WTI

W&T Offshore, Inc. - 10-Q Summary (Period Ended Sept 30, 2010)

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for W&T Offshore, Inc., an independent oil and natural gas producer primarily operating in the Gulf of Mexico. The report covers the three and nine months ended September 30, 2010. The company is an accelerated filer incorporated in Texas.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Turnaround: The company reported a net income of $97.4 million for the nine months ended Sept 30, 2010, compared to a net loss of $251.9 million in the same period of 2009. The 2009 loss was significantly impacted by a $218.9 million ceiling test write-down of oil and natural gas properties due to lower natural gas prices at that time. No such write-down occurred in 2010.
• Revenue Growth: Total revenues increased 19.3% year-over-year. Oil revenues rose 35.4% driven by a 37.2% increase in average realized sales prices ($69.73/Bbl vs $50.82/Bbl). Natural gas revenues decreased slightly (1.8%) due to a 17.5% volume decline, partially offset by a 19.3% price increase.
• Cost Reductions: Lease operating expenses decreased 22.7% to $122.2 million, largely due to net insurance reimbursements exceeding costs related to Hurricane Ike and Gustav remediation ($11.3 million reduction in expenses).
• Acquisitions: The company acquired the Matterhorn and Virgo fields from Total E&P USA for a net payment of $116.6 million in April 2010.

Guidance, Outlook, and Risks

• Capital Expenditures: The company revised its 2010 capital expenditure budget upward to a range of $650 million to $800 million, following a subsequent acquisition of interests in five offshore fields from Shell Offshore Inc. for $395 million (closed Nov 4, 2010) and a letter of intent for a sixth field for $55 million.
• Regulatory Risks: New regulations following the Deepwater Horizon incident (NTL 2010-G05) require accelerated decommissioning of "idle iron" (wells/platforms unused for 5 years). This increased the company's estimated asset retirement obligations by $18.7 million in Q3 2010. Future costs may increase further due to higher demand for salvage contractors.
• Commodity Price Risk: While oil prices remain favorable, natural gas prices are weak ($3.85/MMBtu spot price). The company utilizes commodity derivatives (collars and swaps) to hedge price risk for 2010-2012 production.
• Insurance: The company renewed hurricane and well control insurance in June 2010 at a cost of $20.7 million annually. Policy limits are $100 million for well control and $85 million for hurricane damage, with significant retention requirements.
• Contingencies: The Bureau of Ocean Energy Management (BOEM) disallowed $4.7 million of royalty relief previously recorded. The company is contesting this decision and plans to pursue legal action if necessary.

Investor Verification Checklist

• Asset Retirement Obligations (ARO): Verify the impact of the new BOEM "idle iron" decommissioning rules on future ARO estimates and cash requirements.
• Shell Acquisition Integration: Confirm the closing status and funding sources for the $395 million Shell acquisition and the $55 million letter of intent, and their impact on the 2010 capital budget.
• Insurance Coverage: Review the specific retention amounts ($5M well control, $35M hurricane) and coverage limits relative to the company's exposure in the Gulf of Mexico.
• BOEM Royalty Dispute: Monitor the outcome of the $4.7 million royalty relief dispute with the BOEM.
• Production Volumes: Assess the impact of the Main Pass 108 pipeline outage on natural gas volumes and the expected recovery timeline.