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 on exploration, development and acquisitions in the Gulf of Mexico. The filing covers the three months ended March 31, 2019; comparative figures are for the three months ended March 31, 2018. The company held interests in 48 offshore fields and approximately 720,000 gross leased acres.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $116.1 million | $134.2 million | Down 13.5% |
| Operating income (loss) | $(31.0) million | $38.7 million | Declined $69.7 million |
| Net income (loss) | $(47.8) million | $27.6 million | Declined $75.4 million |
| Basic and diluted EPS | $(0.34) | $0.19 | Declined $0.53 |
| Net cash from operations | $84.8 million | $75.0 million | Up $9.9 million |
| Capital investment cash outflow | $31.6 million | $41.3 million | Lower outflow |
| Ending cash and equivalents | $86.1 million | $130.7 million | Lower year over year |
Reported operating margin was approximately negative 26.7%, compared with positive 28.9% in the prior-year quarter. Net margin was approximately negative 41.1%, compared with positive 20.6%.
- Production declined 9.8% to 3.0 million Boe, or 33,349 Boe per day. Oil and condensate represented 49.2% of production, NGLs 10.3% and natural gas 40.5%.
- Average realized prices were $58.66 per barrel for oil, $20.88 per barrel for NGLs and $3.00 per Mcf for natural gas.
- Lease operating expense increased 17.9% to $43.5 million, while gathering and transportation expense increased 27.0% to $6.4 million.
- The company recorded a $48.9 million derivative loss, primarily from higher crude oil prices reducing the fair value of open oil contracts. It also received $11.9 million of net cash from derivative settlements.
- Interest expense increased to $16.3 million from $11.0 million, partly reflecting the company’s post-2018 debt structure and the prior period’s troubled-debt accounting presentation.
- At March 31, 2019, total assets were $842.5 million, total long-term debt was $634.0 million and shareholders’ deficit was $372.6 million.
Liquidity, Debt and Capital Resources
- The company had $21.0 million outstanding under its revolving Credit Agreement, $8.1 million of letters of credit and reported $220.9 million of availability at March 31, 2019. The borrowing base and lending commitment were $250.0 million as of the filing date.
- The company had $625.0 million principal amount of 9.75% Senior Second Lien Notes due November 1, 2023. The carrying value, net of issuance costs, was $613.0 million.
- W&T was in compliance with all applicable debt covenants at March 31, 2019. The Credit Agreement matures October 18, 2022 and is subject to borrowing-base redeterminations, including one expected by May 15, 2019.
- Operating cash flow exceeded capital investment during the quarter, but operating cash flow was materially supported by $44.6 million of cash advances from joint venture partners, primarily Monza.
- The 2019 capital expenditure forecast was approximately $120 million, excluding potential acquisitions, and the company planned approximately $24 million of asset-retirement-obligation spending.
- Management stated that operating cash flow and cash on hand were expected to fund operations through year-end 2019 and build available cash balances, subject to commodity prices, production, capital spending and acquisition activity.
Material Changes Versus the Prior Comparable Period
- Revenue declined because equivalent production fell 9.8%, oil prices declined 6.2%, NGL prices declined 24.2% and natural gas prices declined 1.0%.
- Downtime from planned maintenance, well servicing and rig movements increased deferred production to approximately 7,200 Boe per day from 4,200 Boe per day. Management reported mid-April production above 37,000 Boe per day after much of the maintenance was completed.
- Lease operating costs rose due to workovers and facility maintenance, particularly at the Mahogany field, and to the addition of the Heidelberg field acquired in April 2018.
- The $48.9 million derivative loss was a major unusual item and did not occur in the prior-year quarter.
- Net cash from operations increased despite lower revenue, primarily because of joint venture cash advances, derivative settlement receipts and lower asset-retirement-obligation settlements.
- The company adopted the lease accounting standard, recognizing approximately $5.0 million of right-of-use assets and lease liabilities related to its Houston office lease. The adoption did not affect earnings or cash flow.
Outlook, Risks, Contingencies and Unusual Items
- Commodity prices, production volumes, offshore operating downtime and the timing and success of exploration and development projects remain the principal drivers of results.
- Open commodity derivatives had a fair value of approximately $20.3 million at March 31, 2019. The contracts include crude oil swaps and options extending to May 2020 and natural gas collars terminating in June 2019.
- The Monza joint venture drilling program had total member commitments of $361.4 million. W&T may be required to fund certain cost overruns, but the company stated that total exposure could not currently be estimated.
- Asset retirement obligations increased to $314.2 million from $310.1 million at year-end 2018. Actual future expenditures could differ materially from estimates.
- W&T had a $49.5 million escrow deposit and corresponding liability related to the Apache lawsuit, which was on appeal at the filing date.
- Other matters include an approximately $4.7 million ONRR royalty dispute, a $2.2 million reserve for the royalties-in-kind matter, unresolved ONRR “unbundling” reviews and nine open BSEE civil penalties totaling $7.7 million, against which approximately $3.4 million was accrued.
- The company reported $54.1 million of income tax receivables related primarily to carryback claims. The claims remained subject to review by the Congressional Joint Committee on Taxation.
- Surety providers may require additional collateral, potentially materially affecting liquidity. Insurance coverage may become more expensive or less available, and the company does not carry business interruption insurance.
Investor Verification Checklist
- Verify the May 2019 borrowing-base redetermination and continued compliance with Credit Agreement leverage and current-ratio covenants.
- Assess whether operating cash flow remains adequate without unusually large Monza cash advances or derivative settlement receipts.
- Track production recovery after maintenance and well-servicing downtime, including the reported mid-April rate above 37,000 Boe per day.
- Evaluate the effect of crude oil and natural gas prices on derivative settlements, future derivative losses and realized revenue.
- Monitor the Apache appeal, ONRR royalty proceedings, BSEE penalties and potential exposure from the unbundling initiative.
- Reconcile the $120 million capital budget, $24 million ARO plan and any acquisitions against available liquidity and debt maturities.
- Review the company’s reserve estimates, asset-retirement obligations, surety collateral requirements and insurance renewals for potential liquidity impacts.