W&T Offshore, Inc. — Form 10-Q Summary
Business context and reporting period
W&T Offshore is an independent oil and natural gas producer operating primarily in the Gulf of Mexico. The filing covers the three months ended March 31, 2016, with comparative results for the three months ended March 31, 2015. The company held interests in approximately 54 offshore fields and approximately 850,000 gross leased acres. The Yellow Rose onshore field was sold in October 2015 for approximately $370.8 million in cash.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $77.7 million | $127.9 million | Down 39.2% |
| Operating loss | $166.6 million | $337.5 million | Improved $170.9 million |
| Net loss | $190.5 million | $255.1 million | Improved $64.6 million |
| Loss per share | $2.49 | $3.36 | Improved $0.87 |
| Operating cash flow | $29.7 million | $52.9 million | Down $23.2 million |
| Capital expenditures | $12.9 million | $82.8 million | Down $69.9 million |
| Ending cash | $370.6 million | $8.4 million | Up $362.3 million |
Revenue declines reflected lower commodity prices and lower production. Average realized prices were $26.73 per barrel for oil, $13.96 per barrel for NGLs and $2.01 per Mcf for natural gas, down 37.9%, 17.0% and 33.2%, respectively. Total production fell 10.3% to 3.942 million barrels of oil equivalent, or 43,317 Boe per day.
Operating costs and expenses were $244.3 million, down 47.5%. Lease operating expense declined 16.6% to $44.5 million, and general and administrative expense declined 20.8% to $16.4 million. DD&A declined 49.2% to $63.7 million. The company recorded a $116.6 million non-cash ceiling-test write-down, compared with $260.4 million in Q1 2015.
Total debt was $1.485 billion at March 31, 2016, consisting primarily of $900.0 million of 8.50% senior notes, a $300.0 million 9.00% term loan and $288.0 million outstanding under the revolving credit facility. Shareholders’ deficit increased to $714.5 million from $526.5 million at December 31, 2015.
Material changes versus the prior comparable period
- Commodity prices weakened materially, reducing revenue despite slightly higher oil sales volumes. NGL and natural gas volumes declined 19.2% and 18.4%, respectively.
- Total production declined 10.3%, partly due to the Yellow Rose divestiture, natural declines, pipeline outages, maintenance and operational issues.
- Cash flow was supported by $340.0 million of revolver borrowings, partially offset by $52.0 million of repayments. The company had no revolver borrowings at December 31, 2015.
- The lenders reduced the borrowing base from $350.0 million to $150.0 million in March 2016. The company was required to repay excess borrowings.
- Capital spending was sharply reduced, and the 2016 capital expenditure budget was set at $15 million, compared with $231 million incurred in 2015.
- The regular quarterly common stock dividend remained suspended.
Guidance, outlook, risks and unusual items
- Management expected another ceiling-test impairment in Q2 2016 if commodity prices did not increase substantially. A filing sensitivity analysis indicated that lower benchmark prices could have increased the Q1 impairment by approximately $106.2 million and reduced proved reserves by approximately 3.1 MMBoe.
- Management estimated $76 million of 2016 asset-retirement-obligation spending and approximately $83.8 million of ARO spending for April 2016 through March 2017. Total ARO was $359.8 million at March 31, 2016.
- After March 31, the company repaid an additional $12.0 million of revolver borrowings. Additional required payments of $64.0 million each were scheduled for May 2016 and June 2016, plus interest, to bring borrowings within the $150.0 million borrowing base. Management stated that available cash was sufficient for these payments.
- BOEM orders required approximately $260.8 million of additional supplemental bonding. The company appealed certain orders and warned that surety bonds could require significant cash collateral or escrow funding.
- Management believed liquidity was adequate to fund operations through March 31, 2017, but noted uncertainty from prolonged low commodity prices, future bonding requirements and debt-covenant compliance.
- Open 2016 derivatives covered portions of expected production, including oil collars with a $40.00 per barrel purchased put and natural gas collars with a $2.25 per MMBtu purchased put. Derivatives generated a $2.5 million gain and $4.1 million of net cash receipts in Q1 2016.
- Other contingencies included an approximately $2.3 million ONRR fine under appeal, an Apache lawsuit with estimated exposure ranging from zero to $32 million, approximately $31 million of disputed Hurricane Ike insurance reimbursement, proposed BSEE civil penalties of $7.1 million against which approximately $1.0 million was accrued, and unquantified environmental and royalty matters.
- The company was in compliance with applicable debt covenants at March 31, 2016. Reported credit-agreement ratios included a First Lien Leverage Ratio of 1.48, Current Ratio of 2.84 and Secured Debt Leverage Ratio of 3.02.
Most important facts for investors to verify
- Whether commodity prices and production trends cause additional ceiling-test impairments or proved-reserve reductions.
- Completion of required revolver repayments and the effect of future borrowing-base redeterminations on liquidity.
- Resolution of the BOEM supplemental-bonding demands and any required cash collateral.
- Compliance with credit-agreement, senior-note and term-loan covenants during continued commodity-price weakness.
- Actual cash spending for ARO, including whether the $76 million 2016 estimate changes materially.
- Outcomes and potential cash exposure from the Apache, ONRR, BSEE, environmental, royalty and insurance matters.
- Whether the $15 million capital budget is sufficient to sustain production and replace reserves.