W&T Offshore, Inc. — Form 10-Q Summary
Business Context and Reporting Period
W&T Offshore, Inc. is an independent oil and natural gas producer focused primarily on the Gulf of Mexico and onshore Texas. The filing covers the three and six months ended June 30, 2014. The company held interests in approximately 66 producing offshore fields and approximately 1.2 million gross leased acres. Production for the first half of 2014 was 41.0% oil and condensate, 11.8% NGLs and 47.2% natural gas on an energy-equivalent basis.
Key Financial Metrics
| Metric | Q2 2014 | Q2 2013 | Six Months 2014 | Six Months 2013 |
|---|---|---|---|---|
| Revenue | $263.0 million | $235.4 million | $517.5 million | $494.6 million |
| Operating income | $34.4 million | $53.8 million | $71.6 million | $114.1 million |
| Net income | $9.8 million | $22.4 million | $21.0 million | $49.0 million |
| Diluted EPS | $0.13 | $0.29 | $0.28 | $0.64 |
| Operating margin | Approximately 13.1% | Approximately 22.9% | Approximately 13.8% | Approximately 23.1% |
| Net margin | Approximately 3.7% | Approximately 9.5% | Approximately 4.1% | Approximately 9.9% |
| Net cash from operations | Not separately provided | Not separately provided | $271.1 million | $297.4 million |
| Capital and property investments | Not separately provided | Not separately provided | $267.8 million cash investing outflow | $300.2 million cash investing outflow |
Cash and cash equivalents were $23.8 million at June 30, 2014, compared with $15.8 million at December 31, 2013. Total assets were $2.55 billion and shareholders’ equity was $553.4 million.
Total debt was $1.224 billion, consisting of $900.0 million of 8.50% Senior Notes due 2019 and $310.0 million drawn under the revolving credit facility, net of debt premium. The facility had a $750.0 million borrowing base, $439.4 million of available borrowing capacity and $0.6 million of outstanding letters of credit. The company was in compliance with applicable debt covenants.
For the six months, operating cash flow before working-capital changes and asset-retirement-obligation settlements was $298.8 million. Cash flow was reduced by $30.3 million of asset-retirement-obligation settlements, while dividends paid totaled $15.1 million. Net debt borrowings were $20.0 million.
Material Changes Versus the Prior Comparable Period
- First-half revenue increased 4.6%, driven by higher natural gas and NGL prices and modestly higher production. Total production increased 1.5% to 8.754 million Boe.
- Oil revenue declined 2.8% in the first half despite a 2.5% volume increase because the average realized oil price fell 5.1% to $99.26 per barrel. Natural gas revenue increased 28.5%, and NGL revenue increased 18.9%.
- Operating income and net income declined 37.2% and 57.1%, respectively, in the first half. The principal pressures were higher DD&A and unfavorable derivative results.
- DD&A increased 20.5% to $251.5 million, or $28.73 per Boe versus $24.22 per Boe, reflecting higher full-cost pool balances and estimated future development costs.
- Commodity derivatives produced a $20.6 million loss in the first half of 2014 versus a $9.5 million gain in the prior-year period. The loss included $14.3 million of realized losses and $6.3 million of unrealized losses.
- Lease operating expense decreased 8.0% to $117.4 million, and lease operating cost per Boe declined 9.4% to $13.41, primarily because of lower workover and insurance costs.
- In May 2014, the company acquired Woodside Gulf of Mexico properties, including a 20% non-operated interest in the Neptune field, for $53.4 million of cash consideration plus assumed asset-retirement obligations. The properties contributed $6.9 million of revenue and $2.6 million of net income after their May transfer date.
- The company increased its 2014 capital expenditure budget by $185.0 million to $635.0 million, primarily for additional deepwater and Permian Basin wells and completed acquisitions.
Guidance, Outlook, Risks and Unusual Items
- Management expects to fund the 2014 capital budget and other requirements with operating cash flow, cash on hand, revolver borrowings, potential divestiture proceeds and, if needed, capital-market financing. The budget remains subject to change and excludes potential future acquisitions.
- Management expects substantial 2014 income tax deferral, with payments, if any, primarily related to alternative minimum tax. The company reported $263.4 million of federal tax-basis net operating loss carryforwards and $12.1 million of alternative minimum tax credits.
- Oil-price exposure remains significant. The company had crude oil swaps covering approximately 1.7 million barrels for the balance of 2014, with open contracts through December 2014. Derivatives reduce price volatility but can limit gains from higher prices.
- Management noted weaker Gulf Coast crude differentials, volatile oil and natural gas prices, potential natural gas oversupply, production deferrals and risks from weather, pipeline outages, platform maintenance and operational issues. Estimated production deferrals were 1.2 million Boe in the first half.
- The company faces substantial offshore plugging, abandonment and remediation obligations. Asset-retirement obligations totaled $357.6 million at June 30, 2014, including $69.9 million classified as current.
- ONRR assessed a $2.3 million statutory fine related to an alleged approximately $30,000 royalty underpayment. The company is contesting the fine, and no amount was accrued because no outcome within the range was considered more likely than another.
- The company expects to pursue up to approximately $46.3 million of insurance claims for Hurricane Ike removal-of-wreck costs after a favorable Fifth Circuit ruling. Recovery is not assured and would reduce oil and gas property costs if received.
- On August 5, 2014, after the quarter ended, the EPA lifted the Parent Company’s suspension and proposed debarment, subject to continued compliance with existing probation conditions, restoring eligibility for future federal contracts and leases.
- The company received a BOEM waiver in May 2014 for certain supplemental offshore bonding requirements applicable to the Parent Company; Energy VI remains subject to supplemental bonding requirements.
- A third-party conversion-factor error caused prior-period natural gas production to be understated. The company determined the related earnings impact was not material and recognized the adjustment in the fourth quarter of 2013.
Important Facts for Investors to Verify
- Whether the $635.0 million 2014 capital budget can be funded while maintaining covenant compliance and adequate liquidity.
- The outcome and potential cash exposure from the $2.3 million ONRR fine and related royalty matters.
- The timing, amount and collectability of the approximately $46.3 million Hurricane Ike insurance claims.
- Future borrowing-base redeterminations, reserve levels and availability under the revolving credit facility.
- The effect of oil-price differentials, natural gas prices and derivative settlements on cash flow and earnings.
- Whether higher DD&A rates, production deferrals and offshore decommissioning costs persist or further reduce margins.
- The performance and integration economics of the Woodside and Callon acquisitions, including their contribution to production and cash flow.
- Potential changes in offshore permitting, environmental, safety, insurance and plugging-and-abandonment requirements.