W&T Offshore, Inc. — 2012 First-Quarter 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. The company acquires, explores and develops oil and natural gas properties. This unaudited report covers the three months ended March 31, 2012, compared with the three months ended March 31, 2011.
- First-quarter production increased 18.4% on an equivalent basis, primarily reflecting the 2011 Yellow Rose and Fairway acquisitions, resumed production at Main Pass 108 and exploration success.
- Production mix was approximately 34.4% oil and condensate, 12.1% NGLs and 53.5% natural gas.
- Oil and NGLs represented 83.2% of revenue, compared with 75.6% in the prior-year quarter.
Financial Performance and Key Metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $235.9 million | $210.9 million | Up 11.9% |
| Operating income | $15.9 million | $37.5 million | Down 57.6% |
| Income before tax | $5.2 million | $28.8 million | Down 82.0% |
| Net income | $3.2 million | $18.6 million | Down 82.7% |
| Basic and diluted EPS | $0.04 | $0.25 | Down $0.21 |
| Operating margin | 6.7% | 17.8% | Down approximately 11.1 percentage points |
| Net margin | 1.4% | 8.8% | Down approximately 7.4 percentage points |
| Net cash from operations | $128.2 million | $72.7 million | Up $55.4 million |
| Capital investment in oil and gas properties | $84.6 million | $39.9 million | Up $44.7 million |
- Oil revenue increased 20.1% to $170.0 million, supported by a 6.5% increase in volumes and a 12.8% increase in unhedged realized oil prices to $110.39 per barrel.
- NGL revenue increased 47.1% to $26.4 million, primarily from a 52.0% increase in volumes; realized NGL prices declined 3.3% to $48.51 per barrel.
- Natural gas revenue decreased 24.5% to $38.4 million despite a 21.0% volume increase, as realized gas prices declined 37.8% to $2.67 per Mcf.
- Total costs and expenses increased 26.9% to $220.0 million. Major increases included DD&A of $88.5 million, G&A of $29.5 million and derivative losses of $39.6 million.
- Cash and cash equivalents were $8.5 million at March 31, 2012, compared with $4.5 million at December 31, 2011.
- Net property and equipment was $1.63 billion, compared with $1.66 billion at year-end 2011.
Debt, Liquidity and Cash Flow
- Long-term debt was $684.0 million at March 31, 2012, consisting of $600.0 million of 8.50% senior notes due June 15, 2019 and $84.0 million outstanding under the revolving credit facility.
- The revolving facility had a $575.0 million borrowing base, $490.3 million of available capacity and $0.7 million of outstanding letters of credit at quarter-end.
- Cash flow from operations exceeded capital investment, but financing cash flow was negative $39.0 million after $33.0 million of net revolving-debt repayment and $5.9 million of dividends.
- The company was in compliance with applicable debt covenants at March 31, 2012.
- On May 7, 2012, the credit agreement was amended and the borrowing base was increased to $650.0 million. The facility continues to mature May 5, 2015.
- The regular quarterly dividend increased to $0.08 per share from $0.04 per share in the prior-year quarter. A further $0.08 per share dividend was declared on May 8, 2012.
Material Changes Versus the Prior Comparable Period
- Higher production and oil pricing increased revenue, but lower natural gas prices reduced the benefit of volume growth.
- Operating profitability deteriorated because expenses grew faster than revenue, including higher DD&A, G&A, interest expense and derivative losses.
- G&A included an $8.3 million increase in an environmental and litigation contingency reserve. Total recorded environmental and litigation liabilities were $10.3 million at March 31, 2012, compared with $2.0 million at December 31, 2011.
- Derivative loss increased to $39.6 million from $23.8 million. The 2012 loss included $5.8 million of realized losses and $33.8 million of unrealized losses.
- Capital expenditures more than doubled to $84.6 million, driven largely by onshore development. The company drilled 18 gross onshore wells during the quarter versus two total wells in the prior-year period.
- Asset retirement obligations declined to $368.5 million from $393.9 million, primarily because BSEE approved a hurricane-damaged platform remediation plan involving reef-in-place treatment.
Guidance, Outlook, Risks and Unusual Items
- Management established a 2012 capital expenditure budget of $425.0 million, excluding acquisitions. The budget includes $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 expects to fund the capital budget and potential acquisitions through operating cash flow, cash on hand, revolver borrowings and, if necessary, capital markets transactions.
- Management expects continued weakness in natural gas prices because of high production, storage growth, associated gas from oil drilling and efficiency gains in shale operations.
- Oil price premiums for offshore crude were unusually high during the quarter but may decline as pipeline flows change and market conditions normalize.
- Commodity derivatives covered approximately 3.8 million barrels of anticipated oil production as of March 31, 2012, with contracts extending through 2014. These instruments reduce some price exposure but can limit gains from higher oil prices and create earnings volatility.
- Hurricane Ike remediation remains a contingency. The company had received $140.0 million of insurance proceeds through March 31, 2012 and recorded approximately $25.5 million of additional estimated ARO costs expected to be incurred through 2013. Reimbursement timing and amount remain uncertain.
- A federal grand jury investigation into environmental compliance at four offshore platforms is continuing, with prosecutors indicating an intent to seek a criminal disposition. The company cannot estimate potential exposure, and the matter could materially adversely affect results.
- A separate Cameron Parish landowners’ lawsuit alleges contamination or other damage from exploration and production activities. The ultimate outcome cannot currently be estimated.
- Offshore permitting, environmental, safety and insurance requirements may increase costs and delay drilling. Insurance policies expiring June 1, 2012 were being renewed, with no assurance that comparable coverage or pricing would remain available.
- The company entered into an estimated $14.0 million drilling-rig commitment scheduled from October 2012 through April 2013.
Investor Verification Checklist
- Verify the sustainability of the higher oil and NGL production volumes following the 2011 acquisitions and the execution of the $425.0 million 2012 capital program.
- Monitor natural gas prices, offshore oil-price premiums and the effect of the company’s derivative contracts on future earnings and cash flow.
- Assess liquidity after planned capital spending, dividends, debt service and any acquisitions, including the borrowing-base redetermination.
- Track the federal environmental investigation and Cameron Parish litigation, including reserve changes and potential penalties or remediation costs.
- Confirm renewal terms and limits for Gulf of Mexico insurance coverage and the timing and collectability of Hurricane Ike reimbursements.
- Reconcile the May 7, 2012 credit-facility amendment and subsequent borrowing-base availability with reported debt covenants and reserve values.