W&T Offshore, Inc. — 2013 First-Quarter 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 filing covers the three months ended March 31, 2013, with comparison to the three months ended March 31, 2012. Production was approximately 41.0% oil and condensate, 11.9% NGLs and 47.1% natural gas on an energy-equivalent basis. The 2013 results include the Gulf of Mexico properties acquired from Newfield in October 2012.
Financial and operating metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $259.2 million | $235.9 million | +9.9% |
| Operating income | $60.3 million | $15.9 million | +279.1% |
| Operating margin | 23.3% | 6.7% | +16.6 percentage points |
| Net income | $26.6 million | $3.2 million | +727.2% |
| Net margin | 10.3% | 1.4% | +8.9 percentage points |
| Basic and diluted EPS | $0.35 | $0.04 | +$0.31 |
| Cash flow from operations | $169.8 million | $128.2 million | +32.5% |
| Capital expenditures | $136.6 million | $85.1 million | +60.7% |
| Cash and equivalents at period end | $12.3 million | $8.5 million | +$3.8 million |
Oil revenue increased 16.2% to $197.6 million, supported by a 19.7% increase in oil sales volumes. NGL revenue declined 30.5% to $18.3 million, principally because the average realized NGL price fell 29.4% to $34.25 per barrel. Natural gas revenue increased 11.7% to $42.9 million as the realized price rose 26.6% to $3.38 per Mcf, despite an 11.5% volume decline.
Total equivalent production increased 0.4% to 4.5 million Boe, or approximately 49,988 Boe per day. The hedged realized price increased 10.7% to $56.58 per Boe. Lease operating expense rose 4.7% to $59.3 million, while DD&A increased 23.0% to $108.9 million. G&A declined 28.5% to $21.1 million.
Long-term debt was $1.060 billion at March 31, 2013, consisting primarily of $900.0 million of 8.50% senior notes due June 2019 and $143.0 million outstanding under the revolving credit facility, net of debt premiums and other adjustments. Interest expense, net of capitalized interest, increased 75.5% to $18.8 million.
The company had a $725.0 million borrowing base and $581.4 million of borrowing capacity available at March 31, 2013, with $0.6 million of letters of credit outstanding. Effective April 19, 2013, the borrowing base and available borrowing amount were increased to $800.0 million. The company reported compliance with its debt covenants.
Material changes versus the prior comparable period
- Revenue and production benefited from the Newfield acquisition and increased oil output, including production from Ship Shoal 349 and West Texas properties.
- Operating income improved substantially as revenue increased and derivative losses declined from $39.6 million to $3.4 million.
- The 2013 derivative loss included a $4.3 million realized loss and a $0.9 million unrealized gain, compared with a $33.8 million unrealized loss in Q1 2012.
- DD&A increased because of additions to the full-cost pool, higher asset-retirement-obligation estimates, increased development costs and the Newfield properties.
- Interest expense increased because the company had $900.0 million of senior notes outstanding versus $600.0 million in the prior-year quarter.
- Capital investment increased to $136.6 million, including $60.6 million for exploration and $73.7 million for development, primarily reflecting higher offshore drilling activity.
- Net cash used in financing declined to $33.1 million from $39.0 million, reflecting net revolver repayments and dividends.
Outlook, commentary, risks and unusual items
Management expects to fund its 2013 capital program and potential acquisitions with operating cash flow, cash on hand, revolver borrowings and, if necessary, capital-market financing. The filing does not provide a formal full-year earnings or production guidance range.
Management expects continued volatility in oil, NGL and natural gas prices. It noted that NGL pricing may remain weak because of high domestic production and ethane and propane inventories. Lower commodity prices could reduce revenue, cash flow, reserves and the revolving-credit borrowing base, and could contribute to full-cost ceiling-test write-downs or covenant pressure.
The company had oil derivatives covering approximately 3.1 million barrels for the balance of 2013 and 2014. These contracts reduce some price exposure but may limit gains from favorable oil-price movements and create earnings volatility because changes in fair value are recognized currently.
Hurricane Ike remediation remains material. The company had received $142.2 million from insurers through March 2013, recorded $5.1 million of insurance receivables and estimated $6.4 million of additional Hurricane Ike costs. Excess insurers are disputing coverage for certain removal-of-wreck costs; the company has incurred $49.7 million and expects an additional $0.7 million. Potential claims under the disputed excess policies may total approximately $50.0 million.
The company accrued $1.3 million for Cameron Parish claims; one claim was settled for $0.5 million in April 2013. A separate False Claims Act qui tam action remains pending, with a reasonably possible adverse outcome but no estimable loss and no accrual. Other ordinary-course claims were not expected by management to have a material adverse effect.
Drilling-rig commitments were approximately $48.4 million at March 31, 2013, and expire within one year. The company was renewing well-control and named-windstorm insurance that expired June 1, 2013 and noted the risk of higher premiums, reduced coverage or uninsured losses.
On May 7, 2013, the board declared a quarterly dividend of $0.09 per share, up from the $0.08 per share paid during the first quarter. Shareholders also approved an additional 4.0 million shares for the incentive plan and extended the plan through April 15, 2019.
Important facts for investors to verify
- Whether oil, NGL and natural gas prices and the company’s hedging positions support the improved operating margin.
- The sustainability of cash flow after the substantially higher exploration and development spending.
- Future borrowing-base redeterminations, revolver availability and compliance with leverage and current-ratio covenants.
- The effect of elevated DD&A and asset-retirement-obligation revisions on future earnings and full-cost ceiling-test risk.
- The outcome and timing of Hurricane Ike insurance litigation and the potential recovery of disputed removal-of-wreck costs.
- The potential exposure from the Cameron Parish claims and the unaccrued False Claims Act litigation.
- Renewal terms and costs for offshore well-control and named-windstorm insurance.
- Whether the Newfield properties deliver expected production, reserves and returns relative to the acquisition cost and assumed obligations.