W&T OFFSHORE INC quarterly report, Q3 FY2017

Business Context and Reporting Period

W&T Offshore, Inc. is an independent oil and natural gas producer focused primarily on exploration, development and acquisition of offshore Gulf of Mexico properties. The Form 10-Q covers the three and nine months ended September 30, 2017; comparative periods are the three and nine months ended September 30, 2016. The interim financial statements are unaudited.

Production mix for the first nine months: 48.8% oil and condensate, 9.2% NGLs and 42.0% natural gas on an energy-equivalent basis.
The company held working interests in approximately 50 offshore producing fields and approximately 710,000 gross leased acres.

Financial Performance and Key Metrics

Metric	Q3 2017	Q3 2016	9M 2017	9M 2016
Revenue	$110.3 million	$107.4 million	$358.0 million	$284.8 million
Operating income (loss)	$15.7 million	$(58.3) million	$76.8 million	$(351.9) million
Net income (loss)	$(1.3) million	$45.9 million	$56.3 million	$(265.5) million
Basic and diluted EPS	$(0.01)	$0.48	$0.39	$(3.25)
Net cash from operating activities	Not provided for the quarter	Not provided for the quarter	$130.3 million	$(9.2) million

Revenue increased 2.7% in the third quarter and 25.7% for the first nine months, despite production declines of 12.2% and 4.6%, respectively, on a Boe basis.
Operating margin was approximately 14.2% in Q3 and 21.4% for the first nine months, compared with negative margins in the corresponding 2016 periods. The improvement primarily reflects higher commodity prices, lower operating costs and the absence of 2016 ceiling-test impairments.
Net margin was approximately negative 1.2% in Q3 and 15.7% for the first nine months. The 2016 nine-month result included a $279.1 million non-cash ceiling-test write-down, while Q3 2016 included a $124.0 million gain on debt exchange.
Average realized prices for the first nine months increased to $45.81 per barrel for oil, $21.88 per barrel for NGLs and $2.97 per Mcf for natural gas, up 30.8%, 38.0% and 27.5%, respectively.
First-nine-month lease operating expense declined 9.9% to $106.8 million, or $9.61 per Boe versus $10.17 per Boe. DD&A declined 32.4% to $116.8 million.
Cash flow from operations was $130.3 million. Investing cash outflow was $74.3 million, including $79.1 million of oil and gas property and equipment investment. Financing cash outflow was $20.1 million, principally for interest payments.
Cash and cash equivalents increased to $106.2 million at September 30, 2017 from $70.2 million at December 31, 2016. Total assets were $887.4 million, and shareholders’ deficit was $597.3 million.

Debt, Liquidity and Capital Structure

Long-term debt principal was $873.7 million, with carrying value of $993.8 million before current maturities and $982.6 million classified as long-term debt on the balance sheet. Current debt-related maturities were $11.1 million.
The company had no borrowings under its revolving credit facility, $0.3 million of letters of credit outstanding and approximately $149.7 million of availability at September 30, 2017. The facility’s borrowing base was $150.0 million and it terminates in November 2018.
Debt instruments include an 11.0% 1.5 Lien Term Loan due November 2019, 9.0% Second Lien Term Loan due May 2020, PIK toggle notes due May 2020 and June 2021, and 8.5% Unsecured Senior Notes due June 2019.
The company was in compliance with applicable debt covenants as of September 30, 2017 and stated that it expects adequate liquidity to fund operations through December 2018 under its assessment period.
Asset retirement obligations totaled $305.0 million, including $29.5 million current. The company expects approximately $69.8 million of ARO spending in 2017.

Material Changes Versus the Prior Comparable Period

Higher realized commodity prices more than offset lower production volumes, driving the nine-month revenue increase of $73.2 million.
Operating results improved substantially because the company recorded no ceiling-test write-down in 2017 versus $279.1 million in the first nine months of 2016.
Interest expense declined 57.5% to $34.3 million for the first nine months, primarily following the September 2016 debt exchange and the absence of revolving-facility borrowings.
The 2016 debt exchange generated a $124.0 million gain; 2017 included a smaller $7.8 million gain primarily related to cash payment rather than PIK treatment of certain note interest.
Capital investment increased to $79.1 million from $24.1 million, mainly on conventional shelf projects, while production declined because of natural declines, maintenance, weather and pipeline outages.
Cash increased despite a $49.5 million escrow deposit related to the Apache lawsuit, $56.2 million of ARO settlements and $74.3 million of investing cash outflow.

Guidance, Outlook, Risks and Unusual Items

The 2017 capital expenditure budget remained $125.0 million, excluding potential acquisitions. Management expected 2017 production to be somewhat below 2016 levels and expected no further 2017 revolving-credit borrowings under current commodity prices and costs.
Management stated that, based on available prices, reserves and other information, it did not anticipate a fourth-quarter 2017 ceiling-test write-down.
Management expected an approximately $14 million full-year 2017 income tax benefit, primarily from NOL carryback claims. Tax receivables totaled $63.7 million at September 30, 2017.
The PIK option for the Second Lien PIK Toggle Notes expires in March 2018 and for the Third Lien PIK Toggle Notes in September 2018. The 1.5 Lien Term Loan and Third Lien PIK Toggle Notes can accelerate to February 28, 2019 if the remaining 2019 Unsecured Senior Notes are not refinanced or otherwise addressed. Management indicated that $429.3 million could become due in the first half of 2019 under that scenario.
In the Apache litigation, the company deposited $49.5 million with the court registry pending appeal and recorded a corresponding liability. The trial court judgment included $43.2 million plus $6.3 million of prejudgment interest, fees and costs.
BOEM rescinded four prior orders seeking $260.8 million of supplemental bonding during the third quarter. The company remained compliant with BOEM financial-assurance obligations, but future demands remain possible. Surety providers may also demand additional collateral.
Six BSEE civil penalty matters remained open, with proposed penalties totaling $7.4 million; the company had accrued approximately $3.4 million.
Commodity prices remain the principal operating risk. Lower oil, NGL or natural gas prices could reduce cash flow, reserves and borrowing-base availability, trigger additional ceiling-test impairments or require additional collateral. The company disclosed that a prolonged period of weak prices could require consideration of bankruptcy relief.
Open derivatives covered a portion of expected fourth-quarter 2017 production, including oil protection at $55.25 per barrel and collars with oil floors of $50.00 per barrel and natural gas floors of $3.07 per MMBtu. These contracts also limit some upside.

Investor Verification Checklist

Verify the company’s ability to refinance or otherwise address the $189.8 million of Unsecured Senior Notes due June 2019 and the potential February 2019 acceleration provisions.
Monitor semiannual borrowing-base redeterminations, revolver availability, debt covenant compliance and any changes in BOEM or surety collateral requirements.
Reconcile cash flow quality, including the effects of insurance reimbursements, tax refunds, the Apache escrow deposit and ARO settlements.
Assess whether higher commodity prices can offset declining production, deferred production from maintenance and the company’s substantial ARO burden.
Track the Apache appeal, ONRR royalty disputes, BSEE penalties and any additional civil, royalty or financial-assurance claims.
Review the assumptions supporting management’s no-write-down expectation, $125.0 million capital budget, approximately $14 million tax benefit and liquidity-through-December-2018 assessment.