WTI

W&T Offshore, Inc. - Q2 2010 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended June 30, 2010. W&T Offshore, Inc. is an independent oil and natural gas producer primarily operating in the Gulf of Mexico. The company holds working interests in approximately 72 producing fields. The reporting period includes the impact of a significant acquisition from Total E&P USA, Inc., and ongoing remediation efforts related to Hurricanes Ike and Gustav.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 19.4% for the quarter and 30.4% for the six-month period compared to 2009. This was driven primarily by a 56.9% increase in average realized oil sales prices ($70.48/Bbl vs. $44.93/Bbl) and a 9.2% increase in natural gas prices, despite a 7.4% decline in total production volumes.
• Profitability Turnaround: The company reported a net income of $70.2 million for the six months ended June 30, 2010, compared to a net loss of $250.6 million in the same period of 2009. The 2009 loss included a $218.9 million ceiling test write-down of oil and natural gas properties, which did not occur in 2010.
• Derivative Gains: The company recognized a derivative gain of $13.3 million for the six months ended June 30, 2010, compared to a loss of $0.9 million in 2009. This gain was primarily due to changes in the fair value of commodity derivatives.
• Acquisition: On April 30, 2010, the company acquired the Matterhorn and Virgo fields from Total for a net payment of $116.6 million, funded by cash on hand.
• Tax Refunds: Operating cash flow was significantly boosted by $99.8 million in federal income tax refunds received during the period, primarily from carrybacks of net operating losses from 2008 and 2009.

Guidance, Outlook, and Risks

• Capital Budget: The company's total capital expenditure budget for 2010 is $450 million, intended to be funded by internal cash flow, cash on hand, and borrowings under the revolving loan facility.
• Deepwater Moratorium: Following the Deepwater Horizon incident, a moratorium on new deepwater drilling was issued. While the company was not drilling deepwater wells at the time, the moratorium may delay anticipated recompletion work at the newly acquired Matterhorn and Virgo fields and prolong permitting for future wells.
• Insurance and Regulation: The company renewed its well control and hurricane damage insurance policies in June 2010 at a cost of $20.7 million. There are risks that insurance costs may increase further or coverage may become limited due to the Gulf of Mexico spill. Additionally, new regulations under the Dodd-Frank Act may increase the cost and complexity of using derivative instruments.
• Commodity Prices: Management notes that oil and natural gas prices remain volatile. A decline in prices could negatively impact revenues, earnings, and liquidity, potentially triggering ceiling test write-downs.

Investor Verification Checklist

• Verify the sustainability of the $99.8 million tax refund, as this was a non-recurring cash inflow significantly impacting operating cash flow.
• Monitor the impact of the deepwater drilling moratorium on the timeline and costs for the Matterhorn and Virgo field recompletions.
• Review the company's hedging strategy and exposure to commodity price volatility, given the significant derivative gains recognized in the period.
• Assess the adequacy of insurance coverage and potential premium increases following the Deepwater Horizon incident.
• Confirm the company's ability to meet its $450 million capital budget without diluting shareholders or increasing leverage beyond current covenants.