W&T Offshore, Inc. — Form 10-Q Summary
Business Context and Reporting Period
W&T Offshore is an independent oil and natural gas producer focused primarily on exploration, development and acquisitions in the offshore Gulf of Mexico. The filing covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods. The company held interests in 47 offshore fields and approximately 637,000 gross leased acres at quarter-end.
Key Financial Metrics
| Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 |
|---|---|---|---|---|
| Total revenue | $273.8 million | $132.8 million | $464.8 million | $258.5 million |
| Operating income | $162.3 million | $33.6 million | $260.0 million | $73.2 million |
| Net income (loss) | $123.4 million | $(51.7) million | $121.0 million | $(52.4) million |
| Diluted EPS | $0.85 | $(0.36) | $0.84 | $(0.37) |
| Net cash from operations | Not separately provided | Not separately provided | $237.8 million | $46.2 million |
| Production | 42,407 Boe/day | 40,888 Boe/day | 40,094 Boe/day | 40,278 Boe/day |
- Margins: Q2 operating margin was approximately 59.3% versus 25.3% in the prior-year quarter; net margin was approximately 45.1% versus negative 38.9%. Six-month operating margin was approximately 55.9% versus 28.3%; net margin was approximately 26.0% versus negative 20.3%.
- Commodity pricing: Q2 realized prices before derivatives were $107.90 per barrel of oil, $43.58 per barrel of NGLs and $7.70 per Mcf of natural gas. Six-month realized prices were $101.43, $41.68 and $6.40, respectively.
- Cash and liquidity: Cash and cash equivalents were $377.7 million at June 30, 2022, compared with $245.8 million at December 31, 2021. The company reported $50.0 million of borrowing availability under its credit agreement and $4.4 million of cash-collateralized letters of credit.
- Debt: Net debt was $709.2 million, consisting primarily of $165.9 million of Term Loan principal and $552.5 million of Senior Second Lien Notes principal. The Term Loan bears fixed interest of 7% and matures in 2028. The 9.75% Senior Second Lien Notes mature November 1, 2023.
- Capital spending and acquisitions: Investing cash outflows were $78.9 million, including $47.6 million for acquisitions and $25.5 million for oil and gas property and equipment. The company acquired Gulf of Mexico interests for approximately $30.2 million and $17.5 million in February and April 2022.
- Asset retirement obligations: Total ARO increased to $460.8 million from $424.5 million at year-end 2021, reflecting acquired liabilities, revisions and accretion, partly offset by $39.8 million of settlements.
Material Changes Versus the Prior Comparable Period
- Revenue increased 106.1% in Q2 and 79.9% for the six months, driven primarily by significantly higher oil, NGL and natural gas prices. Production was broadly stable for the six-month period.
- The company moved from a net loss to substantial net income. The improvement also reflected a derivative gain of $8.9 million in Q2 2022 versus a $81.4 million derivative loss in Q2 2021.
- Six-month derivative loss declined to $71.1 million from $106.0 million. Results included a $138.0 million realized gain from restructuring certain natural gas call contracts and $105.3 million of related net cash proceeds.
- Operating expenses increased 12.3% in Q2 and 10.6% for the six months. Lease operating expense, facilities maintenance, workovers, DD&A and general and administrative costs were higher, while prior-year hurricane repair costs did not recur.
- Operating cash flow increased by $191.6 million to $237.8 million, partly offset by higher ARO settlements, increased receivables and other working-capital uses.
- Financing cash flow changed from $128.2 million provided in the first six months of 2021, when the Term Loan was issued, to $26.9 million used in 2022, primarily for Term Loan repayments.
Guidance, Outlook, Commentary and Risks
- Management stated that, at current commodity prices, expected cash flows should cover liquidity requirements for the foreseeable future. No formal production or revenue guidance was provided.
- Management is discussing potential refinancing of all or part of the Senior Second Lien Notes before their November 2023 maturity. The filing provides no assurance regarding the timing, availability or terms of refinancing.
- Management expects approximately 10% to 12% of 2022 income tax expense to be paid in cash.
- Commodity price volatility remains the principal operating and financial risk. Management cited the effects of the Russia-Ukraine conflict, sanctions, inflation, supply-chain constraints, changing demand, OPEC+ policies and possible COVID-19 disruptions.
- Derivative positions extend through April 2028 and can cause significant volatility in reported earnings. Natural gas calls cover approximately 85% of anticipated natural gas production for the balance of 2022 after the restructuring.
- Decommissioning obligations and potential future BOEM financial-assurance requirements could materially affect liquidity. Surety providers may demand collateral, although no additional demands had been made as of the filing date and no surety bond collateral was outstanding.
- The company disclosed cybersecurity-control deficiencies involving its own infrastructure and primary third-party provider. Remediation, personnel changes and a transition away from the provider were underway; the provider intended to cease services by September 2, 2022. No material adverse impact had been identified as of the filing.
- Legal and contingency matters include an ONRR royalty appeal secured by an $8.2 million surety bond and potential liabilities for decommissioning previously divested properties. The company recognized an additional $0.5 million loss-contingency accrual in the first half of 2022.
Important Facts for Investors to Verify
- Whether the company can refinance or repay the $552.5 million Senior Second Lien Notes before the November 2023 maturity.
- The sustainability of cash flow and earnings after removing the nonrecurring $105.3 million derivative-related cash proceeds and considering future derivative settlements.
- Current commodity prices, hedge volumes and strike prices, particularly the company’s natural gas exposure after the hedge restructuring.
- Compliance with credit agreement and indenture covenants, including the $50.0 million borrowing base and January 3, 2023 credit facility maturity.
- The accuracy and timing of the estimated $460.8 million asset retirement obligation and any additional BOEM or surety collateral requirements.
- Progress and costs associated with the cybersecurity remediation and information-technology service-provider transition.
- Outcomes of the ONRR appeal and potential retained decommissioning liabilities associated with divested properties.