W&T Offshore, Inc. — 2023 Q2 Form 10-Q Summary
Business Context and Reporting Period
W&T Offshore is an independent oil and natural gas producer focused primarily on exploration, development and acquisition activities in the Gulf of Mexico. The filing covers the three and six months ended June 30, 2023, with comparative periods ended June 30, 2022. The financial statements are unaudited and prepared under U.S. GAAP.
At June 30, 2023, the company held interests in 46 producing offshore fields and approximately 578,000 gross leased acres. Production was affected by third-party pipeline maintenance, field and well maintenance, and downtime at non-operated fields.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 |
|---|---|---|---|---|
| Total revenue | $126.2 million | $273.8 million | $257.9 million | $464.8 million |
| Operating income | $0.1 million | $162.3 million | $10.4 million | $260.0 million |
| Operating margin | Approximately 0.1% | Approximately 59.3% | Approximately 4.0% | Approximately 55.9% |
| Net income (loss) | $(12.1) million | $123.4 million | $13.9 million | $121.0 million |
| Net margin | Approximately (9.6)% | Approximately 45.1% | Approximately 5.4% | Approximately 26.0% |
| Net cash from operating activities | Not separately provided | Not separately provided | $49.6 million | $237.8 million |
| Capital expenditures on oil and gas properties | Not separately provided | Not separately provided | $23.0 million cash investment; $23.0 million accrual-basis property investment | $25.5 million cash investment; $73.1 million accrual-basis property investment |
Second-quarter revenue declined 54% year over year. Oil revenue was $90.0 million, NGL revenue was $10.4 million, natural gas revenue was $23.4 million and other revenue was $2.4 million. The six-month revenue decline was driven primarily by lower realized commodity prices and lower production volumes.
- Second-quarter production was 3.368 million barrels of oil equivalent, or 37,011 Boe per day, versus 3.859 million Boe, or 42,407 Boe per day, in the prior-year quarter.
- Six-month production was 6.292 million Boe, or 34,762 Boe per day, versus 7.257 million Boe, or 40,094 Boe per day.
- Second-quarter realized prices before derivative settlements were $71.76 per barrel for oil, $23.44 per barrel for NGLs and $2.34 per Mcf for natural gas.
- Six-month realized prices before derivative settlements were $71.81 per barrel for oil, $24.63 per barrel for NGLs and $2.73 per Mcf for natural gas.
- Second-quarter operating expenses increased to $126.1 million from $111.5 million, primarily because lease operating expenses increased $13.0 million.
- Six-month operating expenses increased to $247.5 million from $204.8 million. Lease operating expense increased $34.8 million, while general and administrative expense increased $8.6 million.
Cash Flow, Debt and Liquidity
For the six months ended June 30, 2023, operating cash flow was $49.6 million, investing cash outflow was $34.5 million and financing cash outflow was $304.8 million. Cash and cash equivalents decreased by $289.7 million to $171.6 million at June 30, 2023; cash, cash equivalents and restricted cash totaled $176.0 million.
- Cash used in financing included the $552.5 million redemption of the 9.75% Senior Second Lien Notes, partially offset by $270.8 million of net proceeds from issuing new notes.
- At June 30, 2023, principal debt consisted primarily of $275.0 million of 11.75% Senior Second Lien Notes due 2026, $128.7 million under the 7.0% Term Loan due 2028 and $11.6 million under the aircraft-related TVPX Loan.
- Debt carried at net book value totaled $403.6 million, including $373.0 million of long-term debt and $30.6 million current debt.
- The company had no borrowings outstanding under its $100 million Credit Agreement, which had a $50.0 million borrowing base and $50.0 million of stated availability at June 30, 2023.
- Management reported compliance with all applicable Credit Agreement and indenture covenants.
- The company also reported approximately $83.0 million of remaining capacity under its at-the-market equity offering program, although no shares were sold under the program during the first six months of 2023.
Material Changes Versus the Prior Comparable Period
- Revenue decreased 54% in the quarter and 45% for the six months, reflecting lower oil, NGL and natural gas prices and lower production volumes.
- Operating profitability deteriorated sharply as lower revenue combined with higher lease operating, depreciation and general and administrative costs.
- Net income changed to a second-quarter loss of $12.1 million from income of $123.4 million; six-month income fell to $13.9 million from $121.0 million.
- Derivative results shifted from a $71.1 million loss in the first six months of 2022 to a $40.1 million gain in 2023, primarily due to unrealized changes in the fair value of open contracts. The prior-year period included substantial cash proceeds from monetizing certain natural gas call positions.
- The company replaced the 9.75% Senior Second Lien Notes due 2023 with $275.0 million of 11.75% Senior Second Lien Notes due 2026 and used substantial cash to complete the redemption.
- Asset retirement obligations increased to $480.8 million from $466.4 million at year-end 2022, primarily because of accretion and upward revisions to estimates.
- On May 15, 2023, the company acquired a corporate aircraft from an entity controlled by its CEO for $19.1 million, funded with $9.0 million of cash and assumed debt with approximately $10.1 million fair value.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal production, revenue or earnings guidance. Management expects liquidity from operating cash flow, cash on hand, the Credit Agreement and potential ATM equity issuance to support operations, capital expenditures, debt service, acquisitions and asset retirement obligations.
- Commodity prices remain the principal market risk. Management cited second-quarter closing prices of $70.66 per barrel for WTI and $2.48 per Mcf for Henry Hub natural gas.
- The company has open commodity derivatives extending through April 2028. Changes in their fair value may materially affect reported earnings even when they relate to future production.
- Inflation, higher interest rates, offshore operating costs, production downtime and pipeline constraints may pressure cash flow and margins.
- Potential future BOEM financial assurance or surety collateral requirements could materially reduce liquidity. The company stated that it had no outstanding BOEM supplemental financial assurance orders and no surety bond collateral outstanding as of the filing date.
- The company is appealing an ONRR royalty-disallowance matter; the surety bond posted for the appeal was $8.9 million at June 30, 2023.
- Remaining recorded loss contingency for potential decommissioning obligations related to previously divested properties was $17.0 million at June 30, 2023. Management stated that additional obligations could arise and that the ultimate amount cannot be predicted with certainty.
- The company recognized a $2.2 million Employee Retention Credit during the first six months of 2023, recorded as a credit to general and administrative expense.
- The six-month effective tax rate was 45.6%, and management stated that the annual effective tax rate could not be reliably estimated for interim reporting. The company does not expect to owe cash taxes for 2023, although it made $2.5 million of federal and state tax payments during the six months.
- Management stated that the CEO and CFO concluded disclosure controls were effective as of June 30, 2023, with no material change in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify the sustainability of cash flow after the substantial 2023 debt refinancing and redemption-related cash outflow.
- Monitor oil, NGL and natural gas prices, realized price differentials, production volumes and the impact of planned or unplanned downtime.
- Review the company’s derivative volumes, strike prices, collateral terms and potential earnings volatility through 2028.
- Assess the ability to meet the 11.75% notes’ interest burden, Term Loan amortization and the aircraft loan’s balloon payment.
- Evaluate the size, timing and funding requirements of asset retirement obligations and contingent decommissioning liabilities.
- Review BOEM financial assurance requirements, surety bond collateral demands and the ONRR appeal.
- Consider the related-party aircraft transaction, executive compensation restructuring and reimbursement requirements for the CEO’s personal aircraft use.
- Confirm that Credit Agreement financial covenants, borrowing-base availability and ATM equity capacity remain available under subsequent conditions.