W&T Offshore, Inc. — 2015 First-Quarter Form 10-Q Summary
Business context and reporting period
W&T Offshore is an independent oil and natural gas producer focused primarily on the Gulf of Mexico and onshore Texas. The filing covers the unaudited three months ended March 31, 2015, compared with the three months ended March 31, 2014. Production was approximately 43.1% oil and condensate, 10.1% NGLs and 46.8% natural gas on an energy-equivalent basis.
Financial performance and key metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $127.9 million | $254.5 million | Down 49.7% |
| Operating income (loss) | $(337.5) million | $37.2 million | Declined $374.7 million |
| Net income (loss) | $(255.1) million | $11.2 million | Declined $266.3 million |
| Basic and diluted EPS | $(3.36) | $0.15 | Declined $3.51 |
| Cash flow from operations | $0.7 million | $118.5 million | Down $117.7 million |
| Capital expenditures | $83.0 million | $95.3 million | Down $12.3 million |
| Total debt | $1.426 billion | $1.360 billion | Up $66.4 million |
Revenue declines reflected lower realized prices: oil fell 56.3% to $43.04 per barrel, NGLs fell 56.1% to $16.81 per barrel and natural gas fell 40.0% to $3.01 per Mcf. Total production increased 0.8% to 4.395 million Boe, including a 9.4% increase in oil volumes, partly offset by lower NGL and natural gas volumes.
Operating costs and expenses were $465.4 million, including a $260.4 million non-cash ceiling-test write-down. Excluding the write-down, costs and expenses were approximately $205.0 million. Reported operating margin was approximately negative 263.9%, and net margin was approximately negative 199.4%; these margins were heavily affected by the ceiling-test charge. Cash flow from operations represented approximately 0.6% of revenue.
Lease operating expense decreased 4.1% to $53.3 million, G&A decreased 12.0% to $20.8 million and DD&A increased 1.8% to $125.5 million. No derivative loss was recorded in Q1 2015, compared with a $7.5 million loss in Q1 2014.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $8.4 million at March 31, 2015, down from $23.7 million at December 31, 2014.
- Operating cash flow of $0.7 million and financing inflows of $67.0 million did not fully offset $83.0 million of investing outflows, resulting in a $15.3 million decrease in cash.
- Debt consisted of $900.0 million of 8.50% senior notes due June 2019 and $514.0 million drawn under the revolving credit facility, which matures November 2018.
- At March 31, 2015, the revolving facility had a $750.0 million borrowing base and $235.4 million of available capacity, before the subsequent amendment.
- The April 2015 amendment reduced the borrowing base to $600.0 million, increased applicable borrowing margins by 0.50 percentage points, revised covenants and restricted distributions through June 2016, subject to specified exceptions.
- The regular quarterly dividend was suspended; Q1 2015 dividends were zero versus $7.6 million paid in Q1 2014.
- Management stated that it expected adequate liquidity to fund operations through March 31, 2016, but cautioned that sustained low commodity prices could materially affect liquidity.
Material changes and outlook
- Commodity prices weakened substantially from the prior year, while production was broadly stable. Management reduced the 2015 capital budget, suspended drilling and completion activity at several locations and implemented cost-reduction initiatives.
- The 2015 capital budget was approximately $200 million, excluding acquisitions, with 92% allocated offshore and most offshore spending directed to deepwater projects.
- Management expects additional ceiling-test write-downs during 2015 if commodity prices remain near Q1 levels. Such write-downs are non-cash, not recoverable and not reversible under the full-cost accounting method.
- On May 5, 2015, the company announced the marketing of a proposed $300.0 million, five-year second-lien term loan. The transaction had not closed by the filing date and was subject to definitive documentation and lender approvals. If completed, proceeds would repay part of the revolver, but the revolver borrowing base would be reduced to $500.0 million.
- The amended credit agreement requires minimum hedging positions of 25% of estimated June–December 2015 production and 35% of estimated 2016 production by June 1, 2015.
- Production totaled 48,837 Boe per day, up 0.8% year over year. The company reported approximately 0.5 million Boe of production deferrals during the quarter from pipeline outages, operational issues and maintenance.
Risks, contingencies and unusual items
- The principal risk is continued weakness or volatility in oil, NGL and natural gas prices, which could reduce revenue, cash flow, borrowing capacity, reserves and covenant compliance.
- The company had no open commodity or interest-rate derivative contracts at March 31, 2015 and was therefore exposed to commodity price movements, subject to the new hedging requirements.
- Apache litigation related to plugging and abandoning three deepwater wells presents estimated exposure ranging from zero to $32 million, excluding interest, court costs and attorneys’ fees. No material amount was accrued.
- An ONRR matter involves a proposed $2.3 million fine relating to approximately $30,000 of alleged royalty underpayments. The company is contesting the fine and has accrued no amount.
- The company is pursuing approximately $30 million, plus interest, fees and potential damages, from certain insurers concerning Hurricane Ike removal-of-wreck claims.
- Total asset retirement obligations were $381.2 million at March 31, 2015, including $16.5 million classified as current.
- New or expanded regulation of produced-water disposal and induced seismicity in Texas could increase costs or restrict Permian Basin operations.
- The company stated that its disclosure controls and procedures were effective as of March 31, 2015, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the proposed $300.0 million second-lien term loan closed and the resulting revolver balance, borrowing base and liquidity.
- Subsequent borrowing-base redeterminations, covenant compliance and required minimum hedges.
- Commodity prices, realized price differentials and any additional 2015 ceiling-test write-downs.
- Actual operating cash flow relative to the reduced capital budget and scheduled interest obligations.
- Progress and potential recovery in the insurance litigation and outcomes of the Apache and ONRR matters.
- Whether production deferrals, reserve debookings and deepwater capital requirements affect future production and reserve replacement.