W&T Offshore, Inc. — 2015 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
W&T Offshore is an independent oil and natural gas producer focused primarily on the Gulf of Mexico and onshore Texas, with interests in 60 producing offshore fields and approximately 1.0 million gross offshore acres. The filing covers the three and six months ended June 30, 2015. The financial statements are unaudited and prepared under U.S. GAAP.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $149.1 million, down 43.3% | $277.0 million, down 46.5% |
| Operating income (loss) | $(278.8) million | $(616.3) million |
| Net income (loss) | $(260.4) million | $(515.5) million |
| Basic and diluted EPS | $(3.43) | $(6.79) |
| Net cash provided by operating activities | Not separately provided for the quarter | $30.1 million, versus $271.1 million |
| Capital expenditures | Not separately provided for the quarter | $151.0 million, versus $266.0 million |
- Second-quarter operating margin was approximately negative 187%; six-month operating margin was approximately negative 223%. Second-quarter net margin was approximately negative 175%; six-month net margin was approximately negative 186%.
- The results included non-cash ceiling-test write-downs of $252.8 million in the second quarter and $513.2 million for the first half, driven by lower commodity prices under full-cost accounting.
- Lease operating expense declined 26.9% in the quarter and 16.1% for the first half. DD&A declined 19.4% and 9.0%, respectively. Cost reductions reflected lower service-provider rates, reduced activity and other cost-reduction initiatives.
- Production totaled 46,497 Boe per day in the quarter and 47,661 Boe per day for the first half, down 3.7% and 1.4%, respectively. First-half production was 44.1% oil and condensate, 9.9% NGLs and 46.0% natural gas on an energy-equivalent basis.
- First-half average realized prices were $49.86 per barrel for oil, $17.94 per barrel for NGLs and $2.88 per Mcf for natural gas, down 49.8%, 54.1% and 40.2%, respectively.
- Cash and cash equivalents were $5.7 million at June 30, 2015, compared with $23.7 million at December 31, 2014. Total current assets were $124.3 million versus $182.6 million.
- Total long-term debt was $1.469 billion at June 30, 2015, compared with $1.360 billion at year-end 2014. Debt comprised $900.0 million of 8.50% Senior Notes due 2019, $300.0 million of 9.00% Term Loan due 2020 and $260.0 million drawn on the revolving facility.
- The revolving facility had a $500.0 million borrowing base and $239.4 million of availability, with $0.6 million of letters of credit outstanding.
- Shareholders’ equity declined from $509.3 million at year-end 2014 to a deficit of $0.8 million at June 30, 2015, primarily because of the first-half net loss.
Material Changes Versus the Prior Comparable Period
- Revenue fell primarily because of lower realized prices, while total production declined only modestly. Oil revenue decreased 46.8% for the first half, NGL revenue decreased 62.4% and natural gas revenue decreased 42.5%.
- The company moved from a $9.8 million second-quarter 2014 profit to a $260.4 million second-quarter 2015 loss, and from $21.0 million of first-half 2014 net income to a $515.5 million first-half 2015 net loss.
- Operating results were substantially affected by the new ceiling-test impairment; no such write-down was recorded in 2014.
- The company issued a $300.0 million 9.00% second-lien term loan in May 2015 and used the net proceeds principally to repay revolving debt. Revolver borrowings decreased from $447.0 million at year-end 2014 to $260.0 million at June 30, 2015.
- The company entered into two credit-agreement amendments that revised financial covenants, permitted additional debt, increased the collateral requirement and established an intercreditor arrangement with the term-loan lenders. The applicable borrowing-base adjustment for additional debt and higher interest margins increased financing constraints.
- The regular quarterly dividend was suspended. No dividends were declared or paid in the first half of 2015, compared with $15.1 million paid in the first half of 2014.
- Capital expenditures declined to $151.0 million from $266.0 million, and drilling activity fell to nine gross wells from 25 gross wells in the prior-year period.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Management expects an additional significant ceiling-test write-down in the third quarter of 2015 and potentially another write-down in the fourth quarter if commodity prices do not increase materially.
- The 2015 capital-expenditure budget was $200 million, excluding acquisitions, allocated approximately 38% to exploration, 61% to development and less than 1% to other items; approximately 92% was allocated offshore. The budget remained subject to change.
- Management stated that liquidity was expected to fund operations through June 30, 2016, but cautioned that prolonged low commodity prices or a significant borrowing-base reduction could adversely affect operations and liquidity.
- The company entered into commodity derivatives covering approximately 25% of projected production for the second half of 2015 and approximately 35% for 2016, as required by the credit agreement. These contracts provide downside protection but may limit gains from higher prices.
- The fall 2015 borrowing-base redetermination was a significant liquidity risk. Lower commodity prices could also impair covenant compliance, reduce proved reserves and require additional financing, asset sales, joint ventures or further credit-agreement amendments.
- W&T anticipated additional supplemental bonding requested by the Bureau of Ocean Energy Management for offshore decommissioning obligations. Total requirements could reach $250 million, although management believed the ultimate amount would be lower.
- Asset retirement obligations totaled $390.1 million, including $41.5 million classified as current. The company also had approximately $6.6 million of drilling-rig commitments expiring within one year.
- Contingencies included a proposed $2.3 million ONRR royalty-related fine, the Apache lawsuit concerning plugging and abandonment costs with estimated exposure ranging from zero to $32 million, ONRR royalty-allocation reviews with an undetermined potential exposure, and BSEE proposed civil penalties totaling $3.6 million. The company accrued less than the proposed BSEE assessments.
- The company pursued insurance recoveries related to Hurricane Ike removal-of-wreck costs and estimated additional potential reimbursement of approximately $30 million, plus possible interest, legal fees and damages.
- Newly identified risks included potential restrictions or higher costs associated with disposal of produced water because of induced-seismicity regulations in Texas, as well as the risk that required BOEM supplemental bonding could be unavailable or adversely affect offshore operations.
Most Important Facts for Investors to Verify
- Whether commodity prices and the fall 2015 borrowing-base redetermination caused additional impairments, covenant pressure or reduced liquidity.
- The company’s ability to maintain compliance with leverage, interest-coverage, secured-debt and current-ratio covenants.
- Actual cash generation relative to the $200 million 2015 capital budget and the company’s very low cash balance.
- The final amount and timing of any BOEM supplemental bonding requirements and their effect on available liquidity.
- Resolution and potential cash exposure from the ONRR fine, royalty reviews, Apache litigation and BSEE penalties.
- Collection and timing of the estimated $30 million of additional Hurricane Ike insurance recoveries.
- Whether the suspension of dividends remains in effect and whether future financing, asset sales or additional debt will be required.