W&T Offshore, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2019. W&T is an independent offshore oil and natural gas producer operating primarily in the Gulf of Mexico. The interim financial statements are unaudited and prepared under U.S. GAAP.
Business Context and Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenue | $132.2 million | $153.5 million | $383.0 million | $437.3 million |
| Operating income | $35.4 million | $57.1 million | $41.8 million | $144.4 million |
| Operating margin | 26.8% | 37.2% | 10.9% | 33.0% |
| Net income | $75.9 million | $46.3 million | $64.5 million | $110.0 million |
| Net margin | 57.4% | 30.1% | 16.8% | 25.1% |
| Basic and diluted EPS | $0.53 | $0.32 | $0.45 | $0.76 |
| Net cash from operations | Not separately presented | Not separately presented | $186.6 million | $294.9 million |
Q3 net income included a $55.5 million income tax benefit, primarily from releasing part of the valuation allowance on deferred tax assets. Nine-month results included a $67.0 million tax benefit, including the valuation allowance release and reversal of an uncertain tax-position liability. Effective tax rates were therefore not meaningful.
- Production: Q3 equivalent sales increased 12.7% to 41,149 Boe per day, partly reflecting the Mobile Bay properties. Nine-month equivalent production declined 1.3% to 36,543 Boe per day.
- Realized prices: Nine-month average realized prices declined to $61.00 per oil barrel from $66.52, $18.07 per NGL barrel from $28.91, and $2.57 per Mcf of natural gas from $2.90.
- Costs: Nine-month lease operating expense increased 19.2% to $131.0 million; gathering and transportation expense increased 23.4% to $19.4 million. General and administrative expense declined 17.0% to $37.5 million.
- Derivatives: The company recorded a $5.9 million derivative gain in Q3 but a $41.2 million derivative loss for the nine-month period, compared with a $5.9 million loss in the prior-year period.
- Balance sheet: September 30 cash was $41.7 million versus $33.3 million at December 31, 2018. Total assets were $1.027 billion and shareholders’ deficit was $257.8 million.
Material Changes Versus the Prior Comparable Period
- Nine-month revenue decreased 12.4%, primarily from lower realized commodity prices and a 1.3% decline in equivalent production.
- Nine-month operating income decreased 71.0%, driven by lower revenue, higher lease operating costs and a $35.3 million year-over-year increase in derivative losses.
- Nine-month net income declined 41.3% despite the tax benefit; the Q3 comparison improved because of the $55.5 million tax benefit in 2019.
- On August 30, 2019, W&T completed the $167.6 million Mobile Bay Acquisition from ExxonMobil, funded with $150.0 million of new Credit Agreement borrowings and cash on hand. The acquisition added producing Gulf of Mexico properties and increased asset retirement obligations by $21.6 million.
- Capital investment and acquisitions materially increased investing cash outflows to $261.2 million from $45.7 million in the prior-year nine-month period.
- Long-term debt increased to $718.9 million from $633.5 million at December 31, 2018, including $105.0 million outstanding under the revolving Credit Agreement and $625.0 million principal amount of 9.75% Senior Second Lien Notes due 2023.
Liquidity, Debt and Outlook
- Credit Agreement borrowing-base availability was $137.8 million at September 30, 2019, based on a $250.0 million borrowing base, with $7.2 million of letters of credit outstanding. The facility matures October 18, 2022.
- The Senior Second Lien Notes bear interest at 9.75% and mature November 1, 2023. W&T was in compliance with applicable debt covenants at September 30, 2019.
- Management estimated 2019 capital expenditures of approximately $130 million to $150 million, excluding the Mobile Bay Acquisition, other potential acquisitions and plugging and abandonment expenditures, plus approximately $13 million for asset retirement obligations.
- Management stated that operating cash flow, cash on hand and available borrowing capacity should be sufficient to fund operations through year-end 2020 under current price and production expectations, while noting that commodity prices, production, capital spending and acquisitions could change that assessment.
Risks, Contingencies and Unusual Items
- Commodity prices materially affect revenue, cash flow and profitability. Open crude oil derivative contracts covered production through May 2020 and may limit gains from higher prices while reducing downside exposure.
- Asset retirement obligations increased to $344.5 million from $310.1 million at December 31, 2018. Actual plugging, abandonment and remediation costs may differ materially from estimates.
- W&T settled the $49.5 million court deposit related to the Apache lawsuit during Q3 after the Fifth Circuit affirmed the trial judgment. The company intends to pursue available Supreme Court review; no related balance-sheet amount remained at September 30, 2019.
- Open ONRR royalty disputes include approximately $4.7 million related to transportation deductions and $2.2 million related to royalties-in-kind. Additional exposure from ONRR’s “unbundling” initiative cannot currently be estimated.
- Nine BSEE civil penalty matters remained open, with proposed penalties totaling $7.7 million; the company had accrued approximately $3.5 million.
- W&T is obligated, subject to exceptions, to fund certain cost overruns for the Monza joint venture drilling program. Total potential exposure was not estimable at the filing date.
- Potential future collateral demands from surety providers or BOEM financial-assurance requirements could materially affect liquidity, although no additional surety demands had been made in 2019 as of the filing date.
Important Facts for Investors to Verify
- Whether Mobile Bay production, costs and reserves improve volumes and cash generation after the acquisition is fully reflected in results.
- The November 2019 borrowing-base redetermination and resulting Credit Agreement availability.
- Commodity-price sensitivity, derivative settlement results and the May 2020 expiration of open crude oil contracts.
- The sustainability of cash flow after elevated acquisition, development and asset-retirement spending.
- Outcomes of the Apache Supreme Court review, ONRR royalty proceedings, BSEE penalties and Monza cost-overrun obligations.
- Whether the deferred tax assets remain realizable and whether future tax benefits or valuation-allowance changes recur; the filing does not provide a reliable normalized tax rate.