# Fellow
Shareholders

_Source: `DeepSeekOCR_Ardian_pruned_1k/energy-oil-gas-e-p/NYSE_WTI_2019/NYSE_WTI_2019.mmd` · pages 3-9_

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Fellow
Shareholders

Over the past 36 years, W&T has been a leader in the Gulf of Mexico, and we continue to expand our strong asset base. We have grown through the right combination of attractive property acquisitions, methodical integration and exploitation of those acquisitions, and successful development and exploratory drilling on our legacy fields, all while maintaining our focus on generating strong free cash flow.

We completed two great acquisitions in 2019 for approximately $188 million that added meaningful production, significant reserves, and future drilling locations. We achieved a 100% success rate on the six wells drilled in 2019 and invested $125.7 million in capital expenditures, before acquisitions, that was below the low end of guidance. In addition, we added nine new shallow water and eight new deepwater leases in Gulf of Mexico federal lease sales.

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At the beginning of 2019, I told you that we were looking closely at acquisition opportunities and in the second half of 2019, we executed two very good

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transactions that met all of our stringent investment criteria.

We look for properties with existing good cash flow, upside that we can achieve with the drill bit, and the potential to increase near-term cash flow through workovers, recompletions and/or facility upgrades. We primarily use the cash we generate to fund drilling and make more acquisitions to consistently grow value. We also use our free cash flow to partially pay down our debt to protect our balance sheet.

On August 30, 2019, we closed our Gulf of Mexico Mobile Bay acquisition from ExxonMobil for $168 million, which included working interests in nine shallow water producing fields and related operatorship in the Mobile Bay area, making W&T the largest operator in the area. These are low decline assets and they are adjacent to our current operations thereby providing us the opportunity to recognize increased scale, rationalize operations and capture cost efficiencies to further grow cash flow. The acquisition also included their onshore gas processing facility that is near our Yellowhammer gas processing facility.

On December 12, 2019, we completed an oil-weighted producing property acquisition from ConocoPhillips for their 75% working interest and operatorship of the Magnolia Field in the central region of the deepwater Gulf of Mexico. The total gross purchase price was $20 million. The field provides upside from additional pay sands in existing well bores and potential opportunities for future drilling. Both acquisitions were funded from W&T's available cash on hand and our revolving credit facility.

The 2019 acquisitions added approximately 81 MMBoE of proved reserves as of year-end, which was higher than the 77MMBoE combined reserves as of the effective dates of each transaction. The increase to reserves was driven by synergies and operational cost savings already captured by W&T at Mobile Bay that were partially offset by lower year-over-year prices. The underlying technical analysis of the total field remained unchanged, but these lower costs allow for higher margins throughout the life of the asset thus extending the overall field life. In addition, there is the opportunity for further growth in reserves from potential field-life extensions with little or no capital as well as through drilling and facility upgrade opportunities. We have a very good track record of reducing costs and enhancing value with all of our past acquisitions and we intend to do that with both Mobile Bay and Magnolia in 2020 and beyond.

Additionally, in the first quarter of 2020, we signed a purchase and sale agreement to acquire the remaining 25% working interest in the Magnolia Field. We expect to close that transaction on March 31, 2020. This is another example of the attractive acquisition opportunities we are seeing across the Gulf of Mexico.

Well-timed and accretive acquisitions, coupled with strong operational results led to W&T's year-end 2019 SEC proved reserves increasing 87% to 157.4 MMBoE from 84.0 MMBoE at year-end 2018. The Company achieved an impressive proved reserve replacement rate of nearly 600% on 2019 production of 14.8 MMBoE. This included acquisitions, positive revisions, extensions and discoveries, and the impact of negative revisions due to pricing. At year end, about 40% of our reserves were liquids and approximately 85% of 2019 proved reserves were classified as proved developed. We also extended our reserve life ratio with 2019 acquisitions and successful drilling to 8.7 years.

The PV-10 value of W&T's SEC proved reserves at year-end 2019 was \(1.3 billion, down about 9% from \)1.4 billion

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at the end of 2018. This was driven by 11% lower oil pricing and a 16% reduction in natural gas pricing.

Our all-in reserve replacement cost in 2019, including acquisitions and drilling costs and considering all reserves and the impact of negative price revisions was \(4.18 per Boe. We are particularly happy with our three-year 2017 through 2019 all-in reserve replacement cost of \)5.05 per Boe, which we think is a very competitive cost for any E&P company.

Looking ahead to 2020, under current uncertain commodity pricing conditions, we intend to closely manage the factors that we can influence, including capital expenditures, operating costs, and G&A. This means that we will take a measured approach to drilling while continuing to fund our capital expenditures, excluding acquisitions, with available cash and cash generated from operations. We will also look to reduce our debt when our cash position is greater than our operating or capital needs.

At year-end 2019, we had \(32.4 million in cash and \)139.2 million of availability under our $250 million revolving bank credit facility. In early 2020, we paid down debt with a portion of our free cash flow and reduced the borrowings on our credit facility by \(25 million to \)80 million in borrowings. That was a 24% reduction in revolver debt.

While we have a substantial inventory of very attractive drilling opportunities, given the current macro pricing downturn, our capital spending plan in 2020 is now expected to be in the range of \(15 to \)25 million. While this is a large decline from our actual spending in 2019, the lower 2020 budget will have a minimal impact on our production expectations in 2020 due to the lower decline profile of our conventional producing properties. We also now expect to spend about \(10 to \)20 million on asset retirement obligations this year. This will give us maximum financial flexibility and facilitate generating free cash flow to reduce debt and potentially fund additional opportunities that we believe are available. We have significant flexibility to adjust our capital spending up or down at any time since we have no long-term rig contract commitments or drilling obligations. We will focus our drilling capital on low risk, high return projects and build on the 100% success rate that we achieved in both 2019 and 2018. Capex is not our only focus, as we are also forecasting a meaningful decrease in our total lease operating expenses per Boe compared to 2019.

Our management team's interests are highly aligned with those of our shareholders given our 34% stake in W&T's equity, which is among the very highest of any public E&P company. This alignment of interest ensures that we are truly incentivized to maximize shareholder value and mitigate risk. So, as you can see, we are tied to doing the right things for, and with, our shareholders in mind.

In closing, I want to thank our management team and all of our employees for their continued hard work and dedication, as well as our Board for their guidance and support. In our more than 36 years in the industry, we have experienced quite a number of commodity price cycles. We believe that we are well positioned today and remain confident in our ability to take advantage of attractive opportunities that a down cycle could present us.

![](images/5_0.jpg)

Tracy W. Krohn
Founder, Chairman, Chief Executive
Officer and President
March 18, 2020

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