacuate our employees and contractors. What impacted us the most was the lack of electricity onshore to refiners and processing plants who buy our production. They were down and we had to wait for them to come back online,” remarked Krohn.
The company announced that its cash position at the end of the third quarter of 2021 stood at over $250m, due in large part to a creative securitisation transaction with Munich Re in May. For many years, W&T used a reserve-based lending (RBL) credit facility that was underwritten by a bank group and secured by its proved reserve base. Over the years, the market for RBL facilities has become less attractive, particularly offshore. Due to losses occasioned by commodity price downturns, many banks have exited the market. The remaining few are now offering less flexible and more onerous commercial terms, which have generally become tougher and less appealing for oil and gas companies. Krohn commented, “Fortunately for W&T, one of our largest assets is our Mobile Bay complex. Those assets are long-lived and have shallow declines, which is a great profile for lenders. Using Mobile Bay as collateral, we were able to work with Munich Re to structure a first-lien secured term loan that appropriately valued the collateral at an attractive cost of capital. The transaction provided us a lot more financial flexibility and dry powder to pursue attractive acquisition opportunities and consider additional exploratory drilling.” When asked about the current state of the M&A market in the Gulf of Mexico, he explained, “The increase in commodity prices in the second half of 2021 has widened the bid-ask a little, making it slightly tougher at the moment. Broadly speaking however, it is a good environment for M&A. Many larger operators are rationalising their portfolios and for some of them, the Gulf is no longer a core asset. Other operators have balance sheet issues that they are trying to fix following the pandemic and a period of low commodity prices.”
Though doomsayers are forecasting the end of the oil and gas industry, the industry veteran believes the industry will continue to be around for years to come. Krohn stated, “Transitioning the energy mix to one that relies more heavily on renewables will take time. Natural gas in particular can play a really important role during that transition. There is no question that there will be changes, but I am confident in the ability of the people in our industry to adapt.”