W&T Offshore, Inc. 2007 Annual Report (10-K) Summary
Business Context and Reporting Period
Company: W&T Offshore, Inc.
Reporting Period: Fiscal year ended December 31, 2007
Business Overview: An independent oil and natural gas producer focused on the Gulf of Mexico (conventional shelf, deep shelf, and deepwater). The company grows reserves through acquisitions and drilling programs. As of December 31, 2007, the company held 638.8 Bcfe of total proved reserves, with 62% classified as proved developed and 38% as proved undeveloped. Approximately 52% of reserves are natural gas and 48% are oil and natural gas liquids.
Key Financial Metrics
| Metric | 2007 | 2006 |
|---|---|---|
| Total Revenues | $1,113.7 million | $800.5 million |
| Net Income | $144.3 million | $199.1 million |
| Earnings Per Share (Diluted) | $1.90 | $2.84 |
| Operating Cash Flow | $688.6 million | $571.6 million |
| Capital Expenditures (Oil & Gas) | $361.2 million | $1,650.7 million |
| Long-Term Debt (Total) | $654.8 million | $685.0 million |
| Cash and Cash Equivalents | $314.1 million | $39.2 million |
| Asset Retirement Obligations | $458.7 million | $314.1 million |
Note: 2006 capital expenditures were significantly higher due to the $1.1 billion Kerr-McGee acquisition.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 39% to $1.1 billion, driven by a 17% increase in average realized oil prices ($67.58/bbl vs. $57.70/bbl) and a 2% increase in natural gas prices ($7.20/Mcf vs. $7.08/Mcf), alongside higher production volumes from the Kerr-McGee acquisition and successful drilling.
- Net Income Decline: Despite higher revenues, net income decreased 27% to $144.3 million. This was primarily due to a $36.5 million derivative loss in 2007 (compared to a $24.2 million gain in 2006), higher depreciation, depletion, and amortization (DD&A) expenses ($532.9 million vs. $337.6 million), and increased interest expense.
- Operating Expenses: Lease operating expenses rose to $234.8 million (from $114.0 million), largely due to the Kerr-McGee acquisition, higher insurance premiums, and $18.5 million in uninsured hurricane remediation costs.
- Debt Restructuring: The company issued $450 million of 8.25% Senior Notes in June 2007. Proceeds were used to pay off the Tranche A term loan and reduce the Tranche B term loan and revolving credit facility balances.
- Dividends: The company declared a special cash dividend of $30 million ($0.39/share) in December 2007, in addition to regular quarterly dividends.
Guidance, Outlook, and Risks
- 2008 Outlook: The company anticipates drilling 44 exploratory wells and 6 development wells. Capital expenditures (excluding acquisitions) are expected to approximate $800 million, funded by operating cash flow and cash on hand.
- Acquisition Activity: On December 21, 2007, the company agreed to acquire Apache Corporation's interest in the Ship Shoal 349 field for $116 million, closing in January 2008. This increased the company's working interest to 100%.
- Key Risks:
- Commodity Prices: Revenue and profitability are highly sensitive to oil and natural gas price fluctuations. A 10% decline in prices would have reduced 2007 pre-tax income by approximately 52%.
- Reserve Replacement: Gulf of Mexico reserves deplete rapidly (approx. 50% within three years), requiring significant capital to maintain production levels.
- Asset Retirement Obligations (ARO): Estimates for plugging and abandonment costs increased by $157.8 million in 2007 due to revised cost studies. Future regulatory changes could further increase these liabilities.
- Weather: Operations are concentrated in the Gulf of Mexico, exposing the company to hurricanes and tropical storms which can shut in production and damage infrastructure.
- Concentration of Control: Tracy W. Krohn controls approximately 53.6% of voting interests, limiting other shareholders' influence on corporate governance.
Investor Verification Checklist
- Derivative Impact: Verify the sensitivity of future earnings to commodity price movements given the $36.5 million derivative loss in 2007 and the nature of open collar contracts.
- ARO Estimates: Review the assumptions used in the $157.8 million increase to asset retirement obligations and the potential for further cost escalations in offshore decommissioning.
- Reserve Quality: Assess the 38% of reserves classified as "proved undeveloped" and the capital required to bring them online, particularly in deepwater and deep shelf environments.
- Debt Covenants: Confirm continued compliance with financial covenants under the Credit Agreement, specifically the leverage ratio and interest coverage ratio, given the new $450 million Senior Notes.
- Insurance Coverage: Evaluate the adequacy of insurance coverage for hurricane damage, noting the $18.5 million in uninsured remediation costs incurred in 2007.