W&T OFFSHORE INC quarterly report, Q1 FY2017

W&T Offshore, Inc. — First Quarter 2017 Form 10-Q

Business Context and Reporting Period

W&T Offshore is an independent oil and natural gas producer focused primarily on exploration, development and acquisitions in the Gulf of Mexico. The company held interests in approximately 52 offshore fields and leased approximately 750,000 gross acres as of March 31, 2017. This unaudited report covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016.

Financial Performance and Position

Metric	Q1 2017	Q1 2016	Change
Revenue	$124.4 million	$77.7 million	+60.1%
Operating income (loss)	$28.2 million	$(166.6) million	Improved by $194.8 million
Net income (loss)	$24.3 million	$(190.5) million	Improved by $214.8 million
Basic and diluted EPS	$0.17	$(2.49)	Improved by $2.66
Cash flow from operations	$81.2 million	$29.7 million	+173.3%
Capital expenditures	$23.3 million	$12.9 million	+80.9%

Operating margin was approximately 22.7% in Q1 2017, versus negative 214.4% in Q1 2016. Net margin was approximately 19.5%, versus negative 245.1%.
Production declined 2.5% to 3.844 million barrels of oil equivalent, or 42,712 Boe per day. Oil represented 47.0% of production, NGLs 9.7% and natural gas 43.3% on an energy-equivalent basis.
Average realized prices increased substantially: oil rose 76.1% to $47.06 per barrel, NGLs rose 67.2% to $23.34 per barrel and natural gas rose 48.3% to $2.98 per Mcf.
Lease operating expense decreased 9.7% to $40.2 million, G&A decreased 19.3% to $13.3 million and DD&A decreased 37.3% to $40.0 million.
No ceiling-test impairment was recorded in Q1 2017, compared with a $116.6 million non-cash write-down in Q1 2016.
Cash and cash equivalents increased to $126.1 million from $70.2 million at December 31, 2016. Total assets were $854.5 million, while shareholders’ deficit was $632.8 million.
Net cash used in investing activities was $23.0 million. Financing activities used $2.3 million, primarily for interest paid on the 1.5 Lien Term Loan.

Debt and Liquidity

Long-term debt had $873.7 million of principal and a $1.011 billion carrying value, including carrying-value adjustments for future interest and PIK amounts. Current debt-related maturities were $8.3 million.
The company had no borrowings outstanding under its revolving credit facility and $0.5 million of letters of credit. Availability was $149.5 million against a $150.0 million borrowing base.
The company was in compliance with applicable credit agreement and debt covenants at March 31, 2017.
The September 2016 debt exchange reduced contractual interest payments and extended maturities on exchanged debt, but $247.7 million could become due on February 28, 2019 if specified remaining senior notes are not refinanced or otherwise addressed. Reported interest expense is materially lower than contractual interest because of the troubled-debt-restructuring accounting.
Asset retirement obligations totaled $326.8 million, including $66.2 million classified as current. Management expected approximately $78.3 million of ARO spending in 2017.

Material Changes Versus the Prior Comparable Period

Higher commodity prices drove the 60.1% revenue increase despite lower production volumes.
The company returned to profitability, principally because of stronger realized prices, lower operating and administrative costs, lower interest expense and the absence of the prior-year ceiling-test write-down.
Operating cash flow increased by $51.5 million. The Q1 2017 amount included a $30.1 million insurance reimbursement and was reduced by $14.5 million of ARO settlements.
Capital spending increased and was concentrated primarily on conventional shelf development. Two productive offshore development wells were completed in Q1 2017, compared with one productive exploration well in Q1 2016.
The company entered into commodity derivatives during Q1 2017; no open derivatives existed at December 31, 2016.

Guidance, Outlook, Risks and Unusual Items

Management established an initial 2017 capital expenditure budget of $125.0 million, excluding potential acquisitions, and expected 2017 production to be slightly higher than 2016. The budget is flexible and may change with commodity prices and operating conditions.
Management’s near-term priorities are liquidity, cost reduction, meeting obligations and investments with short payback periods. Management stated that it expects adequate liquidity to fund operations beyond May 2018, but noted that commodity prices and future bonding requirements could materially affect liquidity and debt covenant compliance.
BOEM supplemental bonding requirements remain a significant contingency. Prior demands totaled $260.8 million; related orders and implementation timelines were subject to stays, extensions, withdrawal and ongoing negotiations. Additional bonding or collateral demands could materially reduce liquidity.
Surety providers may demand additional collateral at their discretion. The company also faces substantial decommissioning and ARO obligations.
Apache litigation related to Mississippi Canyon well-abandonment costs remains unresolved. A jury found $43.2 million of damages, subject to a $17.0 million offset, and also found Apache acted in bad faith; no judgment had been entered as of the filing date.
Other contingencies include an ONRR fine with a potential resolution ranging from waiver or reduction to approximately $1.1 million plus interest, an affirmed approximately $4.7 million royalty assessment, open royalty “unbundling” reviews, and five BSEE civil penalties totaling $8.3 million, for which approximately $2.0 million was accrued.
Commodity prices remain volatile. Derivatives covered a portion of remaining 2017 production, including oil protection around $55.25 per barrel and collars with oil put and call prices of approximately $50.00 and $60.15 per barrel and natural gas put and call prices of approximately $3.07 and $3.96 per MMBtu.
Insurance coverage included $150.0 million of named-windstorm total-loss-only coverage for the Mahogany platform and $300.0 million of general and excess liability coverage. The company did not carry business-interruption insurance.

Most Important Facts for Investors to Verify

Whether commodity prices and production volumes support the $125.0 million 2017 capital program and expected production growth.
The timing and potential cash impact of BOEM supplemental bonding, surety collateral demands and ARO spending.
The company’s ability to refinance or otherwise address debt that could accelerate in February 2019, including the $247.7 million potential accelerated amount.
Future cash interest and PIK accretion, which may materially exceed reported interest expense.
Developments in the Apache lawsuit, ONRR matters, BSEE penalties and royalty “unbundling” reviews.
Liquidity sensitivity to lower oil, NGL and natural gas prices, borrowing-base redeterminations and debt covenant requirements.