W&T Offshore, Inc. — 2017 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 three and six months ended June 30, 2017; financial statements are unaudited and presented in accordance with interim U.S. GAAP.
The company held working interests in approximately 50 offshore producing fields and approximately 730,000 gross leased acres. First-half production was 48.0% oil and condensate, 9.3% NGLs and 42.7% natural gas on an energy-equivalent basis.
Key financial metrics
| Metric | Three months ended June 30, 2017 | Six months ended June 30, 2017 |
|---|---|---|
| Revenue | $123.3 million | $247.7 million |
| Operating income | $32.9 million | $61.1 million |
| Operating margin | 26.7% | 24.7% |
| Net income | $33.3 million | $57.6 million |
| Net margin | 27.0% | 23.3% |
| Basic and diluted EPS | $0.23 | $0.40 |
| Net cash provided by operating activities | Not separately provided | $65.6 million |
| Capital expenditures | Not separately provided | $43.8 million |
| Cash and cash equivalents at period end | Not applicable | $72.3 million |
Six-month production was 7.765 million Boe, down 1.0% year over year, while average daily equivalent sales declined 0.4% to 42,899 Boe per day. Average realized prices increased to $45.76 per barrel for oil, $21.80 per barrel for NGLs and $2.97 per Mcf for natural gas.
At June 30, 2017, total debt principal was $873.7 million and long-term debt was recorded at $984.3 million, including carrying-value adjustments. Current debt obligations were $11.1 million. The company had no borrowings under its revolving credit facility, $0.3 million of letters of credit outstanding and approximately $149.7 million of availability. Total shareholders’ deficit was $598.0 million.
Asset retirement obligations totaled $317.9 million, including $52.4 million classified as current. Current and non-current income tax receivables totaled $81.0 million; the company received an $11.9 million tax refund in July 2017.
Material changes versus the prior comparable period
- Six-month revenue increased 39.7% from $177.4 million to $247.7 million, primarily because realized prices for oil, NGLs and natural gas improved substantially despite a 1.0% production decline.
- Operating income improved from a $293.6 million loss to $61.1 million of income. The prior-year period included a $221.2 million non-cash ceiling-test write-down; no such write-down was recorded in 2017.
- Net income improved from a $311.4 million loss to $57.6 million of income. Second-quarter net income improved from a $120.9 million loss to $33.3 million of income.
- Lease operating expense declined 11.6% to $71.7 million, and general and administrative expense declined 9.0% to $29.7 million for the first half.
- Interest expense declined 60.2% to $22.7 million, primarily following the September 2016 debt exchange and the absence of revolving-credit borrowings.
- Operating cash flow improved from an $11.3 million use of cash to $65.6 million provided. Investing cash use declined to $45.5 million from $50.4 million, while financing cash flow changed from $148.1 million provided to $18.0 million used.
- Cash declined materially from the amount otherwise available because the company deposited $49.5 million into escrow in connection with the Apache lawsuit.
Guidance, outlook, commentary and risks
- Management maintained a 2017 capital expenditure budget of $125.0 million, excluding potential acquisitions, and expected 2017 production to approximate 2016 levels, subject to natural declines, downtime and well performance.
- Management emphasized liquidity, cost reduction, required obligations and investments with short payback periods. It stated that liquidity was expected to fund operations beyond September 2018 under its going-concern assessment, but commodity prices and future bonding requirements could materially affect liquidity and covenant compliance.
- Management did not anticipate a third-quarter 2017 ceiling-test write-down based on prices, reserves and other information available at the filing date, although future write-downs remain sensitive to commodity prices, reserves and costs.
- The company had open 2017 fourth-quarter oil and natural gas derivatives. These provided downside protection but could limit upside if prices exceed the collar ceilings and could require cash payments under certain price movements.
- The debt exchange reduced reported interest expense, but contractual interest payments remain significant. Interest on certain PIK instruments may be paid in kind, increasing principal, and $239.5 million of debt could become due February 28, 2019 if specified refinancing or extension conditions are not met.
- BOEM had been pursuing financial-assurance requirements totaling $260.8 million. The company stated it was compliant, and the IBLA granted remand motions on July 31, 2017 to permit BOEM to rescind the orders; future BOEM bonding demands remain possible.
- The Apache lawsuit resulted in a May 2017 judgment requiring payment of $43.2 million plus $6.3 million of prejudgment interest, fees and costs. The company deposited $49.5 million in escrow and intends to appeal.
- Five BSEE civil penalties totaling $7.5 million remained under appeal; the company had accrued approximately $3.3 million as its best estimate of the final settlement.
- Other contingencies include an appeal involving approximately $4.7 million of additional royalties, potential additional royalties from ONRR’s unbundling initiative, and possible collateral demands from surety-bond providers.
- The company remains highly exposed to oil, NGL and natural gas prices, reserve changes, offshore operating risks, asset-retirement costs, insurance availability and borrowing-base redeterminations.
Most important facts for an investor to verify
- Whether improved commodity prices and cost reductions are sustainable and sufficient to support positive cash flow.
- The timing and funding sources for debt maturities, including the potential February 2019 acceleration and PIK interest accretion.
- Future BOEM financial-assurance requirements and any collateral demands from surety providers.
- The outcome of the Apache appeal and the recoverability of the $49.5 million escrow deposit.
- Actual 2017 production, capital spending and asset-retirement spending compared with management’s expectations.
- The company’s ability to maintain compliance with debt covenants and preserve its $149.7 million revolving-credit availability.
- Potential additional royalty, civil-penalty and environmental liabilities that are not fully quantified in the filing.