Business Context and Reporting Period
Company: W&T Offshore, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: W&T is an independent oil and natural gas producer primarily operating in the Gulf of Mexico (GOM), with interests in conventional shelf, deep shelf, and deepwater areas. The company also began limited onshore operations in Louisiana and Texas in 2010. As of December 31, 2010, the company held approximately 0.9 million gross acres (0.6 million net acres), with 82% held-by-production.
Key Financial Metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Total Revenues | $705.8 million | $611.0 million |
| Net Income (Loss) | $117.9 million | ($187.9 million) |
| Earnings Per Share (Basic/Diluted) | $1.58 | ($2.51) |
| Operating Cash Flow | $464.8 million | $156.3 million |
| Capital Expenditures (Total) | $415.7 million | $276.1 million |
| Proved Reserves (Bcfe) | 485.4 | 371.0 |
| Long-Term Debt | $450.0 million | $450.0 million |
| Cash and Equivalents | $28.7 million | $38.2 million |
| Asset Retirement Obligations (ARO) | $391.3 million | $348.8 million |
Note: The 2010 Net Income includes a reversal of the valuation allowance on deferred tax assets and a special cash dividend of $49.2 million ($0.66/share).
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 15.5% to $705.8 million, driven by a 28.7% increase in average realized oil prices ($71.65/bbl vs. $55.67/bbl) and a 14.6% increase in natural gas prices ($4.55/Mcf vs. $3.97/Mcf). This offset an 8.2% decline in production volumes.
- Profitability Turnaround: The company returned to profitability ($117.9 million net income) from a significant loss in 2009 ($187.9 million). This was aided by higher commodity prices, no ceiling test impairments in 2010 (compared to $218.9 million in 2009), and a $99.8 million federal income tax refund.
- Acquisitions: W&T executed two major acquisitions in 2010, funded by cash on hand:
- Total E&P USA: Acquired Matterhorn and Virgo fields for a net payment of $115.0 million.
- Shell Offshore Inc.: Acquired Tahoe and Southeast Tahoe fields for a net payment of $121.9 million.
- Reserve Growth: Proved reserves increased 30.8% to 485.4 Bcfe, primarily due to the Total and Shell acquisitions (adding ~145.6 Bcfe combined), extensions, and discoveries.
- Production Deferral: Net production averaged 238 MMcfe/day. Approximately 4.9 Bcfe of production was deferred in 2010 due to a third-party pipeline outage at the Main Pass 108 field.
Guidance, Outlook, and Risks
- 2011 Capital Budget: The company budgeted $310 million for capital expenditures (excluding acquisitions), including $161 million to drill and evaluate 14 wells (10 exploration, 4 development). Funding is expected from internal cash flow, cash on hand, and the revolving credit facility.
- Outlook: Management anticipates continued expansion onshore and offshore. They expect to resume production at the Main Pass 108 field in the first half of 2011.
- Regulatory Risks (Deepwater Horizon): The BP Deepwater Horizon incident led to a six-month drilling moratorium and new BOEMRE regulations (NTLs). These include stricter safety measures, longer permit review times (potentially 6+ months), and accelerated decommissioning requirements for "idle iron," which increased the company's ARO estimate by $18.7 million in 2010.
- Insurance and Liability: The company faces potential increases in insurance premiums and reduced coverage availability. Legislation is proposed to increase Oil Pollution Act (OPA) financial responsibility requirements from $35 million to $300 million, which could impact the company's ability to operate without partnerships or asset sales.
- Commodity Price Risk: A 10% decline in average realized prices would decrease pre-tax income by approximately 55%. The company has hedged approximately 1.9 MMBbls of oil production for 2011 and 1.1 MMBbls for 2012 using zero-cost collars.
Investor Verification Checklist
- Reserve Quality: Verify the independent reserve report by Netherland, Sewell & Associates (NSAI) regarding the 485.4 Bcfe total proved reserves and the 19% classified as proved undeveloped.
- Debt Covenants: Confirm compliance with the Credit Agreement covenants, specifically the borrowing base redetermination (reaffirmed at $405.5 million in Nov 2010) and leverage ratios.
- ARO Estimates: Review the sensitivity of the $391.3 million Asset Retirement Obligation to regulatory changes (NTL 2010-G05) and potential cost increases for decommissioning.
- Insurance Coverage: Assess the extent of coverage for the newly acquired Shell properties (approx. 11% of PV-10), which were not covered for named windstorm damage at year-end.
- Pipeline Dependencies: Monitor the status of the Main Pass 108 pipeline outage and the company's reliance on third-party platforms for processing (approx. 3% of 2010 production).