W&T Offshore, Inc. Q1 2011 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2011. W&T Offshore, Inc. is an independent oil and natural gas producer primarily operating in the Gulf of Mexico. The company has recently expanded its portfolio through significant acquisitions from Total E&P USA and Shell Offshore Inc. in 2010, which contributed to production volumes in the first quarter of 2011. The company is also actively pursuing a major onshore acquisition in the West Texas Permian Basin.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Total Revenues | $210.9 million | $169.6 million |
| Net Income | $18.6 million | $42.3 million |
| Earnings Per Share (Diluted) | $0.25 | $0.57 |
| Operating Cash Flow | $72.7 million | $87.0 million |
| Capital Expenditures | $40.0 million | $38.7 million |
| Cash and Equivalents | $58.4 million | $28.7 million (Dec 31, 2010) |
| Long-Term Debt | $450.0 million | $450.0 million |
| Available Revolver Capacity | $405.1 million | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 24.3% to $210.9 million, driven by a 26.4% increase in realized oil prices and a 13.5% increase in production volumes due to 2010 acquisitions.
- Profitability Decline: Net income decreased 55.9% to $18.6 million. This decline was primarily caused by a $23.8 million derivative loss (compared to a $5.9 million gain in Q1 2010) resulting from rising oil prices that exceeded hedge ceilings, and a 74.7% increase in general and administrative expenses.
- Operating Expenses: Lease operating expenses rose 48.2% to $52.4 million, attributed to higher costs from acquired properties and hurricane remediation activities. However, insurance reimbursements provided a net credit of $1.2 million in Q1 2011.
- Production: Average daily equivalent sales increased 13.8% to 252.2 MMcfe/d. Natural gas volumes increased 19.0%, while oil volumes increased 5.9%.
Outlook, Risks, and Unusual Items
- Derivative Hedging: The company holds commodity option contracts (zero-cost collars) covering approximately 1.2 million barrels of anticipated production for the remainder of 2011 and 1.1 million barrels for 2012. The Q1 loss reflects the fair value adjustment of these instruments as oil prices rose above the hedge ceiling.
- Major Acquisition: On April 25, 2011, the company signed an agreement to acquire West Texas Permian Basin properties for $366 million. The deal includes approximately 27 million barrel equivalents of proved reserves and is expected to close in Q2 2011, funded by cash and revolver borrowings.
- Hurricane Remediation: The company continues to manage costs related to Hurricane Ike (2008). As of March 31, 2011, $3.9 million in insurance receivables were recorded, with an estimated $65.8 million in remaining asset retirement obligations related to the storm.
- Operational Disruptions: Production was impacted by a third-party pipeline outage at the Main Pass 108 field (resolved in March 2011) and a planned one-month shutdown of the Matterhorn field for repairs in Q2 2011.
- Regulatory Environment: New regulations following the Deepwater Horizon incident have increased the time and cost required to obtain drilling permits.
Investor Verification Checklist
- Verify the closing status and final purchase price of the $366 million West Texas Permian Basin acquisition.
- Monitor the impact of the Matterhorn field shutdown on Q2 2011 production volumes.
- Review the company's ability to secure a new four-year credit facility with an increased borrowing base (targeted at $525 million to $575 million).
- Assess the trajectory of natural gas prices, which declined 20.3% year-over-year, and their impact on future margins.
- Track the resolution of remaining Hurricane Ike insurance claims and associated asset retirement obligations.