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 offshore Gulf of Mexico exploration, development and acquisitions. The filing covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods. The financial statements are unaudited and presented in thousands, except per-share and production data.
- At September 30, 2022, W&T held interests in 47 offshore fields, including 45 producing fields, and approximately 622,000 gross leased acres.
- Third-quarter production was 41,500 Boe per day, up from 34,848 Boe per day in the prior-year quarter, primarily reflecting 2022 acquisitions.
Financial performance and key metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total revenue | $266.5 million | $133.9 million | $731.3 million | $392.4 million |
| Operating income | $138.1 million | $48.2 million | $398.1 million | $121.4 million |
| Net income (loss) | $66.7 million | $(38.0) million | $187.7 million | $(90.4) million |
| Operating margin | 51.8% | 36.0% | 54.4% | 30.9% |
| Net margin | 25.0% | (28.3%) | 25.7% | (23.0%) |
| Diluted EPS | $0.46 | $(0.27) | $1.30 | $(0.64) |
| Net cash from operating activities | Not separately provided | Not separately provided | $326.9 million | $111.3 million |
- Revenue growth reflected higher commodity prices and increased volumes. For the nine-month period, realized prices before derivatives were $97.59 per barrel for oil, $39.96 per barrel for NGLs and $7.58 per Mcf for natural gas.
- Nine-month production increased to 11.1 million Boe from 10.5 million Boe; average daily equivalent sales increased to 40,568 Boe per day from 38,444 Boe per day.
- Nine-month operating expenses increased to $333.2 million from $271.1 million. Costs increased across lease operations, gathering and transportation, DD&A, and general and administrative expenses.
- Derivative loss was $38.7 million in Q3 and $109.9 million for the first nine months, versus $73.1 million and $179.2 million, respectively, in the prior-year periods. The nine-month 2022 results included $105.3 million of net cash proceeds from restructuring certain natural gas call contracts.
- Cash and cash equivalents were $447.1 million at September 30, 2022, compared with $245.8 million at December 31, 2021. Including restricted cash, ending cash was $451.5 million.
- Nine-month investing cash outflow was $89.7 million, including $51.5 million for acquisitions and $30.0 million for oil and gas properties and equipment. Financing cash outflow was $35.8 million, primarily reflecting $33.8 million of Term Loan repayments.
- Total assets were $1.49 billion and shareholders’ deficit was $55.0 million at September 30, 2022, compared with $1.19 billion and $247.2 million, respectively, at December 31, 2021.
Debt, liquidity and material changes
- Term Loan principal was $157.0 million at September 30, 2022, bearing fixed interest of 7% and maturing May 19, 2028. It requires quarterly amortization and is non-recourse except to specified subsidiaries and related assets.
- Senior Second Lien Notes principal was $552.5 million, bearing 9.75% interest and maturing November 1, 2023. The notes were reclassified to current debt on November 1, 2022 because of the approaching maturity.
- There were no borrowings under the Credit Agreement at September 30, 2022. The facility had a $50.0 million borrowing base and $4.4 million of cash-collateralized letters of credit.
- On November 7, 2022, the Credit Agreement was extended to January 3, 2024, subject to an earlier August 1, 2023 maturity if the Senior Second Lien Notes are not refinanced, replaced or otherwise discharged by that date. Future borrowings accrue interest at SOFR plus 6.0%.
- Management stated that cash on hand and operating cash flow should satisfy obligations and funding needs for at least one year, but this assessment depends on commodity prices, production and costs. Potential measures include reducing capital and operating expenditures, refinancing debt and using up to $100 million available under the ATM equity program.
- W&T remained in compliance with applicable debt covenants at September 30, 2022.
- W&T acquired Gulf of Mexico producing interests for approximately $34.0 million in February 2022 and $17.5 million in April 2022, funded with cash on hand.
Guidance, outlook, risks and unusual items
- The filing provides no formal production or revenue guidance. Management expects 10% to 15% of 2022 income tax expense to be paid in cash.
- Commodity prices remain the principal operating risk. Management cited volatility related to global economic conditions, the Russia-Ukraine conflict, OPEC+ production decisions, supply constraints and possible recessionary effects.
- Management reported third-quarter 2022 WTI and Henry Hub prices of approximately $80 per barrel and $6.50 per Mcf, respectively, and cited EIA expectations for lower fourth-quarter average prices than third-quarter averages.
- Inflation, higher interest rates and rising oilfield service, personnel and capital costs may pressure margins and liquidity.
- Asset retirement obligations were $453.6 million at September 30, 2022, up from $424.5 million at year-end 2021. Nine-month settlements totaled $61.3 million.
- The company has substantial derivative exposure through April 2028. Derivative fair-value changes can materially affect earnings and reported liquidity despite relating partly to future production.
- The Inflation Reduction Act may increase future offshore royalty rates for new leases and impose methane charges beginning with 2024 emissions, potentially increasing operating costs.
- W&T disclosed an information-technology service-provider dispute and transition. The transition generated non-recurring professional and legal costs and could cause operational, cybersecurity, data availability or financial reporting disruptions.
- Other contingencies include an ONRR royalty dispute, an $8.2 million surety bond associated with the appeal, potential decommissioning obligations for previously divested properties estimated at $4.9 million, BSEE matters and ordinary-course claims.
Most important facts for investors to verify
- Progress and terms of refinancing or repayment of the $552.5 million Senior Second Lien Notes due November 2023, including the August 1, 2023 conditional deadline.
- Actual cash generation after derivative settlements, asset retirement expenditures, acquisitions and operating-cost inflation.
- Commodity derivative volumes, strike prices, future cash premiums and the sensitivity of earnings to oil and natural gas prices.
- Production performance and operating costs of the 2022 acquired properties, including the effects of maintenance-related shut-ins.
- Changes in asset retirement obligations, surety requirements, ONRR and decommissioning contingencies, and potential collateral demands.
- Completion of the information-technology transition and any resulting cybersecurity, systems availability, litigation or incremental cost impacts.