WTI

W&T Offshore, Inc. 10-Q Summary

Business Context and Reporting Period

This Quarterly Report on Form 10-Q covers the period ended September 30, 2006. W&T Offshore, Inc. is an independent oil and natural gas company primarily focused on the Gulf of Mexico. The reporting period is defined by the completion of a major strategic transaction: the acquisition of substantially all of Kerr-McGee Oil & Gas Corporation's Gulf of Mexico conventional shelf properties on August 24, 2006. This acquisition added approximately 280.5 Bcfe of proved reserves and significantly expanded the Company's asset base.

Key Financial Metrics

Revenue and Profitability (Nine Months Ended Sept 30, 2006):

• Total Revenues: $536.1 million (up from $432.3 million in 2005).
• Net Income: $161.0 million (up from $138.2 million in 2005).
• Earnings Per Share (Diluted): $2.35 (up from $2.09 in 2005).
• Operating Income: $247.4 million.
• EBITDA: $449.3 million; Adjusted EBITDA: $434.1 million.

Cash Flow and Liquidity:

• Cash from Operating Activities: $351.5 million.
• Cash Used in Investing Activities: $1.46 billion (primarily the $1.1 billion Kerr-McGee acquisition).
• Cash from Financing Activities: $929.0 million (driven by debt borrowings and a $307.0 million equity offering).
• Cash and Cash Equivalents: Decreased from $187.7 million (Dec 31, 2005) to $12.1 million (Sept 30, 2006).
• Working Capital: Deficit of $420.6 million as of September 30, 2006.

Debt and Capital Structure:

• Total Long-Term Debt: $670.9 million (net of discount), consisting of Tranche A and Tranche B term loans.
• Current Maturities: $354.6 million.
• Revolving Credit Facility: $300.0 million available, with $0 outstanding.
• Shareholders' Equity: $1.01 billion.

Material Changes vs. Prior Period

The financial results for the nine months ended September 30, 2006, were materially impacted by the Kerr-McGee acquisition and favorable commodity prices.

• Revenue Growth: Oil and natural gas revenues increased $104.2 million. Oil revenue rose $100.4 million due to a 28% increase in average realized prices ($60.48/bbl vs. $47.38/bbl) and higher volumes. Natural gas revenue increased slightly due to volume gains from the acquisition, offset by lower prices.
• Expense Increases:
  • Lease Operating Expenses: Increased to $66.5 million (from $52.3 million) due to the acquisition and higher insurance premiums/repair costs from Hurricanes Katrina and Rita. Note: $53.9 million of hurricane costs were reclassified to insurance receivables.
  • Depreciation, Depletion, and Amortization (DD&A): Increased to $201.9 million (from $138.8 million) due to the larger asset base.
  • Interest Expense: Increased significantly due to new debt incurred for the acquisition, though $4.1 million was capitalized.
• Derivative Gains: The Company recorded a commodity derivative gain of $21.8 million (unrealized and realized combined) for the nine-month period, contributing to net income.

Guidance, Outlook, and Risks

Management Commentary and Outlook:

• Capital Budget: Due to exploration success, the Company increased its 2006 capital budget by $150 million to $550 million. Spending is focused on deepwater ($134.0 million), deep shelf ($61.1 million), and conventional shelf ($170.6 million).
• Dividends: A cash dividend of $0.03 per share was paid in August 2006. The credit agreement restricts annual cash dividends to a maximum of $30.0 million.
• Liquidity Strategy: Management believes cash flow from operations and the revolving credit facility are sufficient to meet future needs, despite the current working capital deficit.

Risks and Contingencies:

• Insurance Receivables: The Company has incurred approximately $74.5 million in hurricane remediation costs (Katrina and Rita) and expects total costs to be between $90 million and $100 million. As of September 30, 2006, $51.8 million in receivables related to these costs is recorded, with $17.2 million already reimbursed.
• Commodity Price Risk: Revenues are highly sensitive to oil and gas prices. The Company has hedged approximately 14 Bcfe for 2006, 18 Bcfe for 2007, and 11 Bcfe for 2008 via collars and swaps.
• Debt Covenants: The Company is subject to financial covenants including a minimum current ratio (effective Q1 2007), interest coverage, and leverage ratios. The Company was in compliance as of September 30, 2006.

Investor Verification Checklist

• Acquisition Finalization: Verify the final purchase price of the Kerr-McGee transaction, as the $1.06 billion paid is subject to post-closing adjustments.
• Insurance Recovery: Monitor the collection of the $51.8 million in hurricane-related insurance receivables and the final determination of total remediation costs.
• Debt Maturities: Note the significant current maturity of $354.6 million due within one year and the Company's ability to refinance or repay this amount.
• Derivative Impact: Assess the impact of commodity derivative contracts on future earnings, particularly if market prices exceed the hedge ceilings.
• Working Capital: Review the Company's liquidity position given the $420.6 million working capital deficit and reliance on the revolving credit facility.