W&T Offshore, Inc. — Q1 2023 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 acquisition of offshore Gulf of Mexico properties. The filing covers the unaudited three months ended March 31, 2023, compared with the same period in 2022. At quarter-end, the Company held interests in 47 offshore fields and approximately 625,000 gross acres.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenue | $131.7 million | $191.0 million |
| Operating income | $10.4 million | $97.6 million |
| Net income (loss) | $26.0 million | $(2.5) million |
| Diluted EPS | $0.17 | $(0.02) |
| Net cash provided by operating activities | $23.4 million | $27.5 million |
| Capital expenditures, cash basis | $13.3 million used in investing activities | $45.0 million used |
| Ending cash and cash equivalents | $177.4 million | $219.9 million |
Operating margin was approximately 7.9%, compared with 51.1% in Q1 2022. Net margin was approximately 19.7%, compared with a negative margin in the prior-year period. The reported net income benefited substantially from a $39.2 million derivative gain, including a $39.5 million unrealized gain. Excluding derivative gains and losses, the filing does not provide a clear adjusted net income value.
Production totaled 2.924 million barrels of oil equivalent, or 32,489 Boe per day, versus 3.398 million Boe, or 37,756 Boe per day, in Q1 2022. Oil production increased modestly to 1.350 million barrels, while NGL and natural gas production declined. Realized prices before hedging were $71.85 per barrel for oil, $26.51 per barrel for NGLs and $3.23 per Mcf for natural gas.
At March 31, 2023, total debt principal was approximately $413.3 million, consisting of $138.3 million under the 7.0% Term Loan and $275.0 million of 11.75% Senior Second Lien Notes due 2026. Net carrying value of debt was $403.3 million. The Company had no borrowings outstanding under its $100 million Credit Agreement, which had $50.0 million of borrowing-base availability. Asset retirement obligations totaled $469.2 million, including $459.3 million classified as long-term.
Material changes versus the prior comparable period
- Revenue declined $59.3 million, or approximately 31%, primarily because of lower realized oil, NGL and natural gas prices and lower production volumes.
- Operating expenses increased $28.0 million to $121.4 million. Lease operating expense increased $21.8 million, primarily from acquired properties, higher labor, equipment, transportation and insurance costs, and increased Mobile Bay workovers and maintenance. General and administrative expense increased $6.1 million.
- Operating income fell $87.3 million, reflecting lower revenue and higher operating costs.
- The derivative result changed from a $80.0 million loss in Q1 2022 to a $39.2 million gain in Q1 2023, driving the improvement in pretax and net income.
- On January 27, 2023, the Company issued $275.0 million of 11.75% Senior Second Lien Notes due 2026. On February 8, 2023, it redeemed all $552.5 million principal amount of its 9.75% Senior Second Lien Notes due 2023, using $270.8 million of net note proceeds and $296.1 million of cash.
- Financing activities used $294.1 million of cash, compared with $12.9 million used in Q1 2022, principally because of the debt refinancing and redemption.
- Capital expenditures declined to $7.4 million on an accrual basis from $47.6 million, and there were no acquisitions or drilling activity during the quarter.
Outlook, management commentary, risks and unusual items
- Management stated that liquidity needs include operating and capital expenditures, debt service, acquisitions, reserve replacement and asset retirement obligations. Management believes cash on hand, Credit Agreement availability and the ATM equity program provide additional liquidity.
- The Company expects approximately 50% of 2023 income tax expense to be paid in cash. The filing provides no broader formal production or earnings guidance.
- Commodity prices remain the primary operating risk. Management cited oil and gas price volatility, OPEC Plus production decisions, the Russia-Ukraine war, economic conditions, inflation and rising interest rates.
- Derivative fair-value changes may continue to materially affect reported earnings because the Company has contracts extending through April 2028. Open contracts include natural gas swaps, calls and puts.
- The Company recognized a $2.2 million Employee Retention Credit in Q1 2023, recorded as a reduction of general and administrative expense.
- Asset retirement obligations and potential inherited decommissioning liabilities remain significant. The Company recorded a $19.2 million remaining contingency for anticipated decommissioning obligations related to previously divested properties.
- The Company is appealing an Office of Natural Resources Revenue royalty matter. The surety bond posted for the appeal was $8.9 million at March 31, 2023, and the case was awaiting a federal district court ruling.
- Management reported compliance with applicable debt covenants and stated that disclosure controls and procedures were effective as of March 31, 2023.
Important facts for investors to verify
- Whether lower commodity prices and production volumes persist and how they affect operating cash flow.
- The sustainability and cash-flow impact of the natural gas derivative portfolio, including potential future settlements and collateral requirements.
- Debt refinancing terms, the 2026 notes’ 11.75% coupon, scheduled Term Loan amortization and the January 2024 maturity of the Credit Agreement.
- Available liquidity after considering restricted cash, cash held by unrestricted subsidiaries, debt covenants and potential surety or BOEM collateral demands.
- Actual timing and cost of asset retirement and contingent decommissioning obligations, which could materially exceed current estimates.
- The outcome of the ONRR appeal and other royalty, regulatory, environmental and legal matters.