W&T Offshore, Inc. — Q2 2021 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 Gulf of Mexico. This unaudited report covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods. The company held interests in 41 offshore fields and approximately 621,700 gross leased acres as of June 2021.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $132.8 million | $55.2 million | $258.5 million | $179.4 million |
| Operating income (loss) | $(47.9) million | $(28.0) million | $(32.8) million | $43.8 million |
| Net income (loss) | $(51.7) million | $(5.9) million | $(52.4) million | $60.1 million |
| EPS | $(0.36) | $(0.04) | $(0.37) | $0.42 |
| Operating cash flow | Not separately provided | Not separately provided | $46.2 million | $93.5 million |
- Six-month revenue increased 44.1%, driven by higher realized commodity prices, despite a 15.7% decline in average daily equivalent sales to 40,278 Boe per day.
- Six-month realized prices increased to $60.88 per barrel for oil, $24.94 per barrel for NGLs and $2.99 per Mcf for natural gas, compared with $35.57, $9.25 and $1.85, respectively, in 2020.
- Q2 operating margin was approximately negative 36.0% and six-month operating margin was approximately negative 12.7%. Net margins were approximately negative 38.9% and negative 20.3%, respectively.
- Derivative losses were $81.4 million in Q2 and $106.0 million for the six-month period, compared with a $46.5 million derivative gain in the first six months of 2020. The losses primarily reflected higher oil and gas prices reducing the fair value of open contracts.
- Cash and cash equivalents were $209.1 million at June 30, 2021, compared with $43.7 million at December 31, 2020. Total assets were $1.14 billion and shareholders’ deficit was $259.8 million.
- Net cash used in investing activities was $8.9 million, including $5.9 million of oil and gas property and equipment investment. Cash increased $165.4 million during the first six months, principally because of financing activity.
Debt and liquidity
- Total debt principal was approximately $767.5 million, consisting primarily of a $215.0 million term loan and $552.5 million of 9.75% Senior Second Lien Notes. Debt, net of issuance costs, totaled approximately $754.7 million including the current portion.
- The new term loan bears fixed interest at 7%, requires quarterly amortization beginning September 30, 2021, and matures May 19, 2028. It is non-recourse to the parent except for specified subsidiaries and is secured by Mobile Bay assets.
- The Company Credit Agreement had no borrowings outstanding at June 30, 2021, $4.4 million of letters of credit, and a $190.0 million borrowing base. The facility matures October 18, 2022, subject to borrowing-base redeterminations.
- Management stated that cash on hand, operating cash flow and other available liquidity are expected to meet cash requirements for the next 12 months. The company agreed not to borrow under the Company Credit Agreement until the approximately October 1, 2021 borrowing-base redetermination and satisfaction of revised hedging requirements.
Material changes versus the prior comparable period
- Revenue improved substantially because of commodity-price recovery, but lower production volumes, higher operating costs and derivative losses led to a six-month swing from $60.1 million of net income to a $52.4 million net loss.
- Lease operating expense increased 8.2% for the six-month period, including $3.8 million of hurricane repair costs. General and administrative expense increased 26.1%, partly because prior-period PPP-related credits did not recur.
- The company completed the Mobile Bay Transaction in May 2021. Subsidiaries borrowed $215.0 million and acquired Mobile Bay properties and related midstream assets from the company; $80.0 million of Company Credit Agreement borrowings were repaid.
- The $8.4 million PPP grant was forgiven on June 11, 2021, eliminating the repayment obligation.
- Asset retirement obligations increased to $404.0 million from $392.7 million at year-end 2020.
Outlook, commentary, risks and unusual items
- Management estimated 2021 capital expenditures of $30 million to $60 million, excluding acquisitions and plugging and abandonment, and asset-retirement-obligation spending of $25 million to $35 million.
- The current capital budget is weighted toward the second half of 2021. No wells were drilled during the first six months of 2021; the Cota well is expected to begin initial production in the fourth quarter of 2021, subject to infrastructure completion and commodity prices.
- Commodity prices, production volumes, offshore operating conditions, hurricanes, COVID-19 developments and derivative positions remain significant drivers of results. Open derivative contracts produced substantial fair-value liabilities, including $82.8 million of current derivative liabilities and $28.1 million of long-term derivative liabilities at June 30, 2021.
- The company faces significant decommissioning obligations, with $404.0 million of recorded asset-retirement obligations. Future BOEM financial-assurance requirements or demands for surety-bond collateral could materially affect liquidity.
- ONRR royalty matters remain unresolved. The company is awaiting a federal court ruling on one appeal and cannot estimate potential additional royalties under ongoing “unbundling” reviews.
- BSEE civil penalties were settled for $720,000 payable in three annual installments, compared with proposed penalties totaling $7.7 million, together with a safety improvement plan extending through 2022.
- The company reported compliance with applicable debt covenants and effective disclosure controls as of June 30, 2021. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the October 2021 borrowing-base redetermination reduces credit availability because Mobile Bay assets were removed as collateral.
- The timing and amount of required term-loan amortization payments beginning September 30, 2021, and the ability to refinance or repay the Senior Second Lien Notes due November 2023.
- Future realized commodity prices, production volumes and settlement losses or gains from the company’s extensive oil and natural gas derivatives.
- Actual second-half 2021 capital expenditures, ARO spending and production from the Cota well.
- Potential cash requirements from decommissioning obligations, BOEM financial assurance, surety collateral, ONRR royalty matters and other contingencies.