WTI

Business Context and Reporting Period

Company: W&T Offshore, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2005
Business Overview: W&T Offshore is an independent oil and natural gas acquisition, exploitation, and exploration company focused primarily in the Gulf of Mexico. The company operates in conventional shelf, deep shelf, and deepwater environments. As of December 31, 2005, the company held 491.5 Bcfe of proved reserves, with a PV-10 value of approximately $2.4 billion.

Key Financial Metrics

Note: Debt outstanding at year-end was repaid in January 2006.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 15% to $585.1 million, driven primarily by a 34% increase in average realized natural gas prices ($8.27/Mcf vs. $6.18/Mcf) and a 33% increase in average realized oil prices ($48.85/Bbl vs. $36.77/Bbl).
• Production Volumes: Despite higher prices, sales volumes decreased due to production deferrals caused by Hurricanes Cindy, Dennis, Katrina, and Rita. Net production averaged 195 MMcfe/day, with approximately 48 MMcfe/day temporarily shut in during the year.
• Profitability: Net income increased 26% to $189.0 million. This was achieved despite lower volumes due to the significant rise in commodity prices and lower lease operating expenses.
• Reserves: Total proved reserves increased to 491.5 Bcfe from 467.5 Bcfe in 2004. However, 76% of total reserves were classified as undeveloped or non-producing, with 23.5 Bcfe shut-in due to hurricane damage.

Guidance, Outlook, and Risks

Recent Events and Outlook

• Kerr-McGee Acquisition: On January 23, 2006, the company entered into an agreement to acquire Kerr-McGee's Gulf of Mexico conventional shelf properties for approximately $1.3 billion in cash. The transaction is expected to close in Q2 or Q3 2006.
• 2006 Capital Budget: The company expects to spend approximately $346 million on capital projects and $54 million on major maintenance/workovers in 2006. This budget excludes costs related to the Kerr-McGee transaction.
• Production Recovery: The company expects to return to pre-Katrina production levels in the third quarter of 2006.

Risks and Contingencies

• Hurricane Damage: Estimated repair costs for facilities damaged by Hurricanes Katrina and Rita range from $60 million to $75 million. The company has incurred $11.6 million in remediation costs as of year-end and expects insurance to cover the majority of losses, subject to a $5 million deductible.
• Commodity Price Volatility: A 10% decline in realized oil and natural gas prices would have reduced 2005 income before taxes by approximately 20%.
• Reserve Replacement: Approximately 76% of proved reserves are undeveloped or non-producing. The company faces high reserve replacement needs due to the rapid depletion rates typical of Gulf of Mexico reservoirs.
• Financing: The Kerr-McGee transaction requires significant external capital. The company has received commitments for a $1.3 billion senior secured credit facility but may need to issue additional debt or equity.

Investor Verification Checklist

• Insurance Claims: Verify the status of insurance claims related to Hurricanes Katrina and Rita and the potential for coverage disputes or delays.
• Kerr-McGee Closing Conditions: Monitor regulatory approvals and the final adjustment of the $1.3 billion purchase price based on production proceeds and environmental defects.
• Debt Covenants: Review the terms of the new credit facility associated with the Kerr-McGee acquisition, specifically regarding leverage ratios and borrowing base redeterminations.
• Production Recovery Timeline: Confirm the schedule for returning shut-in wells (23.5 Bcfe) to production and the impact on 2006 cash flows.
• Reserve Estimates: Review the independent reserve report by Netherland, Sewell & Associates, Inc., particularly regarding the classification of proved undeveloped reserves and the economic assumptions used.