W&T Offshore, Inc. — Fiscal 2016 Form 10-K Summary
Business context and reporting period
W&T Offshore is an independent oil and natural gas producer focused on exploration, development and acquisition activities in the Gulf of Mexico. The filing covers the fiscal year ended December 31, 2016, with comparative results for 2015 and 2014. The company operates as a single segment and held interests in approximately 750,000 gross offshore acres at year-end.
At December 31, 2016, proved reserves totaled 74.0 MMBoe, comprising 44% oil, 11% NGLs and 45% natural gas. Approximately 64% were proved developed producing, 23% proved developed non-producing and 13% proved undeveloped. The company employed 302 people.
Financial and operating metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $400.0 million | $507.3 million | Down 21.1% |
| Operating income (loss) | $(330.6) million | $(1,145.7) million | Improved |
| Net income (loss) | $(249.0) million | $(1,044.7) million | Improved |
| Loss per share | $(2.60) | $(13.76) | Improved |
| Cash flow from operations | $14.2 million | $133.2 million | Down 89.4% |
| Capital expenditures | $48.6 million | $230.2 million | Down 78.9% |
| Cash and equivalents | $70.2 million | $85.4 million | Down $15.2 million |
| Total debt carrying value | $1.021 billion | $1.197 billion | Down $176.1 million |
| Shareholders’ equity (deficit) | $(659.0) million | $(526.5) million | Deficit increased |
Average daily production declined to 41,980 Boe from 46,709 Boe. Oil sales volumes declined to 7.201 million barrels, NGL volumes to 1.542 million barrels and natural gas volumes to 39.731 Bcf. Average realized prices were $37.35 per barrel for oil, $17.14 per barrel for NGLs and $2.53 per Mcf for natural gas.
Lease operating expenses declined to $152.4 million, or $9.92 per Boe, while gathering and transportation costs increased to $22.9 million. DD&A and ARO accretion totaled $211.6 million. The company recorded a $279.1 million non-cash ceiling-test write-down, compared with $987.2 million in 2015. The 2016 operating loss and net loss remained substantial despite lower impairment charges and reduced operating costs.
Asset retirement obligations were $334.4 million at year-end, including $78.3 million expected to be spent in 2017. The standardized measure of discounted future net cash flows from proved reserves was $478.3 million, compared with $613.9 million in 2015; PV-10 before ARO was $755 million.
Material changes versus the prior comparable period
- Revenue fell primarily because realized oil, NGL and natural gas prices declined and production decreased 9.9% on an equivalent basis.
- Production declined due to natural declines, the 2015 sale of the Yellow Rose field and operational issues, partly offset by contributions from the Big Bend and Dantzler deepwater fields.
- Capital spending was sharply reduced to preserve liquidity, from $230.2 million in 2015 to $48.6 million in 2016.
- In September 2016, the company exchanged approximately $710.2 million of senior notes for $301.8 million of secured notes and 60.4 million common shares, and issued a $75.0 million 1.5 Lien Term Loan. The transaction reduced principal debt but increased secured leverage and diluted shareholders.
- The debt exchange produced a reported $123.9 million gain. Under troubled-debt-restructuring accounting, contractual interest on the newly issued debt is recorded differently from ordinary interest expense, so reported interest expense is materially lower than contractual cash and PIK obligations.
- The revolving credit facility had no borrowings outstanding at year-end, but availability was approximately $149.5 million and the borrowing base had fallen to $150 million from $750 million at December 31, 2014.
- No dividends were paid in 2016 or 2015, and the dividend suspension remained in effect.
Guidance, outlook, commentary and risks
Management expects 2017 production to be slightly higher than 2016, although natural declines, unplanned downtime, well performance and completion timing could produce flat or lower production. The 2017 capital expenditure budget is approximately $125 million, excluding acquisitions, with more than half allocated to development. Planned 2017 ARO spending is approximately $78.3 million.
Management intends to operate within cash flow, preserve liquidity, meet financial obligations and pursue acquisitions selectively. Acquisitions may remain limited until commodity prices improve or financing becomes available on acceptable terms. The company had no open commodity derivative positions at December 31, 2016, although it entered into derivative contracts during the first quarter of 2017.
The most significant liquidity risk is the company’s ability to meet debt service, ARO and financial-assurance requirements in a low-price environment. The BOEM had demanded $260.8 million of additional financial assurances; the effectiveness of those orders was stayed through May 31, 2017. The BOEM subsequently extended implementation timing for certain non-sole-liability properties and withdrew its December 2016 sole-liability order, but could reissue requirements.
Debt maturities and refinancing are material. The remaining unsecured senior notes mature in June 2019. The Third Lien PIK Toggle Notes and 1.5 Lien Term Loan may accelerate to February 28, 2019 if the remaining unsecured notes are not refinanced, replaced or otherwise addressed; approximately $247.7 million could become due at that time.
Other material contingencies include an Apache lawsuit involving alleged unpaid abandonment costs, four open BSEE civil penalty matters with proposed penalties totaling $8.1 million and $1.5 million accrued, ONRR royalty disputes, an ONRR fine that could be approximately $1.1 million plus interest, and potential additional royalties under the ONRR “unbundling” initiative. The company also faces hurricane, spill, environmental, regulatory, insurance, cybersecurity, reserve-estimation and third-party infrastructure risks.
The company stated that it expected adequate liquidity to fund operations for at least 12 months from the filing date, but cautioned that commodity prices and BOEM financial-assurance actions could materially affect liquidity and operations. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts an investor should verify
- Whether the company can refinance or otherwise address the remaining 2019 unsecured notes before the February 28, 2019 acceleration trigger.
- The outcome, timing and funding requirements of BOEM financial-assurance demands, including potential surety collateral and cash requirements.
- Actual 2017 operating cash flow, production, realized prices and performance against the $125 million capital budget.
- Whether additional full-cost ceiling-test impairments or reserve reductions occur if oil, NGL or natural gas prices weaken.
- The final outcomes of the Apache litigation, ONRR royalty matters, BSEE penalties and the ONRR unbundling reviews.
- Changes in cash, borrowing-base availability, debt principal including PIK accruals, covenant compliance and liquidity after year-end.
- The adequacy and renewal cost of insurance, particularly because named-windstorm coverage was limited primarily to the Mahogany platform and the company did not carry business-interruption insurance.