Business Context and Reporting Period
W&T Offshore, Inc. is an independent oil and natural gas producer focused primarily on exploration, development and acquisition of properties in the Gulf of Mexico. The unaudited Form 10-Q covers the three and six months ended June 30, 2020, with comparisons to the same periods in 2019.
The quarter was materially affected by the COVID-19 pandemic, the oil-market supply shock and depressed commodity prices. Production benefited from the 2019 Mobile Bay and Magnolia acquisitions, but the Company shut in selected operated and non-operated properties in response to low oil prices.
Financial Performance and Position
| Metric | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 |
|---|---|---|---|---|
| Total revenue | $55.2 million | $134.7 million | $179.4 million | $250.8 million |
| Operating income (loss) | $(28.0) million | $37.4 million | $43.8 million | $6.4 million |
| Net income (loss) | $(5.9) million | $36.4 million | $60.1 million | $(11.4) million |
| Basic and diluted EPS | $(0.04) | $0.25 | $0.42 | $(0.08) |
| Net cash provided by operating activities | Not separately presented | Not separately presented | $93.5 million | $106.3 million |
Second-quarter revenue declined 59.0%, primarily because oil revenue fell 71.9% and NGL revenue fell 58.7%. Natural gas revenue increased 9.2% on higher volumes. Operating margin was approximately negative 50.8% in the quarter versus 27.7% in the prior-year quarter. The six-month operating margin was approximately 24.4% versus 2.6% in 2019, but the comparison benefited substantially from a $46.5 million derivative gain and a $47.5 million gain on debt repurchases.
- Six-month production increased 39.7% to 47,795 Boe per day, primarily from Mobile Bay and Magnolia. Production mix was 37.3% oil and condensate, 10.4% NGLs and 52.3% natural gas.
- Six-month average realized prices declined to $35.57 per barrel for oil, $9.25 per barrel for NGLs and $1.85 per Mcf for natural gas, compared with $61.96, $19.36 and $2.81, respectively, in 2019.
- Second-quarter average realized oil price was $21.67 per barrel, while NGLs were $4.67 per barrel and natural gas was $1.78 per Mcf.
- Six-month operating costs and expenses fell 44.5% to $135.6 million. Lease operating expenses were $83.1 million, DD&A was $68.6 million and general and administrative expense was $19.6 million.
- Cash flow from operations was $93.5 million. Investing cash outflows were $40.5 million, primarily for oil and gas properties and equipment; financing cash outflows were $48.9 million.
- Cash and cash equivalents were $36.5 million at June 30, 2020, compared with $32.4 million at December 31, 2019.
- Total assets were $942.7 million and shareholders’ deficit was $187.2 million at June 30, 2020.
Debt, Liquidity and Capital Allocation
- Long-term debt carrying value was $624.2 million at June 30, 2020, consisting of $80.0 million under the Credit Agreement and $544.2 million carrying value of the Senior Second Lien Notes.
- The Company had $128.9 million of availability under the Credit Agreement and $6.1 million of outstanding letters of credit. No long-term debt maturities occur until 2022.
- The Credit Agreement borrowing base was reduced from $250.0 million to $215.0 million. The June 2020 amendment increased the interest-rate margin by 25 basis points, waived the leverage-ratio covenant through December 2021 and added a first-lien debt-to-EBITDAX limit of 2.00 to 1.00 during the waiver period. The next borrowing-base redetermination was scheduled for fall 2020.
- The Company repurchased $72.5 million principal amount of 9.75% Senior Second Lien Notes for $23.9 million, recording a $47.5 million gain and reducing annualized interest expense by approximately $7.1 million.
- Management stated that cash on hand, operating cash flow and available liquidity were currently adequate, but warned that prolonged market deterioration could require additional liquidity measures.
- 2020 capital expenditures, excluding acquisitions and plugging and abandonment expenditures, were estimated at $15 million to $25 million. Asset-retirement-obligation spending was estimated at $2 million to $4 million.
Material Changes Versus the Prior Comparable Period
- Revenue decreased $79.5 million in the quarter and $71.4 million for the six months, despite higher production, because commodity prices fell sharply.
- The Company moved from $36.4 million of second-quarter net income in 2019 to a $5.9 million net loss in 2020. For the six months, it moved from an $11.4 million loss to $60.1 million of income, primarily due to derivative gains and the debt-repurchase gain.
- Oil and NGL revenue declined materially, while natural gas revenue increased because of production growth from acquired properties.
- Capital expenditures for exploration and development fell to $12.0 million for the six months from $54.0 million in 2019. Total reported investments in oil and gas property and equipment were $14.6 million versus $76.9 million.
- The Company received $8.4 million under the Paycheck Protection Program. It recognized $8.4 million of expense reductions, including $2.3 million in lease operating expense, $5.0 million in general and administrative expense and $1.1 million in interest expense. No PPP debt was recorded because management believed forgiveness was probable.
- Asset-retirement obligations increased to $374.8 million from $355.6 million at year-end 2019.
Guidance, Outlook, Risks and Unusual Items
- Management reduced capital spending and curtailed selected production in response to COVID-19, OPEC+ actions, storage constraints and low oil prices. The duration and severity of the downturn remained uncertain.
- Commodity-price exposure remains significant. Derivative instruments provided $37.6 million of net cash receipts during the first six months, but changes in fair value produced a $15.4 million loss in the second quarter and a $46.5 million gain for the six months.
- The Company’s open derivatives cover portions of future oil and gas production through 2022. These contracts may reduce downside exposure but can limit gains from favorable price movements.
- The Company has approximately $374.8 million of asset-retirement obligations, and actual plugging, abandonment and remediation costs may differ materially from estimates.
- W&T remains subject to potential additional royalty liabilities under ONRR’s unbundling initiative; the filing states that the possible amount cannot currently be estimated.
- Nine BSEE civil penalties remained open, with proposed penalties totaling $7.7 million. The Company had accrued approximately $3.5 million.
- A separate ONRR royalty appeal involves approximately $4.7 million of additional royalties. The Company filed a motion for summary judgment in June 2020, with the government’s response scheduled for August 2020.
- W&T disclosed potential exposure to future surety-bond collateral demands and BOEM financial-assurance requirements. It stated that no surety-bond collateral was outstanding as of the filing date.
- Credit and counterparty concentration is significant: approximately 54% of six-month revenue came from three major oil and gas companies, and receivables are concentrated among a limited number of counterparties.
Important Facts for Investors to Verify
- Whether oil, NGL and natural gas prices recover sufficiently to support positive operating cash flow without relying heavily on derivative settlements or working-capital releases.
- The fall 2020 Credit Agreement borrowing-base redetermination and continued compliance with the revised financial covenants.
- Whether the $8.4 million PPP loan is forgiven or must be repaid through April 2025 at 1% interest.
- The ultimate resolution and cash impact of the ONRR royalty matters, BSEE penalties and other legal contingencies.
- The timing, cost and production impact of returning shut-in wells to service, including possible reserve revisions or impairments.
- The Company’s ability to fund approximately $374.8 million of asset-retirement obligations and any future surety or BOEM collateral requirements.
- The extent to which reported six-month profitability was driven by nonrecurring derivative gains, debt-repurchase gains, tax benefits and PPP expense credits rather than recurring operations.