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[Editor's note: A version of this story appears in the January 2020 edition of Oil and Gas Investor. Subscribe to the magazine here.]
It was Christmas Eve, 1985 ... and 31-year-old Tracy Krohn was freezing. Wrapped in a diver’s wet suit and loaded down with gear, he was submerged into the Gulf Intracoastal Waterway of south Louisiana blindly searching for the problem that could wreck his three-year-old company.
With zero visibility, he was left to use his hands to locate and assess the issue. The unscheduled, late night swim was prompted by a phone call earlier in the day from the U.S. Army Corps of Engineers. One of his newly acquired natural gas pipelines had sprung a leak. It was the line that supplied natural gas as a lift mechanism for the wells on the north side of the canal, which was what carried most of his young company’s revenue. Making matters worse, a permit from the Corps to pull the line and make repairs by the light of the day would take upward of six months to receive. It was a death sentence for W&T Oil Properties Inc.— now W&T Offshore.
Three months prior, in September, Krohn had taken a bank loan and purchased the property— the company’s first transaction—for $500,000. And now, there he was, taking things into his own hands, literally, in a desperate bid to save his company. He was able to locate the leak, but unfortunately, it was in a tricky spot—notched in a seam where two individual lines were bound together. The situation looked dire.
“I had to figure out how to repair that internally,” Krohn recalled. “I actually modified an existing tool, invented a way to do that and ran it from the north to the south, spaced it out across the leak, pressured up, and it held.
“It was a cup packer, which we use generally for injection well purposes. I spent the better part of that week at the machine shop trying to figure out how to get this done. I had to shave the whole tool down. But, if we don’t get this done, the company’s out of business in a short period of time.”
Six months later, Krohn sold half of the field interest for double what he had paid for it. Meanwhile, oil prices were cratering, dropping below $10 per barrel.
Today, W&T Offshore employs roughly 300 people and has a market capitalization of $615 million. The company’s Gulf of Mexico assets are located across both the shallow and deep water. Its 605,000 gross acres on the shelf generate over 70% of the company’s total daily production, with the remainder coming from its 221,000 gross acres in the deep. As of the third quarter of 2019, the company was producing just over 41,000 barrels of oil equivalent per day (boe/d), which included just one month of production from its most recent acquisition from Exxon Mobil Corp. at Mobile Bay. (Editor’s note: W&T also acquire deepwater GoM assets from ConocoPhillips in December.)
Krohn’s office is a mix of paperwork and racing paraphernalia dominated on the right by a conference table flanked by high back chairs that stand out due to the integration of his racing team’s neon green color scheme. The space gives the impression of a man dedicated to the treasure hunt that will move his company forward while still respecting and learning from what has come before.
Krohn got his start in the oil field in 1972. His mother worked for Pat Taylor of Taylor Energy, and through that connection, Tracy was able to get on as a roustabout with a division of Fluor Drilling. It was Oct. 4, 1972; Krohn was 18 years old.
“I ended up on this drilling rig after this horrendous boat ride,” he said. “Everybody on the boat was sick, and it was a horrible ride. Somehow I ended up in a bunk room, out of the bed. Got out of it, and I’m sure I was just nasty. I hadn’t been there very long when the door slammed wide open and one of the biggest humans I’ve ever seen in my life said, ‘Boy, what in the hell are you doing in my bed?!’ And it got worse from there.”
From the rocky starts, Krohn and W&T have persevered. The company’s most recent triumph is a $200 million acquisition from Exxon Mobil covering nine producing fields and related onshore facilities in Mobile Bay offshore Alabama immediately adjacent to existing W&T properties. The deal was an accretive acquisition, according to Krohn, that included working interests in nine shallow-water producing fields and related operatorship, as well as offshore and onshore facilities and infrastructure. The new assets basically surround W&T’s Fairway Field, in which a controlling interest was purchased from Shell in 2011.
Not only would the deal add almost 75 million barrels of oil equivalent (MMboe) in net proved reserves to the company’s coffers, it was a true full circle moment for Krohn. He had spent some time on the rig that drilled the discovery well in the area for Mobil back in 1979.
“We made a great discovery there, and then here I am 40 years later buying this field,” he said. “We went over and did a little town hall with the Exxon folks that we were interested in staying with us, and I told them, ‘You know I’ve been working on this transaction for 40 years.’ That’s my story, I’m sticking with it.”
During the past three-plus decades, Krohn has been successful in guiding W&T through the peaks and valleys of the oil patch—downturns in 1986, 1999, 2008 and 2015, the Macondo disaster in 2010, and Hurricanes Katrina, Rita and Ike.
In the most recent downturn, the company found itself with a crushing debt load ($1.5 billion at one point) in a soft commodities pricing environment and was teetering on the brink of collapse.
“That’s the only time I’ve been caught on the wrong side of the debt equation,” recalled Krohn. “Unfortunately, we had to swap debt for equity at an unfavorable time.”
In the fall of 2016, the company commenced an exchange offer that swapped $710 million in senior notes due in 2019 for just over 60 million shares of W&T common stock. The move reduced the company’s overall outstanding indebtedness by $408 million ahead of a new financing package.
“I went from being majority interest owner to largest shareholder,” he said. “Doesn’t sound like a big difference, but it was a big difference for me. In spite of that, we didn’t do anything that killed the company. I learned a long time ago that you don’t do any one thing that could bring your company down, that’s too much risk. So, if you’re doing a managed risk portfolio, then you try to get some diversification in it, right?”
Those were shaky years, and though he swears he never thought the company was in danger of going bankrupt, Krohn knew that things had to change. The company cut spending drastically and with the assistance of those less-than-ideal but effective financial maneuvers, pushed out or eliminated a chunk of its debt maturities.
“The hard part about that was giving up the shares at a not very good time,” he said. “I think that we did that very well.”
Krohn tells the story of a specialist brought in from a large legal firm that was retained to assist W&T through the company’s financial straits. It was an attorney out of Chicago that Krohn didn’t really see eye-to-eye with.
“He looks at me, and the first thing he says is, ‘Mr. Krohn, you just need to give up on the idea of owning equity in this company.’ I’m a majority interest owner of this company for three decades at that point, right? Basically what he was telling me was give up on my equity, he would get me a nice contract, and I could pay him $10 million a month for the privilege of letting him fix this for me. It was a very short conversation.”
With net debt levels around $580 million at mid-year 2019, W&T’s current capital allocation plan includes maintenance of a prudent balance sheet and the use of free cash flow to grow opportunistically. The operator’s chief focus remains on high rate of return projects that can generate cash flow quickly, as well as the pursuit of compelling acquisitions and inventory expansion.
The event that changed everything
Macondo was a different challenge for W&T—one not of its own making. On April 20, 2010, a BP-operated well in the deepwater U.S. Gulf experienced a catastrophic blowout. Eleven men died. What followed was a series of very public missteps that would lead to the Macondo well in Mississippi Canyon 252 spewing uncontrolled hydrocarbons into the Gulf of Mexico for 87 days.
In the wake of the disaster, the regulatory agencies governing offshore drilling were razed, built anew and a moratoria on new wells in the region was put in place.
“There were some other things that occurred that shouldn’t have been that way,” said Krohn. “The fallout from it was increased regulation, increased scrutiny. The only silver lining around that is BP could afford to pay for it. It didn’t really roil the insurance markets.”
Krohn said the fallout from Macondo was not as dire as it could have been for W&T, confessing, however, that the regulatory system “swung a little bit too far out on a pendulum.”
One thing that did occur post-Macondo was increasing inspections. Prior to the accident, the company would expect to get one or two inspections per year. In the post-Macondo world, they occur twice a week in many cases.
“I don’t necessarily think that’s a bad thing, but it is an expensive thing,” said Krohn. “Because whenever they show up, it’s about $18,000 for the inspection that we get to pay for. So, if you got three or four rigs running out there, it’s a pretty big bill. And they hired a bunch more people, and they hired a bunch more helicopters.
“The inspection times have increased remarkably. But I think those were kind of the bigger issues that came out of Macondo.”
In response to Macondo, U.S. Gulf operators faced a federally mandated drilling moratorium that slammed the brakes on all offshore wells for six months. However, it was more than 10 months before any permits were issued in the region due in part to new rule requirements on oil containment. It was during this stretch that a lot of Gulf-centric companies began to look elsewhere for drillable assets, and W&T was no different. In 2011, and out of character, the operator purchased a tranche of onshore acreage in West Texas.
With all of the risks and challenges associated with offshore, it has always been home for W&T.
Today, with so many operators having moved onshore, and having either deemphasized or sold out of the U.S. Gulf, it begs the question, why does the Gulf remain W&T’s sole focus? Perhaps that lesson can be best told by the company’s entry (and exit) from West Texas—a 21,900 gross leasehold acres (21,500 net acres) position in the Permian Basin it purchased for $366 million.
“We took a brief foray over into West Texas and bought some properties,” recalled Krohn.
“Drilled a bunch of wells and spent a bunch of money, trying to catch up with the cash flow. We proved the horizontal model. For the last couple of wells, 1,500 and 1,700 barrels a day on a 5,500-foot lateral. Good wells. We were making plans to spin the company off, take it public, or sell it or some other way to extinguish much of the debt. Then, prices dropped. The timing wasn’t good and we were spending too much money.”
“At the end of the exercise, we came back to the Gulf of Mexico exclusively,” said Krohn. “When you think about the amount of money we spent, and what we got in return, West Texas just doesn’t cash flow.
“Overall, for the oil and gas business, the onshore shale basins just don’t cash flow. There are certain areas that produce better than others, and that’s why you have type curves, right? You’re looking for the best geology. It’s still about rock properties. The Gulf of Mexico is primarily structural and stratigraphic in nature and for that reason, we don’t have type curves. You have to analyze each one of these prospects individually.
“The good news is it can be quite lucrative. So, it does tend to be cash-flow positive. The idea of free-cash-flow positive is very compelling to me. And because I’m the largest shareholder, that’s extremely compelling.”
One of the company’s flagship assets is Mahogany Field in Ship Shoal 349/359. Originally discovered by Phillips in 1994, it was one of the region’s first commercial sub-salt projects.
Historically, most of Mahogany’s production came from the main P-sand. W&T has drilled and completed over a dozen wells at the field since 2011, including the deeper T and U sands. These wells, recompletions and selective remedial work at the field have yielded over 16 MMboe since 2011.
In July, the company brought the A-19 well online at the field and produced over 7,000 boe/d from the T-sand.
The A-6ST well, a P-sand completion, was successfully drilled during the third quarter of 2019 and is scheduled to be brought online prior to year-end. W&T has grown production more than 10 times at Mahogany since 2011, with 76% of that being liquids. Also recently, the company has struck pay dirt on a handful of additional shallow and deepwater tests.
“We’ve had good success out in the South Timbalier area in medium deepwater depths,” said Krohn. “Good discoveries there. Of course, we’ve done Big Bend and Dantzler, which were green field exploration projects that we did along with Noble. Those are great assets, along with stuff that we bought. We’ve also done a drilling joint venture recently.”
The venture, called Monza, has yielded success. It’s a three-year-plus, 14-well program valued at over $360 million funded in part by an entity owned and controlled by funds managed by HarbourVest Partners, a Boston based private-equity fund sponsor, and Baker Hughes, a GE company.
W&T offered up working interest in the wells in return for the funds to drill. Krohn personally owns a little over 4% of the fund. The initiative has helped the company to reduce capex and increase free cash flow.
“We’ve drilled nine wells there now, and we’re finding a pretty decent share of reserves,” he explained.
“We had a recent discovery at Mississippi Canyon in what we call our Gladden Field. So, a new discovery there that’s recently come online. It’s not what I would call a home run, but it’s about what we expected.
“I like the wells. I like the fact that we were going to be able to drill them and make money with it. We get a 10% carry on our 20% stake. It’s not rocket science. Some of it was pretty proprietary in how we structured it. We spent a lot of time on structuring this deal. Part of the reason for it is that we envisioned that we could do it again.”
The most recent well at Gladden in Mississippi Canyon Block 800 was drilled using semisub Noble Sam Croft in just over 3,100 feet of water and encountered 200 feet of net oil pay. The well was completed and placed on production ahead of schedule in the third quarter at about 4,600 gross boe/d, with 89% oil.
Elsewhere, the joint venture has enjoyed success on a pair of wells at the Ewing Bank 910 field area. Both the ST 320 A-2 and A-3 wells encountered commercial pay. The A-2 was producing around 7,000 boe/d by mid-April, and the A-3 was flowing around 5,500 boe/d following start-up during the third quarter.
At Virgo Field in Viosca Knoll 832, the A-13 well struck 77 feet of net vertical pay and was brought online in the first half of the year. Wells at Ship Shoal 28 and East Cameron 321 were also deemed commercially successful with the latter encountering better-than-expected 84 feet of net vertical pay. Both wells are expected to be brought online by year-end.
Outlier investments aside, most of Krohn’s energy remains focused ... on energy.
W&T will continue to pursue acquisitions that make sense. Krohn still actively gets in the weeds when opportunities arise to vet the pros and cons of every deal, as well as arriving at the right number price-wise. W&T itself has been targeted for acquisition over the years. Krohn estimates it has happened seriously around three times, with one of those almost coming to fruition. His ownership stake in the company makes deals like that a bit more complicated.
“Go where they ain’t,” said Krohn. “I do have less competition now. It doesn’t mean I don’t have competition, but when we took the company public there was a pretty large list of competitors that we disclosed and told the public about.”
During a road show years ago, Krohn was asked how many of W&T’s publicly traded Gulf of Mexico (GoM) competitors he expected to be around in five years’ time. He answered without hesitation.
“None.” he said, “Five years from now none of these guys as you know them today will be here. And I was right. Many of those companies were merged or bought.”
There was one exception, Stone Energy. Stone remained a publicly traded GoM peer and later filed for bankruptcy in December 2016. The company eventually reorganized and emerged from Chapter 11 in 2017 and then merged with Talos Energy Inc.
“So, they’re all gone, every one of them. Unlike us, many weren’t in it for the long run in the Gulf of Mexico, and others took outsized risk because management had no skin in the game,” said Krohn.
Newer companies, like Talos, Fieldwood, EnVen, Kosmos and others have come into the region, but not near as many players as there were earlier this decade.
“Admittedly, it’s a mature basin,” said Krohn of the U.S. Gulf. “The risk on finding reserves is greater. But, our success rate has been over 90%. It had been 75% to 80% traditionally. A good place to look for oil and gas is in oil and gas fields. That’s pretty much been the philosophy most of the time.”
For 2020, W&T expects to spend something north of $100 million, after a capex campaign of an estimated $140 million in 2019. The company will likely continue to pursue attractive acquisitions in what Krohn calls the current environment for deals in the Gulf “as good as I’ve ever seen.”
From The Racing Rush To The Silver Screen
One thing Krohn will never be categorized as is risk averse. Not in oil exploration, and not in his “other gig” as a race car owner—and driver. He’s been behind the wheel at LeMans, as has his regular co-driver, Nic Jonsson, 13 times, a fantasy of his when he used to race his MGB back at autocross pop-ups in the parking lots at Louisiana State University.
He followed that dream initially, but soon realized that racing was an expensive sport. So he put it on hold. Then, at 48 years old, he climbed back behind the wheel and not long after, Krohn Racing was born.
He attended racing school and drove in a spec series. After some success there, he decided to take it to the next level and started racing against factory pros and factory teams.
“It was like going from kindergarten to college, but it was a lot of fun and a good education,” he quipped.
He was behind the wheel of the neon green Krohn Racing Ferrari at LeMans in 2013 when a failure during a practice run sent him into a half-spin and careening off of a tire wall at high speed.
“It was a compression right turn,” he said. “So, as I was turning right, the car bottomed out. It pins the front, swings it around, went into the tire wall and made a bunch of noise. That’s not the way you want to make Sports Center, right?”
Earlier this year, another practice crash kept Krohn out of the LeMans competition. This past June, he slammed his Porsche into a wall at 160 miles per hour. It measured a 60G initial impact. You’re not supposed to survive that. The car did its job and absorbed the brunt of the impact. Krohn escaped with lower back pain and some internal bruising, but nothing broken. The crash ended his 2019 racing campaign.
“Kudos to Porsche for building just an incredible machine,” said Krohn. “I mean, it took the hit and did everything it was supposed to do. And I did everything I was supposed to do. When I knew I was going to hit the wall, I pulled back hands and feet and everything else. Didn’t break anything in my hands or my legs or my feet or anything. I didn’t have a concussion.”
This past August, Krohn turned 65—historically a significant mile-marker in most professional lives. Reaching that landmark begged the question: Any thoughts of retiring?
“No,” he said without hesitation. “I would like to be in this business as long as it’s still interesting to me and we’re still having success, that’s what I’d like to carry on doing.
“Actually, I’m in very good physical shape, otherwise I wouldn’t have gotten through that crash as well as I did. I do take care of myself. I think it’s important that you do that anyway. I still get a kick out of making a new well, making a new acquisition. This is how we make money. It employs a lot of people that I feel very privileged to work with. I think this is a great business. It does a lot of things for our country.”
Beyond oil and racing, Krohn also has proven a somewhat savvy investor in another high-stakes business: Hollywood. A few years back, he put some money into a fund to back a small-budget film about a ballet dancer struggling with her sanity. The movie was 2010’s “Black Swan,” directed by Darren Aronofsky. The film, starring Natalie Portman and Mila Kunis, carried a budget of $13 million. It made $330 million worldwide at the box office.
“As it turned out, I was the largest investor in that movie,” said Krohn. “I did very well with it. Just pure dumb ass luck, I mean really. I tried to figure out how you know when you’re going to have a really good film. And I did some due diligence on it. You really don’t know when you’re going to have a successful film. There’s different ways that people try to figure that out. But at the end of the day, it’s just pretty random.”
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