Coming off of a year that saw record financial results for his company, the CEO of W&T Offshore would appear to be undaunted by a tight market for drilling rigs and costs that have escalated sharply on the strength of high commodity prices.
Tracy Krohn, CEO, who founded W&T in 1983, said the company isn't having trouble securing the rigs it needs, but prices have been steep. However, with natural gas prices declining from about $14 to $7 and lower, he said during a conference call that costs should be coming down. "We feel fairly confident that we're close to the top [of drilling costs] at this time." Krohn admitted the company is paying more than it would like for rigs and said there aren't any plans to lock in rigs under long-term contracts. "My experience is in the past when we get into higher priced scenarios people lock in rates on rigs and they get hammered pretty hard for it in the end."
Just as service companies have benefited from high commodity prices, so has W&T. While production was off last year due to hurricane-related shut-ins, results improved due to higher commodity prices. W&T reported a 31.5% increase in net income for the fourth quarter of 2005 and a 26% increase for the year. And once it completes the acquisition and integration of Kerr-McGee's Gulf of Mexico assets, the company will have plenty of prospects for further growth.
Fourth quarter net income was $50.9 million (77 cents/diluted share) on revenues of $152.9 million, compared to $38.7 million (59 cents/share) on revenues of $138.9 million for the fourth quarter of 2004. Full-year net income was $189 million ($2.87/share) on revenues of $585.1 million, compared to $149.5 million ($2.27/share) on revenues of $508.7 million in 4Q 2004.
"The year 2005 was a momentous one for W&T Offshore," said Krohn. "We began the year with the completion of our initial public offering, which positioned us to pursue larger transactions, and finished it recovering from the aftermath of two category 5 hurricanes. In spite of the distractions, we achieved a drilling success rate of 79% by successfully drilling 23 of 29 wells, generated 5% reserve growth and had the best financial year in the company's history.
"Boosted by favorable commodity prices, our fourth quarter financial results were particularly solid, even with the significant production deferral following the hurricanes. In the midst of all these interruptions, we began the process that led to the signing of the merger agreement involving Kerr-McGee's Gulf of Mexico properties, the largest transaction in the history of the company" (see NGI, Jan. 30).
Production in 4Q 2005 was 9.4 Bcf of gas at an average price of $12.06/Mcf and 0.7 MMbbl of oil and liquids at an average price of $55.87/bbl. This compares to 4Q 2004 production of 13.1 Bcf of gas at an average price of $7.00/Mcf and 1.1 MMbbl of oil at an average price of $42.72/bbl. Sales volume of all products were harmed by Hurricanes Katrina and Rita, which reduced anticipated production in 4Q 2005 by about 11.7 Bcfe or 46%.
For the full year 2005, production was 46.5 Bcf of gas at an average price of $8.27/Mcf and 4.1 MMbbl of oil and liquids at an average price of $48.84/bbl. This compares to 53.3 Bcf of gas at an average price of $6.18/Mcf and 4.8 MMbbl of oil at an average price of $36.77/bbl in 2004. In 2005, W&T was forced to defer company-wide production of about 5.7 Bcfe during the third quarter and about 11.7 Bcfe during the fourth quarter of 2005 as a result of Tropical Storm Cindy and Hurricanes Dennis, Katrina and Rita, or 20% of production for the entire year.
Clifford Williams, vice president of reservoir engineering, told analysts the company still has about 31 MMcfe/d of production shut in in the Gulf. Currently, 18 fields have infrastructure that needs repair. This accounts for 63% of shut-in production or 20 MMcfe/d. Also, damage to other infrastructure not operated by the company accounts for 37% of shut-in production or 11 MMcfe/d. W&T anticipates the majority of hurricane-related repairs will be completed early in the third quarter.
W. Reid Lea, CFO, said the only impediment to closing the Kerr-McGee transaction sooner than expected is a backlog of work at the Department of Interior's Minerals Management Service due to the hurricanes. Closing is expected in the second quarter, "although there's a possibility that it could fall into the third quarter," Lea said. Lea will join a panel of speakers discussing natural gas supply issues at GasMart 2006 this May 3-5 in Denver (see http://gasmart.com/ for details).
W&T did not have any hedges in place in 2004 or 2005. However, in January 2006 it entered into commodity hedging arrangements in connection with financing planned for the acquisition of Kerr-McGee's Gulf properties.
During 2005, W&T had an exploration success rate of 77% by successfully drilling 17 of 22 exploration wells, which included two of four in the deepwater. W&T also drilled six of seven development wells in 2005, all of which were conventional Shelf wells. The company replaced 134% of production. At the end of 2005 proved reserves were 491.5 Bcfe compared to proved reserves of 467.5 Bcfe at the end of 2004. Year-end 2005 proved reserves consist of 215.9 Bcf of gas (44% of proved reserves) and 45.9 MMbbl (56% of proved reserves). Present value of proved reserves discounted 10% and without deducting any future income taxes, is $2.4 billion based on year-end prices of $9.73/MMBtu for gas and $57.75/bbl oil.
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