W&T Offshore, Inc. — Q1 2014 Form 10-Q Summary
Business Context and Reporting Period
W&T Offshore, Inc. is an independent oil and natural gas producer focused on the Gulf of Mexico and onshore Texas. The filing covers the unaudited three months ended March 31, 2014, compared primarily with the three months ended March 31, 2013. Production comprised approximately 39.7% oil and condensate, 12.0% NGLs and 48.3% natural gas on an energy-equivalent basis.
Financial Performance and Key Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $254.5 million | $259.2 million | Down 1.8% |
| Operating income | $37.2 million | $60.3 million | Down 38.3% |
| Operating margin | 14.6% | 23.3% | Down 8.7 percentage points |
| Net income | $11.2 million | $26.6 million | Down 58.0% |
| Net margin | 4.4% | 10.3% | Down 5.9 percentage points |
| Basic and diluted EPS | $0.15 | $0.35 | Down $0.20 |
| Cash flow from operations | $118.5 million | $169.8 million | Down $51.3 million |
| Capital expenditures | $95.1 million | $136.6 million | Down $41.6 million |
Oil revenue decreased 13.6% to $170.7 million because sales volumes declined 6.1% and the average realized oil price fell 8.0% to $98.56 per barrel. NGL revenue increased 9.2% to $20.0 million, while natural gas revenue increased 47.5% to $63.3 million as the realized gas price rose 48.5% to $5.02 per Mcf.
Total production declined 3.1% to 4.36 million Boe, or 48,427 Boe per day. The average realized price increased 1.3% to $58.29 per Boe, but costs increased to $48.14 per Boe from $43.47 per Boe. DD&A increased 13.3% to $123.3 million, or $28.29 per Boe, primarily due to higher estimated future development costs and additions to the full-cost pool.
At March 31, 2014, cash and cash equivalents were $20.3 million, total assets were $2.49 billion and shareholders’ equity was $547.3 million. Long-term debt was $1.19 billion, consisting of $900.0 million of 8.50% senior notes and $279.0 million drawn under the revolving credit facility. The company reported compliance with applicable debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue declined modestly, but profitability fell substantially because of lower oil prices and volumes, higher DD&A, higher general and administrative expense, and larger derivative losses.
- Derivative loss increased to $7.5 million from $3.4 million, comprising a $4.7 million realized loss and a $2.8 million unrealized loss.
- Lease operating expense decreased 6.3% to $55.6 million, while general and administrative expense increased 11.9% to $23.6 million.
- Operating cash flow declined primarily because of working-capital changes, including lower changes in joint-interest receivables and accounts payable.
- Capital spending decreased to $95.1 million, reflecting lower onshore drilling and offshore activity.
- The 2014 results include the Callon Properties acquired in late 2013; those properties contributed $8.7 million of revenue and $2.8 million of net income in Q1 2014. The Q1 2013 results did not include them.
- The company paid a $0.10 per-share dividend in Q1 2014, compared with $0.08 in Q1 2013.
Liquidity, Debt and Cash Flow
Net cash used in investing activities was $95.3 million, and net cash used in financing activities was $18.6 million. Financing cash flows included $92.0 million of revolver borrowings, $103.0 million of repayments and $7.6 million of dividends.
The revolver borrowing base was $800.0 million at March 31, 2014, with $520.6 million of availability and $0.4 million of outstanding letters of credit. Effective April 17, 2014, the borrowing base was reduced to $750.0 million and reported undrawn capacity was $455.6 million. The company stated that operating cash flow, available borrowings and other liquidity sources should fund ongoing requirements, although additional financing could be required for acquisitions and future development.
Guidance, Outlook, Risks and Unusual Items
- The 2014 capital expenditure budget is $450.0 million, excluding potential acquisitions, allocated 42% to exploration, 52% to development and 6% to other items; 68% is planned offshore and 32% onshore.
- Management intends to continue evaluating acquisitions and joint ventures and expects to fund the budget through operating cash flow, cash on hand, revolver borrowings, divestitures and, if necessary, capital markets access.
- Management expects substantial income tax deferral during the remainder of 2014. Federal tax-basis net operating loss carryforwards were $263.4 million, and alternative minimum tax credits were $12.1 million.
- Commodity prices remain the principal operating risk. Lower oil, NGL or natural gas prices could reduce revenue, liquidity, reserves and the credit facility borrowing base, and could trigger a full-cost ceiling-test write-down.
- Open oil derivative contracts covered approximately 2.8 million barrels of anticipated production for the balance of 2014, reducing some price exposure but limiting upside from favorable prices.
- The EPA issued notices concerning suspension, proposed debarment and Clean Water Act listing for the Parent Company. Existing federal leases and current drilling and production operations were not materially affected as of the filing date; the outcome of the company’s challenge was uncertain.
- BOEM challenged the Parent Company’s waiver of supplemental bonding requirements for offshore decommissioning liabilities. A stay was extended through June 15, 2014. Additional bonding generated approximately $0.9 million of annual bond fees for Energy VI, and future letters of credit could reduce borrowing availability.
- ONRR proposed a $2.3 million statutory fine related to an alleged royalty underpayment of approximately $30,000. The company is contesting the fine and had accrued no liability because no outcome within the range was considered more likely than another.
- The company was disputing approximately $46.0 million of Hurricane Ike removal-of-wreck insurance coverage. Claims under the relevant excess policies were filed after March 31, 2014.
- An erroneous third-party conversion factor understated previously reported natural gas production at the Tahoe field. The company concluded the prior-period impact was not material and recorded the adjustment in Q4 2013.
- Estimated asset retirement obligations were $354.4 million at March 31, 2014, including $68.7 million classified as current. Revisions primarily reflected higher estimates for coiled-tubing work and platform removal.
Most Important Facts for Investors to Verify
- Confirm the effect of the April 2014 borrowing-base reduction on liquidity, covenant headroom and future capital spending.
- Monitor oil, NGL and natural gas prices, derivative settlements and the percentage of 2014 production hedged.
- Assess whether production deferrals, including pipeline and platform maintenance issues, are resolved and whether planned production growth materializes.
- Evaluate the sustainability of the $450.0 million capital program against operating cash flow of $118.5 million in Q1.
- Track the EPA suspension/debarment proceedings, BOEM supplemental bonding dispute and potential letters-of-credit requirements.
- Track the ONRR fine and the Hurricane Ike insurance appeal, including potential cash costs or recoveries.
- Review future DD&A rates, reserve revisions and the risk of a full-cost ceiling-test impairment.