Not long ago W&T Offshore Inc. was planning to drill about 25 wells this year. However, the company has backed down from that number as it eyes a market for acquisitions and joint ventures that is becoming increasingly attractive, CEO Tracy Krohn said last Thursday.
W&T said it plans to spend $450 million this year in its capital program -- a 63% increase from 2009 -- on 10 wells plus other items budgeted at $153 million, with the balance allocated to acquisitions, additional drilling opportunities from the company's prospect inventory, joint venture (JV) projects and/or other drilling ventures.
"I assure you we can spend the entire $450 million on quality, internally generated projects," Krohn told financial analysts during an earnings conference call. "However, as we continue through the process, we felt very strongly that the acquisition market is becoming more attractive and the JV opportunities were beginning to present themselves on a more frequent basis, so we felt we should allocate some of our budget toward those efforts."
Much of W&T's acreage is held by production, so the drilling prospects can wait, Krohn, said, noting that delaying drilling might be a good thing as it will allow time for technology and infrastructure to develop and more data on the plays to become available. "That being said, if we're not able to secure new transactions in a reasonable timeframe, we can always go to that original list and start drilling our own prospects."
However, that's not likely, Krohn later said, as the W&T team is beating the bushes. "...[W]e're not sitting around waiting and hoping that something will come across our laps and we'll buy it. We're aggressively pursuing prospects that we think are top quality."
That, of course, is part of a strategy to grow reserves and production, Krohn said, noting that he doesn't care whether that's through the drillbit or the checkbook. "We are and always have been indifferent on how we accomplish this goal."
W&T is building its onshore expertise, having recently relocated exploration geology employees to Houston to put them closer to deal flow and increase the emphasis on new projects, Krohn said. "Similarly, we're in the process of hiring staff to increase our M&A [mergers and acquisitions] effort as well. Our additional staffing will add a layer of expertise in areas like onshore, where we would like to be more active in the future."
That's not to say onshore expertise is entirely lacking at the company. The W&T staff has experience in onshore basins in about a dozen states, Krohn said. "...I don't think that going out and drilling wells in West Texas or Appalachia or the Rockies is that much of a challenge when you compare it to drilling a well in 4,000 feet of water in the Gulf of Mexico.
"...[W]e have identified over 160 prospects that we are tracking in our prospect inventory database, and we significantly reduced both operating costs and long-term asset retirement obligations," Krohn said. "We are better able to take advantage of rising energy prices with a lower cost structure."
Net income for the fourth quarter was $64 million (84 cents/share) on revenues of $176.1 million, compared to a net loss in the year-ago quarter of $851.4 million (minus $11.21) on revenues of $108.3 million. Net income increased in the fourth quarter mainly due to a $1.2 billion ceiling test impairment experienced in 2008; $38.4 million in additional tax benefits related to tax legislation in 2009; higher production volumes in 2009 and an increase in the average realized unhedged price to $7.67/Mcfe in 2009 from $6.68/Mcfe in 2008.
During the fourth quarter the company sold 22.9 Bcfe, compared to 16.2 Bcfe in the year-ago period. Production was higher compared to the corresponding period in 2008 due to deferrals caused by Hurricane Gustav in late August 2008 and Hurricane Ike in early September 2008.
As of Dec. 31 proved reserves were 371 Bcfe, compared to proved reserves of 491.1 Bcfe as of Dec. 31, 2008. The decline was primarily due to production, the divestiture of certain noncore assets, the use of average prices versus end-of-year prices in reserves calculation, and downward revisions because of the debooking of proved undeveloped reserves (PUD) as a result of the Securities and Exchange Commission's new five-year limitation on the life of PUDs from the date they were initially recorded, the company said.
Year-end 2009 proved reserves are comprised of 45% natural gas and 55% oil and natural gas liquids.
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