W&T Offshore, Inc. — 2018 Q1 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 acquisition activities in the Gulf of Mexico. The filing covers the unaudited three months ended March 31, 2018, compared with the three months ended March 31, 2017. Production mix was 46.8% oil and condensate, 10.5% NGLs and 42.7% natural gas on an energy-equivalent basis.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $134.2 million | $124.4 million | 7.9% increase |
| Operating income | $38.7 million | $28.2 million | 37.4% increase |
| Operating margin | 28.9% | 22.7% | Improved |
| Net income | $27.6 million | $24.3 million | 13.7% increase |
| Net margin | 20.6% | 19.5% | Improved |
| Diluted EPS | $0.19 | $0.17 | 11.8% increase |
| Cash flow from operations | $75.0 million | $81.2 million | 7.6% decrease |
| Capital investment in oil and gas properties | $21.1 million | $23.3 million | 9.5% decrease |
| Ending cash and equivalents | $130.7 million | $126.1 million | 3.7% increase |
Revenue benefited from higher realized prices despite a 13.4% decline in equivalent production. Realized oil price increased 32.9% to $62.52 per barrel, NGL price increased 18.0% to $27.54 per barrel and natural gas price increased 1.7% to $3.03 per Mcf. Oil revenue rose 14.5% and NGL revenue rose 10.5%, while natural gas revenue declined 13.1%.
Total debt had a carrying value of approximately $990.3 million, consisting of $22.9 million classified as current and $967.5 million classified as long-term. Principal debt was $889.8 million. The company had no borrowings under its revolving facility and $0.3 million of letters of credit outstanding at March 31, 2018, leaving stated availability of $149.7 million against a $150.0 million borrowing base. Shareholders’ deficit was $544.6 million.
Material changes versus the prior comparable period
- Higher commodity prices more than offset lower production volumes, increasing revenue and operating income.
- Lease operating expense decreased 8.3%, gathering and transportation expense decreased 18.6%, and DD&A decreased 4.8% in absolute dollars.
- General and administrative expense increased 13.3% to $15.0 million, partly due to incentive compensation.
- The prior-year period included a $4.0 million derivative gain; no open commodity derivatives existed at March 31, 2018.
- Operating cash flow declined primarily because Q1 2017 included $30.1 million of insurance reimbursements. Q1 2018 benefited from $19.1 million of cash advances from joint-venture partners.
- Equivalent production declined to 36,976 Boe per day from 42,712 Boe per day. Maintenance, well issues and pipeline outages deferred approximately 4,200 Boe per day in Q1 2018 versus 1,800 Boe per day in Q1 2017.
- The company formed Monza Energy LLC, a joint venture for up to 14 Gulf of Mexico drilling projects. As of April 27, 2018, investor commitments totaled approximately $297.6 million. W&T expects an aggregate 30.0% share of net revenues while contributing 20.0% of estimated well costs, leases and infrastructure access.
Guidance, outlook, risks and unusual items
- Management revised its 2018 capital expenditure program to $75.0 million from $130.0 million following formation of the JV drilling program. The program includes participation in 11 wells, seven within the JV.
- The revolving credit facility matures November 8, 2018. The $189.8 million principal amount of 8.50% unsecured senior notes matures June 15, 2019. If those notes are not refinanced or otherwise addressed by February 28, 2019, the 1.5 Lien Term Loan and Third Lien PIK Toggle Notes may accelerate to that date.
- Management expects to build cash during 2018 to redeem, repurchase or refinance the unsecured senior notes and believes adequate liquidity exists through May 2019. The filing cautions that refinancing, lender extensions and future borrowing-base determinations are not assured.
- The company was in compliance with applicable debt covenants at March 31, 2018. Management stated that liquidity could be affected by commodity prices, BOEM bonding requirements, surety collateral demands and debt covenant compliance.
- In April 2018, W&T closed a $31.1 million gross acquisition of a 9.375% non-operated interest in the Heidelberg field and issued a $9.4 million letter of credit, requiring approximately $4.7 million of cash collateral.
- Asset retirement obligations totaled $306.5 million at March 31, 2018. Management expects approximately $31.6 million of ARO spending in 2018, although actual costs may differ materially.
- The company deposited $49.5 million related to an Apache lawsuit and recorded a corresponding long-term liability while appealing the judgment. Five BSEE civil penalties totaling $7.8 million remained open; approximately $3.3 million was accrued.
- Open ONRR royalty matters could result in additional payments, but the company cannot estimate the potential range. Management also noted possible future surety collateral demands and BOEM financial-assurance requirements.
- April 2018 crude oil derivatives covered 11,000 barrels per day from May through December 2018; these contracts were entered after the reporting date.
Most important facts for investors to verify
- Progress and terms of refinancing or extending the November 2018 revolver and addressing the June 2019 senior-note maturity and potential February 2019 acceleration.
- Actual production recovery following maintenance, well issues and pipeline outages, and the sustainability of higher commodity prices.
- Cash generation relative to debt service, capital spending, ARO obligations, acquisition spending and required collateral.
- Monza investor funding, W&T’s future cash commitments, drilling results and the expected 30% aggregate net-revenue participation.
- Status and potential exposure from the Apache appeal, ONRR royalty reviews, BSEE penalties, BOEM bonding and surety collateral requirements.
- Collection timing and final approval of the $65.1 million income-tax receivable, which primarily relates to carryback claims.