W&T OFFSHORE INC quarterly report, Q3 FY2011

W&T Offshore, Inc. — Form 10-Q Summary

Reporting period: Three and nine months ended September 30, 2011. The company is an independent oil and natural gas producer focused primarily on the Gulf of Mexico and onshore Texas. The filing is unaudited and should be read with the 2010 Form 10-K.

Business Context and Strategic Changes

Production was approximately 47% oil, condensate and NGLs and 53% natural gas on an equivalent basis for the first nine months.
Completed the acquisition of approximately 21,500 net acres in the West Texas Permian Basin for adjusted cash consideration of approximately $394.6 million, adding estimated proved reserves of approximately 182 Bcfe, approximately 78% of which were proved undeveloped at December 31, 2010.
Completed the acquisition of Shell’s 64.3% interest in Fairway Field and a like interest in the Yellowhammer processing plant for approximately $40.0 million in cash, subject to final post-effective-date adjustments.
Onshore acreage increased to approximately 173,000 net acres. The company continued to diversify beyond its primarily offshore operations.

Financial and Operating Metrics

Metric	Q3 2011	Q3 2010	9M 2011	9M 2010
Revenue	$245.4 million	$169.6 million	$709.1 million	$518.8 million
Operating income	$95.3 million	$36.8 million	$248.5 million	$132.7 million
Net income	$52.9 million	$27.2 million	$126.8 million	$97.4 million
Basic and diluted EPS	$0.70	$0.36	$1.68	$1.30
Operating margin	38.8%	21.7%	35.0%	25.6%
Net margin	21.6%	16.0%	17.9%	18.8%
Net cash from operations	Not separately provided	Not separately provided	$396.1 million	$392.9 million
Net cash used in investing	Not separately provided	Not separately provided	$620.1 million	$243.1 million

Revenue growth reflected higher oil and NGL prices and volumes, higher natural gas volumes, acquisitions, resumed production at Main Pass 108, and successful exploration. Q3 oil and NGL revenue increased 45.6%; nine-month revenue increased 46.6%.
Q3 oil and NGL volumes increased 11.1% and the average realized unhedged price increased 32.9% to $90.84 per barrel. Nine-month volumes increased 9.4% and the average realized price increased 33.5% to $93.08 per barrel.
Natural gas volumes increased 34.9% in Q3 and 19.8% for nine months, while average realized unhedged gas prices declined 4.5% and 8.6%, respectively.
Total production increased 22.7% in Q3 and 14.9% for nine months on a Bcfe basis. Average daily equivalent sales were 287.9 MMcfe in Q3 and 271.2 MMcfe for nine months.
Lease operating expense increased 71.4% in Q3 and 30.9% for nine months. Production costs increased to $2.40 per Mcfe in Q3 and $2.34 per Mcfe for nine months, versus $1.80 and $2.10, respectively, in the comparable periods.
DD&A and asset retirement obligation accretion totaled $84.5 million in Q3 and $241.9 million for nine months. Per-unit DD&A and accretion declined because of higher proved reserves.
Derivative accounting produced a $17.3 million gain in Q3 and a $10.8 million gain for nine months, including significant unrealized fair-value gains. These gains are not necessarily indicative of recurring operating performance.
Effective tax rates were 35.3% in Q3 and 35.2% for nine months, compared with 2.4% and 7.4% in the prior-year periods, when tax benefits primarily reflected reductions in valuation allowances.

Liquidity, Debt and Capital Allocation

Cash and cash equivalents declined to $7.7 million at September 30, 2011 from $28.7 million at December 31, 2010.
Total assets increased to $1.84 billion from $1.42 billion, primarily reflecting acquisitions and capital investment. Shareholders’ equity increased to $546.0 million from $421.7 million.
Issued $600.0 million of 8.5% senior notes due June 15, 2019 and used proceeds to repurchase all $450.0 million of 8.25% senior notes due 2014. The refinancing produced a $22.7 million loss on extinguishment of debt, including premiums and write-offs of issuance costs.
Long-term debt was $694.0 million at September 30, 2011, consisting of $600.0 million of senior notes and $94.0 million drawn under the revolving credit facility.
The secured revolving facility had a $537.5 million borrowing base and $443.0 million of undrawn capacity at September 30. Lenders increased the borrowing base to $575.0 million in October 2011. The facility terminates May 5, 2015.
The company was in compliance with applicable credit agreement covenants at September 30, 2011. Letters of credit outstanding were approximately $0.5 million.
Capital expenditures and acquisitions used $620.1 million of investing cash in the first nine months, including approximately $394.6 million for the Permian Basin Properties and $40.0 million for the Fairway Properties.
Management expected to fund the 2011 capital budget and acquisitions through operating cash flow, cash on hand, revolving borrowings, senior notes and other financing sources as needed.
The 2011 capital expenditure budget, excluding acquisitions, was $310 million, including $70 million to $80 million of planned Permian Basin development expenditures from the May closing through year-end.
Quarterly cash dividends were $0.04 per common share. The board declared another $0.04 per-share dividend payable December 1, 2011.

Material Changes Versus the Prior Comparable Period

Revenue increased 44.7% in Q3 and 36.7% for nine months; operating income increased 158.7% and 87.2%, respectively; net income increased 94.7% and 30.2%.
Growth was driven primarily by higher oil pricing, increased production volumes, acquisitions and restored pipeline access, partly offset by lower natural gas prices and higher operating costs.
Operating costs increased 13.0% in Q3 and 19.3% for nine months, below revenue growth, while general and administrative expenses increased 35.2% and 42.2%.
The company shifted from $450 million of 8.25% senior notes at year-end 2010 to $600 million of 8.5% senior notes and $94 million of revolving debt at September 30, 2011.
Operating cash flow was broadly unchanged year over year despite stronger operating results because 2010 included approximately $99.8 million of tax refunds, while 2011 included tax payments.
Net cash used in investing more than doubled because of the Permian Basin and Fairway acquisitions and increased development spending.

Guidance, Outlook, Risks and Unusual Items

Management continued to expect approximately $310 million of 2011 capital expenditures excluding acquisitions. The budget remained flexible and subject to operating conditions.
Management expected substantially all 2011 income taxes to be deferred, with only minimal payments anticipated primarily for alternative minimum tax; actual payments could increase based on operating results, drilling and plugging activity.
Management expected operating cash flow, available revolver capacity and other external sources to fund ongoing requirements, but liquidity remains sensitive to commodity prices, borrowing-base redeterminations and capital spending.
Oil prices remained volatile but benefited from premiums on offshore crude. Management expected continued weakness in natural gas prices unless demand improved, drilling declined materially or production shut-ins occurred.
Commodity derivatives covered approximately 0.4 million barrels for the balance of 2011 and 1.1 million barrels for 2012. Collars had a $75.00 per-barrel floor and weighted-average ceilings generally between $97.88 and $98.99. The hedges may limit gains from higher oil prices.
Hurricane Ike remediation remained a material contingency. The company estimated $57.1 million of additional ARO-related costs, expected to be completed by the end of 2013, with future insurance reimbursement uncertain. Insurance receivables were $1.7 million at September 30, 2011.
A federal grand jury investigation by the U.S. Attorney’s Office and EPA concerns environmental compliance, surface discharges and reporting at four offshore platforms. The government indicated an intent to seek a criminal disposition; potential exposure could not be estimated.
Risks include lower oil and gas prices, ceiling-test impairments, reduced borrowing capacity, regulatory and permitting delays, offshore accidents and hurricanes, insurance availability and claims recovery, hydraulic-fracturing regulation, proposed EPA air-emission rules, pipeline access and increased transportation costs.
The filing states that disclosure controls and procedures were effective as of September 30, 2011 and that no material change occurred in internal control over financial reporting during the quarter.

Important Facts for Investors to Verify

Whether production growth and Permian Basin development deliver expected reserve additions, production rates and returns.
The impact of higher operating costs, ARO settlements and hurricane remediation on future free cash flow.
Commodity-price sensitivity, including the effect of the oil collars and continued weakness in natural gas pricing.
Current revolver availability, future borrowing-base redeterminations and compliance with leverage and current-ratio covenants.
Final purchase-price adjustments and allocation for the Fairway acquisition.
Potential penalties, restrictions or remediation costs from the federal environmental investigation.
Actual insurance recoveries and the portion of Hurricane Ike costs that remains uninsured.
Final requirements and costs arising from offshore permitting, hydraulic-fracturing regulation and EPA air-emission rules.