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 the Gulf of Mexico. The filing covers the three and nine months ended September 30, 2015, with comparisons to the corresponding 2014 periods. Production for the nine months was approximately 44.7% oil and condensate, 9.6% NGLs and 45.7% natural gas on an energy-equivalent basis.
Financial Performance and Key Metrics
| Metric | Q3 2015 | Q3 2014 | Nine Months 2015 | Nine Months 2014 |
|---|---|---|---|---|
| Revenue | $126.2 million | $234.5 million | $403.2 million | $752.0 million |
| Operating income (loss) | $(468.6) million | $21.0 million | $(1,084.9) million | $92.6 million |
| Net income (loss) | $(477.6) million | $0.7 million | $(993.1) million | $21.7 million |
| Basic and diluted EPS | $(6.29) | $0.01 | $(13.08) | $0.28 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided | $134.8 million | $419.8 million |
| Capital expenditures | Not separately provided for the quarter | Not separately provided | $192.8 million | $455.5 million |
- Revenue declined 46.2% in the quarter and 46.4% year to date, primarily because realized prices fell sharply. Nine-month realized prices declined 51.2% for oil to $47.81 per barrel, 52.8% for NGLs to $17.57 per barrel and 37.9% for natural gas to $2.82 per Mcf.
- Production was relatively stable: nine-month oil-equivalent sales declined 0.9% to 12.9 million Boe, while Q3 sales increased 0.2% year over year.
- Lease operating expense decreased 24.1% year to date to $143.5 million, and G&A expense decreased 11.3% to $57.0 million. Cost reductions did not offset commodity-price declines.
- Reported operating margins were approximately negative 371% in Q3 and negative 269% for the nine months, substantially affected by impairment charges. Net margins were approximately negative 378% and negative 246%, respectively.
- The company recorded non-cash ceiling-test write-downs of $441.7 million in Q3 and $954.9 million for the nine months. No comparable write-down was recorded in 2014.
- Cash and cash equivalents were $7.5 million at September 30, 2015, down from $23.7 million at December 31, 2014. Current assets were $123.7 million versus current liabilities of $260.1 million.
- Total long-term debt was $1.473 billion, consisting primarily of $900.0 million of 8.50% senior notes, $300.0 million of 9.00% term-loan principal and $265.0 million drawn on the revolving facility.
- Shareholders’ equity declined from $509.3 million at year-end 2014 to a deficit of $475.8 million at September 30, 2015, primarily because of the year-to-date net loss.
Material Changes Versus the Prior Comparable Period
- Commodity-price deterioration drove the revenue collapse despite largely stable production volumes.
- Operating results shifted from profit to substantial loss, primarily because of lower prices and the $954.9 million ceiling-test impairment.
- Operating cash flow fell $285.0 million, or approximately 68%, year over year, to $134.8 million.
- Capital expenditures fell from $455.5 million to $192.8 million, reflecting a reduced 2015 capital program and fewer acquisition expenditures.
- Interest expense increased 23.2% year to date to $71.8 million, primarily because of the May 2015 9.00% term loan and higher revolving-facility borrowing costs.
- Regular dividends were suspended; no dividends were declared or paid in 2015 compared with $0.30 per share for the first nine months of 2014.
- The company issued a $300.0 million 9.00% term loan in May 2015 and used the proceeds primarily to repay revolving-facility borrowings.
Guidance, Outlook, Risks and Unusual Items
- Management expected another significant ceiling-test impairment in Q4 2015 if commodity prices did not increase materially. Management’s illustrative analysis indicated that applying October 1, 2015 benchmark prices could have increased the Q3 impairment by approximately $321 million.
- The 2015 capital budget was approximately $200 million, with expected spending $10 million to $20 million above budget because of prior-year project work. Approximately $29 million remained to be spent in Q4.
- Management believed liquidity was adequate to fund operations through September 30, 2016, but warned that sustained low commodity prices or a further borrowing-base reduction could materially affect liquidity, covenant compliance, reserves and capital spending.
- On October 15, 2015, the company sold its Yellow Rose field interests for approximately $376.1 million in cash plus assumption of certain asset-retirement obligations. Proceeds repaid all revolving-facility borrowings, with approximately $100 million added to cash. The company retained an overriding royalty interest.
- Effective October 30, 2015, the revolving-facility borrowing base was reduced from $500 million to $350 million. The third credit-agreement amendment eliminated the maximum leverage and minimum interest-coverage covenants, but tightened the first-lien leverage covenant to 1.50:1.00 and retained other restrictions.
- As of September 30, the company was in compliance with applicable debt covenants. Subsequent borrowing-base reductions and covenant changes remain important liquidity considerations.
- BOEM notified the company in October 2015 that approximately $358 million of supplemental financial assurance and/or bonding may be required for offshore obligations. The company submitted a counterproposal; failure to obtain required surety or letters of credit could reduce borrowing availability or threaten federal-lease operations.
- Material contingencies include an ONRR fine of approximately $2.3 million, the Apache plugging-and-abandonment lawsuit with estimated exposure ranging from zero to $32 million, royalty reviews with an unclear potential amount, and approximately $30 million of disputed insurance reimbursement claims.
- The company identified a material weakness in internal control over financial reporting related to review of non-cash investing activity in the cash-flow statement. It planned to amend its March 31 and June 30, 2015 Form 10-Q filings.
Most Important Facts for Investors to Verify
- Whether Q4 2015 and subsequent periods generated additional ceiling-test impairments and further reductions in proved reserves.
- Actual cash received from the Yellow Rose divestiture, final purchase-price adjustments and post-sale liquidity.
- Whether the $350 million borrowing base and amended covenants remain sufficient under prevailing commodity prices.
- BOEM’s response to the company’s counterproposal and the ultimate amount, form and collateral impact of required supplemental financial assurance.
- Remediation of the cash-flow reporting material weakness and the amounts reported in subsequent amended filings.
- Progress and potential financial outcomes of the ONRR, Apache, royalty, BSEE and insurance matters.
- Future commodity-price hedging volumes, settlement gains or losses and exposure to oil, NGL and natural-gas price volatility.