WTI

W&T Offshore, Inc. 10-Q Summary

Business Context and Reporting Period

Company: W&T Offshore, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: An independent oil and natural gas producer focused on the Gulf of Mexico. The company operates approximately 82 producing fields. Operations have been significantly impacted by Hurricanes Ike and Gustav (2008), resulting in ongoing remediation costs and production shut-ins.

Key Financial Metrics

Note: All figures in millions unless otherwise noted. Nine-month net loss includes a $205.0 million non-cash ceiling test impairment recorded in Q1 2009.

Material Changes vs. Prior Period

• Revenue Decline: Revenues for the nine months ended September 30, 2009, decreased by 60.7% ($672.4 million) compared to the same period in 2008. This was driven by a 52.4% drop in average realized oil prices and a 61.0% drop in natural gas prices, alongside a 12.0% decrease in production volumes.
• Profitability Shift: The company swung from a net income of $292.6 million in the first nine months of 2008 to a net loss of $238.0 million in 2009. The primary driver was the $205.0 million ceiling test impairment recorded in Q1 2009 due to declining natural gas prices.
• Cost Structure: Lease operating expenses per Mcfe increased to $2.20 in the nine-month period (from $1.92 in 2008) due to lower production volumes and hurricane remediation costs ($19.3 million included in expenses). However, total depreciation, depletion, and amortization (DD&A) decreased significantly due to the reduced asset base from impairments.
• Liquidity: Cash and cash equivalents decreased by $250.2 million during the nine-month period, primarily due to investing activities ($263.1 million) and financing activities ($79.0 million), despite positive operating cash flow.

Guidance, Outlook, and Risks

• Capital Expenditures: Management expects 2009 capital expenditures to approximate $290 million, significantly lower than 2008 levels due to economic uncertainty and lower cash flows. The majority of the 2009 drilling program is complete.
• Production Outlook: Approximately 9 MMcfe per day remains shut-in due to hurricane damage. Management expects the majority of this production to be reestablished in the first half of 2010.
• Debt and Covenants: The borrowing base was reduced to $405.5 million in April 2009 and reaffirmed in November 2009. The company is currently in compliance with all financial covenants, including a maximum leverage ratio of 3.75 to 1 for the quarter ended September 30, 2009.
• Insurance and Hurricanes: The company faces ongoing costs related to Hurricanes Ike and Gustav. While insurance receivables of $43.5 million are recorded, there is a risk that future claims may not be fully covered or that insurance costs will rise. The company does not carry business interruption insurance.
• Commodity Price Risk: Continued weakness in natural gas prices poses a risk of further ceiling test impairments. The company has entered into commodity derivatives (collars and swaps) to hedge approximately 20 Bcfe of anticipated 2010 production.

Investor Verification Checklist

• Impairment Sensitivity: Verify the impact of current natural gas prices on the full cost ceiling test, as further declines could trigger additional non-cash impairments.
• Insurance Recovery: Monitor the status of the $43.5 million insurance receivable and the approval of remaining hurricane remediation costs by underwriters.
• Production Restart: Track the timeline for bringing the 9 MMcfe/day of shut-in production back online in 2010.
• Debt Covenants: Confirm continued compliance with the leverage ratio and borrowing base requirements, especially given the reduced borrowing base of $405.5 million.
• Cash Burn: Assess the sustainability of the dividend ($0.03/share declared) and capital expenditure plan given the reduced operating cash flow compared to 2008.