W&T OFFSHORE INC annual report, FY2017

W&T Offshore, Inc. — Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2017; filed March 2, 2018. The filing is an annual report, not a standalone Q4 filing, although unaudited quarterly data are provided. W&T is an independent oil and natural gas producer operating primarily in the Gulf of Mexico, with interests in 49 offshore fields and approximately 703,186 gross acres.

Financial and Operating Highlights

Metric	2017	2016	Change
Total revenue	$487.1 million	$400.0 million	+21.8%
Operating income (loss)	$110.0 million	$(330.6) million	Improved
Net income (loss)	$79.7 million	$(249.0) million	Improved
Diluted earnings per share	$0.56	$(2.60)	Improved
Cash flow from operations	$159.4 million	$14.2 million	Increased
Capital expenditures	$130.0 million	$48.6 million	Increased
Average production	39,921 Boe per day	41,980 Boe per day	Down 5.2%
Cash and cash equivalents	$99.1 million	$70.2 million	Increased
Principal indebtedness	$889.8 million	$873.7 million	Increased
Shareholders’ deficit	$(573.5) million	$(659.0) million	Improved

Revenue growth was driven primarily by higher realized commodity prices. Average realized prices increased 28.9% for oil to $48.13 per barrel, 36.2% for NGLs to $23.35 per barrel and 17.0% for natural gas to $2.96 per Mcf. Production volume declines, natural production declines, pipeline and platform outages, and tropical-storm activity partially offset the price benefit.

Operating costs improved: lease operating expenses declined 5.7% to $143.7 million, or $9.86 per Boe, while gathering and transportation costs declined 10.8% to $20.4 million. DD&A and accretion declined to $155.7 million from $211.6 million. No ceiling-test impairment was recorded in 2017, compared with a $279.1 million non-cash impairment in 2016.

Operating cash flow benefited from higher prices, lower operating expenses and lower reported interest expense. Cash used in investing activities was $107.1 million, and cash used in financing activities was $23.5 million. The company paid $72.4 million for asset retirement obligations and deposited $49.5 million with the court in connection with the Apache litigation.

Reserves, Capital Allocation and Margins

Total proved reserves increased slightly to 74.2 MMBoe from 74.0 MMBoe. Production was 14.6 MMBoe, offset by positive revisions, extensions and discoveries.
Reserve mix was 46% crude oil, 11% NGLs and 43% natural gas. Proved developed producing reserves represented 74% of total reserves; proved undeveloped reserves represented 16%.
PV-10 was $992.9 million before ARO and $800.7 million after ARO. Standardized measure of discounted future net cash flows was $740.6 million. PV-10 is a non-GAAP measure and is not a market value estimate.
Five continental-shelf wells were drilled in 2017, four of which were successful and began producing during the year. The reported drilling success rate was 80%.
Management’s initial 2018 capital expenditure budget is approximately $130 million, excluding acquisitions, focused on lower-risk and higher-return oil projects. Planned 2018 ARO spending is approximately $23.6 million to $24 million.

Material Changes Versus 2016

The company moved from a $249.0 million net loss to $79.7 million of net income, largely because of higher commodity prices and the absence of the 2016 ceiling-test write-down.
Interest expense declined to $45.8 million from $92.3 million, primarily following the 2016 debt exchange and the absence of revolving-credit borrowings during 2017.
A $7.8 million gain on exchange of debt was recognized in 2017, compared with a $123.9 million gain in 2016. The 2017 gain primarily reflected cash interest payments on PIK-toggle notes and related accounting adjustments.
Production declined while reserves remained broadly stable, reflecting successful drilling, recompletions, workovers, technical revisions and higher commodity prices.
Cash increased by $28.8 million to $99.1 million despite higher capital spending, ARO expenditures and the $49.5 million Apache escrow deposit.

Debt, Liquidity and Going-Concern Considerations

At December 31, 2017, principal debt was $889.8 million, consisting principally of a $75.0 million 1.5 lien term loan, a $300.0 million second-lien term loan, $171.8 million of second-lien PIK-toggle notes, $153.2 million of third-lien PIK-toggle notes and $189.8 million of unsecured senior notes. Carrying-value debt, including accounting adjustments, was $992.1 million.

The revolving credit facility had a $150.0 million borrowing base, approximately $149.7 million of availability and no borrowings at year-end. The facility matures November 8, 2018, and lenders indicated they were unwilling to extend it under then-current conditions.
The unsecured senior notes mature June 15, 2019. If they are not refinanced or otherwise addressed by February 28, 2019, the 1.5 lien term loan and third-lien PIK-toggle notes may accelerate, potentially creating approximately $239.5 million due at that date under the stated assumptions.
The company stated that it was evaluating refinancing, liability-management and other alternatives and expected to build cash balances during 2018. It also stated that it believed liquidity was adequate through March 2019, but acknowledged substantial uncertainty around commodity prices, bonding requirements and debt refinancing.
The company was in compliance with applicable debt covenants and BOEM financial-assurance obligations as of the filing date.

Guidance, Outlook and Management Commentary

Management expects 2018 production to be lower than 2017 before acquisitions, due to natural declines, downtime, completion timing and well performance.
The company intends to operate within cash flow, conserve capital, maintain liquidity, meet debt and ARO obligations, pursue selected acquisitions and establish a drilling joint venture with private investors.
The proposed drilling joint venture was expected to close initially by mid-March 2018. It was intended to reduce W&T’s capital outlay through promoted-basis drilling. Entities controlled by the CEO and his family were expected to acquire approximately 4% of the venture on the same terms as unaffiliated investors.
Management did not anticipate a first-quarter 2018 ceiling-test write-down based on information available at filing, but future impairments remain sensitive to commodity prices and reserve estimates.
The company had no open commodity derivative positions at December 31, 2017 and no significant income tax payments were expected in 2018.

Risks, Contingencies and Unusual Items

Commodity prices and concentration: All production and proved reserves are concentrated in the Gulf of Mexico. A 10% decline in 2017 realized commodity prices would have reduced pretax income by approximately $48 million, assuming no other changes.
Debt refinancing: The maturity of the revolving credit facility and potential acceleration of other debt create significant liquidity and refinancing risk. Defaults could trigger cross-defaults and acceleration.
ARO and bonding: ARO was $300.4 million at year-end, with approximately $23.6 million expected to be spent in 2018. BOEM could reinstate or increase supplemental financial-assurance requirements, and sureties may demand additional collateral.
Apache litigation: A trial court judgment directed W&T to pay $43.2 million plus $6.3 million of prejudgment interest, fees and costs. W&T deposited $49.5 million with the court and appealed. The company recorded $49.5 million of other liabilities, $43.2 million of capitalized ARO and $6.3 million of expense.
ONRR royalty matters: W&T paid approximately $2.1 million in additional royalties through December 31, 2017 under the ONRR “unbundling” initiative and expects additional payments, but could not estimate the range or materiality of future exposure.
BSEE penalties: Four proposed civil penalties totaling $7.3 million remained open; the company had accrued approximately $3.3 million.
Operational and environmental exposure: Hurricanes, oil spills, offshore accidents, pipeline outages, regulatory changes, environmental liabilities and uninsured losses could materially affect production, liquidity and results.
Customer concentration: Shell Trading accounted for approximately 46% of 2017 sales and Vitol for approximately 15%, although management did not believe the loss of a customer would materially impair market access.
Dividends remained suspended, and no dividends were paid in 2017 or 2016.

Investor Verification Checklist

Verify the company’s ability to refinance or repay the November 2018 revolving facility and the February 2019 potential accelerated debt obligations.
Track commodity prices, production volumes, reserve revisions and any subsequent ceiling-test impairments.
Confirm completion, capitalization and funding of the proposed drilling joint venture, including the CEO and family investment.
Monitor BOEM financial-assurance requirements, surety collateral demands and actual ARO expenditures relative to the $300.4 million recorded liability.
Review developments in the Apache appeal, ONRR royalty proceedings and BSEE civil penalties.
Assess whether $130 million of 2018 capital spending can be funded while production declines and debt maturities remain significant.
Consider the difference between reported interest expense and contractual cash interest because of troubled-debt-restructuring accounting and PIK provisions.