Business Context and Reporting Period
W&T Offshore, Inc. is an independent oil and natural gas producer focused on exploration, development and acquisitions in the Gulf of Mexico. The Form 10-K covers the fiscal year ended December 31, 2020, with unaudited fourth-quarter data also presented. The company operated as a single reportable segment and held interests in 43 offshore producing fields, with approximately 42,046 Boe per day of average 2020 production.
Key Financial Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $346.6 million | $534.9 million | Down 35.2% |
| Operating income | $24.6 million | $58.6 million | Down 58.0% |
| Net income | $37.8 million | $74.1 million | Down 49.0% |
| Basic and diluted EPS | $0.26 | $0.52 | Down $0.26 |
| Cash flow from operations | $108.5 million | $232.2 million | Down 53.3% |
| Cash used in investing | $47.6 million | $313.8 million | Lower use of cash |
| Cash used in financing | $49.6 million | Cash provided of $80.7 million | Shift to cash use |
| Cash and equivalents | $43.7 million | $32.4 million | Up $11.3 million |
| Debt principal | $632.5 million | $730.0 million | Down $97.5 million |
| Asset retirement obligations | $392.7 million | $355.6 million | Up $37.1 million |
Average realized prices declined to $38.45 per barrel for oil, $11.26 per barrel for NGLs and $2.05 per Mcf for natural gas, decreases of 35.8%, 36.0% and 20.1%, respectively. Production increased approximately 3.5% to 3.8%, primarily due to a full year of Mobile Bay production.
Production costs improved: lease operating expense declined to $10.58 per Boe from $12.43 per Boe, gathering and transportation costs declined to $16.0 million from $26.0 million, and G&A declined to $41.7 million from $55.1 million. DD&A was $97.8 million, or $7.82 per Boe, compared with $129.0 million, or $10.01 per Boe, in 2019.
The company recorded a $23.8 million derivative gain, compared with a $59.9 million derivative loss in 2019, and a $47.5 million gain from repurchasing $72.5 million of Senior Second Lien Notes for $23.9 million. The reported $30.2 million income tax benefit was substantially affected by the CARES Act, tax guidance and a $32.1 million reduction in the deferred-tax valuation allowance.
Material Changes Versus the Prior Comparable Period
- Revenue fell primarily because of lower commodity prices, despite higher production. Oil revenue declined 45.9%, NGL revenue declined 14.6%, and natural gas revenue declined 6.6%.
- Operating income and net income declined materially, although lower operating expenses, derivative settlements and the debt-repurchase gain partially offset the price-related downturn.
- Operating cash flow fell by $123.7 million, reflecting lower realized prices, reduced tax refunds and working-capital effects.
- Capital investment was substantially reduced. Cash investment in oil and gas properties was $44.2 million, compared with $125.7 million in 2019; 2020 accrual-basis exploration and development expenditures were $12.9 million versus $124.8 million in 2019.
- Total proved reserves declined to 144.4 MMBoe from 157.4 MMBoe. The decrease included a 27.7 MMBoe reduction from lower commodity-price assumptions and 15.4 MMBoe of production, partly offset by 26.2 MMBoe of positive technical revisions and 3.6 MMBoe of acquisitions.
- Net capitalized oil and gas properties declined to $686.9 million from $748.8 million. No full-cost ceiling-test impairment was recorded in 2020.
- The company completed additional Mobile Bay and Magnolia interests for approximately $3.7 million in aggregate cash consideration. Mobile Bay contributed approximately 37% of 2020 production.
- Dividends remained suspended, and the company did not repurchase common stock during 2020.
Fourth-Quarter 2020 Snapshot
| Metric | Q4 2020 |
|---|---|
| Revenue | $94.7 million |
| Operating income | $0.3 million |
| Net loss | $8.9 million |
| Loss per share | $0.06 |
Fourth-quarter results included an $11.5 million derivative loss and a $6.9 million income tax benefit. The filing does not provide a clear fourth-quarter Adjusted EBITDA value.
Debt, Liquidity and Outlook
- At December 31, 2020, debt consisted of $80.0 million drawn under the revolving Credit Agreement and $552.5 million principal amount of 9.75% Senior Second Lien Notes due 2023.
- Cash was $43.7 million, and availability under the Credit Agreement was $130.6 million based on a $215.0 million borrowing base. In January 2021, the borrowing base was reduced to $190.0 million, reducing availability by $25.0 million.
- The company was in compliance with its debt covenants at year-end. The January 2021 amendment also introduced an anti-cash-hoarding prepayment requirement when cash exceeds $25.0 million, subject to adjustments.
- Management expected operating cash flow and available borrowing capacity to fund 2021 capital expenditures, asset retirement obligations and other obligations. The preliminary 2021 capital budget was $30 million to $60 million, excluding acquisitions, with planned ARO spending of $17 million to $21 million.
- Management stated that capital spending could be reduced if commodity prices weaken and increased if prices improve. No formal production or earnings guidance was provided.
Management Commentary, Risks and Unusual Items
- COVID-19, OPEC+ actions and the resulting 2020 commodity-price collapse reduced demand, pricing and cash flow. Future disruptions could constrain transportation, delay development or require production shut-ins.
- Hurricanes and tropical storms caused production downtime and $4.7 million of 2020 repair costs. Deferred production from storms, maintenance, well issues and pipeline outages totaled approximately 2.8 MMBoe.
- The company is highly concentrated in the Gulf of Mexico, creating exposure to hurricanes, offshore accidents, third-party platforms and pipelines, environmental liabilities, insurance availability and regulatory changes.
- Future Biden Administration actions regarding federal leasing, drilling permits, methane emissions, climate policy and offshore financial-assurance requirements could increase costs, delay activity or restrict existing and future operations.
- Asset retirement obligations are significant and estimates may change materially. The company had approximately $400.6 million of surety bonds outstanding, primarily for plugging and abandonment obligations, and may be required to post additional collateral.
- The ONRR royalty-deduction appeal remained pending. The current surety bond penal sum was $8.2 million. Additional royalties related to the ONRR “unbundling” initiative cannot be estimated clearly and could be material.
- A January 2021 BSEE settlement reduced proposed civil penalties totaling $7.7 million to $720,000 payable over three annual installments, plus implementation of a safety-improvement plan through 2022.
- The company received $8.4 million under the Paycheck Protection Program and recorded expense reductions of $8.4 million. SBA acceptance had not been confirmed at filing; rejection could require repayment of some or all funds.
- A $7.6 million discretionary employee bonus was approved in February 2021, payable in March and April 2021.
Important Facts for Investors to Verify
- Whether commodity prices and production volumes can support debt service and the 2021 capital and ARO budgets.
- The effect of the January 2021 borrowing-base reduction and any future lender redeterminations on liquidity.
- The maturity and refinancing risk associated with $552.5 million of Senior Second Lien Notes due in 2023.
- Potential additional BOEM financial-assurance or surety-collateral requirements.
- The outcome of the ONRR royalty appeal and “unbundling” reviews, including any additional royalty exposure.
- The accuracy and durability of the 144.4 MMBoe proved-reserve estimate, PV-10 of $740.9 million and standardized measure of $493.7 million, all of which depend on SEC pricing assumptions and reserve estimates.
- The status of PPP forgiveness, the BSEE safety-improvement obligations and the $7.6 million employee bonus.
- Exposure to Gulf of Mexico hurricanes, environmental incidents, third-party infrastructure outages and uninsured business interruption losses.