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W&T Makes Permian Onshore Play

W&T Offshore Inc. has made a "transformative acquisition" to grow reserves and production by agreeing to acquire about 21,900 gross leasehold acres (21,500 net acres) for $366 million in the West Texas Permian Basin in Gaines, Dawson, Andrews and Martin counties, the company said Tuesday.

The reserves are more than 91% oil and natural gas liquids (NGL). On Jan. 1 the estimate of proved reserves was 27 million boe (164 Bcfe). Estimates of proved and probable reserves were 53 million boe (318 Bcfe). Current wells produce about 2,800 boe/d. Since Jan. 1 daily production has increased from about 1,900 boe, W&T said. The sellers were not disclosed.

"The sellers have three active rigs drilling in the field and ongoing completions are being made on the new wells," the company said. "We expect to keep at least three rigs working in the field throughout the remainder of 2011. Accordingly, we would expect daily production to increase."

W&T said there is "significant upside potential" in the acquired leasehold with "hundreds of proved undeveloped and probable well locations." Capital expenditures associated with the properties for the rest of 2011 are estimated at $35-40 million.

The company will mainly be targeting the Wolfberry Trend in the Permian, CEO Tracy Krohn told financial analysts during a conference call Tuesday.

"The acquisition of the Permian Basin oil properties will allow us to continue with our goals of a steadier growth pattern coupled with good cash flow and positive full-cycle economics," Krohn said. "We believe that there are many more attractive acquisition opportunities for us both offshore and with conventional onshore properties as so many of our competitors continue to pursue the various shale resource basins."

Krohn emphasized that W&T is focused on growth and that the further move onshore is not replacing the company's traditional activities offshore in the Gulf of Mexico.

"As we told you last call, although the company's focus has historically been offshore we've repeatedly stated that we've been out here looking around in different areas, in other basins, including onshore as well as internationally," he said. "Our [previous] lack of investment onshore otherwise wasn't a philosophical issue but rather a rate of return issue. We believe that acquiring and operating these Permian Basin oil properties is a transformational move for us and that these properties will make a solid contribution to the company's future."

Rates of return in the offshore tend to be quicker, though, Krohn said. "That's why we like it so much. On the other hand, you get a nice predictable reserve growth profile with the onshore stuff. And it is oil; it's not a shale play. The Permian Basin has been out there for decades. All we're thinking is we can look at it with a fresh set of eyes and give it maybe a tweak on technology."

Krohn emphasized that W&T has directional drilling experience it can apply onshore. "The concept of drilling horizontal wells isn't a difficult thing for us to imagine," he said. "Similarly, we expect that we'll employ some good petrophysics and geophysics to these [onshore] projects as well."

The CEO said he was not sure if the company would drill horizontally in the Permian this year, "but we're certainly looking at it."

The Permian Basin deal is subject to adjustments and has an effective date of Jan. 1, 2011. Closing is expected in the second quarter. The acquisition will be funded with cash on hand and borrowing under W&T's revolving credit facility.

Also on Tuesday the company announced first quarter results.

"The first quarter benefited from higher production volumes, primarily because of the acquisition of the deepwater properties from Total E&P USA [see Daily GPI, April 9, 2010] and Shell Offshore Inc. [see Daily GPI, Nov. 8, 2010] during 2010 and significantly higher oil prices," Krohn said. "Our oil and natural gas liquids production, which represented 48% of our total production on an Mcfe basis in the quarter, continues to contribute substantially to our revenues in this higher-price environment. Thus far in 2011 we have successfully drilled three exploration wells, one well on the conventional shelf and the other two wells are onshore."

Net income for the first quarter was $18.6 million (25 cents/share) on revenues of $210.9 million, compared to $42.3 million (57 cents/share) on revenues of $169.6 million during the year-ago period. Decreases in net income from derivatives and an increased effective tax rate were partially offset by higher production volumes and much higher averaged realized oil prices during the first quarter of 2011 versus the comparable period in 2010, W&T said. Excluding special items, first quarter net income was $32.7 million (43 cents/share). Net income excluding special items for the corresponding quarter of 2010 was $39 million (52 cents/share).

W&T sold 22.7 Bcfe at an average price of $9.27/Mcfe in the first quarter, of which 48% was oil and NGLs, compared to 20 Bcfe sold at an average price of $8.50/Mcfe in the first quarter of 2010, of which 50% was oil and NGLs.

Average oil and NGL prices increased $18.48/bbl to $88.43/bbl. Oil and NGL sales volumes increased by 153,000 bbl, while oil and NGL revenue increased by $44 million. The sales volume increase for oil is primarily attributable to the acquisition of the Total properties during the second quarter of 2010 and exploration and development efforts.

Natural gas revenue decreased $3.2 million on a 1.8 Bcf increase in sales volumes as natural gas prices fell $1.09/Mcf to $4.29/Mcf. The sales volume increase for natural gas is primarily attributable to the acquisition of the Shell properties during the fourth quarter of 2010, partially offset by reservoir declines and the continuing shut-in of the company's Main Pass 108 field production throughout the first quarter of 2011 due to a third-party pipeline outage. Initial field production at Main Pass 108 resumed on March 31, gradually increasing to more than 46 MMcfe/d net, made up of 38 MMcfe/d and 1,400 b/d.

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