W&T Offshore, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2012. The filing is an annual report; quarterly data for the fourth quarter is included but the primary financial statements cover the full year. W&T is an independent oil and natural gas producer operating primarily in the Gulf of Mexico and Texas.
Business Context
- Year-end proved reserves were 117.5 MMBoe, or 705.1 Bcfe, up from 116.9 MMBoe in 2011. Reserves were 47% oil, 13% NGLs and 40% natural gas.
- Proved reserves were 53% developed producing, 21% developed non-producing and 26% undeveloped. PV-10 was $2.8 billion; PV-10 after asset retirement obligations was $2.5 billion; standardized measure was $1.8 billion.
- Average production increased 1.3% to 280.9 MMcfe per day. Production was approximately 35% oil and condensate, 12% NGLs and 52% natural gas on an energy-equivalent basis.
- The October 2012 acquisition of Newfield Properties added approximately 7.0 MMBoe of proved reserves and 268,000 net offshore acres for an adjusted purchase price of $205.6 million.
Financial and Operating Metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue | $874.5 million | $971.0 million | Down 9.9% |
| Operating income | $169.3 million | $329.5 million | Down 48.6% |
| Net income | $72.0 million | $172.8 million | Down 58.3% |
| Basic and diluted EPS | $0.95 | $2.29 | Down 58.5% |
| Operating margin | 19.4% | 33.9% | Down 14.5 percentage points |
| Net margin | 8.2% | 17.8% | Down 9.6 percentage points |
| Cash flow from operations | $385.1 million | $521.5 million | Down 26.2% |
| Capital expenditures | $684.9 million | $719.0 million | Down 4.8% |
| Cash and equivalents | $12.2 million | $4.5 million | Increased |
| Long-term debt | $1.088 billion | $717.0 million | Increased $370.6 million |
Operating margin and net margin are calculated from reported revenue and income. Capital spending exceeded operating cash flow by approximately $299.7 million, before acquisitions, dividends and financing activities.
- Unhedged realized oil price declined 1.5% to $104.35 per barrel; NGL price declined 28.8% to $39.75 per barrel; and natural gas price declined 28.6% to $2.94 per Mcf.
- Lease operating expense increased to $232.3 million from $219.2 million, and DD&A plus ARO accretion increased to $356.2 million from $328.8 million.
- General and administrative expense increased to $82.0 million, including environmental settlements and related legal costs.
- The company recorded a $14.0 million derivative loss in 2012 versus a $1.9 million derivative gain in 2011. No ceiling-test impairment was recorded.
- Cash used in investing activities was $657.4 million. Financing activities provided $280.0 million, primarily from issuing $300.0 million of additional 8.50% Senior Notes.
Material Changes Versus Prior Period
- Revenue and profitability declined primarily because of sharply lower NGL and natural gas prices, higher operating costs, higher DD&A, and derivative losses. Production volume growth and acquisitions only partly offset pricing pressure.
- Debt increased following the issuance of additional 8.50% Senior Notes. At year-end, $900.0 million of the notes was outstanding, together with $170.0 million drawn under the revolving credit facility.
- The revolving facility had a $725.0 million borrowing base and $554.4 million of undrawn capacity, net of outstanding borrowings and letters of credit. The facility matures in May 2015; the Senior Notes mature in June 2019.
- Development activity increased materially onshore and in deepwater. The company drilled 77 gross onshore wells and five gross offshore wells in 2012, compared with 40 and eight, respectively, in 2011.
- Proved developed reserves increased to 73.9% of total reserves from 65.4%, while proved undeveloped reserves declined to 30.6 MMBoe from 40.5 MMBoe, reflecting development and reclassification activity.
- The company paid $82.8 million of dividends, including $59.0 million of special dividends, compared with $58.8 million in 2011. The board declared another regular dividend of $0.08 per share payable in March 2013.
Guidance, Outlook, Risks and Unusual Items
- Management set a 2013 capital budget of $450.0 million, excluding acquisitions, with 63% allocated to exploration and 37% to development. The budget is 63% offshore and 37% onshore and includes 11 offshore wells and 27 Yellow Rose wells.
- Management expected to fund the 2013 program through operating cash flow, cash on hand, revolver borrowings and, if necessary, capital markets access. The budget is subject to change and no acquisitions had closed as of the filing date.
- Management expected continued weakness in natural gas prices and noted potential pressure on oil premiums as Gulf Coast pipeline capacity expands. It also estimated that third-party pipeline price changes could reduce 2013 operating income by up to $10.0 million beyond the 2012 impact.
- Asset retirement obligations were $384.1 million at year-end. Regulatory interpretations and expanded decommissioning work increased the obligation estimate by $74.1 million during 2012, partly offset by work completed and other revisions.
- Hurricane Isaac, Tropical Storm Debbie and pipeline outages deferred approximately 0.8 MMBoe, or 4.8 Bcfe, of 2012 production. The company also expected additional Hurricane Ike plugging and abandonment costs.
- Environmental matters included a January 2013 guilty plea relating to 2009 Clean Water Act violations, $0.7 million of fines, $0.3 million of community service, a three-year probation period and a third-party environmental compliance program.
- Cameron Parish landowner claims resulted in $10.0 million of settlements during 2012, with $1.3 million accrued for remaining probable claims. A related qui tam action remained pending, with reasonably possible loss not estimable and no accrual recorded.
- Insurers disputed coverage for up to approximately $50.0 million of Hurricane Ike wreck-removal claims. The company had incurred $45.6 million and expected approximately $5.0 million more; coverage litigation was pending.
- Key risks include commodity-price volatility, reserve replacement, deepwater and offshore operating hazards, hurricanes, pipeline and processing dependence, regulatory and environmental liabilities, hydraulic-fracturing restrictions, insurance availability, borrowing-base reductions and covenant compliance.
Investor Verification Checklist
- Verify the sustainability of cash flow relative to the $450.0 million 2013 capital budget, debt service and required asset-retirement expenditures.
- Assess sensitivity to natural gas and NGL prices, including the potential for future full-cost ceiling-test impairments.
- Review the borrowing-base redetermination mechanics, revolver covenants and the effect of reserve or commodity-price changes on liquidity.
- Track the Hurricane Ike insurance litigation and the timing and cost of remaining plugging, abandonment and wreck-removal work.
- Monitor the pending qui tam litigation, environmental compliance probation and remaining Cameron Parish claims.
- Evaluate reserve quality, the $583.6 million estimated cost to develop proved undeveloped reserves and the company’s ability to replace annual production.
- Consider that approximately 52.6% of voting interests were controlled by Chairman and CEO Tracy W. Krohn, creating significant shareholder-control and governance concentration.