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 Gulf of Mexico. The filing covers the three and nine months ended September 30, 2018; financial statements are unaudited. As of October 31, 2018, 139.2 million common shares were outstanding.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $153.5 million | $110.3 million | $437.3 million | $358.0 million |
| Operating income | $57.1 million | $15.7 million | $144.4 million | $76.8 million |
| Operating margin | 37.2% | 14.2% | 33.0% | 21.4% |
| Net income (loss) | $46.3 million | $(1.3) million | $110.0 million | $56.3 million |
| Net margin | 30.1% | (1.2)% | 25.2% | 15.7% |
| EPS, basic and diluted | $0.32 | $(0.01) | $0.76 | $0.39 |
| Cash flow from operations | Not separately provided | Not separately provided | $294.9 million | $130.3 million |
Revenue growth was driven primarily by higher oil and NGL prices. Nine-month realized oil price increased 45.2% to $66.52 per barrel and NGL price increased 32.1% to $28.91 per barrel, while natural gas price declined 2.4% to $2.90 per Mcf. Nine-month production declined 9.1% to 37,017 Boe per day, with natural gas volumes down 12.0%.
At September 30, 2018, cash and cash equivalents were $339.1 million versus $99.1 million at December 31, 2017. Total assets were $1.10 billion, current assets were $490.0 million and shareholders' deficit was $459.8 million. Reported debt carrying value was $983.9 million, including $224.8 million classified as current, principally the $189.8 million of unsecured notes due June 2019.
Operating cash flow increased 126% year over year, reflecting higher realized commodity prices, lower asset-retirement spending and working-capital changes. Investing cash flow was $(45.7) million, including $59.2 million of oil and gas property investment, $16.8 million for the Heidelberg acquisition and $50.5 million of proceeds from the Permian Basin royalty-interest sale. Financing cash flow was $(9.1) million.
Material changes versus the prior comparable period
- Third-quarter revenue rose 39.2%, and nine-month revenue rose 22.1%, despite lower nine-month production.
- Nine-month operating income increased 88.0% and net income increased 95.3%.
- Costs increased more slowly than revenue overall, although lease operating expense rose 2.8% for the nine-month period and cost per Boe increased 10.4% to $28.40.
- The nine-month derivative result changed from a $4.8 million gain in 2017 to a $5.9 million loss in 2018.
- The company acquired a 9.375% non-operated interest in the Heidelberg field for a net $16.8 million and sold Permian Basin overriding royalty interests for $50.5 million.
- W&T formed the Monza drilling joint venture. Total member commitments were $361.4 million, and W&T's contribution was $53.5 million, with potential exposure to certain cost overruns that cannot currently be estimated.
Refinancing, outlook and management commentary
On October 18, 2018, after the reporting date, W&T issued $625.0 million of 9.75% Senior Second Lien Notes due 2023 and entered into a new revolving credit facility with an initial $250.0 million borrowing base, maturing in 2022. The proceeds, cash on hand and revolver borrowings were used to retire or redeem substantially all existing notes and term loans.
Immediately after refinancing, revolver borrowings were $61.0 million, letters of credit were $9.7 million and revolver availability was $179.3 million. Management stated that post-refinancing liquidity exceeded $200 million and that the company expected to have adequate liquidity through November 2019. The transaction is expected to produce an approximately $47.0 million net gain and add approximately $17.9 million of capitalized debt issuance costs in the fourth quarter.
Management forecast 2018 capital expenditures of approximately $95 million, excluding Heidelberg and other potential acquisitions, with participation in 10 wells, including seven in the Monza program. Management emphasized profitable investments with short payback periods, spending within cash flow, cost reductions and maintaining liquidity. It may increase investment if commodity prices remain at or improve from current levels.
Commodity prices remain the principal operating risk. The company expects continued weakness in natural gas pricing, while its outlook cited relatively stable 2019 crude oil prices. The new credit agreement requires hedging of at least 50% of projected production for 18 months by December 2, 2018.
Risks, contingencies and unusual items
- The company has substantial asset-retirement obligations of $313.2 million, including $30.2 million current, and estimated 2018 ARO spending of $30.6 million.
- A $49.5 million deposit and matching liability remain related to the Apache lawsuit; the company appealed the judgment, with oral argument scheduled for December 4, 2018.
- Additional royalty exposure remains under ONRR matters, including a $4.7 million dispute, a $2.1 million reserve for royalties-in-kind and unresolved “unbundling” reviews for which the potential amount cannot be estimated.
- Eight BSEE civil penalties totaling $7.9 million were open; the company accrued approximately $3.4 million.
- BOEM or surety providers may require significant additional bonds or cash collateral. The company posted $10.6 million of additional BOEM bonds during April 2018.
- Pipeline minimum-volume obligations assumed with Heidelberg are estimated at $19.6 million through 2028.
- Natural gas and oil production may be affected by natural declines, maintenance, well issues and pipeline outages. Deferred production averaged 4,300 Boe per day during the first nine months of 2018.
- The CEO's affiliated entities purchased approximately $8.0 million of the new Senior Second Lien Notes on the same terms as other initial investors; their prior $5.0 million Second Lien Term Loan investment was repaid.
Investor verification checklist
- Verify the post-refinancing debt structure, interest burden, covenant compliance and borrowing-base redetermination expected in spring 2019.
- Assess sensitivity to oil, NGL and natural gas prices, including the required 2018-2019 hedging program.
- Reconcile reported liquidity with restricted cash, letters of credit, BOEM requirements and potential surety collateral demands.
- Track production declines, deferred production, Heidelberg performance and results from the Monza drilling program.
- Review resolution and possible cash impact of the Apache lawsuit, ONRR royalty matters and BSEE penalties.
- Evaluate the timing and collectability of the $65.2 million income-tax receivable, including claims subject to Joint Committee on Taxation review.