W&T Offshore, Inc. — 2021 Q1 Form 10-Q Summary
Business context and reporting period
W&T Offshore is an independent oil and natural gas producer focused primarily on offshore properties in the Gulf of Mexico. The filing covers the unaudited three months ended March 31, 2021, compared with the three months ended March 31, 2020. As of March 2021, the company held interests in 42 offshore fields and approximately 709,000 gross leased acres.
Financial performance and key metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $125.6 million | $124.1 million | +1.2% |
| Operating income | $15.0 million | $71.8 million | Down $56.8 million |
| Operating margin | 12.0% | 57.8% | Down 45.8 points |
| Net income (loss) | $(0.7) million | $66.0 million | Down $66.7 million |
| Net margin | (0.6)% | 53.2% | Down 53.8 points |
| Operating cash flow | $45.0 million | $84.3 million | Down $39.4 million |
| Capital expenditures | $1.6 million | $11.5 million | Down $10.0 million |
| Cash and equivalents | $53.4 million | $47.6 million | Up $5.8 million year over year |
Production declined 25.9% on an average daily equivalent basis to 39,657 Boe per day. Volumes were affected by field shut-ins, the February 2021 freeze, hurricane repairs, reservoir management and natural declines. Higher realized prices offset the volume decline: oil prices increased 22.4% to $56.73 per barrel, natural gas prices increased 75.4% to $3.35 per Mcf, and NGL prices increased 83.3% to $23.88 per barrel.
Lease operating expense declined 22.7% to $42.4 million, DD&A declined 31.9% to $26.6 million, and general and administrative expense declined 23.3% to $10.7 million. These reductions were more than offset by a $24.6 million derivative loss, compared with a $61.9 million derivative gain in the prior-year quarter. The derivative loss included $8.2 million of realized losses and $16.3 million of unrealized losses.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $53.4 million at March 31, 2021, compared with $43.7 million at December 31, 2020.
- Net cash used in financing activities was $32.0 million, consisting primarily of repayment of Credit Agreement borrowings.
- Credit Agreement borrowings were $48.0 million, down from $80.0 million at year-end 2020. Availability was $137.6 million against a $190.0 million borrowing base.
- Senior Second Lien Notes had $552.5 million principal outstanding, bear interest at 9.75%, and mature November 1, 2023. Total long-term debt, net, was $593.8 million.
- The Credit Agreement matures October 18, 2022. No long-term debt maturities were scheduled before October 2022.
- The company reported compliance with all applicable debt covenants. The Credit Agreement’s leverage-ratio covenant waiver period extends through December 31, 2021, subject to other requirements.
- Total asset retirement obligations were $398.9 million, including $26.4 million classified as current.
- Shareholders’ deficit was $208.6 million at March 31, 2021.
Material changes versus the prior comparable period
- Revenue was broadly stable because materially higher commodity prices offset substantially lower production volumes.
- Profitability deteriorated sharply because the prior-year period benefited from a $61.9 million derivative gain and an $18.5 million gain on debt transactions, while Q1 2021 recorded a $24.6 million derivative loss and no debt-transaction gain.
- Operating cash flow decreased despite higher prices, reflecting lower production, higher receivables, net derivative cash payments and lower joint-venture partner advances.
- Debt declined by $31.4 million from December 31, 2020, primarily due to the $32.0 million Credit Agreement repayment.
- The company completed consolidation of two Alabama gas-processing plants and estimates future savings of approximately $5 million annually.
- The company recognized a $2.1 million employee retention credit and recorded $3.5 million of expense for a discretionary employee cash bonus during the quarter.
Guidance, outlook, risks and unusual items
Management estimated 2021 capital expenditures, excluding acquisitions and plugging and abandonment expenditures, of $30 million to $60 million, and asset-retirement-obligation spending of $17 million to $21 million. No broader production or earnings guidance was provided.
Management expected cash on hand, operating cash flow and available borrowing capacity to satisfy cash requirements for the next 12 months, while noting that prolonged market deterioration could require additional liquidity. The borrowing base was subject to a scheduled spring 2021 redetermination, creating potential availability risk.
- Commodity prices remain the primary earnings and cash-flow risk. Derivatives reduce some price exposure but can generate significant mark-to-market losses and limit upside.
- COVID-19 effects, future variants, weather events, hurricane repairs, production shut-ins and natural declines may continue to affect production.
- Asset retirement obligations and potential BOEM financial-assurance or surety-collateral requirements could materially affect liquidity.
- Monza joint-venture cost overruns must be funded by W&T in certain circumstances; total potential exposure was not estimable.
- The company’s PPP forgiveness application for an $8.4 million loan remained unresolved. If rejected, all or part of the amount could become repayable through April 2022 at 1% interest.
- ONRR royalty disputes and unbundling reviews could result in additional royalties, although the potential amount was not determinable.
- A BSEE settlement reduced proposed civil penalties of $7.7 million to $720,000 payable in three annual installments; the first installment was paid in March 2021.
- Approximately 67% of Q1 revenue came from three major oil and gas companies, creating customer concentration risk.
Most important facts for investors to verify
- Outcome of the spring 2021 Credit Agreement borrowing-base redetermination and resulting liquidity availability.
- Progress and economics of planned 2021 capital spending, production recovery and the expected Cota well start-up.
- Commodity-price sensitivity, derivative positions and future realized hedge settlements.
- Ability to manage approximately $398.9 million of asset retirement obligations and any additional surety or BOEM collateral demands.
- Status of PPP loan forgiveness, ONRR royalty matters and other regulatory contingencies.
- Refinancing plans for the 2022 Credit Agreement maturity and the $552.5 million of Senior Second Lien Notes due in 2023.