W&T Offshore, Inc. 2019 Form 10-K Summary
Business Context and Reporting Period
W&T Offshore, Inc. is an independent oil and natural gas producer focused on exploration, development and acquisitions in the Gulf of Mexico. This Form 10-K covers the fiscal year ended December 31, 2019; the filing was signed March 5, 2020. The company operated or held interests in 51 offshore producing fields, approximately 815,000 gross acres, 146 offshore structures and 240 productive wells.
The company completed the $169.8 million acquisition of Exxon Mobil’s Mobile Bay Properties in August 2019, funded with cash and $150.0 million of credit-facility borrowings. The properties contributed approximately 18,500 net Boe per day in fourth-quarter 2019 and represented 35% of fourth-quarter production.
Key Financial and Operating Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $534.9 million | $580.7 million | Down 7.9% |
| Operating income | $58.6 million | $247.0 million | Down $188.4 million |
| Net income | $74.1 million | $248.8 million | Down 70.2% |
| Basic and diluted EPS | $0.52 | $1.72 | Down $1.20 |
| Cash flow from operations | $232.2 million | $321.8 million | Down 27.8% |
| Cash used in investing | $313.8 million | $66.4 million | Higher primarily from Mobile Bay |
| Cash and equivalents | $32.4 million | $33.3 million | Down $0.9 million |
| Production | 40,634 Boe/day | 36,510 Boe/day | Up 11.3% |
| Proved reserves | 157.4 MMBoe | 84.0 MMBoe | Up 87% |
Average realized prices declined year over year: oil fell 8.7% to $59.89 per barrel, NGLs fell 38.0% to $17.60 per barrel and natural gas fell 17.4% to $2.57 per Mcf. Production costs increased to $14.18 per Boe from $13.18 per Boe, while DD&A and general and administrative expense per Boe declined to $10.01 and $3.72, respectively.
2019 net income included a $75.2 million income tax benefit, primarily from valuation allowance reversals and settlement of an uncertain tax position. The company recorded a $59.9 million derivative loss, compared with a $53.8 million derivative gain in 2018. No ceiling-test impairment was recorded in 2019.
At December 31, 2019, principal debt was $730.0 million, consisting of $625.0 million of 9.75% Senior Second Lien Notes due November 2023 and $105.0 million outstanding under the Credit Agreement due October 2022. Credit-facility availability was $139.2 million, including the effect of $5.8 million of letters of credit. The $250.0 million borrowing base remained unchanged, and the company was in compliance with applicable covenants.
Asset retirement obligations were $355.6 million at year-end, including $22.0 million classified as current. Shareholders’ deficit improved to $249.4 million from $324.8 million, but remained negative. No dividends were paid in 2019 or 2018.
Material Changes Versus the Prior Comparable Period
- Revenue declined despite higher production because commodity prices, particularly NGL and natural gas prices, were substantially lower.
- Operating income decreased primarily because of lower realized prices, a $113.7 million year-over-year swing from derivative gain to derivative loss, and higher lease operating expenses.
- Lease operating expenses rose 20.2% to $184.3 million, driven principally by Mobile Bay and the full-year impact of the Heidelberg acquisition, as well as higher workover and facilities-maintenance costs.
- Cash flow from operations fell $89.5 million, while investing cash use increased by $247.4 million, reflecting the Mobile Bay acquisition and higher property investment.
- Production increased 11.3%, mainly from Mobile Bay, Mahogany drilling and workovers, and other wells placed on production.
- Proved reserves increased by 73.4 MMBoe. Additions included 90.1 MMBoe from acquisitions, partly offset by 14.8 MMBoe of production and 10.0 MMBoe of price-related reductions.
- The company drilled and completed six wells in 2019, all productive, compared with six productive wells completed in 2018.
- The 2019 quarterly pattern was uneven: first-quarter revenue was $116.1 million and net loss was $47.8 million, while fourth-quarter revenue was $151.9 million and net income was $9.6 million. The filing attributes significant quarterly volatility to derivative valuation changes and tax benefits.
Guidance, Outlook, Risks and Unusual Items
Management established a preliminary 2020 capital-expenditure budget of $50 million to $100 million, excluding acquisitions, and expects $15 million to $25 million of ARO spending. Management stated that operating cash flow and cash on hand should fund operations through year-end 2020 and allow repayment of a portion of credit-facility borrowings, based on current commodity prices and production expectations.
The outlook is highly sensitive to commodity prices, production volumes, operating costs, borrowing-base redeterminations and access to liquidity. A 10% decline in 2019 realized commodity prices would have increased the pretax loss by approximately $53.0 million, assuming no other changes. A 100-basis-point increase in interest rates would have increased 2019 interest expense by approximately $1.5 million.
- Commodity-price weakness could reduce cash flow, reserves, borrowing capacity and the ability to fund capital spending, debt service and decommissioning.
- The Credit Agreement borrowing base is subject to semiannual and discretionary redeterminations; a reduction could create a borrowing-base deficiency requiring repayment.
- BOEM may require additional financial assurances for offshore decommissioning. The company reported compliance at the filing date and no outstanding BOEM orders, but future demands could pressure liquidity.
- Surety providers may demand additional collateral. The company had approximately $382.6 million of surety bonds outstanding, primarily for plugging and abandonment obligations.
- ARO estimates are subject to substantial revision because of offshore logistics, hurricanes, changing regulations and service-provider costs.
- BSEE had nine open civil penalties totaling $7.7 million; the company had accrued approximately $3.5 million.
- ONRR royalty matters remain outstanding. The company had paid $3.1 million through December 31, 2019 under the “unbundling” initiative but could not estimate additional exposure.
- The ONRR royalty-in-kind claim was estimated at no more than $0.25 million after a favorable Fifth Circuit ruling, and the related liability reserve was reduced to that amount.
- Operations are concentrated in the Gulf of Mexico and exposed to hurricanes, pipeline outages, environmental events, regulatory changes, cybersecurity incidents and uninsured losses. Approximately 2.1 MMBoe of 2019 production was deferred because of pipeline, maintenance and well issues.
- Open derivatives protect a portion of expected production but may limit gains from higher prices and create valuation volatility. As of year-end, oil contracts extended through December 2020 and natural gas call contracts through December 2022.
Most Important Facts for Investors to Verify
- Whether 2020 commodity prices and production support management’s liquidity projections and planned debt repayment.
- The results of future borrowing-base redeterminations and compliance with the Credit Agreement’s leverage and current-ratio covenants.
- Mobile Bay production, operating costs, integration progress and realized economic returns following the acquisition.
- The timing and ultimate cost of the $355.6 million ARO balance, BSEE idle-iron directives and related surety-bond collateral requirements.
- Potential additional ONRR royalties, BSEE penalties and other regulatory or environmental liabilities beyond recorded reserves.
- The sustainability of reserves and PV-10, which are based on SEC-mandated commodity-price assumptions and are not GAAP measures of market value.
- The extent to which 2019 earnings benefited from the $75.2 million tax benefit and whether comparable tax benefits are available in future periods.
- The impact of derivative settlements and mark-to-market changes on future earnings and cash flow.