W&T Offshore, Inc. Form 10-Q Summary
Business Context and Reporting Period
W&T Offshore is an independent oil and natural gas producer focused on the Gulf of Mexico and the Permian Basin of West Texas. The filing covers the three and nine months ended September 30, 2014. Production for the nine-month period was 41.0% oil and condensate, 11.8% NGLs and 47.2% natural gas on an energy-equivalent basis.
Key Financial Metrics
| Metric | Q3 2014 | Q3 2013 | Nine Months 2014 | Nine Months 2013 |
|---|---|---|---|---|
| Revenue | $234.5 million | $244.6 million | $752.0 million | $739.2 million |
| Operating income | $21.0 million | $32.0 million | $92.6 million | $146.1 million |
| Operating margin | 8.9% | 13.1% | 12.3% | 19.8% |
| Net income | $0.7 million | $14.2 million | $21.7 million | $63.2 million |
| Net margin | 0.3% | 5.8% | 2.9% | 8.6% |
| Basic and diluted EPS | $0.01 | $0.19 | $0.28 | $0.83 |
| Operating cash flow | Not separately provided | Not separately provided | $424.9 million | $475.8 million |
- Production increased 1.7% year over year for the first nine months to 13.049 million Boe, or 47,797 Boe per day.
- Nine-month average realized oil price declined 7.0% to $97.89 per barrel; NGL pricing increased 11.9% to $37.26 per barrel and natural gas pricing increased 21.4% to $4.54 per Mcf.
- Q3 DD&A increased 23.6% to $128.7 million, and nine-month DD&A increased 21.5% to $380.2 million. DD&A per Boe rose to $29.96 in Q3 and $29.14 for the first nine months.
- Cash and cash equivalents were $17.2 million at September 30, 2014, compared with $15.8 million at December 31, 2013.
- Total long-term debt was $1.261 billion, consisting primarily of $900.0 million of 8.50% Senior Notes due 2019 and $347.0 million drawn under the revolving credit facility.
- The revolving facility had a $750.0 million borrowing base and $402.4 million of availability at September 30; the borrowing base was reaffirmed at $750.0 million on October 22, 2014. The company was in compliance with applicable debt covenants.
- Asset retirement obligations increased from $354.4 million at December 31, 2013 to $404.0 million at September 30, 2014, including $115.7 million classified as current.
Material Changes Versus the Prior Comparable Period
- Q3 revenue decreased 4.1%, while nine-month revenue increased 1.7%. Lower oil prices and reduced offshore crude-price premiums outweighed modest volume growth in Q3.
- Q3 net income declined 95.2%, and nine-month net income declined 65.7%. Operating income fell 34.4% in Q3 and 36.6% for the nine-month period.
- The results benefited from a $13.8 million derivative gain in Q3 2014 versus a $15.7 million derivative loss in Q3 2013. For the nine-month period, derivative losses were $6.8 million versus $6.2 million in 2013.
- Q3 2013 included $9.1 million of other income, primarily from an option payment; Q3 2014 included only $0.2 million.
- Nine-month operating cash flow decreased $50.9 million, primarily because 2013 included substantially larger income-tax refunds and stronger receivable collections. Cash flow before working-capital changes and asset-retirement settlements was relatively stable.
- Lease operating expense declined 3.0% for the first nine months, but increased 6.5% in Q3. The nine-month decline reflected lower workover, insurance and facility-maintenance costs.
Acquisitions, Capital Spending and Outlook
- W&T acquired a 20% non-operated interest in the Neptune field and related deepwater assets from Woodside for preliminary total consideration of $64.7 million. The assets contributed $12.5 million of Q3 revenue and $4.2 million of net income before certain corporate expenses.
- In September, W&T increased its Fairway Field and Yellowhammer plant ownership from 64.3% to 100% for preliminary consideration of $24.3 million. The incremental 2014 impact was immaterial.
- Nine-month capital expenditures and property acquisitions totaled $455.5 million, including $360.6 million of exploration and development spending.
- The revised 2014 capital expenditure budget was $635.0 million, excluding potential acquisitions. Management expected to fund the program with operating cash flow, cash on hand, revolver borrowings, potential asset sales and capital-market access if necessary.
- Management stated that recent oil-price declines had not yet changed operations or drilling plans, but plans were under review.
- The company completed its September 30 full-cost ceiling test without a required write-down. Management warned that sustained WTI and Brent prices in the high-$70s to low-$80s could result in a non-cash ceiling-test write-down in Q4 2014 and potentially additional write-downs in 2015.
Risks, Contingencies and Unusual Items
- Commodity-price weakness could reduce revenue, earnings and liquidity; impair oil and gas properties; reduce proved reserves; impair financial-ratio compliance; and reduce the borrowing base.
- Open oil derivatives covered approximately 0.6 million barrels of anticipated production for the remainder of 2014. These contracts reduce price exposure but may limit upside from higher prices.
- W&T is contesting a $2.3 million ONRR fine related to an alleged approximately $30,000 royalty underpayment. No liability was accrued because no outcome within the range was considered more likely than another.
- Following a favorable Fifth Circuit ruling concerning Hurricane Ike removal-of-wreck insurance coverage, four underwriters had not paid. W&T sued for estimated potential reimbursement of approximately $35 million, plus 18% interest, attorney fees and possible damages.
- The EPA lifted the Parent Company’s suspension and proposed debarment, subject to continued compliance with probation conditions. The Parent Company also regained eligibility for a waiver of certain BOEM supplemental bonding requirements; Energy VI remains subject to supplemental bonding.
- Asset-retirement obligations, offshore regulatory requirements, permitting delays, environmental compliance, insurance availability and decommissioning costs remain significant risks.
- A prior-period production conversion-factor error increased reported 2013 natural gas volumes but did not affect revenue or operating cash flow. The related 2013 net-income impact was deemed immaterial and recorded in Q4 2013.
Important Facts for Investors to Verify
- Whether crude prices remain low enough to trigger the anticipated Q4 2014 full-cost ceiling-test impairment.
- Future borrowing-base redeterminations, revolver availability and compliance with leverage and current-ratio covenants.
- Progress and ultimate recovery in the Hurricane Ike insurance litigation, including interest and legal costs.
- Resolution of the ONRR royalty fine and appeal concerning approximately $4.7 million of previously disallowed royalty reductions.
- Actual spending against the $635.0 million 2014 capital budget and the extent to which acquisitions increase debt.
- Trends in offshore production deferrals, realized Gulf Coast oil-price differentials, DD&A per Boe and asset-retirement obligations.
- Future dividend capacity given low reported earnings, substantial capital spending and approximately $1.26 billion of debt.