WTI

Business Context and Reporting Period

Company: W&T Offshore, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: W&T is an independent oil and natural gas producer focused on the Gulf of Mexico, operating in conventional shelf, deep shelf, and deepwater environments. The company holds interests in approximately 0.9 million gross acres. As of December 31, 2009, total proved reserves were 371.0 Bcfe (45% natural gas, 55% oil and NGLs). The company is controlled by Tracy W. Krohn, who owns approximately 52.5% of the voting interests.

Key Financial Metrics

Realized Prices (2009): Oil averaged $55.67 per barrel; Natural Gas averaged $3.97 per Mcf.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 49.7% to $611.0 million, driven by a 43.6% drop in average realized oil prices and a 57.8% drop in average realized natural gas prices compared to 2008.
• Impairment Charges: The company recorded a ceiling test impairment of $218.9 million in Q1 2009 due to declining natural gas prices. This followed a $1.2 billion impairment in late 2008.
• Reserve Reduction: Total proved reserves decreased by 120.1 Bcfe (24.5%) to 371.0 Bcfe. This reduction was due to production (94.8 Bcfe), divestitures of non-core assets (23.9 Bcfe), and negative revisions (25.5 Bcfe) largely attributable to new SEC reserve reporting rules requiring 12-month average pricing rather than spot prices.
• Debt Reduction: Long-term debt decreased by $203.2 million as the company paid off its Tranche B term loan facility and reduced borrowings under its revolving credit facility using cash on hand.
• Asset Dispositions: Sold 36 non-core fields in Q4 2009 and one field in Q2 2009, receiving $32.2 million in proceeds and reducing ARO liabilities by $128.5 million.

Guidance, Outlook, and Risks

• 2010 Capital Budget: The company budgets $450 million for 2010 capital expenditures, intending to fund this entirely with internally generated cash flow and cash on hand. Approximately $150 million is allocated to exploration and development, with the remainder for acquisitions and joint ventures.
• Production Outlook: Approximately 9 MMcfe per day of production remains shut-in due to Hurricane Ike damage, with the majority expected to be reestablished in the first half of 2010.
• Key Risks:
  • Commodity Prices: Continued volatility and low natural gas prices threaten future revenues and could trigger additional ceiling test impairments.
  • Hurricane Exposure: Operations are concentrated in the Gulf of Mexico, exposing the company to severe weather risks. Insurance coverage has become more expensive and limited, with a $35 million retention per occurrence.
  • Reserve Replacement: High depletion rates (52% of reserves depleted within three years) necessitate significant capital investment to sustain production.
  • Regulatory Changes: New SEC reserve rules and potential climate change legislation (e.g., cap-and-trade) could increase costs and reduce reported reserves.

Investor Verification Checklist

• Reserve Revisions: Verify the impact of the new SEC 12-month average pricing rule on the reported 371.0 Bcfe reserve count versus the "Flat Case" (396.0 Bcfe) or "NYMEX Case" (406.0 Bcfe) scenarios.
• Insurance Coverage: Confirm the status of insurance claims related to Hurricane Ike and the adequacy of the new $35 million retention policy against potential future storm damage.
• Debt Covenants: Monitor compliance with the Credit Agreement's leverage ratio (3.50 to 1 for Q4 2009) and the borrowing base redetermination scheduled for April 2010.
• Shut-in Production: Track the timeline for bringing the 9 MMcfe/day of hurricane-damaged production back online in 2010.
• Asset Retirement Obligations: Review the reconciliation of ARO liabilities, noting the $77.3 million increase in estimates due to Hurricane Ike damage revisions.