W&T OFFSHORE INC quarterly report, Q2 FY2016

W&T Offshore, Inc. Form 10-Q Summary

Business context and reporting period

W&T Offshore is an independent oil and natural gas producer focused on offshore Gulf of Mexico operations. The filing covers the three and six months ended June 30, 2016. Production was approximately 47.7% oil and condensate, 10.3% NGLs and 42.0% natural gas on an energy-equivalent basis. The company held interests in approximately 54 offshore fields and approximately 750,000 gross leased acres.

Financial performance and position

Metric	Q2 2016	Q2 2015	Six months 2016	Six months 2015
Revenue	$99.7 million	$149.1 million	$177.4 million	$277.0 million
Operating loss	$(127.0) million	$(278.8) million	$(293.6) million	$(616.3) million
Net loss	$(120.9) million	$(260.4) million	$(311.4) million	$(515.5) million
Loss per share	$(1.58)	$(3.43)	$(4.07)	$(6.79)
Operating cash flow	Not separately provided	Not separately provided	$(11.3) million	$80.9 million
Capital expenditures	Not separately provided	Not separately provided	$17.7 million	$151.0 million

Revenue declined 33.1% in the quarter and 36.0% for the first half, primarily due to lower commodity prices and lower production. Approximate operating margins were negative 127.4% in Q2 2016 and negative 165.5% for the first half; approximate net margins were negative 121.3% and negative 175.6%, respectively. These margins were heavily affected by non-cash ceiling-test impairments.

Q2 2016 production was 3.9 million Boe, down 7.8%; first-half production was 7.8 million Boe, down 9.1%.
First-half realized prices decreased to $32.80 per oil barrel, $14.85 per NGL barrel and $2.03 per Mcf of natural gas, declines of 34.2%, 17.2% and 29.5%, respectively.
Lease operating expense declined 17.6% to $81.1 million for the first half, and general and administrative expense declined 19.4% to $32.7 million.
The company recorded a $104.6 million Q2 and $221.2 million first-half non-cash ceiling-test write-down, compared with $252.8 million and $513.2 million in the respective 2015 periods.
Cash and cash equivalents were $171.8 million at June 30, 2016, compared with $85.4 million at December 31, 2015. The increase primarily reflected net financing proceeds.
Total debt was $1.345 billion, consisting principally of $900.0 million of 8.50% Senior Notes, $300.0 million of 9.00% Term Loan debt and $148.0 million outstanding under the revolving credit facility.
Total shareholders’ deficit increased to $(832.8) million from $(526.5) million at year-end 2015.
No common dividends were paid, and the dividend suspension remained in effect.

Material changes versus the prior comparable period

Commodity prices and production volumes declined, driving a $99.6 million first-half revenue reduction.
Operating and net losses improved in reported dollars largely because 2015 included larger ceiling-test impairments, although underlying cash generation deteriorated.
Operating cash flow changed from $80.9 million provided in the first half of 2015 to $11.3 million used in the first half of 2016. Management stated that cash flow before working-capital changes, ARO settlements and income-tax adjustments declined to approximately $6.5 million from $87.6 million.
Capital spending fell to $17.7 million from $151.0 million as the company curtailed drilling and development activity.
The borrowing base under the revolving facility was reduced from $350.0 million to $150.0 million in March 2016. The company had $148.0 million drawn at June 30, 2016.
The company sold its Yellow Rose onshore interests in 2015 for approximately $370.9 million in cash; the divestiture contributed to lower production and expenses in 2016.

Guidance, outlook, risks and unusual items

Management expects continued pressure from weak oil, NGL and natural gas prices and stated that it is focused on conserving capital, maintaining liquidity, reducing costs and evaluating possible divestitures. No precise full-year production or earnings guidance was provided.
The 2016 capital budget remained well below prior-year levels. The company expected approximately $76 million of ARO spending during 2016 and estimated ARO spending of $91.3 million from July 2016 through June 2017.
Management stated that it believed liquidity would be adequate to fund operations through June 30, 2017, but cautioned that prolonged low commodity prices, future bonding requirements and debt-covenant compliance could materially affect liquidity.
Management expected that another ceiling-test write-down was probable in Q3 2016 if commodity prices declined from prevailing levels.
On July 25, 2016, the company commenced an exchange offer for up to $900.0 million of existing 8.50% Senior Notes. Under the proposed terms, consideration could include up to 62.1 million shares, $202.5 million of new secured notes and $180.0 million of new unsecured notes. Completion was subject to substantial tender, shareholder, lender and other conditions.
The company also had a conditional commitment for a $75.0 million 1.5 Lien Term Loan, with proceeds intended primarily to reduce revolver borrowings. Management warned that failure to complete the restructuring and address near-term liquidity needs could lead to inability to service debt, covenant defaults or seeking relief under the U.S. Bankruptcy Code.
BOEM demanded an aggregate $260.8 million of additional security for offshore decommissioning obligations. The effectiveness of the orders was stayed through August 31, 2016 while discussions and appeals continued. New BOEM guidance effective September 12, 2016 could require additional bonds, financial assurances or collateral and could expose the company to enforcement actions, suspension of operations or lease cancellation.
Other contingencies included an Apache lawsuit with claimed exposure of up to $43.7 million plus interest and costs, an ONRR fine of approximately $1.1 million, unresolved royalty reviews, BSEE proposed civil penalties totaling $7.1 million with approximately $1.0 million accrued, and insurance recovery claims estimated at approximately $31 million plus interest and other amounts.
Open commodity derivatives covered portions of anticipated 2016 production, including oil collars with a $40.00 per barrel put price and natural gas collars with a $2.25 per MMBtu put price. Derivative losses were $4.9 million in Q2 and $2.4 million for the first half.

Investor verification checklist

Verify whether the 2016 debt exchange offer and $75.0 million 1.5 Lien Term Loan were completed and assess their effect on debt, dilution, collateral priority and liquidity.
Verify the outcome of the BOEM security orders, the new decommissioning-bonding framework and any collateral or lease-related consequences.
Assess the company’s borrowing-base availability, revolver balance, covenant compliance and debt maturities, particularly the 2019 Senior Notes and 2020 Term Loan.
Monitor commodity prices, production volumes, derivative settlements and the potential for additional ceiling-test impairments.
Evaluate whether operating cash flow can fund ARO obligations, capital spending, interest and other contractual requirements without additional financing or asset sales.
Review the status and potential financial impact of the Apache litigation, ONRR and BSEE matters, royalty reviews and insurance recovery claims.