W&T Offshore, Inc. — Q1 2022 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 months ended March 31, 2022, compared with the same period in 2021. At quarter-end, the company held interests in 47 offshore fields and approximately 655,000 gross leased acres.
Financial Highlights
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $191.0 million | $125.6 million | +$65.4 million |
| Operating income | $97.6 million | $39.6 million | +$58.0 million |
| Net loss | $2.5 million | $0.7 million | Loss increased |
| Net loss per diluted share | $0.02 | $0.01 | Loss increased |
| Cash flow from operations | $27.5 million | $45.0 million | -$17.4 million |
| Capital expenditures and acquisitions | $47.6 million | $1.6 million | +$46.0 million |
| Cash and cash equivalents | $215.5 million | $245.8 million at Dec. 31, 2021 | -$30.3 million |
- Revenue growth was driven by higher commodity prices, despite a 4.8% decrease in total production volumes to 3.398 million Boe. Average realized prices before hedging increased to $55.29 per Boe from $34.66 per Boe.
- Oil revenue rose to $122.7 million, natural gas revenue to $51.4 million, and NGL revenue to $13.8 million.
- Operating margin was approximately 51.1%, compared with 31.5% in the prior-year quarter. However, an $80.0 million derivative loss, including $43.7 million realized and $36.3 million unrealized, more than offset operating income and resulted in a net loss.
- Operating expenses increased to $93.4 million from $86.0 million. Lease operating expense rose modestly, while DD&A and accretion increased to $30.9 million and general and administrative expense increased to $13.8 million.
- Total debt, net of issuance costs, was $720.3 million at March 31, 2022, consisting primarily of $172.1 million under the Term Loan and $548.2 million of Senior Second Lien Notes. The company had no borrowings under its revolving Credit Agreement and reported $50.0 million of availability.
- The $552.5 million principal amount of 9.75% Senior Second Lien Notes matures November 1, 2023. The $178.2 million Term Loan bears interest at 7% and matures May 19, 2028.
- Shareholders’ deficit was $249.4 million at March 31, 2022, compared with $247.2 million at December 31, 2021.
Material Changes Versus the Prior Comparable Period
- Commodity prices increased substantially: average realized oil price rose to $94.10 per barrel from $56.73, NGL price to $39.60 from $23.88, and natural gas price to $4.91 per Mcf from $3.35.
- Production declined to 37,756 Boe per day from 39,657 Boe per day, primarily because of natural well declines and maintenance-related shut-ins.
- Derivative losses increased to $80.0 million from $24.6 million as rising commodity prices reduced the value of hedges and increased settlement losses. Including realized derivative effects, realized value per Boe was $42.43 versus $32.35.
- Cash flow from operations declined despite higher revenue because of larger derivative settlement payments, higher asset retirement obligation settlements, and increased working capital requirements.
- The company completed a $30.2 million cash-funded acquisition from ANKOR on February 1, 2022, acquiring producing properties and operatorship in several Gulf of Mexico fields. It also acquired additional interests for approximately $17.5 million on April 1, 2022.
- Capital spending increased as operations returned toward normal levels following lower pandemic-period activity. The company did not drill any wells during the quarter but completed the East Cameron 349 B-1 well through the Monza joint venture.
- Asset retirement obligations increased to $475.0 million from $424.5 million, primarily due to acquired assets, projects moving into the current term and higher estimated costs.
Guidance, Outlook, Risks and Unusual Items
- Management stated that current commodity prices and expected operating cash flow should cover liquidity requirements for the foreseeable future, while noting that future commodity prices cannot be predicted with certainty.
- Management intends to begin discussions regarding refinancing all or part of the Senior Second Lien Notes before their November 2023 maturity; no refinancing terms or completed transaction were disclosed.
- Commodity price volatility, derivative exposure, production declines, offshore operating risks, weather, pipeline constraints, geopolitical developments and possible changes in OPEC+ policy remain key risks.
- The Russia-Ukraine conflict could increase commodity-price volatility, disrupt energy markets and affect the company’s access to capital. COVID-19 variants could also disrupt operations or energy demand.
- Potential future BOEM financial-assurance requirements and requests for additional surety-bond collateral could materially affect liquidity. The company stated that it was in compliance with BOEM obligations and had no outstanding surety-bond collateral demands as of the filing date.
- The company was in compliance with applicable debt covenants as of March 31, 2022. The revolving facility is controlled by Calculus Lending, an affiliate of the company’s chairman and chief executive officer; the related amendments were reviewed by independent directors or the Audit Committee.
- The company recorded a $4.5 million accrual in 2021 for potential decommissioning liabilities associated with previously divested properties. No additional liability was recorded in Q1 2022.
- The SEC’s proposed climate disclosure rules could increase compliance costs and litigation or financing risks, although the company stated that its existing risk factors had not materially changed.
Investor Verification Checklist
- Verify the company’s ability to refinance or repay the $552.5 million Senior Second Lien Notes due in November 2023.
- Assess the cash impact and future fair-value sensitivity of the company’s oil and natural gas derivative portfolio.
- Monitor production volumes, maintenance-related deferrals, acquisition integration and expected returns from increased capital spending.
- Review liquidity available to restricted subsidiaries separately from cash held by unrestricted Mobile Bay subsidiaries.
- Evaluate the adequacy and timing of the $475.0 million asset retirement obligation estimate and potential BOEM or surety-collateral requirements.
- Review the ONRR royalty appeal, potential retained decommissioning liabilities and other legal or regulatory contingencies.