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W&T Offshore Chief Skeptical of Shale Plays' Payoff

Management of Houston-based W&T Offshore Inc. expects attractively priced acquisitions to start "landing in our lap," CEO Tracy W. Krohn said last week. While the company has been looking on- and off-shore, at home and abroad, for prospects, Krohn described a strategy focused on oil and a general ambivalence toward gas shale plays.

"I've had difficulty getting a cash flow model in shale plays that I think is appropriate," Krohn told financial analysts during a third quarter earnings conference call. "We've got guys banging on our door to come buy them, but the full-cycle economics still appear to us to be $6-7, and maybe you can go out and hedge [production] for something close to that, but it appears that you're just spinning your wheels on a full-cycle economics basis. I would tell you that shale plays -- unless there's something really peculiarly good about them, such as maybe a little more [natural gas] liquids [NGL] in them -- aren't the top priority for us. It doesn't mean we wouldn't do one or get involved in a play...If it shows up and it makes sense then of course we would do it, probably more in the form of a joint venture..."

During the company's second quarter conference call in August, Krohn told analysts W&T was building its cash position in anticipation of future acquisitions at bargain prices (see NGI, Aug. 10). "Suffice it to say that the bid-ask gap is narrowing, and we expect to have our fair share of success in making acquisitions at reasonable prices," Krohn said during last Thursday's call.

W&T has looked for deals around the Gulf Coast region as well as in other parts of Texas and in the Midcontinent, Krohn said. Overseas locales have garnered attention wherever the rule of law prevails, he said. Canada has yet to reveal much of interest. "We have looked at some things south of the border that have some appeal," Krohn said.

"Our strong and growing cash position gives us lots of options. I like these so-called downtimes because they always seem to allow for growth opportunities at competitive pricing. Timing is always the question, and while we're working to get that right, our growth profile can appear lumpy. Absent an acquisition by the end of the year, proved reserves will go down, but at less than what many would consider an average decline rate for the Gulf of Mexico."

Acquisition opportunities will increase as producers find their hedges rolling off and some experience commodity price "sticker shock," Krohn said. "We think that things are going to start landing in our lap here pretty quick that will require somebody that can move quickly and efficiently to close. The Gulf of Mexico is always our bailiwick and always has been. I like it because it's got great cash flow and the biggest thing you've got to worry about is where you're going to deploy your cash next."

W&T currently has more than 160 prospects in various stages of development, of which about two-thirds are held by production, representing an increase of about 30 prospects since the end of 2008, Krohn said.

The company commenced production at Green Canyon Block 646, where the Daniel Boone project started up in late September and is currently producing, gross, approximately 6,000 b/d of oil and 5.7 MMcf/d of gas, or 6,950 boe/d. W&T has a 60% working interest.

Overall, W&T production increased to 25.7 Bcfe, or a 29% increase over third quarter 2008. Oil and NGL production increased to 1.9 million bbl and represented 45% of third quarter volumes. The company has hedged approximately 20 Bcfe of 2010 production.

"As our production volumes have grown with increasing percentages of oil and natural gas liquids, we have seen our cash flows from operations rise," said Krohn. "With the commencement of production from our Daniel Boone project in late September, we should be able to increase our oil production and build our cash position for redeployment in new opportunities. Our plan is to remain disciplined in our approach as we evaluate drilling opportunities from our Gulf of Mexico prospect inventory and also continue to search for the right acquisition opportunities both offshore and onshore."

The company's cash balance on Sept. 30 was $107.3 million and it had $262.3 million of undrawn capacity under a revolving credit facility. The borrowing base was recently reaffirmed at $405.5 million. Capital spending for 2010 has not been finalized, but Krohn said W&T plans to drill within its cash flow and cash on hand, as has been its custom, preserving capital for potential acquisitions.

W&T posted a net loss for the third quarter of $1.3 million (minus 2 cents/share) on revenues of $167 million, compared with net income for the same quarter of 2008 of $78.2 million ($1.02/share) on revenues of $289.8 million.The net loss in the third quarter is mainly due to a lower average realized prices of $6.30/Mcfe, versus $14.57/Mcfe (unhedged) during the same period in 2008, partially offset by a 29% increase in production volumes over the third quarter of 2008.

The company sold 14 Bcf of gas at an average realized price of $3.08/Mcf in the third quarter and sold 1.9 million bbl of oil and NGLs at an average realized price of $61.09/bbl.

Late last month W&T closed on the sale of 36 noncore oil and gas fields to a third-party producer effective Aug. 1, 2009. Production from the fields represented approximately 9% of the company's October production.

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