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 and onshore Texas. The unaudited report covers the three and six months ended June 30, 2013, with comparisons to the corresponding 2012 periods.
- First-half production mix was approximately 40.6% oil and condensate, 11.9% NGLs and 47.5% natural gas on an energy-equivalent basis.
- The company continued integrating the October 2012 acquisition of Newfield Gulf of Mexico properties, purchased for approximately $205.7 million.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $235.4 million | $215.5 million | $494.6 million | $451.4 million |
| Operating income | $53.8 million | $99.1 million | $114.1 million | $115.0 million |
| Net income | $22.4 million | $53.6 million | $49.0 million | $56.8 million |
| Basic and diluted EPS | $0.29 | $0.70 | $0.64 | $0.75 |
| Operating margin | 22.9% | 46.0% | 23.1% | 25.5% |
| Net margin | 9.5% | 24.9% | 9.9% | 12.6% |
| Cash flow from operations | Not separately provided | Not separately provided | $297.4 million | $241.3 million |
- Q2 revenue increased 9.2%, while first-half revenue increased 9.6%. Oil and natural gas revenue growth more than offset a substantial decline in NGL revenue.
- Q2 operating income declined 45.7% and net income declined 58.2%, primarily because the prior-year quarter included a much larger derivative gain and 2013 incurred higher DD&A, lease operating and interest expense.
- First-half operating income was broadly flat, while net income declined 13.7%.
- First-half production decreased 3.2% on an equivalent basis. Oil volumes increased 17.1%, while NGL volumes declined 9.2% and natural gas volumes declined 14.4%.
- First-half unhedged realized prices were $104.61 per barrel for oil, $33.26 per barrel for NGLs and $3.78 per Mcf for natural gas. Compared with 2012, oil prices declined 3.4%, NGL prices declined 28.2% and natural gas prices increased 46.5%.
- DD&A increased 19.7% to $208.8 million for the first half, and DD&A per Mcfe rose to $4.04 from $3.27.
- Cash flow from operations increased 23.2% to $297.4 million, but capital spending increased 59.7% to $299.2 million. Cash declined to $9.3 million from $12.2 million at year-end 2012.
- Total debt was $1.10 billion at June 30, 2013, consisting primarily of $900.0 million of 8.50% Senior Notes and $183.0 million outstanding under the revolving credit facility.
- The revolving facility had an $800.0 million borrowing base and $616.9 million of availability. The company was in compliance with applicable debt covenants.
- Shareholders’ equity increased to $582.2 million from $541.2 million at December 31, 2012. Dividends paid during the first half totaled $12.8 million, or $0.17 per share.
Material changes versus the prior comparable period
- Revenue benefited from higher oil volumes, higher natural gas prices and contributions from the Newfield properties, but production was affected by natural declines and operational deferrals.
- NGL revenue fell 34.8% in the first half because of lower prices and volumes.
- Lease operating expense increased 9.1% in the first half, including higher workover and facilities costs.
- The Q2 derivative gain decreased to $12.8 million from $49.9 million. First-half derivative gains were $9.5 million versus $10.2 million.
- Interest expense increased 71.1% in the first half because the company had $900.0 million of senior notes outstanding versus $600.0 million in the prior-year period.
- Capital expenditures rose primarily because of increased offshore drilling activity. The company completed 26 gross wells in the first half of 2013 versus 39 in the prior-year period.
Guidance, outlook, commentary and risks
- The 2013 capital expenditure budget is $450.0 million, excluding acquisitions, allocated approximately 63% to exploration and 37% to development, and 63% offshore and 37% onshore.
- Management expects to fund the budget and potential acquisitions with operating cash flow, cash on hand, revolver borrowings and, if necessary, capital-market access.
- Management cited continued volatility and downside risks for oil, NGL and natural gas prices. Lower prices could reduce revenue, cash flow, liquidity, proved reserves and the borrowing base, and could result in a full-cost ceiling-test write-down.
- Production deferrals were estimated at 3.2 Bcfe in the second quarter and 4.6 Bcfe for the first half, resulting from pipeline outages, maintenance, water-treatment upgrades, workovers and other performance issues.
- A July 2013 Ship Shoal 349 well produced an initial rate of approximately 4,000 Boe/d net of royalty, with a reported peak rate of approximately 4,644 Boe/d gross.
- Open crude oil derivatives covered approximately 1.4 million barrels for the balance of 2013 and 0.7 million barrels for 2014. These contracts reduce price exposure but may limit gains from favorable price movements.
- Hurricane Ike remediation remained material. The company had received $147.2 million of insurance proceeds, spent $44.5 million on wreck removal and expected an additional $2.6 million. A federal district court ruled for insurers on coverage exhaustion requirements; the company intends to appeal.
- The qui tam environmental litigation was dismissed without prejudice on August 6, 2013, with an opportunity for the plaintiff to amend. Management believes an adverse outcome is reasonably possible, but the potential loss cannot be estimated and no accrual was recorded.
- Other commitments included approximately $28.0 million of drilling rig commitments and $6.7 million remaining under a well-containment services agreement.
- The board declared a $0.09 per-share dividend on August 7, 2013, payable September 12, 2013.
Important facts for investors to verify
- Whether production deferrals and offshore maintenance issues are resolved and whether the Ship Shoal 349 discovery reaches sustained commercial production.
- The effect of lower NGL prices, commodity-price volatility and derivative settlements on future revenue and cash flow.
- Future borrowing-base redeterminations, revolver availability, leverage and compliance with debt covenants.
- Whether the company can execute its $450.0 million capital budget while maintaining liquidity and dividends.
- The outcome and potential financial exposure of the Hurricane Ike insurance appeal and the qui tam litigation.
- The magnitude and timing of asset-retirement obligations, including revisions associated with offshore regulatory requirements.