WTI

W&T Offshore, Inc. - 10-Q Summary (Period Ended September 30, 2008)

Business Context and Reporting Period

This filing is a Quarterly Report on Form 10-Q for W&T Offshore, Inc., an independent oil and natural gas producer focused on the Gulf of Mexico. The report covers the three and nine months ended September 30, 2008. The company operates approximately 155 producing fields in federal and state waters. Operations were significantly impacted in the third quarter by Hurricanes Ike and Gustav, which caused facility damage and production deferrals.

Key Financial Metrics

Note: Revenue increased 43.0% year-over-year, driven by a 73.5% increase in average realized oil prices and a 42.4% increase in natural gas prices, partially offset by volume declines due to hurricane disruptions.

Material Changes vs. Prior Period

• Revenue Growth: Revenues for the nine months ended September 30, 2008, rose to $1.1 billion from $774.3 million in the prior year period. Oil revenues increased by $265.5 million and natural gas revenues by $67.3 million.
• Profitability: Net income surged to $292.6 million from $94.9 million in the same period of 2007, primarily due to higher commodity prices and a derivative gain in the current period compared to a loss in the prior period.
• Production Volumes: Total sales volumes decreased 11.4% year-over-year (81.7 Bcfe vs. 92.2 Bcfe). The company estimates approximately 8 Bcfe of production was deferred during the nine months due to damage from Hurricanes Ike and Gustav.
• Costs: Lease operating expenses decreased nominally by $12.6 million year-over-year, largely due to the absence of significant uninsured hurricane remediation costs in 2008 compared to 2007 (Katrina/Rita). However, on a per-unit basis, costs increased due to lower production volumes.
• Derivatives: The company recorded a net derivative loss of $20.9 million for the nine months ended September 30, 2008, compared to a loss of $15.1 million in 2007. This included a $29.8 million realized loss on commodity settlements offset by a $10.9 million unrealized gain.

Outlook, Risks, and Management Commentary

• Production Outlook: Production averaged 120 MMcfe per day in October 2008. Management expects production to range between 140 and 170 MMcfe per day for the remainder of 2008 as facilities are restored.
• Capital Markets: Management notes significant disruptions in global capital markets but states the company has not experienced liquidity disruptions. The company holds $685.3 million in cash and has $500.0 million of undrawn capacity under its revolving credit facility, which was reaffirmed by lenders on October 24, 2008.
• Hurricane Impact: The company incurred $1.3 million in remediation costs for Hurricane Ike and $0.5 million for Hurricane Gustav as of September 30, 2008. Estimated future development costs increased by $25.8 million and asset retirement obligations by $28.0 million due to hurricane damage. The company does not carry business interruption insurance.
• Dividends: A special dividend of $20.84 million ($0.2729 per share) was declared on November 3, 2008, payable December 22, 2008.
• Risks: Key risks include volatility in oil and natural gas prices, potential impairment of oil and gas properties if prices decline, and the ability to secure funding in distressed capital markets. The company passed its cost center ceiling test for impairment as of September 30, 2008.

Investor Verification Checklist

• Hurricane Recovery: Verify the timeline for full production restoration and the final cost of remediation for Hurricanes Ike and Gustav.
• Commodity Hedging: Review the specific terms of open commodity derivative contracts (collars) and their impact on future revenue if prices decline further.
• Capital Expenditures: Confirm the company's ability to fund its revised 2008 drilling program (estimated at ~$611 million excluding acquisitions) given the projected lower cash flows in Q4.
• Debt Covenants: Monitor compliance with financial covenants under the Credit Agreement, particularly the leverage ratio and asset coverage ratio, given the volatility in asset valuations.
• Reserve Revisions: Assess the impact of hurricane damage on proved reserve estimates and the potential for future impairment charges if commodity prices remain depressed.