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 primarily on the Gulf of Mexico and onshore Texas. This unaudited Form 10-Q covers the three and six months ended June 30, 2012, with comparisons to the corresponding 2011 periods.
Key Financial Metrics
| Metric | Q2 2012 | Q2 2011 | Six Months 2012 | Six Months 2011 |
|---|---|---|---|---|
| Revenue | $215.5 million | $252.9 million | $451.4 million | $463.8 million |
| Operating income | $99.1 million | $115.6 million | $115.0 million | $153.2 million |
| Operating margin | 46.0% | 45.7% | 25.5% | 33.0% |
| Net income | $53.6 million | $55.2 million | $56.8 million | $73.8 million |
| Net margin | 24.9% | 21.8% | 12.6% | 15.9% |
| Basic and diluted EPS | $0.70 | $0.73 | $0.75 | $0.98 |
| Cash flow from operations | Not separately provided | Not separately provided | $241.3 million | $229.8 million |
| Capital investment in oil and gas properties | Not separately provided | Not separately provided | $187.3 million | $85.8 million |
Production increased 12.4% on an energy-equivalent basis in the first half, but average realized prices decreased 13.4%. First-half production comprised approximately 33.6% oil and condensate, 12.7% NGLs and 53.7% natural gas. Oil represented 71.7% of revenue, NGLs 11.6% and natural gas 16.4%.
Balance Sheet, Debt and Liquidity
- At June 30, 2012, cash and cash equivalents were $8.6 million, restricted cash was $30.8 million and total current assets were $199.3 million.
- Total debt was $680.0 million: $600.0 million of 8.50% senior notes due June 2019 and $80.0 million outstanding under the revolving credit facility.
- The revolving facility had a $650.0 million borrowing base and $569.4 million of borrowing capacity available, including approximately $0.6 million of letters of credit.
- Total shareholders’ equity was $595.2 million, compared with $544.6 million at December 31, 2011.
- The company complied with applicable senior-note and revolving-credit covenants at June 30, 2012.
- Dividends paid during the first half were $0.08 per share per quarter, double the $0.04 quarterly dividend paid in 2011. A further $0.08 per share dividend was declared on July 30, 2012.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue declined 14.8%, while first-half revenue declined 2.7%, primarily because of sharply lower natural gas prices and lower second-quarter oil volumes.
- First-half oil revenue increased 4.2% and NGL revenue increased 22.7%, but natural gas revenue decreased 32.4%.
- First-half natural gas realized price fell 41.0% to $2.58 per Mcf; NGL realized price fell 15.5% to $46.31 per barrel. Oil realized price increased 3.5% to $108.28 per barrel.
- Lease operating expense increased 15.8% in the first half, and general and administrative expense increased 22.1%, reflecting acquired properties, higher insurance and workover costs, and increased legal, compensation and benefit expense.
- First-half net income decreased 23.1%, and EPS decreased 23.5%, despite higher production and operating cash flow.
- Derivative accounting produced a $10.2 million gain in the first half of 2012, compared with a $6.5 million loss in the prior-year period. The second-quarter gain was $49.9 million, primarily unrealized, and materially supported reported earnings.
- The company invested $187.3 million in oil and gas properties in the first half, compared with $85.8 million in 2011; the prior-year period also included the $397.0 million Yellow Rose acquisition.
- On May 15, 2012, W&T sold its 40% non-operating interest in South Timbalier 41 for $30.5 million. Proceeds were held as restricted cash for a planned like-kind replacement acquisition.
- Asset retirement obligations declined from $393.9 million at year-end 2011 to $349.0 million at June 30, 2012, substantially because of a revised Hurricane Ike remediation plan.
Outlook, Commentary, Risks and Unusual Items
- Management set a 2012 capital expenditure budget of $425.0 million, excluding potential acquisitions, including $209.0 million for offshore wells, $170.0 million for onshore wells and $46.0 million for facilities, recompletions, seismic and leasehold items.
- Management expects to fund the capital program and potential acquisitions with operating cash flow, cash on hand, revolver borrowings and, if necessary, capital-market financing.
- Management expects continued weakness in natural gas prices because of high production, storage levels, shale-related supply and associated gas from oil drilling. Lower oil, NGL and natural gas prices could reduce revenue, liquidity and borrowing-base availability and could trigger ceiling-test impairments.
- Open crude oil derivatives covered approximately 1.0 million barrels for the balance of 2012, 1.3 million barrels for 2013 and 0.7 million barrels for 2014. These contracts reduce price exposure but may limit gains from favorable price movements.
- Hurricane Ike remediation remained ongoing. The company had recorded approximately $21.1 million of additional estimated remediation costs in asset retirement obligations and expected completion in 2013. Reimbursement timing and amount were uncertain.
- A federal grand jury and EPA investigation into environmental compliance at four offshore platforms was ongoing, with prosecutors indicating an intent to seek a criminal disposition. The company could not estimate its potential exposure, and the outcome could materially adversely affect the company.
- A Cameron Parish landowner lawsuit alleges contamination and property damage and seeks compensatory and punitive damages. The outcome was not estimable. Environmental and litigation reserves totaled $10.4 million at June 30, 2012, including an $8.4 million increase during the first half.
- Drilling rig commitments were approximately $36.9 million at June 30, 2012, generally expiring within one year.
Most Important Facts for Investors to Verify
- Whether production growth can offset continued weakness in natural gas and NGL prices.
- The sustainability of earnings excluding the $50.2 million second-quarter unrealized derivative gain and other noncash derivative valuation changes.
- Execution of the $425.0 million capital program and its funding requirements relative to operating cash flow.
- Future borrowing-base redeterminations, revolver availability and compliance with leverage and current-ratio covenants.
- The final purchase-price settlement for the Fairway Properties and the use of the $30.5 million restricted like-kind-exchange proceeds.
- Potential financial, operational and reputational consequences of the federal environmental investigation and related litigation.
- Actual Hurricane Ike remediation expenditures and insurance reimbursements, including any costs not covered by insurance.