W&T Offshore Inc. — FY2014 Form 10-K Summary
Business context and reporting period
W&T Offshore is an independent oil and natural gas producer focused primarily on the Gulf of Mexico and the Permian Basin in West Texas. The filing covers the fiscal year ended December 31, 2014, with comparative results for 2013 and 2012. The company operated approximately 1.2 million gross acres, produced primarily offshore, and employed 339 people.
- 2014 production averaged 48.3 thousand Boe per day, compared with 49.3 thousand Boe per day in 2013.
- Year-end proved reserves increased to 120.0 MMBoe from 117.7 MMBoe, including 69% proved developed and 31% proved undeveloped reserves.
- Reserve mix was approximately 52% oil, 13% NGLs and 35% natural gas.
- 2014 acquisitions included additional ownership of the Fairway Field and Yellowhammer plant and the Woodside Properties.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $948.7 million | $984.1 million | Down 3.6% |
| Operating income | $62.1 million | $146.7 million | Down 57.7% |
| Operating margin | 6.5% | 14.9% | Down approximately 8.4 points |
| Net income (loss) | $(11.7) million | $51.3 million | Declined to a loss |
| Basic and diluted EPS | $(0.16) | $0.68 | Declined |
| Cash flow from operations | $511.4 million | $561.4 million | Down 8.9% |
| Capital expenditures | $626.6 million | $634.4 million | Down 1.2% |
| Cash and equivalents | $23.7 million | $15.8 million | Increased |
| Long-term debt | $1.360 billion | $1.205 billion | Increased $154.6 million |
| Asset retirement obligations | $390.6 million | $354.4 million | Increased $36.1 million |
Oil revenue declined 9.2% as the average realized oil price fell 11.2% to $90.96 per barrel, partly offset by a 2.3% increase in oil volumes. Natural gas revenue increased 15.1%, supported by a 22.5% increase in the realized gas price to $4.35 per Mcf, while gas volumes declined 6.0%. NGL revenue declined modestly.
Profitability was pressured by higher depreciation, depletion and amortization, which rose to $490.5 million from $430.6 million, and higher general and administrative expense. DD&A and accretion totaled $28.98 per Boe versus $25.10 per Boe in 2013. The company recorded a $4.0 million derivative gain in 2014 compared with an $8.5 million derivative loss in 2013, but had no open derivative positions at year-end.
Cash flow from operations exceeded capital expenditures by approximately $115 million before dividends and other financing effects. Net cash used in investing activities was $630.0 million, while financing activities provided $126.4 million, principally from net revolving-credit borrowings of $157.0 million. The company paid $30.3 million in regular dividends during 2014 and subsequently suspended the regular quarterly dividend in response to market conditions.
Material changes versus the prior comparable period
- Revenue decreased despite higher natural gas pricing, primarily because of lower oil prices and reduced production.
- Operating income fell sharply as revenue declined and DD&A increased.
- Net income shifted from a $51.3 million profit to an $11.7 million loss.
- Debt increased primarily because borrowings under the revolving credit facility rose to $447.0 million from $290.0 million.
- Borrowing-base availability was $750.0 million, with approximately $302.4 million of capacity remaining after borrowings and letters of credit.
- Proved reserves increased by 2.3 MMBoe, reflecting 9.7 MMBoe of extensions and discoveries, 6.1 MMBoe of acquisitions and 4.1 MMBoe of positive revisions, partially offset by 17.6 MMBoe of production.
- Production was affected by approximately 2.6 MMBoe of deferrals, including pipeline outages, platform maintenance and operational issues.
- Net property and equipment increased to $2.494 billion from $2.276 billion, while shareholders’ equity declined to $509.3 million from $540.6 million.
The fourth quarter was materially weaker than the first three quarters: revenue was $196.7 million, operating loss was $30.5 million, net loss was $33.4 million and diluted loss per share was $0.44, compared with fourth-quarter 2013 revenue of $244.9 million and net loss of $11.9 million.
Guidance, outlook, commentary and risks
- Management set a 2015 capital expenditure budget of approximately $200 million, excluding acquisitions, versus approximately $630 million in 2014. The budget allocated 38% to exploration, 61% to development and less than 1% to other items; 92% was directed offshore.
- The reduced budget, suspended dividend, suspended drilling and completion activities at certain locations, and cost-reduction initiatives were responses to the sharp decline in oil and gas prices.
- Management believed liquidity was adequate to fund operations through December 31, 2015 under its modeled scenarios, but warned that prolonged low prices could materially affect liquidity.
- Management expected that continued oil and gas prices near December 2014 and January 2015 levels could cause noncompliance with certain credit-agreement financial covenants during 2015. Covenant relief was expected to be discussed with lenders at the April 2015 borrowing-base redetermination, but no assurance was provided.
- The company did not record a full-cost ceiling-test impairment at December 31, 2014 using SEC-required average prices of $91.12 per barrel for oil and $4.27 per Mcf for gas. Management stated that continued low prices would likely result in a non-cash ceiling-test impairment during 2015, potentially in more than one quarter.
- PV-10 of proved reserves was $2.605 billion, PV-10 after ARO was $2.304 billion and standardized measure was $1.703 billion. These non-GAAP and reserve measures use historical SEC pricing assumptions and are not current market values.
- Material risks include commodity-price volatility, declining Gulf of Mexico production, deepwater capital intensity, reserve replacement requirements, borrowing-base reductions, covenant compliance, ARO and decommissioning costs, hurricanes, regulatory and environmental obligations, insurance limitations and third-party pipeline or platform outages.
- The company is contesting a proposed $2.3 million ONRR fine related to approximately $30,000 of alleged royalty underpayments. No liability was accrued because no outcome was considered more likely than another.
- Apache Corporation filed a lawsuit regarding plugging and abandonment costs for three deepwater wells; the company estimated potential exposure from zero to $32 million and accrued its estimated reasonable share.
- The company estimated potential insurance reimbursement of approximately $31 million, plus interest, attorneys’ fees and damages, related to Hurricane Ike removal-of-wreck claims.
- BSEE proposed civil penalties of $990,000 in February 2015 related to two 2014 incidents of noncompliance; the company is contesting the proposal.
Most important facts for an investor to verify
- Whether lenders reduced the $750 million borrowing base or granted covenant amendments after the 2015 redetermination.
- The amount and timing of any 2015 full-cost ceiling-test impairment and related reserve reductions.
- Whether operating cash flow remained sufficient to fund the $200 million capital program, debt service and required ARO or bonding commitments.
- The company’s ability to refinance or repay $447 million of revolving debt and $900 million of 8.50% senior notes due in 2019.
- The outcome of the ONRR fine, Apache litigation, BSEE penalty proposal and Hurricane Ike insurance claims.
- Actual commodity prices, production volumes, production deferrals and realized price differentials relative to the reserve assumptions used at year-end 2014.
- Changes in offshore decommissioning obligations, insurance availability and BOEM financial-assurance requirements.
- Whether the regular dividend remains suspended and whether any future distributions are permitted under the credit agreement and senior-note indenture.