W&T Offshore, Inc. — Q3 2020 Form 10-Q Summary
Business context and reporting period
W&T Offshore is an independent oil and natural gas producer focused primarily on exploration, development and acquisition activities in the Gulf of Mexico. The unaudited report covers the three and nine months ended September 30, 2020, with comparisons to the corresponding 2019 periods.
- The company held interests in 50 offshore fields, including 41 producing fields, and leased approximately 772,000 gross acres.
- Production mix for the nine months was approximately 36.7% oil and condensate, 11.1% NGLs and 52.2% natural gas on a Boe basis.
- COVID-19, the related energy-demand shock, OPEC+ actions and Gulf of Mexico hurricanes materially affected commodity prices, production and operating activity.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenue | $72.5 million | $132.2 million | $251.9 million | $383.0 million |
| Operating income (loss) | $(19.5) million | $35.4 million | $24.3 million | $41.8 million |
| Net income (loss) | $(13.3) million | $75.9 million | $46.7 million | $64.5 million |
| EPS, basic and diluted | $(0.09) | $0.53 | $0.33 | $0.45 |
| Cash flow from operations | Not separately disclosed | Not separately disclosed | $114.7 million | $186.6 million |
| Operating margin | (26.9%) | 26.8% | 9.6% | 10.9% |
| Net margin | (18.4%) | 57.4% | 18.6% | 16.8% |
All dollar amounts are as reported or calculated from reported figures; financial statement amounts are in thousands unless otherwise noted.
- Oil revenue declined 54.7% in Q3 and 45.8% for the nine months, driven by lower prices and lower oil volumes. Nine-month realized oil price was $37.17 per barrel versus $61.00 in 2019.
- Nine-month realized NGL price decreased 45.9% to $9.78 per barrel, while realized natural gas price decreased 26.8% to $1.88 per Mcf.
- Nine-month equivalent production increased 18.5% to 43,317 Boe per day, primarily from the Mobile Bay and Magnolia properties, but lower commodity prices more than offset the volume increase.
- Q3 operating expenses decreased 5.0%; nine-month expenses decreased 33.3%, reflecting lower activity and cost reductions. Q3 G&A increased 43.2%, while nine-month G&A decreased 9.3% partly due to PPP-related credits.
- Derivative results were volatile: a $11.2 million loss in Q3 2020 versus a $5.9 million gain in Q3 2019, but a $35.3 million gain for the first nine months versus a $41.2 million loss in 2019.
- The nine-month net income included a $47.5 million gain from purchasing $72.5 million principal amount of Senior Second Lien Notes for $23.9 million. The Q3 and nine-month tax benefits were $21.1 million and $23.3 million, respectively, with $27.5 million of the nine-month benefit related to CARES Act and interest-limitation changes.
Balance sheet, debt and liquidity
| Balance-sheet item | September 30, 2020 | December 31, 2019 |
|---|---|---|
| Cash and cash equivalents | $56.5 million | $32.4 million |
| Total assets | $949.5 million | $1,003.7 million |
| Total debt carrying value | $624.7 million | $719.5 million |
| Asset retirement obligations | $381.7 million | $355.6 million |
| Shareholders’ deficit | $(199.5) million | $(249.4) million |
- Credit Agreement borrowings were $80.0 million, with $130.6 million of availability and $4.4 million of outstanding letters of credit. The agreement matures October 18, 2022.
- Senior Second Lien Notes had $552.5 million principal outstanding, bear interest at 9.75% and mature November 1, 2023.
- Total debt declined $97.5 million, or 13%, from year-end 2019, which management estimated would reduce annualized interest expense by approximately $8 million.
- The June 2020 credit amendment increased the interest margin, waived the leverage-ratio covenant through year-end 2021 and substituted a 2.00-to-1.00 first-lien-debt-to-EBITDAX covenant. The company reported compliance with all applicable covenants.
- Operating cash flow was $114.7 million, investing cash outflow was $41.7 million and financing cash outflow was $48.9 million for the nine months. Cash increased $24.1 million.
- Management stated that cash on hand, operating cash flow and available credit were expected to be sufficient for current requirements, while acknowledging that prolonged market deterioration could require additional liquidity measures.
Material changes versus the prior comparable period
- Nine-month revenue fell 34.2% despite an 18.5% increase in daily equivalent production, primarily because realized oil, NGL and natural gas prices fell sharply.
- Q3 revenue fell 45.2%, and the company moved from $35.4 million of operating income to a $19.5 million operating loss.
- Nine-month operating cash flow declined 38.5%, primarily because of lower commodity-price-driven revenue, although lower receivables, derivative settlements and working-capital changes provided support.
- Investing cash outflow decreased substantially from $261.2 million to $41.7 million because 2019 included the $167.7 million Mobile Bay acquisition.
- Capital expenditures were materially reduced. Nine-month exploration and development spending was $10.9 million versus $92.5 million in 2019.
- Asset retirement obligations increased to $381.7 million from $355.6 million, and shareholders’ deficit improved primarily because of nine-month net income.
Guidance, outlook, commentary and risks
- For 2020, excluding acquisitions and plugging and abandonment expenditures, management estimated capital expenditures of $15 million to $25 million and ARO spending of $2 million to $4 million.
- The company expected to consolidate two Alabama gas-processing plants beginning in Q4 2020, with estimated future savings of approximately $5 million annually.
- Hurricanes caused significant production shut-ins in the second and third quarters and additional shut-ins in October. Most affected wells had returned to production, but one field remained offline at the end of October; approximately $5 million of Q4 repair costs was expected.
- Management estimated deferred production of approximately 13,500 Boe per day in Q3 and 7,100 Boe per day for the nine months, largely due to hurricanes, shut-ins and natural declines.
- The company received $8.4 million under the Paycheck Protection Program and recorded $8.4 million of expense reductions across lease operating, G&A and interest expense. SBA forgiveness had not been confirmed; rejection could require repayment of all or part of the funds through April 2022 at 1% interest.
- ARO estimates are subject to substantial uncertainty. Potential additional BOEM/BSEE financial-assurance or bonding requirements could materially affect liquidity.
- Open contingencies include approximately $7.7 million of proposed BSEE civil penalties, of which approximately $3.5 million was accrued; unresolved ONRR royalty matters with an indeterminate potential exposure; and potential cost overruns under the Monza drilling program, for which total exposure could not be estimated.
- Commodity derivatives reduced some price exposure but produced significant fair-value volatility and may limit gains from favorable price movements. Open contracts covered portions of oil and natural gas production through 2022.
- Other principal risks include sustained low commodity prices, reduced demand and storage constraints, production restart costs, hurricane and offshore operational risks, insurance availability and concentration of revenue among major customers.
Most important facts for investors to verify
- Whether oil, NGL and natural gas prices and production volumes recover sufficiently to support positive operating cash flow and covenant compliance.
- The outcome of the fall 2020 borrowing-base redetermination and the company’s continuing availability under its Credit Agreement.
- Senior Second Lien Note maturities, refinancing requirements and the sustainability of debt repurchases.
- Whether the SBA forgives the $8.4 million PPP amount and the effect of any required repayment.
- Actual hurricane repair costs, production restoration and the economics of previously shut-in wells.
- Potential changes in BOEM/BSEE financial-assurance rules and resulting collateral or bonding requirements.
- Resolution and ultimate exposure from BSEE penalties, ONRR royalty reviews and Monza cost-overrun obligations.
- The extent to which reported nine-month net income benefited from the $47.5 million debt-purchase gain, derivative gains and tax benefits rather than recurring operations.