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 the Gulf of Mexico and Texas, with interests in offshore fields and onshore properties. This unaudited Form 10-Q covers the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $185.9 million | $245.4 million | $637.3 million | $709.1 million |
| Operating income | $7.6 million | $95.3 million | $122.6 million | $248.5 million |
| Net income (loss) | $(1.5) million | $52.9 million | $55.3 million | $126.8 million |
| EPS, basic and diluted | $(0.02) | $0.70 | $0.73 | $1.68 |
| Operating margin | 4.1% | 38.9% | 19.2% | 35.0% |
| Net margin | (0.8)% | 21.6% | 8.7% | 17.9% |
| Cash flow from operations | Not separately provided | Not separately provided | $351.5 million | $396.1 million |
Revenue declined 24.2% in the third quarter and 10.1% for the first nine months. Nine-month equivalent production increased 2.3%, but the average realized sales price declined 12.3%. Oil represented 72.5% of nine-month revenue, NGLs 10.2%, and natural gas 17.1%.
- Q3 operating costs and expenses increased 18.9% despite lower revenue, primarily because of a $24.7 million derivative loss versus a $17.3 million derivative gain in the prior-year quarter.
- Nine-month lease operating expense increased 6.5% to $170.3 million, while DD&A increased 4.1% to $251.9 million and general and administrative expense increased 15.8% to $62.8 million.
- Nine-month average realized prices decreased 26.1% for NGLs to $40.99 per barrel and 37.3% for natural gas to $2.72 per Mcf. Oil pricing increased 2.0% to $105.89 per barrel, but oil sales volumes declined 3.0%.
- At September 30, 2012, cash and cash equivalents were $7.0 million, restricted cash was $24.0 million, and total current assets were $189.9 million versus current liabilities of $258.1 million.
- Long-term debt was $719.0 million, consisting of $600.0 million of 8.50% senior notes and $119.0 million outstanding under the revolving credit facility, plus $0.6 million of letters of credit. The facility had a $650.0 million borrowing base and $530.4 million of available capacity.
- Shareholders’ equity increased to $591.0 million from $544.6 million at December 31, 2011. Regular dividends paid during the first nine months totaled $0.24 per share.
Material changes versus the prior comparable period
- Revenue fell due mainly to substantially weaker natural gas and NGL prices, lower Q3 production volumes, Hurricane Isaac, pipeline outages, natural production declines, and the sale of the South Timbalier 41 interest.
- Equivalent production increased for the nine-month period, supported by acquisitions and exploration and development activity, but pricing deterioration more than offset volume growth.
- Operating income fell 92.1% in Q3 and 50.7% for the nine-month period. Net income changed to a Q3 loss and declined 56.4% for the first nine months.
- Capital spending on oil and gas properties and equipment was $312.4 million in the first nine months, compared with $185.2 million in the prior-year period excluding the 2011 acquisitions. The 2012 capital budget was $425.0 million, excluding acquisitions.
- W&T sold its 40% non-operating interest in South Timbalier 41 for $30.5 million and held $24.0 million of sale proceeds as restricted cash for a like-kind exchange.
- On October 5, 2012, after quarter-end, W&T completed the $228.0 million stated-price acquisition of Newfield offshore properties, including estimated proved reserves of 7.7 million barrels of oil equivalent. The preliminary adjusted cash consideration was $207.7 million, excluding assumed future asset retirement obligations.
Outlook, risks, contingencies and unusual items
- Management expects to fund ongoing requirements through operating cash flow, cash on hand, borrowings, and capital markets access. Additional financing may be needed for acquisitions.
- On October 24, 2012, W&T issued an additional $300.0 million of 8.50% senior notes for approximately $312.0 million of net proceeds. Proceeds were used to repay all outstanding revolving-credit borrowings, including amounts used to fund the Newfield acquisition, and for general corporate purposes. The borrowing base was reduced from $650.0 million to $575.0 million pending redetermination.
- On October 30, 2012, the board declared a regular $0.08-per-share dividend and a special $0.47-per-share dividend, payable December 3, 2012.
- Commodity prices remain the principal operating risk. Management expected continued weakness in natural gas prices and noted that lower oil, NGL, or gas prices could reduce cash flow, reserves, liquidity, covenant compliance, and the borrowing base, and could cause a full-cost ceiling-test write-down.
- Open oil derivatives covered approximately 0.5 million barrels for the balance of 2012, 1.3 million barrels for 2013, and 0.7 million barrels for 2014. Derivative fair-value changes are recorded in earnings and may limit the benefit of favorable oil-price movements.
- W&T continues to face a federal grand jury investigation concerning alleged environmental compliance matters on four offshore platforms. The government indicated an intent to seek a criminal disposition; settlement discussions were ongoing, and potential exposure could not be estimated.
- The company paid $9.0 million to settle most Cameron Parish claims and accrued an additional $1.8 million for remaining claims. A newly served False Claims Act qui tam action involves similar alleged environmental violations; loss likelihood and amount were not determinable.
- Asset retirement obligations totaled $334.2 million at September 30, 2012, including $83.5 million classified as current. Approximately $12.8 million of additional Hurricane Ike-related ARO work was expected to be completed in 2013.
- New or evolving offshore, emissions, drilling-permit, and environmental requirements may increase operating and capital costs. The filing states that disclosure controls were effective and that there were no material changes to internal control over financial reporting.
Investor verification priorities
- Verify the post-quarter-end Newfield acquisition accounting, reserve estimates, assumed asset retirement obligations, and the effect on production and leverage.
- Verify the October 2012 senior-note issuance, repayment of the revolving facility, revised borrowing base, and subsequent borrowing-base redetermination.
- Monitor natural gas and NGL prices, oil-price differentials, derivative mark-to-market losses, and the company’s remaining hedge positions.
- Assess liquidity after the acquisition, capital spending, regular and special dividends, debt service, and asset retirement expenditures.
- Track the federal environmental investigation, the qui tam litigation, Cameron Parish claims, insurance recoveries, and any resulting fines, settlements, or remediation costs.
- Review whether the company’s production declines, commodity-price weakness, or reserve revisions could trigger covenant pressure or a full-cost ceiling-test impairment.