W&T Offshore, Inc. — FY2015 Form 10-K Summary
Business context and reporting period
W&T Offshore is an independent oil and natural gas exploration, development and production company focused primarily on the Gulf of Mexico. The filing covers the fiscal year ended December 31, 2015, with audited comparisons for 2014 and 2013. The company operated as a single reporting segment and had approximately 900,000 gross offshore acres and 297 employees at year-end.
In October 2015, W&T sold substantially all of its onshore Yellow Rose field interests in the Permian Basin for approximately $372.9 million, retained a sliding-scale overriding royalty interest, and became essentially an offshore Gulf of Mexico producer.
Financial and operating metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $507.3 million | $948.7 million | Down 46.5% |
| Operating income (loss) | $(1,145.7) million | $62.1 million | Turned sharply negative |
| Net income (loss) | $(1,044.7) million | $(11.7) million | Much larger loss |
| Basic and diluted EPS | $(13.76) | $(0.16) | Declined |
| Net cash from operations | $132.6 million | $474.0 million | Down 72.0% |
| Capital expenditures | $230.2 million | $626.6 million | Down 63.3% |
| Cash and equivalents | $85.4 million | $23.7 million | Increased |
| Long-term debt | $1,196.9 million | $1,352.1 million | Decreased, primarily from revolver repayment |
| Shareholders’ equity | $(526.5) million | $509.3 million | Turned negative |
Revenue declined because realized prices fell substantially: oil to $45.05 per barrel from $90.96, NGLs to $17.25 from $34.49, and natural gas to $2.67 per Mcf from $4.35. Total production declined approximately 3% to 46,709 Boe per day. Production costs excluding DD&A and impairment declined on a per-Boe basis, but the reduction was insufficient to offset commodity-price deterioration.
The reported operating margin was approximately negative 226%, and the net margin was approximately negative 206%, primarily reflecting a $987.2 million non-cash ceiling-test impairment charge. The impairment was recorded in every quarter, including $32.4 million in the fourth quarter. Interest expense incurred increased to $104.6 million from $86.9 million.
Year-end proved reserves were 76.4 MMBoe, down from 120.0 MMBoe in 2014. Reserves were 46% oil, 9% NGLs and 45% natural gas; 90% were proved developed and 10% proved undeveloped. PV-10 was $966 million before ARO and $614 million after ARO, equal to the standardized measure. These non-GAAP reserve values are based on SEC pricing assumptions and are not current market values.
Material changes versus the prior comparable period
- Commodity-price declines drove a 46.5% revenue reduction and a substantial deterioration in earnings and operating cash flow.
- The company recorded a $987.2 million ceiling-test write-down, compared with no such charge in 2014, reducing net property and equipment to $990.0 million from $2.49 billion.
- W&T issued a $300 million 9.00% second-lien term loan in May 2015 and used the proceeds to reduce revolving debt.
- The revolving credit facility borrowing base was reduced to $350 million from $750 million at December 31, 2014. No revolver borrowings were outstanding at year-end 2015, although $0.9 million of letters of credit were outstanding.
- The regular quarterly dividend was suspended; no dividends were paid in 2015 versus $30.3 million in 2014.
- Capital spending fell to $230.2 million from $626.6 million, with most 2015 spending directed to deepwater projects.
- Proved undeveloped reserves fell to 7.4 MMBoe from 36.7 MMBoe, largely due to the Yellow Rose divestiture, completed projects and economic or timing revisions.
Guidance, outlook, risks and unusual items
Management set an initial 2016 capital expenditure budget of $15 million, excluding potential acquisitions, compared with $230.2 million incurred in 2015 and $626.6 million in 2014. Management expects 2016 production to be lower than 2015 because of downtime, pipeline maintenance and well performance, although deepwater projects completed in 2015 and the Ewing Bank 910 A-8 well are expected to support production. Planned 2016 ARO spending is approximately $84.3 million.
Management expected further ceiling-test impairment in the first quarter of 2016 if commodity prices did not recover. The filing states that the company believed it had adequate liquidity to fund operations through December 31, 2016, but cautions that prolonged low prices and future bonding requirements could materially affect liquidity.
- In February 2016, W&T borrowed $340 million under its revolving facility, leaving approximately $9.1 million of remaining availability and approximately $447 million of cash after the borrowing.
- In February and March 2016, BOEM demanded approximately $260.8 million of additional surety bonds for decommissioning obligations, due by March 29, 2016. The filing states that the company had not obtained the bonds or acceptable replacement assurances as of filing.
- If the borrowing base is reduced below outstanding borrowings and letters of credit, the excess must be repaid within 90 days in three equal monthly installments.
- Total ARO was $378.3 million at year-end, including $84.3 million expected to be spent in 2016. Actual costs and timing may differ materially.
- Key risks include further oil, NGL and gas price declines, borrowing-base reductions, inability to obtain bonding or collateral, debt covenant breaches, offshore accidents and hurricanes, regulatory delays, environmental liabilities, pipeline or platform outages, and limited access to capital markets.
- Material contingencies include an Apache lawsuit concerning plugging and abandonment costs, an insurance recovery claim of approximately $31 million plus interest and fees related to Hurricane Ike, an ONRR fine potentially approximately $1.1 million, BSEE proposed penalties with $1.0 million accrued against proposed amounts totaling $8.1 million, and an unquantified Iberville School Board environmental lawsuit.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal control over financial reporting as of December 31, 2015.
Most important facts for investors to verify
- Resolution and collateral requirements associated with the $260.8 million BOEM supplemental-bonding demand.
- The post-year-end borrowing-base redetermination and any required repayment or covenant relief.
- Actual 2016 commodity prices, production, operating cash flow and additional ceiling-test impairments.
- Liquidity after the $340 million revolver draw, including cash collateral or letters of credit required by sureties.
- Progress on ARO spending, decommissioning obligations and potential changes in regulatory cost estimates.
- Whether the $15 million capital budget can sustain production and preserve proved reserves, particularly proved undeveloped reserves.
- Resolution and potential cash exposure from the Apache, ONRR, BSEE, environmental and Hurricane Ike insurance matters.
- The effect of concentrated Gulf of Mexico operations, third-party platforms and pipelines, hurricanes, insurance limits and offshore regulatory requirements.