W&T Offshore, Inc. 2013 Q3 Form 10-Q Summary
Business context and reporting period
W&T Offshore is an independent oil and natural gas producer focused on the Gulf of Mexico and onshore Texas. The unaudited report covers the three and nine months ended September 30, 2013, with comparisons to the same 2012 periods. The company held interests in approximately 67 producing offshore fields and approximately 1.3 million gross leased acres.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Revenue | $244.6 million | $185.9 million | $739.2 million | $637.3 million |
| Operating income | $32.0 million | $7.6 million | $146.1 million | $122.6 million |
| Operating margin | 13.1% | 4.1% | 19.8% | 19.2% |
| Net income (loss) | $14.2 million | $(1.5) million | $63.2 million | $55.3 million |
| Net margin | 5.8% | (0.8)% | 8.6% | 8.7% |
| Diluted EPS | $0.19 | $(0.02) | $0.83 | $0.73 |
| Net cash from operations | Not separately provided | Not separately provided | $475.8 million | $351.5 million |
Production increased 1.6% on an Mcfe basis for the nine-month period. Oil and condensate represented approximately 40.7% of production, NGLs 11.9%, and natural gas 47.4%. Oil and NGL revenue represented 81.3% of total revenue for the nine months.
- Nine-month oil revenue increased 19.2% to $550.3 million, primarily from a 19.8% increase in oil sales volumes; realized oil price declined 0.6% to $105.30 per barrel.
- Nine-month natural gas revenue increased 25.0% to $136.5 million; realized price increased 37.5% to $3.74 per Mcf, partly offset by a 9.0% volume decline.
- Nine-month NGL revenue declined 21.9% to $50.6 million as realized price fell 18.8% to $33.30 per barrel and volumes declined 3.9%.
- Lease operating expense increased 14.4% to $194.9 million, while DD&A and accretion increased 24.2% to $312.9 million.
- Derivative loss declined to $6.2 million from $14.4 million for the nine-month period, but Q3 still included a $15.7 million derivative loss, including an $11.2 million unrealized loss.
- Interest expense, net of capitalized interest, increased 69.0% to $56.6 million for the nine-month period, reflecting higher senior-note borrowings.
Liquidity, debt and capital allocation
- September 30 cash and cash equivalents were $15.2 million, compared with $12.2 million at December 31, 2012. Restricted cash was $16.5 million, principally related to a like-kind exchange.
- Total long-term debt was $1.053 billion, consisting of $900.0 million of 8.50% senior notes and $137.0 million drawn under the revolving credit facility, net of debt premiums.
- The existing facility had an $800.0 million borrowing base and $662.9 million of borrowing availability at September 30, 2013. The company was in compliance with applicable debt covenants.
- Nine-month capital investment in oil and gas properties was $423.1 million, including $149.4 million of exploration and $246.1 million of development spending. The 2013 capital expenditure budget was $550.0 million, excluding acquisitions.
- Financing cash use was $53.0 million, including $33.0 million of net revolving-facility repayments and $19.6 million of dividends. Dividends paid were $0.26 per share for the nine-month period.
Material changes versus the prior comparable period
- Q3 revenue increased 31.5%, and net income improved from a $1.5 million loss to $14.2 million of profit. Nine-month revenue increased 16.0% and net income increased 14.3%.
- Q3 operating margin improved substantially, although higher lease operating expense and DD&A reduced the benefit of higher revenue. Nine-month DD&A per Mcfe increased to $4.07 from $3.33.
- The 2012 Newfield acquisition contributed to 2013 production, revenue and expenses; the comparable 2012 period did not include those properties before their October 2012 acquisition.
- Production deferrals were estimated at 4.7 Bcfe in Q3 and 9.3 Bcfe for the nine months, due to third-party pipeline outages, platform maintenance and operational issues, including maintenance affecting the Wrigley field.
- The company sold several Gulf of Mexico interests, receiving $11.9 million of cumulative net proceeds and reversing $19.6 million of asset retirement obligations. A $16.5 million sale proceeds amount remained restricted for a like-kind exchange.
Outlook, commentary, risks and unusual items
- Management expected the $550.0 million 2013 capital budget to be funded with operating cash flow, cash on hand, revolving borrowings and, if necessary, capital-market access. The budget allocation was approximately 60% exploration and 40% development, and 65% offshore and 35% onshore.
- Management expected continued volatility and potential weakness in oil, NGL and natural gas prices. Price declines could reduce revenue, cash flow and liquidity, trigger ceiling-test impairments, reduce proved reserves or lower the borrowing base.
- Open oil derivatives covered approximately 0.8 million barrels for the balance of 2013 and 2.1 million barrels for 2014. These contracts reduce downside exposure but can limit gains from favorable prices.
- On October 17, 2013, W&T agreed to acquire Callon properties; the first closing occurred November 5 for approximately $76.4 million of cash consideration, funded with cash and revolving borrowings. The properties were not included in Q3 results.
- On November 8, 2013, the company entered a new credit agreement increasing total facility capacity from $900.0 million to $1.2 billion and extending maturity to November 8, 2018. The borrowing base remained $800.0 million, and the maximum leverage covenant was changed from 3.0:1 to 3.5:1.
- Hurricane Ike removal-of-wreck costs totaled $45.3 million through September 30, with an additional $2.1 million expected. The company appealed a court ruling favoring insurers regarding exhaustion of underlying policy limits.
- The Cameron Parish litigation resulted in $1.3 million of settlements during the first nine months. A federal qui tam action was dismissed with prejudice on November 5, 2013; management considered an adverse outcome remote and recorded no accrual.
- Asset retirement obligations totaled $362.1 million at September 30, including $95.0 million current and $267.1 million long term. Revisions primarily reflected increased offshore work requirements from BSEE.
Important facts for investors to verify
- Confirm the effect of the Callon acquisition, post-closing adjustments and related borrowing on fourth-quarter and future leverage.
- Monitor borrowing-base redeterminations, covenant compliance and the amount of unused revolving capacity.
- Assess whether production deferrals, offshore maintenance, natural declines and permitting constraints affect projected production.
- Review sensitivity to oil, NGL and natural gas prices, including the impact of derivative settlements and unrealized derivative losses.
- Evaluate the sustainability of capital spending, dividends and liquidity relative to operating cash flow.
- Track Hurricane Ike insurance litigation, expected removal-of-wreck costs, ARO revisions and other environmental or regulatory liabilities.
- Verify the accounting effects of restricted like-kind-exchange proceeds, tax refunds and the $9.5 million unrecognized tax benefit.