W&T OFFSHORE INC annual report, FY2011

W&T Offshore, Inc. 2011 Form 10-K Summary

Business context and reporting period

W&T Offshore is an independent oil and natural gas producer focused primarily on the Gulf of Mexico and Texas. The filing covers the fiscal year ended December 31, 2011; fourth-quarter data are presented as unaudited supplemental information. During 2011, the Company expanded its onshore operations through the Yellow Rose acquisition in the Permian Basin and continued offshore exploration, development and production activities.

Year-end proved reserves: 116.9 MMBoe, or 701.1 Bcfe, up from 80.9 MMBoe in 2010.
Reserve mix: 44% oil, 15% NGLs and 41% natural gas.
Reserve classification: 46% proved developed producing, 19% proved developed non-producing and 35% proved undeveloped.
Year-end reserve PV-10 was $3.1 billion; standardized measure of discounted future net cash flows was $2.0 billion.
Average production was 278.2 MMcfe per day, compared with 238.4 MMcfe per day in 2010.

Financial performance and key metrics

Metric	2011	2010	Change
Revenue	$971.0 million	$705.8 million	+37.6%
Operating income	$329.5 million	$166.8 million	+97.6%
Net income	$172.8 million	$117.9 million	+46.6%
Basic and diluted EPS	$2.29	$1.58	+45.0%
Cash flow from operations	$521.5 million	$464.8 million	+12.2%
Capital expenditures and acquisitions	$719.0 million	$415.7 million	+73.0%
Cash and equivalents	$4.5 million	$28.7 million	Down $24.1 million
Long-term debt	$717.0 million	$450.0 million	+59.3%
Shareholders’ equity	$544.6 million	$421.7 million	+29.1%

Operating margin was approximately 33.9%, compared with 23.6% in 2010; net margin was approximately 17.8%, compared with 16.7%.
Production volumes increased 16.7% on an equivalent basis. Oil revenue benefited from a 37.0% increase in realized price to $105.92 per barrel; NGL revenue increased due to higher prices and volumes.
Natural gas revenue increased despite a 9.5% decline in realized price to $4.12 per Mcf, because sales volumes rose 20.1%.
Lease operating expense increased to $219.2 million from $169.7 million, and production cost increased to $2.33 per Mcfe from $2.14 per Mcfe.
DD&A and asset retirement obligation accretion totaled $328.8 million, or $3.24 per Mcfe, down from $3.38 per Mcfe.
Income tax expense rose to $91.5 million from $11.9 million; the effective tax rate was 34.6% versus 9.2% in 2010.
No ceiling-test impairment was recorded in 2011 or 2010. The Company recorded a $22.7 million loss on extinguishment of debt in 2011.

Liquidity, debt and capital allocation

Operating cash flow of $521.5 million funded a substantial portion of the $719.0 million investment program, but investing cash outflows exceeded operating cash flow, contributing to the decline in cash.
The Company had a $575.0 million borrowing base under its revolving facility, $117.0 million drawn, $0.4 million of letters of credit outstanding and approximately $457.6 million of undrawn capacity at year-end.
In June 2011, W&T issued $600.0 million of 8.5% senior notes due 2019 and repurchased all $450.0 million of 8.25% senior notes due 2014.
The revolving credit facility matures in May 2015 and is secured by oil and natural gas properties. The Company was in compliance with applicable debt covenants at year-end.
2011 dividends totaled $58.8 million, including a $46.9 million special dividend. The Board declared an additional $0.08 per share dividend payable in March 2012.
Asset retirement obligations totaled $393.9 million, including $138.2 million classified as current. Contractual obligations totaled approximately $1.56 billion, including debt principal, interest, drilling commitments, leases, ARO and derivatives.

Material changes versus the prior comparable period

Revenue, operating income and net income increased substantially, driven by higher oil prices, increased production, acquisitions and the restoration of production affected by a pipeline outage.
Production rose from 87.0 Bcfe to 101.5 Bcfe. The Main Pass 108 and related field production resumed after the third-party pipeline was repaired in March 2011.
Capital spending increased materially, primarily because of the $394.4 million Yellow Rose acquisition, the $42.9 million Fairway acquisition and higher onshore development activity.
Onshore activity expanded sharply: W&T drilled 40 gross onshore wells in 2011, compared with two in 2010, and 39 were productive.
Proved reserves increased 44.5% to 116.9 MMBoe, primarily from 39.0 MMBoe acquired reserves, extensions and discoveries, and revisions.
Proved undeveloped reserves increased to 40.5 MMBoe from 15.7 MMBoe. Estimated future development costs for these reserves were $471.4 million.
Debt increased by $267.0 million, while the maturity profile was extended through the issuance of the 2019 senior notes.
General and administrative expense increased to $74.3 million from $53.3 million, reflecting incentive compensation, acquisitions, expanded operations, surety premiums and litigation costs.

Guidance, outlook, management commentary and risks

The 2012 capital budget was $425.0 million, excluding acquisitions: $209.0 million for ten offshore wells, $170.0 million for 65 onshore wells and $46.0 million for facilities, recompletions, seismic and leasehold items.
Management expected continued weakness in natural gas prices through at least 2012 because of high storage levels, shale production, mild weather and associated gas from oil drilling.
The Company intended to fund 2012 capital spending and potential acquisitions with operating cash flow, cash on hand, revolver borrowings and, if necessary, capital-market access. The budget was subject to change.
Key risks include commodity-price volatility, natural gas oversupply, reserve and impairment risk, substantial offshore operating and decommissioning costs, hurricanes, pipeline and processing dependence, drilling execution, insurance availability and regulatory delays.
Post-Deepwater Horizon permitting and safety requirements increased offshore costs and could delay drilling, production or lease retention.
The Company was subject to a federal grand jury investigation concerning alleged environmental compliance violations involving surface discharges and reporting on four offshore platforms. Management could not estimate potential exposure and stated that the matter could have a material adverse effect.
A $2.0 million liability was recorded in the fourth quarter of 2011 for environmental loss contingencies. Separately, Cameron Parish landowners alleged property contamination and sought compensatory and punitive damages; potential exposure was not estimable.
The Company was contesting a $4.7 million ONRR disallowance related to royalty relief for transportation of deepwater production.
Insurance coverage does not cover all operational and gradual-pollution risks, and the Company does not carry business interruption insurance. Hurricane remediation related to Hurricane Ike was expected to continue through 2013.
Three customers accounted for approximately 62% of 2011 sales: Shell Trading, ConocoPhillips and J.P. Morgan Ventures Energy. Management did not consider the loss of a purchaser likely to prevent sales because alternative purchasers were available.
Tracy W. Krohn controlled approximately 52.7% of voting interests, creating concentrated shareholder control and related corporate-governance risks.

Most important facts for an investor to verify

Whether 2012 operating cash flow and the $425.0 million capital budget were sufficient without materially increasing debt or accessing equity markets.
The outcome and potential financial, operational and regulatory consequences of the federal environmental investigation and related litigation.
Whether the Company converted its large proved undeveloped reserve base into production within the required five-year development period and at forecast costs.
The effect of natural gas price weakness and oil-price volatility on revenue, borrowing-base availability, liquidity and ceiling-test impairment risk.
Future asset retirement and hurricane remediation cash requirements, including the timing and collectability of insurance reimbursements.
Changes in offshore permitting, environmental, hydraulic-fracturing and emissions regulations and their effect on capital and operating costs.
Debt covenant compliance, semiannual borrowing-base redeterminations and the Company’s ability to refinance or repay the $117.0 million revolver and $600.0 million senior notes.
The filing’s reported financial statements and internal controls received unqualified opinions from Ernst & Young; investors should nevertheless review the notes on acquisitions, derivatives, ARO, contingencies and related-party transactions.