W&T Offshore, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2019. W&T is an independent Gulf of Mexico oil and natural gas producer with interests in 47 offshore fields and approximately 710,000 gross leased acres.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenues | $134.7 million | $149.6 million | $250.8 million | $283.8 million |
| Operating income | $37.4 million | $48.5 million | $6.4 million | $87.2 million |
| Net income (loss) | $36.4 million | $36.1 million | $(11.4) million | $63.7 million |
| EPS, basic and diluted | $0.25 | $0.25 | $(0.08) | $0.44 |
| Net cash from operating activities | Not separately provided | Not separately provided | $106.3 million | $115.2 million |
- Margins: Q2 operating margin was approximately 27.7%, compared with 32.4% in the prior-year quarter; six-month operating margin was approximately 2.6%, compared with 30.7%. Q2 net margin was approximately 27.0%; the six-month net margin was approximately negative 4.5%.
- Production: Six-month equivalent sales declined 8.3% to 6.19 million Boe, or 34,201 Boe per day. Oil, NGL and natural gas volumes declined 4.1%, 14.1% and 11.8%, respectively.
- Realized prices: Six-month oil, NGL and natural gas prices decreased 4.6%, 29.8% and 3.8%, respectively, to $61.96 per barrel, $19.36 per barrel and $2.81 per Mcf.
- Cash and liquidity: Cash and cash equivalents were $65.7 million at June 30, 2019, versus $33.3 million at December 31, 2018. Credit Agreement availability was $221.8 million, based on a $250.0 million borrowing base, $21.0 million of borrowings and $7.2 million of outstanding letters of credit.
- Debt: Total long-term debt was $634.4 million, including $21.0 million under the Credit Agreement and $625.0 million principal amount of 9.75% Senior Second Lien Notes due November 2023. The Company was in compliance with applicable debt covenants.
- Asset retirement obligations: Total ARO increased to $323.3 million from $310.1 million at year-end 2018, including $26.3 million classified as current.
- Shareholders’ deficit: The deficit was $335.0 million at June 30, 2019, compared with $324.8 million at December 31, 2018.
Material changes versus the prior comparable period
- Six-month revenue declined 11.6%, primarily because of lower production and lower realized commodity prices.
- Lease operating expense increased 15.7% to $83.8 million, while gathering and transportation expense increased 35.1% to $13.5 million. On a per-Boe basis, total production costs increased to $15.72 from $12.21.
- Derivative results deteriorated materially: the Company recorded a six-month derivative loss of $47.1 million in 2019 versus a $6.2 million loss in 2018. Q2 2019 included a $1.8 million derivative gain.
- Interest expense increased 25.2% to $28.5 million for the six months, partly reflecting the Company’s post-restructuring debt structure and differing interest presentation in the prior period.
- Six-month operating cash flow declined 7.7% to $106.3 million, while investing cash outflows declined to $73.1 million from $77.8 million. Cash increased by $32.4 million during the first half of 2019.
- Q2 net income benefited from an $11.7 million income tax benefit associated primarily with reversal of an uncertain tax position settled with the IRS. The six-month loss therefore does not reflect an equivalent recurring cash tax burden.
Guidance, outlook and management commentary
- 2019 capital expenditures, excluding the pending ExxonMobil acquisition, other potential acquisitions and ARO, were forecast at approximately $125 million to $155 million. Planned 2019 ARO spending was approximately $23 million.
- Management stated that operating cash flow, cash on hand and Credit Agreement availability were expected to fund operations through year-end 2019 and the planned ExxonMobil acquisition, subject to commodity prices, production, operating performance and additional capital needs.
- On June 26, 2019, W&T agreed to acquire ExxonMobil Gulf of Mexico properties and a related processing facility for $200 million, subject to adjustments. The transaction was expected to close around August 30, 2019 and was to be funded with cash and Credit Agreement borrowings. The properties had approximately 74 million Boe of net proved reserves and first-quarter 2019 production of approximately 19,800 net Boe per day.
- The Monza joint venture drilling program covers up to 14 projects. W&T may be required to fund certain cost overruns, although total exposure could not be estimated. Members had contributed $184.9 million by June 30, 2019, and W&T’s net contribution was $57.6 million.
- Commodity prices remain the principal market risk. W&T uses crude oil and natural gas derivatives, but does not designate them as hedges, causing fair-value changes to flow through earnings. Open crude oil contracts extended through May 2020.
Risks, contingencies and unusual items
- Apache litigation: On July 16, 2019, the Fifth Circuit affirmed a judgment against W&T. The Company had deposited $49.5 million with the court and accrued the same amount as a liability; management did not expect the decision to materially affect liquidity, financial position or results of operations.
- ExxonMobil acquisition funding: Closing the $200 million acquisition will increase borrowing and liquidity requirements and remains subject to customary closing adjustments and conditions.
- Royalty and regulatory matters: The Company had reserves of approximately $4.7 million for a royalty-deduction dispute and $2.2 million for a royalties-in-kind matter. ONRR “unbundling” reviews could result in additional royalties, but the potential amount was not determinable.
- BSEE penalties: Nine open civil penalty matters totaled proposed penalties of $7.7 million; W&T had accrued approximately $3.5 million.
- Liquidity risks: Borrowing-base redeterminations could reduce availability. Sureties or BOEM could require significant additional collateral. The Company also faces substantial ARO obligations and offshore operating, insurance, environmental and weather-related risks.
- Tax assets: Current income tax receivables were $54.1 million, with refunds expected in the third quarter of 2019. A $121.8 million valuation allowance remained against deferred tax assets.
Important facts for investors to verify
- Completion, final consideration and financing of the ExxonMobil acquisition.
- Actual post-acquisition production, reserves, operating costs and effects on borrowing-base availability.
- Commodity prices, production volumes, derivative settlements and the potential for further derivative fair-value losses.
- Progress and ultimate outcomes of the Apache, ONRR, royalties-in-kind and BSEE matters.
- Compliance with leverage and current-ratio covenants after acquisition financing.
- Cash tax-refund collections, ARO expenditures and potential surety or BOEM collateral requirements.