WTI

Business Context and Reporting Period

Company: W&T Offshore, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: July 12, 2006
Event: The filing details the acquisition of substantially all of Kerr-McGee Oil & Gas Corporation's conventional shelf properties in the Gulf of Mexico. The transaction, announced on January 23, 2006, involves a base consideration of approximately $1.3 billion in cash and was expected to close in the third quarter of 2006. Upon completion, W&T Offshore projected owning approximately 800 Bcfe of proved reserves and becoming a top three gross acreage holder on the conventional shelf of the Gulf of Mexico.

Key Financial Metrics and Reserves

Acquisition Consideration: Approximately $1.3 billion in cash (base consideration).
Pro Forma Adjusted Purchase Price: $1,165.0 million (as of March 31, 2006, subject to adjustments).
Reserves (Kerr-McGee Properties as of Sept 30, 2005): 345.3 Bcfe total proved reserves (15.6 MMBbls oil, 251.7 Bcf gas).
Reserve Composition: 69% proved developed; 73% natural gas. Approximately 18.4% of reserves were shut in due to Hurricanes Katrina and Rita.
Production (Kerr-McGee Properties):

• Year ended Dec 31, 2005: 193 MMcfe per day average net production.
• Estimated June 11, 2006: 178 MMcfe per day (approx. 8 MMcfe/day shut in due to storms).

Financial Performance of Kerr-McGee Properties (Audited):

• 2005 Revenues: $562.1 million.
• 2005 Direct Operating Expenses: $95.7 million.
• 2005 Revenues in Excess of Direct Operating Expenses: $466.4 million.

Pro Forma Financials (W&T Offshore + Kerr-McGee):

• 2005 Pro Forma Net Income: $258.4 million ($3.52 basic EPS).
• Q1 2006 Pro Forma Net Income: $62.7 million ($0.84 basic EPS).
• Pro Forma Total Assets (March 31, 2006): $2.26 billion.
• Pro Forma Long-Term Debt: $339.1 million (plus $363.4 million current maturities).

Standardized Measure of Discounted Future Net Cash Flows (Kerr-McGee Properties): $1.47 billion (2005).

Material Changes and Comparisons

Revenue Growth: Kerr-McGee Properties revenues increased from $216.4 million in 2003 to $562.1 million in 2005, driven by higher commodity prices and the inclusion of Westport Properties acquired in 2004.
Production Impact: Q1 2006 production for the Kerr-McGee Properties (approx. 142 MMcfe/day) was significantly lower than Q1 2005 (approx. 243 MMcfe/day) due to the lingering effects of Hurricanes Katrina and Rita.
Capital Investment: Capital investments for the Kerr-McGee Properties were approximately $78 million in 2005, $65 million in 2004, and $70 million in 2003.
Pro Forma Impact: The acquisition significantly increases W&T Offshore's asset base and revenue stream but introduces substantial depreciation, depletion, amortization (DD&A), and interest expenses. Pro Forma DD&A for 2005 is estimated at $465.8 million, and interest expense is estimated at $52.0 million.

Guidance, Risks, and Contingencies

Transaction Status: The merger agreement is effective as of October 1, 2005, with closing expected in Q3 2006. The purchase price is subject to adjustment based on production, stored liquids, and other factors, with reconciliation expected within 120 days of closing.
Storm-Related Contingencies:

• Properties suffered insurable damages from Hurricanes Katrina and Rita in 2005.
• W&T Offshore is indemnified by Kerr-McGee for storm damages related to the properties prior to the effective date.
• As of Dec 31, 2005, $11 million in repair costs were recorded with no insurance recoveries recognized (below deductibles). Between Jan 1 and March 31, 2006, an additional $11 million in losses were recognized, offset by $5 million in estimated insurance recoveries.

Customer Concentration: Substantially all production from the Kerr-McGee Properties is sold to a single customer. However, management does not believe the loss of a single purchaser would materially affect the ability to sell production due to the commodity nature of the market. Existing sales agreements will not carry over post-closing.
Legal Proceedings: No pending or threatened claims are known that could have a material adverse effect on the financial statements presented.
Financing: The transaction is funded by a combination of a common stock offering (8.5 million shares) and borrowings under a $1.3 billion senior secured credit facility (initial borrowing of $725 million assumed in pro forma).

Investor Verification Checklist

• Transaction Closing: Verify the actual closing date and final purchase price adjustments, which may differ from the $1.165 billion pro forma estimate.
• Reserve Accuracy: Confirm the final proved reserve estimates (345 Bcfe) and the impact of the 18.4% shut-in volume due to hurricanes on future production forecasts.
• Debt Servicing: Assess the impact of the new $725 million debt load on liquidity and interest coverage ratios, noting the LIBOR-based interest rates.
• Insurance Recoveries: Monitor the final settlement of hurricane-related insurance claims, as current estimates ($5 million recovery) may change.
• Customer Contracts: Verify the terms of new sales agreements to be negotiated post-closing, given the current reliance on a single customer.
• Pro Forma Assumptions: Review the assumptions regarding DD&A and G&A expense increases, as these significantly impact pro forma net income.