W&T Offshore, Inc. — 2018 Q2 Form 10-Q Summary
Business context and reporting period
W&T Offshore is an independent oil and natural gas producer focused primarily on exploration, development and acquisitions in the Gulf of Mexico. The filing covers the unaudited three and six months ended June 30, 2018, compared with the corresponding 2017 periods.
As of June 30, 2018, the company held interests in approximately 48 offshore producing or producible fields and leased approximately 650,000 gross acres. Six-month production was 48.8% crude oil and condensate, 9.9% NGLs and 41.3% natural gas on an energy-equivalent basis.
Financial performance and key metrics
| Metric | Three months ended June 30, 2018 | Six months ended June 30, 2018 | Comparable-period change |
|---|---|---|---|
| Total revenue | $149.6 million | $283.8 million | +21.3% and +14.6% |
| Operating income | $48.5 million | $87.2 million | +47.4% and +42.8% |
| Net income | $36.1 million | $63.7 million | +8.3% and +10.6% |
| Basic and diluted EPS | $0.25 | $0.44 | Up from $0.23 and $0.40 |
| Operating margin | 32.4% | 30.7% | Improved from approximately 26.7% and 24.7% |
| Net margin | 24.1% | 22.5% | Improved from approximately 27.0% and 23.3% |
- Six-month oil revenue increased 25.4% to $213.9 million and NGL revenue increased 16.4% to $18.4 million. Natural gas revenue declined 17.2% to $48.8 million.
- Six-month average realized prices were $64.93 per barrel for oil, $27.57 per barrel for NGLs and $2.92 per Mcf for natural gas. Oil and NGL prices increased materially, while natural gas prices declined modestly.
- Six-month production declined 13.1% to 6.747 million Boe, or 37,275 Boe per day. Maintenance, well issues, pipeline outages and natural production declines contributed to lower volumes.
- Six-month operating cash flow was $115.2 million, compared with $65.6 million in 2017. Investing cash flow was negative $77.8 million, including $31.8 million for oil and gas properties and $16.6 million for the Heidelberg acquisition. Financing cash flow was negative $7.1 million.
- Cash and cash equivalents increased to $129.4 million from $99.1 million at December 31, 2017. Current assets were $286.6 million and current liabilities were $342.3 million.
- Debt principal totaled approximately $903.2 million. Debt carrying value was $224.7 million classified as current and $761.0 million classified as long term. Shareholders’ deficit was $507.4 million.
- The company had no revolver borrowings, $9.7 million of outstanding letters of credit and $140.3 million of available borrowing capacity under its $150.0 million borrowing base.
Material changes versus the prior comparable period
- Higher oil and NGL prices more than offset lower production volumes, increasing revenue and operating income.
- Production volumes declined across oil, NGLs and natural gas, with natural gas volumes down 15.9% for the six-month period.
- Lease operating expense increased 1.0% for the six-month period, while gathering and transportation expense declined 13.4%, DD&A declined 3.1% in absolute dollars, and general and administrative expense declined 1.6%.
- Derivative results changed from a $7.6 million gain in the first half of 2017 to a $6.2 million loss in 2018, reflecting new crude oil contracts and commodity-price movements.
- The prior-year period included a $7.8 million gain on exchange of debt and a $16.6 million income tax benefit; 2018 included neither. The company recorded $0.2 million of income tax expense for the six-month period.
- W&T formed Monza Energy LLC for a Gulf of Mexico joint drilling program covering up to 14 projects over three years. Total member commitments were $361.4 million as of June 30, 2018, and W&T’s maximum exposure for certain cost overruns cannot currently be estimated.
- W&T acquired a 9.375% non-operated interest in the Heidelberg field for a net cash purchase price of $16.6 million and recognized $3.6 million of asset retirement obligations.
- Asset retirement obligations increased to $317.2 million from $300.4 million at year-end 2017, primarily due to revisions related to sustained casing pressure and property scope changes.
Guidance, outlook, risks and unusual items
- Management forecast approximately $95 million of 2018 capital expenditures, excluding the Heidelberg acquisition and other potential acquisitions. The program includes participation in 10 wells, seven within the Monza joint drilling program.
- Management’s near-term priorities are liquidity, cost reductions, meeting obligations and investments with short payback periods. Management expects to build sufficient cash to redeem, repurchase or refinance the $189.8 million of 8.50% unsecured senior notes due June 15, 2019.
- The revolving credit facility matures November 8, 2018. If the senior notes are not extended, refinanced or otherwise addressed by February 28, 2019, the 1.5 Lien Term Loan and Third Lien PIK Toggle Notes would accelerate to that date, creating approximately $234.8 million of potential payment obligations.
- Management stated that it believes available liquidity is adequate to fund operations through August 2019, but noted substantial uncertainty relating to commodity prices, BOEM bonding requirements, debt refinancing and covenant compliance. There is no assurance that lenders will extend or replace the revolving facility.
- The company was in compliance with all debt covenants at June 30, 2018. It had also satisfied current BOEM financial-assurance obligations, although it posted an additional $10 million of bonds in April 2018.
- Commodity-price exposure remains significant. Crude oil derivatives covered portions of expected production through December 2018, including swaps, puts and collars. The contracts may reduce downside exposure but can limit gains from higher prices.
- Material contingencies include a $49.5 million escrow deposit and corresponding liability related to the Apache lawsuit; unresolved royalty disputes and appeals; five proposed BSEE civil penalties totaling $7.8 million, against which approximately $3.4 million was accrued; and potential additional royalty obligations under ONRR reviews.
- The company assumed pipeline minimum-volume commitments estimated at $19.6 million through 2028 in connection with the Heidelberg acquisition. Surety providers may also demand additional collateral, potentially affecting liquidity.
Most important facts for investors to verify
- Progress on refinancing or redeeming the senior notes due June 2019 and avoiding acceleration of the 1.5 Lien Term Loan and Third Lien PIK Toggle Notes.
- Extension or replacement of the revolving credit facility before its November 8, 2018 maturity and the effect of future borrowing-base redeterminations.
- Actual production volumes, deferred production and realized oil, NGL and natural gas prices relative to the 2018 capital program.
- Cash collections and timing of the $65.2 million of income-tax receivables, including the claims subject to Joint Committee on Taxation review.
- Changes in BOEM bonding requirements, surety collateral demands and asset retirement obligation estimates.
- Resolution and potential cash impact of the Apache lawsuit, ONRR royalty matters, RIK dispute, unbundling reviews and BSEE penalties.
- Funding requirements, drilling results and potential cost overruns associated with the Monza joint drilling program.