W&T OFFSHORE INC quarterly report, Q3 FY2016

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

Business context and reporting period

W&T Offshore is an independent oil and natural gas producer operating primarily in the Gulf of Mexico, with interests in approximately 54 offshore fields and approximately 750,000 gross leased acres. This filing covers the three and nine months ended September 30, 2016; the financial statements are unaudited.

Production for the nine-month period consisted of approximately 47.4% oil and condensate, 10.1% NGLs and 42.5% natural gas on an energy-equivalent basis. The company continued to operate in a weak commodity-price environment and maintained suspended dividends, reduced capital spending and implemented cost-reduction measures.

Key financial metrics

Metric	Q3 2016	Q3 2015	Nine months 2016	Nine months 2015
Revenue	$107.4 million	$126.2 million	$284.8 million	$403.2 million
Operating loss	$(58.3) million	$(468.6) million	$(351.9) million	$(1,084.9) million
Net income (loss)	$45.9 million	$(477.6) million	$(265.5) million	$(993.1) million
Basic and diluted EPS	$0.48	$(6.29)	$(3.25)	$(13.08)
Net cash from operating activities	Not separately provided for the quarter	Not separately provided for the quarter	$(9.2) million	$134.8 million
Capital expenditures	Not separately provided for the quarter	Not separately provided for the quarter	$24.1 million	$192.8 million

Derived operating margins were approximately negative 54.3% in Q3 2016 and negative 123.5% for the nine months. Net margin was approximately 42.8% in Q3 2016 and negative 93.2% for the nine months; the quarterly profit was primarily caused by a $124.0 million gain on the debt exchange rather than operating performance.

Q3 production was 3.819 MMBoe, down 11.2% year over year; nine-month production was 11.661 MMBoe, down 9.8%.
Nine-month average realized prices declined to $35.01 per barrel for oil, $15.85 per barrel for NGLs and $2.33 per Mcf for natural gas.
Lease operating expense declined 17.3% to $118.6 million for the nine months, and general and administrative expense declined 20.5% to $45.4 million.
Ceiling-test write-downs were $57.9 million in Q3 and $279.1 million for the nine months, compared with $441.7 million and $954.9 million, respectively, in the prior-year periods.
Cash and cash equivalents were $73.4 million at September 30, 2016, compared with $85.4 million at December 31, 2015.
Total assets were $832.6 million and shareholders’ deficit was $678.0 million at September 30, 2016.

Debt, liquidity and capital structure

Carrying value of total long-term debt was $1.023 billion at September 30, 2016, including $8.8 million classified as current. Principal debt included a $75.0 million 1.5 Lien Term Loan, $300.0 million Second Lien Term Loan, $159.8 million Second Lien PIK Toggle Notes, $142.0 million Third Lien PIK Toggle Notes and $189.8 million of remaining unsecured senior notes.
On September 7, 2016, the company exchanged approximately $710.2 million, or 79%, of its 8.50% senior notes due 2019 for new secured PIK notes and 60.4 million common shares, and issued a $75.0 million 1.5 Lien Term Loan. The transaction reduced principal debt by approximately $408.4 million before accounting adjustments and produced a $124.0 million accounting gain.
The revolving credit facility had a $150.0 million borrowing base, $149.1 million of availability and no borrowings outstanding at September 30, 2016; letters of credit totaled approximately $0.9 million.
The company reported compliance with applicable debt covenants. It was required to maintain minimum liquidity of $15 million and had a reported current ratio of 2.35 to 1.00.
Management stated that it believed liquidity was adequate to fund operations through September 30, 2017, but noted significant uncertainty from commodity prices, bonding requirements and debt covenants.

Material changes versus the prior comparable period

Revenue declined 14.9% in Q3 and 29.4% for the nine months, driven primarily by lower oil and natural gas prices and lower production volumes.
Operating losses improved substantially because of lower ceiling-test write-downs, lower DD&A, reduced lease operating costs and lower G&A, although operations remained unprofitable.
Operating cash flow deteriorated from $134.8 million provided in the prior-year nine-month period to $9.2 million used in 2016, reflecting lower realized prices, lower production, ARO settlements and collateral deposits.
Capital spending fell sharply to $24.1 million from $192.8 million for the nine months. Management estimated 2016 capital expenditures of approximately $60 million and expected to spend approximately $74 million on ARO activities.
Outstanding common shares increased materially following issuance of 60.4 million shares in the debt exchange; 137.1 million shares were outstanding at October 31, 2016.
The Yellow Rose onshore asset sale completed in October 2015 reduced comparative production and operating costs in 2016.

Outlook, commentary, risks and unusual items

Management described its short-term priorities as preserving liquidity, reducing costs, satisfying obligations and making investments with short payback periods. It was considering increased capital investment above 2016 levels and possible divestitures, but provided no formal earnings or production guidance.
Commodity-price exposure remains significant. Open derivatives covered a portion of remaining 2016 production, including oil collars with a $40.00 per barrel put price and natural gas collars with a $2.25 per MMBtu put price.
Further ceiling-test write-downs remain possible if commodity prices, reserves, development costs or operating costs deteriorate. The filing’s pro forma analysis was not presented as a prediction of the fourth-quarter result.
BOEM had ordered approximately $260.8 million of additional financial assurance for decommissioning obligations. The orders were stayed through January 31, 2017 while the company pursued a tailored compliance plan under new NTL #2016-N01. Failure to provide required assurances could result in penalties, suspension of operations or production, or lease-cancellation proceedings.
Asset retirement obligations totaled $346.8 million at September 30, 2016, with estimated spending of $90.2 million from October 2016 through September 2017. Sureties may demand additional collateral, potentially affecting liquidity.
After the reporting date, a jury found that W&T failed to pay its share of Apache’s well-abandonment costs and determined damages of $43.2 million, subject to a $17.0 million offset. The jury also found Apache acted in bad faith; W&T intended to seek judgment consistent with that finding.
Other contingencies include an ONRR fine potentially approximating $1.1 million, five BSEE incidents with proposed penalties totaling $8.3 million, the Apache litigation, royalty reviews, an Iberville Parish environmental lawsuit with unquantified exposure and an insurance-reimbursement claim estimated at approximately $31 million plus interest, fees and damages.
The company disclosed that prolonged weak commodity prices or significant bonding demands could impair debt-service capacity, covenant compliance and liquidity, and could require asset sales or bankruptcy-related relief.

Important facts for investors to verify

Whether BOEM approves the tailored compliance plan and the ultimate amount, timing and collateral requirements for supplemental bonding.
Available liquidity after ARO settlements, surety collateral demands, operating cash flow and any required debt payments.
The company’s ability to refinance or otherwise address remaining 2019 unsecured notes; certain new debt could accelerate and become due on February 28, 2019 if refinancing conditions are not met.
Subsequent court developments and the final monetary outcome of the Apache lawsuit.
Actual commodity prices, production volumes and any additional ceiling-test impairment.
The effect of PIK interest on future principal balances and the difference between contractual interest payments and reported interest expense under the troubled-debt-restructuring accounting.
Realization of the $52.1 million income-tax receivable and other tax attributes, including the effect of the debt-exchange tax gain.