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 primarily on exploration, development and acquisitions in the Gulf of Mexico. The report covers the three months ended March 31, 2020, with unaudited interim financial statements prepared under U.S. GAAP. The filing was delayed because COVID-19 disrupted work-from-home workflows and the quarterly review process.
The company held approximately 815,000 gross leased acres, including conventional shelf and deepwater properties. Production benefited materially from the August 2019 acquisition of the Mobile Bay Properties and the December 2019 Magnolia acquisition.
Financial and Operating Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $124.1 million | $116.1 million | 6.9% increase |
| Operating income | $71.8 million | $(31.0) million | Improved by $102.8 million |
| Net income | $66.0 million | $(47.8) million | Improved by $113.7 million |
| Basic and diluted EPS | $0.46 | $(0.34) | Improved by $0.80 |
| Cash flow from operations | $84.3 million | $84.8 million | Down $0.5 million |
| Capital investment cash flow | $(35.6) million | $(31.6) million | Higher use of cash |
| Cash at period-end | $47.6 million | $86.1 million | Period-end comparison |
Reported operating margin was approximately 57.9% and net margin approximately 53.2%, substantially aided by a $61.9 million derivative gain and an $18.5 million gain on repurchasing debt. These items are not representative of recurring production economics.
- Oil revenue declined 2.4% to $84.7 million as a 23.6% volume increase was more than offset by a 21.0% decline in realized price to $46.33 per barrel.
- NGL revenue was essentially flat at $6.5 million; volume increased 60.2%, while realized price declined 37.6% to $13.03 per barrel.
- Natural gas revenue increased 34.2% to $29.3 million as volume increased 110.0%, partly offset by a 36.3% decline in realized price to $1.91 per Mcf.
- Total production increased 62.4% to 4.873 million Boe, or 53,553 Boe per day. The production mix was 37.5% oil and condensate, 10.2% NGLs and 52.3% natural gas.
- Lease operating expenses increased 26.0% to $54.8 million, principally because of the Mobile Bay and Magnolia acquisitions. DD&A increased 15.9% to $39.1 million, while G&A declined 1.0% to $14.0 million.
- Asset retirement obligations totaled $364.1 million, including $361.3 million classified as long-term.
Liquidity, Debt and Capital Resources
- At March 31, 2020, cash and cash equivalents were $47.6 million, total assets were $1.009 billion and shareholders’ deficit was $182.3 million.
- Long-term debt had a $677.5 million principal balance and a $668.1 million carrying value, consisting of $80.0 million under the Credit Agreement and $597.5 million of 9.75% Senior Second Lien Notes due 2023.
- The company repaid $25.0 million under the Credit Agreement and spent $8.5 million to purchase $27.5 million principal amount of Senior Second Lien Notes during the quarter.
- Operating cash flow of $84.3 million funded $35.6 million of investing activities and $33.5 million of financing activities, producing a $15.1 million increase in cash during the quarter.
- At March 31, 2020, the Credit Agreement borrowing base was $250.0 million, with $80.0 million borrowed and $5.8 million of letters of credit outstanding. The filing reports availability as $164.2 million in the debt discussion and approximately $170 million in the liquidity overview.
- The company was in compliance with applicable debt covenants at March 31, 2020.
Material Changes and Subsequent Events
- COVID-19, the OPEC+ market disruption and sharply lower oil prices caused substantial commodity-price volatility and reduced industry activity. W&T shut in selected operated oil-weighted properties and received notices of shut-ins at certain non-operated properties.
- The company reduced its 2020 capital expenditure forecast to $15 million-$25 million, excluding acquisitions and plugging and abandonment expenditures, and estimated ARO spending at $2 million-$4 million.
- On June 17, 2020, the Credit Agreement borrowing base was reduced from $250.0 million to $215.0 million, the interest-rate margin increased by 25 basis points, and the collateral requirement increased from 85% to 90% of proved reserves.
- From June 30, 2020 through December 31, 2021, the leverage-ratio covenant was waived and replaced with a first-lien debt-to-EBITDAX limit of 2.00 to 1.00.
- After quarter-end, the company purchased approximately $45.1 million principal amount of Senior Second Lien Notes for approximately $15.4 million. The filing also states that total note principal reduction from December 31, 2019 through June 22, 2020 was $72.5 million, with estimated annualized interest savings of $7.1 million.
- On April 15, 2020, the company received $8.4 million under the Paycheck Protection Program. Management expected no repayment but stated that the outcome was not assured.
- Subsequent-quarter derivative contracts included natural gas collars for 2020 and 2021 and 2021 crude oil swaps at a weighted average price of $41.00 per barrel.
Outlook, Risks and Contingencies
Management stated that available cash, operating cash flow and borrowing capacity were currently expected to meet requirements, but warned that prolonged market deterioration could require additional liquidity measures. Results may be materially affected by oil, NGL and natural gas prices, production shut-ins, storage and transportation constraints, reserve-based borrowing-base reductions and the ability to access bank funding.
- The company’s derivative portfolio can reduce downside exposure but may limit gains from favorable price movements. Derivative fair values produced a significant Q1 gain that may reverse with commodity-price changes.
- W&T has substantial asset retirement obligations and may face higher costs to restart shut-in wells. Restarted wells may produce less than expected or become uneconomic, potentially reducing reserves and causing impairments.
- Open regulatory and legal matters include approximately $4.7 million related to an ONRR royalty dispute, unresolved ONRR “unbundling” reviews with an undetermined potential exposure, and nine BSEE civil penalties totaling $7.7 million. The company had accrued approximately $3.5 million for the BSEE matters.
- The company may be required to post significant surety-bond or BOEM financial-assurance collateral. No surety collateral was outstanding as of the filing date, but future demands could materially affect liquidity.
- Insurance coverage was renewed, but premiums, availability and coverage levels may deteriorate. The company does not carry business-interruption insurance.
- Revenue concentration remains significant: approximately 57% of Q1 revenue came from three major oil and gas companies.
Key Facts for Investors to Verify
- Whether the $61.9 million derivative gain and $18.5 million debt-repurchase gain should be excluded when assessing recurring earnings and cash-generation capacity.
- Actual post-quarter-end production volumes, realized commodity prices and the duration and cost of production shut-ins.
- Compliance with the revised borrowing-base terms and the 2.00-to-1.00 first-lien debt-to-EBITDAX covenant.
- Current liquidity after the borrowing-base reduction, debt repurchases, PPP proceeds and any required collateral postings.
- Whether 2020 capital spending of $15 million-$25 million and ARO spending of $2 million-$4 million remain achievable.
- Resolution and ultimate cost of ONRR royalty matters, BSEE penalties, other litigation and Monza joint-venture cost-overrun obligations.