Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Form 10-Q

 

 

 

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 1-32414

 

 

W&T OFFSHORE, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Texas   72-1121985
(State of incorporation)  

(IRS Employer

Identification Number)

Nine Greenway Plaza, Suite 300  
Houston, Texas   77046-0908
(Address of principal executive offices)   (Zip Code)

(713) 626-8525

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   þ
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company.    Yes  ¨    No  þ

As of August 2, 2011, there were 74,468,455 shares outstanding of the registrant’s common stock, par value $0.00001.

 

 

 


Table of Contents

W&T OFFSHORE, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

         Page  

PART I – FINANCIAL INFORMATION

  

Item 1.

  Financial Statements   
  Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010      1   
  Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2011 and 2010      2   
  Condensed Consolidated Statement of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2011      3   
  Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010      4   
  Notes to Condensed Consolidated Financial Statements      5   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      23   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      33   

Item 4.

  Controls and Procedures      34   

PART II – OTHER INFORMATION

  

Item 1.

  Legal Proceedings      34   

Item 1A.

  Risk Factors      34   

Item 5.

  Other information - Submission of Matters to a Vote of Security Holders      35   

Item 6.

  Exhibits      35   

SIGNATURE

     36   

EXHIBIT INDEX

     37   


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

     June 30,
2011
    December 31,
2010
 
    

(In thousands, except share data)

(Unaudited)

 
Assets     

Current assets:

    

Cash and cash equivalents

   $ 8,710      $ 28,655   

Receivables:

    

Oil and natural gas sales

     91,517        79,911   

Joint interest and other

     11,308        25,415   

Insurance

     6,925        1,014   
  

 

 

   

 

 

 

Total receivables

     109,750        106,340   

Deferred income taxes

     —          5,784   

Prepaid expenses and other assets

     44,153        23,426   
  

 

 

   

 

 

 

Total current assets

     162,613        164,205   

Property and equipment – at cost:

    

Oil and natural gas properties and equipment (full cost method, of which $151,934 at June 30, 2011 and $65,419 at December 31, 2010 were excluded from amortization)

     5,707,628        5,225,582   

Furniture, fixtures and other

     16,018        15,841   
  

 

 

   

 

 

 

Total property and equipment

     5,723,646        5,241,423   

Less accumulated depreciation, depletion and amortization

     4,163,013        4,021,395   
  

 

 

   

 

 

 

Net property and equipment

     1,560,633        1,220,028   

Restricted deposits for asset retirement obligations

     33,921        30,636   

Deferred income taxes

     —          2,819   

Other assets

     15,297        6,406   
  

 

 

   

 

 

 

Total assets

   $ 1,772,464      $ 1,424,094   
  

 

 

   

 

 

 
Liabilities and Shareholders’ Equity     

Current liabilities:

    

Accounts payable

   $ 65,636      $ 80,442   

Undistributed oil and natural gas proceeds

     36,263        25,240   

Asset retirement obligations

     105,379        92,575   

Accrued liabilities

     23,331        25,827   

Income taxes payable

     2,596        17,552   

Income taxes deferred – current portion

     2,249        —     

Long-term debt – current portion

     43,850        —     
  

 

 

   

 

 

 

Total current liabilities

     279,304        241,636   

Long-term debt

     675,000        450,000   

Asset retirement obligations, less current portion

     287,699        298,741   

Deferred income taxes

     24,806        —     

Other liabilities

     12,383        11,974   

Commitments and contingencies

     —          —     

Shareholders’ equity:

    

Preferred stock, $0.00001 par value; 2,000,000 shares authorized; 0 issued at June 30, 2011 and December 31, 2010

     —          —     

Common stock, $0.00001 par value; 118,330,000 shares authorized; 77,338,074 issued and 74,468,901 outstanding at June 30, 2011; 77,343,520 issued and 74,474,347 outstanding at December 31, 2010

     1        1   

Additional paid-in capital

     381,191        377,529   

Retained earnings

     136,247        68,380   

Treasury stock, at cost

     (24,167     (24,167
  

 

 

   

 

 

 

Total shareholders’ equity

     493,272        421,743   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,772,464      $ 1,424,094   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  
     (In thousands, except per share data)  
     (Unaudited)  

Revenues

   $ 252,922      $ 179,667      $ 463,777      $ 349,252   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses:

        

Lease operating expenses

     48,597        52,457        101,002        87,823   

Production taxes

     845        283        1,133        512   

Gathering and transportation

     3,797        3,726        8,350        8,313   

Depreciation, depletion and amortization

     75,880        69,895        141,618        132,819   

Asset retirement obligation accretion

     7,490        6,127        15,844        12,412   

General and administrative expenses

     18,002        14,375        36,131        24,754   

Derivative (gain) loss

     (17,332     (7,374     6,508        (13,270
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     137,279        139,489        310,586        253,363   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     115,643        40,178        153,191        95,889   

Interest expense:

        

Incurred

     12,056        10,914        22,192        21,834   

Capitalized

     (2,079     (1,329     (3,491     (2,745

Loss on extinguishment of debt

     20,663        —          20,663        —     

Other income

     9        354        16        482   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

     85,012        30,947        113,843        77,282   

Income tax expense

     29,837        3,077        40,019        7,097   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 55,175      $ 27,870      $ 73,824      $ 70,185   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted earnings per common share

   $ 0.73      $ 0.37      $ 0.98      $ 0.94   

Dividends declared per common share

   $ 0.04      $ 0.03      $ 0.08      $ 0.06   

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

 

     Common Stock
Outstanding
     Additional
Paid-In

Capital
     Retained
Earnings
    Treasury Stock     Total
Shareholders’

Equity
 
     Shares     Value           Shares      Value    
     (In thousands)  
     (Unaudited)  

Balances at December 31, 2010

     74,474      $ 1       $ 377,529       $ 68,380        2,869       $ (24,167   $ 421,743   

Cash dividends

     —          —           —           (5,957     —           —          (5,957

Share-based compensation

     —          —           3,662         —          —           —          3,662   

Restricted stock issued, net of forfeitures

     (5     —           —           —          —           —          —     

Net income

     —          —           —           73,824        —           —          73,824   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Balances at June 30, 2011

     74,469      $ 1       $ 381,191       $ 136,247        2,869       $ (24,167   $ 493,272   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Six Months Ended June 30,  
     2011     2010  
     (In thousands)  
     (Unaudited)  

Operating activities:

    

Net income

   $ 73,824      $ 70,185   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation, depletion, amortization and accretion

     157,462        145,231   

Amortization of debt issuance costs and discount on indebtedness

     815        669   

Loss on extinguishment of debt

     20,663        —     

Share-based compensation

     3,662        1,943   

Derivative (gain) loss

     6,508        (13,270

Cash payments on derivative settlements

     (8,322     (442

Deferred income taxes

     35,726        2,945   

Changes in operating assets and liabilities:

    

Oil and natural gas receivables

     (11,606     (11,739

Joint interest and other receivables

     14,107        21,931   

Insurance receivables

     12,583        29,879   

Income taxes

     (14,957     91,513   

Prepaid expenses and other assets

     (24,650     (9,129

Asset retirement obligations

     (29,703     (35,210

Accounts payable and accrued liabilities

     (6,382     (62,542

Other liabilities

     115        12,354   
  

 

 

   

 

 

 

Net cash provided by operating activities

     229,845        244,318   
  

 

 

   

 

 

 

Investing activities:

    

Acquisitions of significant property interests in oil and natural gas properties

     (396,976     (116,589

Investment in oil and natural gas properties and equipment

     (85,801     (89,705

Proceeds from sales of oil and natural gas properties and equipment

     —          1,335   

Purchases of furniture, fixtures and other

     (178     (167
  

 

 

   

 

 

 

Net cash used in investing activities

     (482,955     (205,126
  

 

 

   

 

 

 

Financing activities:

    

Issuance of 8.5% Senior Notes

     600,000        —     

Repurchase of 8.25% Senior Notes

     (406,150     —     

Borrowings of long-term debt – revolving bank credit facility

     310,000        285,000   

Repayments of long-term debt – revolving bank credit facility

     (235,000     (285,000

Repurchase premium and debt issuance costs

     (29,728     —     

Dividends to shareholders

     (5,957     (4,481
  

 

 

   

 

 

 

Net cash provided (used) in financing activities

     233,165        (4,481
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     (19,945     34,711   

Cash and cash equivalents, beginning of period

     28,655        38,187   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 8,710      $ 72,898   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

W&T OFFSHORE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

Operations. W&T Offshore, Inc. and subsidiaries, referred to herein as “W&T” or the “Company,” is an independent oil and natural gas producer, active in the acquisition, exploitation, exploration and development of oil and natural gas properties primarily in the deepwater and deep shelf regions in the Gulf of Mexico. W&T has recently diversified its operations by expanding onshore primarily in the West Texas Permian Basin.

Interim Financial Statements. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and the appropriate rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, the condensed consolidated financial statements do not include all of the information and footnote disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

Operating results for interim periods are not necessarily indicative of the results that may be expected for the entire year. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Reclassifications. Certain reclassifications have been made to the prior periods’ financial statements to conform to the current presentation.

Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

2. Acquisitions

On May 11, 2011, we completed the acquisition of approximately 21,900 gross acres (21,500 net acres) of oil and gas leasehold interests in the West Texas Permian Basin (the “Permian Basin Properties”) from Opal Resources LLC and Opal Resources Operating Company LLC (“Opal”). The stated purchase price was $366.3 million, subject to certain adjustments, including adjustments from an effective date of January 1, 2011. Taking into account adjustments through June 30, 2011, the purchase price was $399.5 million. The increase of $33.2 million primarily reflects drilling costs in excess of cash flow from the effective date of January 1, 2011 to the closing date of May 11, 2011. The purchase price is subject to further adjustments and we expect final settlement could occur as early as the third quarter of 2011. We acquired estimated proved reserves of approximately 30 million barrels of oil equivalent (182 Bcfe) (using a 6 to 1 Mcf to barrel equivalency) as of December 31, 2010, comprised of approximately 91% oil and natural gas liquids and which are approximately 78% proved undeveloped. The acquisition was funded from cash on hand and borrowings under our revolving bank credit facility.

During 2010, we closed on two major acquisition transactions. On April 30, 2010, through our wholly-owned subsidiary, W&T Energy VI, LLC (“Energy VI”), we acquired all of Total E&P USA’s (“Total”) interest, including production platforms and facilities, in three federal offshore lease blocks located in the Gulf of Mexico and assumed the asset retirement obligations (“ARO”) for plugging and abandonment of the acquired interest. The purchase price was $121.3 million. The properties acquired from Total are producing interests and include a 100% working interest in the Matterhorn field (Mississippi Canyon block 243) and a 64% working interest in the Virgo field (Viosca Knoll blocks 822 and 823).

 

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Table of Contents

W&T OFFSHORE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

On November 4, 2010, through Energy VI, we acquired all of Shell Offshore Inc.’s (“Shell”) interests, including production platforms and facilities, in three federal offshore lease blocks located in the Gulf of Mexico and assumed the ARO for plugging and abandonment of the acquired interest. The purchase price was $139.9 million. The properties acquired from Shell are producing interests and include a 70% working interest in the Tahoe field (Viosca Knoll 783), 100% working interest in the Southeast Tahoe field (Viosca Knoll 784) and a 6.25% of 8/8ths overriding royalty interest in the Droshky field (Green Canyon 244).

The Permian Basin Properties accounted for $11.1 million of revenue, $1.4 million of direct operating expenses, $2.4 million of depreciation, depletion, amortization and accretion (“DD&A”) and $2.6 million of income taxes, resulting in $4.8 million of net income for the three and six months ended June 30, 2011. The net income attributable to these properties does not reflect certain expenses, such as general and administrative expenses and interest expense; therefore this information is not intended to report results as if these operations were managed on a stand-alone basis. In addition, the Permian Basin Properties are not recorded in a separate entity for tax purposes; therefore income tax was estimated using the federal statutory tax rate.

Pro forma financial statements have been prepared due to the acquisition being significant to us. The unaudited pro forma financial information was computed as if the acquisition of the Permian Basin Properties had been completed on January 1, 2010. The historical financial information is derived from the unaudited historical consolidated financial statements of W&T and the unaudited historical statements of revenues and direct operating expenses of the Permian Basin Properties (which were based on information provided by Opal). The adjustments noted below assume the entire transaction was financed with borrowings because the cash and cash equivalents balances for the assumed acquisition date was less than the cash and cash equivalents on hand used on the actual closing date of May 11, 2011.

The pro forma adjustments were based on information and estimates by management to be directly related to the purchase of the Permian Basin Properties. The pro forma financial information is not necessarily indicative of the results of operations had the purchase occurred on January 1, 2010. If the transaction had been in effect for the periods indicated, the results may have been substantially different. For example, we may have operated the assets differently than Opal, realized sales prices may have been different and costs of operating the properties may have been different. The following tables present a summary of our pro forma consolidated statement of income (loss) for the six months ended June 30, 2011 and 2010 (in thousands except earnings per share):

 

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Table of Contents

W&T OFFSHORE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

     Six Months Ended June 30, 2011  
     Historical     Permian
Basin
Properties
    Pro Forma
Adjustments
    Pro Forma  

Revenues

   $ 463,777      $ 23,801  (a)    $ —        $ 487,578   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses:

        

Lease operating expenses

     101,002        5,261  (a)      —          106,263   

Production taxes

     1,133        1,352  (a)      —          2,485   

Gathering and transportation

     8,350        10  (a)      —          8,360   

Depreciation, depletion and amortization

     141,618        —          9,263  (b)      150,881   

Asset retirement obligation accretion

     15,844        —          10  (c)      15,854   

General and administrative expenses

     36,131        —          (282 )(d)      35,849   

Derivative loss

     6,508        —          —          6,508   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     310,586        6,623        8,991        326,200   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income/(loss)

     153,191        17,178        (8,991     161,378   

Interest expense:

        

Incurred

     22,192        —          3,865  (e)      26,057   

Capitalized

     (3,491     —          (1,165 )(f)      (4,656

Loss on extinguishment of debt

     20,663        —          —          20,663   

Other income

     16        —          —          16   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income/(loss) before income tax expense

     113,843        17,178        (11,691     119,330   

Income tax expense

     40,019        —          1,920  (g)      41,939   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income/(loss)

   $ 73,824      $ 17,178      $ (13,611   $ 77,391   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted earnings per common share

   $ 0.98          $ 1.02   

 

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Table of Contents

W&T OFFSHORE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

     Six Months Ended June 30, 2010  
     Historical     Permian
Basin
Properties
    Pro Forma
Adjustments
    Pro Forma  

Revenues

   $ 349,252      $ 12,043  (a)    $ —        $ 361,295   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses:

        

Lease operating expenses

     87,823        1,695  (a)      —          89,518   

Production taxes

     512        575  (a)      —          1,087   

Gathering and transportation

     8,313        4  (a)      —          8,317   

Depreciation, depletion and amortization

     132,819        —          13,857  (b)      146,676   

Asset retirement obligation accretion

     12,412        —          15  (c)      12,427   

General and administrative expenses

     24,754        —          —          24,754   

Derivative (gain)

     (13,270     —          —          (13,270
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     253,363        2,274        13,872        269,509   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income/(loss)

     95,889        9,769        (13,872     91,786   

Interest expense:

        

Incurred

     21,834        —          5,489  (e)      27,323   

Capitalized

     (2,745     —          (1,548 )(f)      (4,293

Other income

     482        —          —          482   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income/(loss) before income tax expense

     77,282        9,769        (17,813     69,238   

Income tax expense/(benefit)

     7,097        —          (2,815 )(g)      4,282   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income/(loss)

   $ 70,185      $ 9,769      $ (14,998   $ 64,956   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted earnings per common share

   $ 0.94          $ 0.87   

The purchase price is subject to further adjustments and we expect final settlement could occur as early as the third quarter of 2011. For these pro forma financial statements, the cash consideration is assumed to be funded entirely from borrowings from the revolving bank credit facility. The following table presents the purchase price allocation for the Permian Basin Properties as of June 30, 2011 (in thousands):

 

Oil and natural gas properties and equipment (full cost method, $84,720 excluded from amortization)

   $ 399,501   

Asset retirement obligation

     (382

Long-term liability

     (2,143
  

 

 

 

Total cash paid

   $ 396,976   
  

 

 

 

The following adjustments were made in the preparation of the condensed combined financial statements:

 

  (a) Revenues and direct operating expenses for the Permian Basin Properties were derived from the historical records of Opal up to the closing date of May 11, 2011.

 

  (b) Depreciation, depletion and amortization (“DD&A”) was estimated using the full-cost method and determined as the incremental DD&A expense due to adding the Permian Basin costs, reserves and production into the computation. The purchase price allocation included $84.7 million allocated to the pool of unevaluated properties for oil and gas interests. Accordingly, no DD&A expense was estimated for the unevaluated properties.

 

  (c) Asset retirement obligations and related accretion were estimated by the management of W&T.

 

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(Unaudited)

 

  (d) Incremental transaction expenses related to the purchase of Permian Basin Properties were $0.3 million and were assumed to be funded from cash on hand.

 

  (e) Interest expense was computed using interest rates that were in effect during the applicable time period and it was assumed that six-month LIBOR borrowings were made as allowed under the revolving bank credit facility. The assumed interest rates ranged from 3.1% to 3.5%. A reduction in the revolving bank credit facility commitment fee related to the assumed borrowings was netted against the computed incremental interest expense.

 

  (f) Incremental capitalized interest was computed for the addition of $84.7 million allocated to the pool of unevaluated properties and the capitalization interest rate was adjusted for the assumed borrowings.

 

  (g) Income tax was computed using the 35% federal statutory rate.

3. Hurricane Remediation and Insurance Claims

During the third quarter of 2008, Hurricane Ike and, to a much lesser extent, Hurricane Gustav caused property damage and disruptions to our exploration and production activities. Our insurance policies in effect on the occurrence dates of Hurricanes Ike and Gustav had a retention requirement of $10 million per occurrence to be satisfied by us before we could be indemnified for losses. In the fourth quarter of 2008, we satisfied our $10 million retention requirement for Hurricane Ike in connection with two platforms that were toppled and were deemed total losses. Our insurance coverage policy limits at the time of Hurricane Ike were $150 million for property damage due to named windstorms (excluding certain damage incurred at our marginal facilities) and $250 million for, among other things, removal of wreckage if mandated by any governmental authority. The damage we incurred as a result of Hurricane Gustav was below our retention amount.

Below is a summary of remediation costs and amounts approved for payments related to Hurricanes Ike and Gustav that were included in lease operating expense (in thousands). Bracketed amounts represent credits to expense:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Incurred and reversals of accruals

   $ 114      $ 2,229      $ 76      $ (1,878

Plus amounts returned to insurers

     —          —          1,240        —     

Less amounts approved for payment by insurers

     (587     (138     (587     (2,357
  

 

 

   

 

 

   

 

 

   

 

 

 

Included in lease operating expense

   $ (473   $ 2,091      $ 729      $ (4,235
  

 

 

   

 

 

   

 

 

   

 

 

 

We recognize insurance receivables with respect to capital, repair and plugging and abandonment costs as a result of hurricane damage when we deem those to be probable of collection. Our assessment of probability considers the review and approval of such costs by our insurance underwriters’ adjuster. Claims that have been processed in this manner have customarily been paid on a timely basis. Incurred expenses included revisions of previous estimates. Amounts in 2011 include return of reimbursements that were previously received by us related to prepayments based on preliminary estimates. See Note 4 for additional information about the impact of hurricane related items on our asset retirement obligations.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Below is a reconciliation of our insurance receivables from December 31, 2010 to June 30, 2011 (in thousands):

 

Balance, December 31, 2010

   $ 1,014   

Costs approved under our insurance policies, net

     17,841   

Payments received, net

     (11,930
  

 

 

 

Balance, June 30, 2011

   $ 6,925   
  

 

 

 

At June 30, 2011 and December 31, 2010, substantially all of the amounts in insurance receivables relate to the plugging and abandonment of wells and dismantlement of facilities damaged by Hurricane Ike. We expect that our available cash and cash equivalents, cash flow from operations and the availability under our revolving bank credit facility will be sufficient to meet necessary expenditures that may exceed our insurance coverage for damages incurred as a result of Hurricane Ike.

4. Asset Retirement Obligations

Our asset retirement obligations primarily represent the estimated present value of the amount we will incur to plug, abandon and remediate our producing properties at the end of their productive lives in accordance with applicable laws. A summary of the changes to our asset retirement obligations is as follows (in thousands):

 

Balance, December 31, 2010

   $ 391,316   

Liabilities settled

     (29,703

Accretion of discount

     15,844   

Liabilities assumed through acquisition

     382   

Liabilities incurred

     330   

Revisions of estimated liabilities due to Hurricane Ike

     6,628   

Revisions of estimated liabilities – all other

     8,281   
  

 

 

 

Balance, June 30, 2011

     393,078   

Less current portion

     105,379   
  

 

 

 

Long-term

   $ 287,699   
  

 

 

 

5. Derivative Financial Instruments

Our market risk exposure relates primarily to commodity prices and interest rates. From time to time, we use various derivative instruments to manage our exposure to commodity price risk from sales of oil and natural gas and interest rate risk from floating interest rates on our revolving bank credit facility. We do not enter into derivative instruments for speculative trading purposes. Our derivative instruments currently consist of commodity option contracts. We are exposed to credit loss in the event of nonperformance by the counterparties; however, we do not currently anticipate any of our counterparties being unable to fulfill their contractual obligations.

We account for derivative contracts in accordance with GAAP, which requires each derivative to be recorded on the balance sheet as an asset or a liability at its fair value. Changes in a derivative’s fair value are required to be recognized currently in earnings unless specific hedge accounting criteria are met at the time we enter into a derivative contract. We have elected not to designate our commodity derivatives as hedging instruments. For additional information about fair value measurements, refer to Note 7.

Commodity Derivative: During 2010, we entered into commodity option contracts to manage our exposure to commodity price risk from sales of oil through December 31, 2012. While these contracts are intended to reduce the effects of price volatility, they may also limit future income from favorable price movements. As of June 30, 2011, our open commodity derivatives were as follows:

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Zero Cost Collars – Oil

 

Effective

Date

  

Termination

Date

   Notional
Quantity  (Bbls)
     Weighted Average
NYMEX Contract Price
     Fair Value
Liability
(in thousands)
 
         Floor      Ceiling     

7/1/2011

   9/30/2011      231,900       $   75.00       $   93.02       $ 934   

10/1/2011

   12/31/2011      392,100         75.00         95.58         2,714   

1/1/2012

   3/31/2012      364,000         75.00         97.88         2,726   

4/1/2012

   6/30/2012      364,000         75.00         97.88         3,186   

7/1/2012

   9/30/2012      124,000         75.00         97.88         1,152   

10/1/2012

   12/31/2012      251,000         75.00         98.99         2,357   
     

 

 

    

 

 

    

 

 

    

 

 

 
        1,727,000       $   75.00       $   96.86       $ 13,069   
     

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2011, $9.6 million and $3.5 million were included in accrued liabilities and other long-term liabilities, respectively, related to our commodity derivative contracts. At December 31, 2010, $9.5 million and $5.4 million were included in accrued liabilities and other long-term liabilities, respectively, related to our commodity derivative contracts. Our derivative gain for the three months ended June 30, 2011 includes realized losses of $6.1 million and unrealized gains of $23.4 million related to our commodity derivatives. Our derivative loss for the six months ended June 30, 2011 includes realized losses of $8.3 million and unrealized gains of $1.8 million related to our commodity derivatives. Our derivative gain for the three months ended June 30, 2010 includes realized and unrealized gains of $2.1 million and $5.3 million, respectively, related to our commodity derivatives. Our derivative gain for the six months ended June 30, 2010 includes realized and unrealized gains of $3.2 million and $10.4 million, respectively, related to our commodity derivatives.

Interest Rate Swap: Our interest rate swap contract with a fixed interest rate of 5.21% expired in August 2010. During the three months ended June 30, 2010, we recognized an unrealized gain of $1.8 million and a realized loss of $1.8 million for this contract. During the six months ended June 30, 2010, we recognized an unrealized gain of $3.3 million and a realized loss of $3.6 million for this contract.

6. Long-Term Debt

On June 10, 2011, we issued $600 million of our Senior Notes at par with an interest rate of 8.5% and maturity date of June 15, 2019 (the “8.5% Senior Notes”). Interest is payable semi-annually in arrears on June 15 and December 15 of each year beginning on December 15, 2011. The 8.5% Senior Notes are unsecured and are fully and unconditionally guaranteed by certain of our subsidiaries. The restrictive covenants and redemption provisions of the 8.5% Senior Notes are substantially similar to the terms of the 8.25% Senior Notes due 2014 (the “8.25% Senior Notes”). At June 30, 2011, the outstanding balance of our 8.5% Senior Notes was $600 million and was classified at their carrying value as long-term debt. The estimated annual effective interest rate on the 8.5% Senior Notes is 8.7% which includes amortization of debt issuance costs. At June 30, 2011, the estimated fair value of the 8.5% Senior Notes was approximately $606 million. For additional details about fair value measurements, refer to Note 7.

We used a portion of the net proceeds from the issuance of the 8.5% Senior Notes to fund a concurrent tender offer of our 8.25% Senior Notes, pursuant to which $406.2 million in principal amount of the 8.25% Senior Notes were tendered for repurchase. At June 30, 2011, the outstanding balance of our 8.25% Senior Notes was $43.9 million and was classified at their carrying value as short-term debt. At December 31, 2010, the outstanding balance of our 8.25% Senior Notes was $450 million and was classified at their carrying value as long-term debt. The estimated annual effective interest rate on the 8.25% Senior Notes during the six months ended June 30, 2011 was 8.4%. At June 30, 2011 and December 31, 2010, the estimated fair value of the 8.25% Senior Notes was approximately $45.7 million and $441 million, respectively. For additional details about fair value measurements, refer to Note 7. Costs related to the 8.25% Senior Notes that were repurchased pursuant to the tender offer, which includes the repurchase premium and a prorated amount of the unamortized debt issuance costs, are included in the statement of income within the line item classification, Loss on extinguishment of debt, in the amount of $20.0 million. See Note 13 for additional information regarding the remaining $43.9 million of 8.25% Senior Notes.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

On May 5, 2011, we entered into a Fourth Amended and Restated Credit Agreement (the “Credit Agreement”) which provides a revolving bank credit facility with an initial borrowing base of $525 million. This is a secured facility that is collateralized by our oil and natural gas properties. The Credit Agreement terminates on May 5, 2015 and replaces the prior Third Amended and Restated Credit Agreement (the “Prior Credit Agreement”), which would have expired July 23, 2012. The pricing terms and restrictive covenants of the Credit Agreement are substantially similar to the terms of the Prior Credit Agreement. Availability under the Credit Agreement is subject to a semi-annual borrowing base determination set at the discretion of our lenders. The amount of the borrowing base is calculated by our lenders based on their evaluation of our proved reserves and their own internal criteria. Any determination by our lenders to change our borrowing base will result in a similar change in the availability under our revolving bank credit facility.

The initial borrowing base is reduced by $0.25 for every dollar of senior note indebtedness in excess of $450 million. Due to the issuance of the 8.5% Senior Notes, our borrowing base was reduced to $487.5 million.

The Credit Agreement contains covenants that restrict, among other things, the payment of cash dividends and share repurchases of up to $60 million per year, borrowings other than from the revolving bank credit facility, sales of assets, loans to others, investments, merger activity, hedging contracts, liens and certain other transactions without the prior consent of the lenders. Letters of credit may be issued up to $90 million, provided availability under the revolving bank credit facility exists. We are subject to various financial covenants calculated as of the last day of each fiscal quarter; including a minimum current ratio and a maximum leverage ratio as such ratios are defined in the Credit Agreement. We were in compliance with all applicable covenants of the Credit Agreement as of June 30, 2011.

Borrowings under the revolving bank credit facility bear interest at the applicable London Interbank Offered Rate (“LIBOR”) plus a margin that varies from 2.00% to 2.75% depending on the level of total borrowings under the Credit Agreement, or an alternative base rate equal to the applicable margin ranging from 1.00% to 1.75% plus the highest of the (a) the Prime Rate, (b) the Federal Funds Rate plus 0.50%, and (c) LIBOR plus 1.0%. The unused portion of the borrowing base is subject to a commitment fee of 0.50%. The estimated annual effective interest rate was 7.2% for the first six months of 2011 for borrowings under the Credit Agreement and the Prior Credit Agreement and includes amortization of debt issuance costs, commitment fees and other related costs.

Unamortized debt issuance costs related to the Prior Credit Agreement are included in the statement of income within the line item classification, Loss on extinguishment of debt, in the amount of $0.7 million.

At June 30, 2011, we had $75 million in borrowings and $0.5 million in letters of credit outstanding under the revolving bank credit facility. At December 31, 2010, we had no borrowings and $0.4 million in letters of credit outstanding under the revolving bank credit facility provided by the Prior Credit Agreement.

7. Fair Value Measurements

We measure the fair value of our derivative financial instruments by applying the income approach, using models with inputs that are classified within Level 2 of the valuation hierarchy. The inputs used for the fair value measurement of our derivative financial instruments are the exercise price, the expiration date, the settlement date, notional quantities, the implied volatility, the discount curve with spreads and published commodity futures prices. As described in Note 5, our derivative financial instruments are reported in the balance sheet at fair value and changes in fair value are recognized currently in earnings.

The fair value of our Senior Notes is based on quoted prices. The market for our Senior Notes is not an active market; therefore the fair value is classified within Level 2. The Senior Notes are reported in the balance sheet at their carrying value and their fair value is reported in Note 6.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

8. Share-Based Compensation and Cash-Based Incentive Compensation

In 2010, the W&T Offshore, Inc. Amended and Restated Incentive Compensation Plan, (“the Plan”) was approved. As allowed by the Plan, in August 2010, the Company granted restricted stock units (“RSUs”) to certain of its employees and in January 2011, the Company granted restricted stock to one of its employees. RSUs are a long-term compensation component of the Plan, are granted to only certain employees, and are subject to adjustment based on the Company achieving certain predetermined performance criteria and vest at the end of a specified deferral period. Prior to 2010, the Company granted only restricted stock to its employees. In 2011 and in prior years, restricted stock was granted to the Company’s non-employee directors under the Director Compensation Plan. In addition to share-based compensation, the Company may grant its employees cash-based incentive awards, which are a short-term component of the Plan, and are based on the Company and the employee achieving certain predetermined performance criteria.

We recognize compensation cost for share-based payments to employees and non-employee directors over the period during which the recipient is required to provide service in exchange for the award, based on the fair value of the equity instrument on the date of grant. We are also required to estimate forfeitures, resulting in the recognition of compensation cost only for those awards that actually vest.

At June 30, 2011, there were 2,152,377 shares of common stock available for award under the Plan and 568,783 shares of common stock available for award under the Directors Compensation Plan.

Restricted Stock: The Company currently has unvested restricted shares outstanding issued to employees and non-employee directors. Restricted shares are subject to forfeiture until vested and cannot be sold, transferred or disposed of during the restricted period. The holders of restricted shares generally have the same rights as a shareholder of the Company with respect to such shares, including the right to vote and receive dividends or other distributions paid with respect to the shares.

A summary of share activity related to restricted stock for the six months ended June 30, 2011 is as follows:

 

      Restricted Stock  
      Shares     Weighted Average
Grant Date Fair
Value Per Share
 

Outstanding restricted shares, December 31, 2010

     470,392      $ 7.42   

Granted

     20,433        25.45   

Vested

     (24,633     13.26   

Forfeited

     (25,879     6.83   
  

 

 

   

Outstanding restricted shares, June 30, 2011

     440,313        7.97   
  

 

 

   

At June 30, 2011, the composition of our restricted stock awards outstanding, by year granted, was as follows:

 

      Shares  

Employees – granted in:

  

2011

     5,325  (1) 

2009

     385,780  (2) 

Non-employee directors – granted in:

  

2011

     15,108  (3) 

2010

     23,330  (4) 

2009

     10,770  (5) 
  

 

 

 

Total

     440,313   
  

 

 

 

 

Vesting is expected to occur, less any forfeitures, as follows:

 

(1) Equal installments in December 2011 and December 2012.
(2) December 2011.
(3) Equal installments in May 2012, 2013 and 2014.
(4) Equal installments in May 2012 and 2013.
(5) May 2012.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

The grant date fair value of restricted stock granted during the six months ended June 30, 2011 and 2010 was $0.5 million and $0.4 million, respectively. The fair value of the shares that vested during the six months ended June 30, 2011 and 2010 was $0.6 million and $0.1 million, respectively.

Restricted Stock Units: During 2010, the Company awarded to certain employees RSUs that were 100% contingent upon meeting a specified performance requirement, which was achieved in 2010. RSUs are subject to forfeiture until vested and cannot be sold, transferred or disposed of during the restricted period. Effective January 2011, RSUs awarded in 2010 earn dividend equivalents at the same rate as dividends paid on our common stock.

A summary of share activity related to RSUs for the six months ended June 30, 2011 is as follows:

 

     Restricted Stock Units  
     Units (1)     Weighted Average
Grant Date Fair
Value Per Unit
 

Outstanding RSUs, December 31, 2010

     1,266,617      $ 9.36   

Granted

     —          —     

Vested

     —          —     

Forfeited

     (33,096     9.36   
  

 

 

   

Outstanding RSUs, June 30, 2011

     1,233,521        9.36   
  

 

 

   

 

(1) All of the RSUs granted in 2010 will vest in December 2012 subject to employment conditions.

During the six months ended June 30, 2011 and 2010, there were no grants or vesting of RSUs.

Share-Based Compensation: A summary of incentive compensation expense under share-based payment arrangements and the related tax benefit for the three and six months ended June 30, 2011 and 2010 is as follows (in thousands):

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  

Share-based compensation expense from:

           

Restricted stock

   $ 603       $ 747       $ 1,191       $ 1,943   

Restricted stock units

     1,232         —           2,471         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,835       $ 747       $ 3,662       $ 1,943   
  

 

 

    

 

 

    

 

 

    

 

 

 

Share-based compensation tax benefit:

           

Tax benefit computed at the statutory rate

   $ 642       $ 261       $ 1,282       $ 680   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash-based Incentive Compensation: As defined by the Plan, performance and annual incentive awards may be granted to eligible employees. These awards are performance-based awards consisting of one or more business criteria and individual performance criteria and a targeted level or levels of performance with respect to each of such criteria. Generally, the performance period is the calendar year and determination and payment is made in cash in the first quarter of the following year.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Incentive Compensation: A summary of incentive compensation expense for the three and six months ended June 30, 2011 and 2010 is as follows (in thousands):

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  

Share-based compensation expense included in:

           

Lease operating expense

   $ 116       $ 159       $ 233       $ 428   

General and administrative

     1,719         588         3,429         1,515   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total charged to operating income

     1,835         747         3,662         1,943   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash-based incentive compensation included in:

           

Lease operating expense

     1,119         651         2,199         777   

General and administrative

     3,288         2,377         6,052         2,911   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total charged to operating income

     4,407         3,028         8,251         3,688   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total incentive compensation charged to operating income

   $ 6,242       $ 3,775       $ 11,913       $ 5,631   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of June 30, 2011, unrecognized share-based compensation expense related to our outstanding restricted shares and RSUs was $1.7 million and $6.9 million, respectively. Unrecognized compensation expense will be recognized through April 2014 for restricted shares and November 2012 for RSUs.

9. Income Taxes

Income tax expense of $29.8 million and $40.0 million was recorded during the three and six months ended June 30, 2011, respectively. Our effective tax rate for the three and six months ended June 30, 2011 was 35.1% and 35.2%, respectively, which approximated the federal and state statutory rates. Income tax expense of $3.1 million and $7.1 million was recorded during the three and six months ended June 30, 2010, respectively. Our effective tax rate for the three and six months ended June 30, 2010 was 9.9% and 9.2% and primarily reflects a reduction in our valuation allowance that was recorded in prior years.

Exclusive of interest, the amount of unrecognized tax benefit recorded in other liabilities was $ 3.6 million as of June 30, 2011 and December 31, 2010. We recognize interest and penalties related to unrecognized tax benefits in income tax expense and these amounts were immaterial for the six months ended June 30, 2011 and 2010. The tax years from 2007 through 2010 remain open to examination by the applicable tax jurisdictions.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

10. Earnings Per Share

The following table presents the calculation of basic earnings per common share for the three and six months ended June 30, 2011 and 2010 (in thousands, except per share amounts):

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  

Net income

   $ 55,175       $ 27,870       $ 73,824       $ 70,185   

Less portion allocated to nonvested shares

     1,178         379         1,558         957   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income allocated to common shares

   $ 53,997       $ 27,491       $ 72,266       $ 69,228   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     74,020         73,669         74,012         73,665   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic and diluted earnings per common share

   $ 0.73       $ 0.37       $ 0.98       $ 0.94   

Shares excluded due to being anti-dilutive (weighted-average)

     1,683         1,017         1,699         1,021   

11. Dividends

During the six months ended June 30, 2011 and 2010, we paid regular cash dividends of $0.04 and $0.03 per common share per quarter, respectively. On August 3, 2011, our board of directors declared a cash dividend of $0.04 per common share, payable on September 12, 2011 to shareholders of record on August 22, 2011.

12. Contingencies

We are a party to various pending or threatened claims and complaints seeking damages or other remedies concerning our commercial operations and other matters in the ordinary course of our business. In addition, claims or contingencies may arise related to matters occurring prior to our acquisition of properties or related to matters occurring subsequent to our sale of properties. In certain cases, we have indemnified the sellers of properties we have acquired, and in other cases, we have indemnified the buyers of properties we have sold. We are also subject to federal and state administrative proceedings conducted in the ordinary course of business. Although we can give no assurance about the outcome of pending legal and federal or state administrative proceedings and the effect such an outcome may have on us, management believes that any ultimate liability resulting from the outcome of such proceedings, to the extent not otherwise provided for or covered by insurance, will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.

13. Subsequent Event

On July 18, 2011, we redeemed the remaining outstanding $43.9 million principal amount of our 8.25% Senior Notes, which would have matured in June 2014, at a redemption price of 104.125% plus accrued interest under the terms of the applicable indenture. These were 8.25% Senior Notes that were not tendered and repurchased during our tender offer conducted in June 2011. The redemption premium and remaining unamortized debt issuance costs of $2.0 million will be included in the statement of income within the line item classification, Loss on extinguishment of debt, in the third quarter of 2011.

 

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(Unaudited)

 

14. Supplemental Guarantor Information

Our payment obligations under the 8.5% Senior Notes, the 8.25% Senior Notes and the Credit Agreement (see Note 6) are fully and unconditionally guaranteed by certain of our wholly-owned subsidiaries, Energy VI and W&T Energy VII, which does not have any active operations, (together, the “Guarantor Subsidiaries”).

The following unaudited condensed consolidating financial information presents the financial condition, results of operations and cash flows of W&T Offshore, Inc. and other consolidated subsidiaries (“Parent Company”) and the Guarantor Subsidiaries, together with consolidating adjustments necessary to present the Company’s results on a consolidated basis. Consolidated subsidiaries other than the Guarantor Subsidiaries are considered “minor” under applicable accounting rules of the SEC.

Condensed Consolidating Balance Sheet as of June 30, 2011

 

     Parent
Company
    Guarantor
Subsidiaries
     Eliminations     Consolidated
W&T

Offshore,  Inc.
 
     (In thousands)  
Assets          

Current assets:

         

Cash and cash equivalents

   $ 8,710      $ —         $ —        $ 8,710   

Receivables:

         

Oil and natural gas sales

     69,201        22,316         —          91,517   

Joint interest and other

     11,308        —           —          11,308   

Insurance

     6,925        —           —          6,925   

Income taxes

     45,830        —           (45,830     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total receivables

     133,264        22,316         (45,830     109,750   

Deferred income taxes

     —          9,183         (9,183     —     

Prepaid expenses and other assets

     44,153        —           —          44,153   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total current assets

     186,127        31,499         (55,013     162,613   

Property and equipment – at cost:

         

Oil and natural gas properties and equipment

     5,435,135        272,493         —          5,707,628   

Furniture, fixtures and other

     16,018        —           —          16,018   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total property and equipment

     5,451,153        272,493         —          5,723,646   

Less accumulated depreciation, depletion and amortization

     4,094,280        68,733         —          4,163,013   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net property and equipment

     1,356,873        203,760         —          1,560,633   

Restricted deposits for asset retirement obligations

     33,921        —           —          33,921   

Other assets

     325,119        155,804         (465,626     15,297   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,902,040      $ 391,063       $ (520,639   $ 1,772,464   
  

 

 

   

 

 

    

 

 

   

 

 

 
Liabilities and Shareholders’ Equity          

Current liabilities:

         

Accounts payable

   $ 64,285      $ 1,351       $ —        $ 65,636   

Undistributed oil and natural gas proceeds

     35,937        326         —          36,263   

Asset retirement obligations

     105,348        —           31        105,379   

Accrued liabilities

     23,331        —           —          23,331   

Income taxes

     —          48,426         (45,830     2,596   

Deferred income taxes – current

     2,249        —           —          2,249   

Long-term debt - current

     43,850        —           —          43,850   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total current liabilities

     275,000        50,103         (45,799     279,304   

Long-term debt

     675,000        —           —          675,000   

Asset retirement obligations, less current portion

     256,593        31,136         (30     287,699   

Deferred income taxes

     33,989        —           (9,183     24,806   

Other liabilities

     168,186        —           (155,803     12,383   

Commitments and contingencies

     —          —           —          —     

Shareholders’ equity:

         

Common stock

     1        —           —          1   

Additional paid-in capital

     381,191        236,944         (236,944     381,191   

Retained earnings

     136,247        72,880         (72,880     136,247   

Treasury stock, at cost

     (24,167     —           —          (24,167
  

 

 

   

 

 

    

 

 

   

 

 

 

Total shareholders’ equity

     493,272        309,824         (309,824     493,272   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,902,040      $ 391,063       $ (520,639   $ 1,772,464   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

17


Table of Contents

W&T OFFSHORE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Condensed Consolidating Balance Sheet as of December 31, 2010

 

     Parent
Company
    Guarantor
Subsidiaries
     Eliminations     Consolidated
W&T

Offshore,  Inc.
 
     (In thousands)  
Assets          

Current assets:

         

Cash and cash equivalents

   $ 28,655      $ —         $ —        $ 28,655   

Receivables:

         

Oil and natural gas sales

     50,421        29,490         —          79,911   

Joint interest and other

     25,415        —           —          25,415   

Insurance

     1,014        —           —          1,014   

Income taxes

     2,492        —           (2,492     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total receivables

     79,342        29,490         (2,492     106,340   

Deferred income taxes

     5,784        2,755         (2,755     5,784   

Prepaid expenses and other assets

     23,426        —           —          23,426   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total current assets

     137,207        32,245         (5,247     164,205   

Property and equipment – at cost:

         

Oil and natural gas properties and equipment

     4,955,460        270,122         —          5,225,582   

Furniture, fixtures and other

     15,841        —           —          15,841   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total property and equipment

     4,971,301        270,122         —          5,241,423   

Less accumulated depreciation, depletion and amortization

     3,994,085        27,310         —          4,021,395   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net property and equipment

     977,216        242,812         —          1,220,028   

Restricted deposits for asset retirement obligations

     30,636        —           —          30,636   

Deferred income taxes

     2,819        —           —          2,819   

Other assets

     275,461        47,160         (316,215     6,406   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,423,339      $ 322,217       $ (321,462   $ 1,424,094   
  

 

 

   

 

 

    

 

 

   

 

 

 
Liabilities and Shareholders’ Equity          

Current liabilities:

         

Accounts payable

   $ 77,422      $ 3,020       $ —        $ 80,442   

Undistributed oil and natural gas proceeds

     24,866        374         —          25,240   

Asset retirement obligations

     92,575        —           —          92,575   

Accrued liabilities

     25,827        —           —          25,827   

Income taxes

     —          20,044         (2,492     17,552   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total current liabilities

     220,690        23,438         (2,492     241,636   

Long-term debt

     450,000        —           —          450,000   

Asset retirement obligations, less current portion

     269,016        29,725         —          298,741   

Deferred income taxes

     2,755        —           (2,755     —     

Other liabilities

     59,135        —           (47,161     11,974   

Commitments and contingencies

     —          —           —          —     

Shareholders’ equity:

         

Common stock

     1        —           —          1   

Additional paid-in capital

     377,529        236,944         (236,944     377,529   

Retained earnings

     68,380        32,110         (32,110     68,380   

Treasury stock, at cost

     (24,167     —           —          (24,167
  

 

 

   

 

 

    

 

 

   

 

 

 

Total shareholders’ equity

     421,743        269,054         (269,054     421,743   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,423,339      $ 322,217       $ (321,462   $ 1,424,094   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

18


Table of Contents

W&T OFFSHORE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Condensed Consolidating Statement of Income for the Three Months Ended June 30, 2011

 

     Parent
Company
    Guarantor
Subsidiaries
     Eliminations     Consolidated
W&T

Offshore,  Inc.
 
     (In thousands)  

Revenues

   $ 192,527      $ 60,395       $ —        $ 252,922   
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating costs and expenses:

         

Lease operating expenses

     38,066        10,531         —          48,597   

Production taxes

     845        —           —          845   

Gathering and transportation

     3,249        548         —          3,797   

Depreciation, depletion and amortization

     56,432        19,448         —          75,880   

Asset retirement obligation accretion

     6,784        706         —          7,490   

General and administrative expenses

     16,892        1,110         —          18,002   

Derivative (gain)

     (17,332     —           —          (17,332
  

 

 

   

 

 

    

 

 

   

 

 

 

Total costs and expenses

     104,936        32,343         —          137,279   
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating income

     87,591        28,052         —          115,643   

Earnings of affiliates

     18,234        —           (18,234     —     

Interest expense:

         

Incurred

     12,056        —           —          12,056   

Capitalized

     (2,079     —           —          (2,079

Loss on extinguishment of debt

     20,663        —           —          20,663   

Interest income

     9        —           —          9   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before income tax expense

     75,194        28,052         (18,234     85,012   

Income tax expense

     20,019        9,818         —          29,837   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 55,175      $ 18,234       $ (18,234   $ 55,175   
  

 

 

   

 

 

    

 

 

   

 

 

 

Condensed Consolidating Statement of Income for the Six Months Ended June 30, 2011

 

     Parent
Company
    Guarantor
Subsidiaries
     Eliminations     Consolidated
W&T

Offshore,  Inc.
 
     (In thousands)  

Revenues

   $ 332,753      $ 131,024       $ —        $ 463,777   
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating costs and expenses:

         

Lease operating expenses

     80,147        20,855         —          101,002   

Production taxes

     1,133        —           —          1,133   

Gathering and transportation

     6,321        2,029         —          8,350   

Depreciation, depletion and amortization

     100,195        41,423         —          141,618   

Asset retirement obligation accretion

     14,432        1,412         —          15,844   

General and administrative expenses

     33,549        2,582         —          36,131   

Derivative loss

     6,508        —           —          6,508   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total costs and expenses

     242,285        68,301         —          310,586   
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating income

     90,468        62,723         —          153,191   

Earnings of affiliates

     40,770        —           (40,770     —     

Interest expense:

         

Incurred

     22,192        —           —          22,192   

Capitalized

     (3,491     —           —          (3,491

Loss on extinguishment of debt

     20,663        —           —          20,663   

Interest income

     16        —           —          16   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before income tax expense

     91,890        62,723         (40,770     113,843   

Income tax expense

     18,066        21,953         —          40,019   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 73,824      $ 40,770       $ (40,770   $ 73,824   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

19


Table of Contents

W&T OFFSHORE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Condensed Consolidating Statement of Income for the Three Months Ended June 30, 2010

 

     Parent
Company
    Guarantor
Subsidiaries  (1)
     Eliminations     Consolidated
W&T

Offshore,  Inc.
 
     (In thousands)  

Revenues

   $ 160,511      $ 19,156       $ —        $ 179,667   
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating costs and expenses:

         

Lease operating expenses

     46,546        5,911         —          52,457   

Production taxes

     283        —           —          283   

Gathering and transportation

     3,512        214         —          3,726   

Depreciation, depletion and amortization

     63,831        6,064         —          69,895   

Asset retirement obligation accretion

     6,031        96         —          6,127   

General and administrative expenses

     13,102        1,273         —          14,375   

Derivative (gain)

     (7,374     —           —          (7,374
  

 

 

   

 

 

    

 

 

   

 

 

 

Total costs and expenses

     125,931        13,558         —          139,489   
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating income

     34,580        5,598         —          40,178   

Earnings of affiliates

     3,639        —           (3,639     —     

Interest expense:

         

Incurred

     10,914        —           —          10,914   

Capitalized

     (1,329     —           —          (1,329

Interest income

     354        —           —          354   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before income tax expense

     28,988        5,598         (3,639     30,947   

Income tax expense

     1,118        1,959         —          3,077   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 27,870      $ 3,639       $ (3,639   $ 27,870   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Began operations on May 1, 2010. Includes only May and June of 2010.

Condensed Consolidating Statement of Income for the Six Months Ended June 30, 2010

 

     Parent
Company
    Guarantor
Subsidiaries  (1)
     Eliminations     Consolidated
W&T
Offshore, Inc.
 
     (In thousands)  

Revenues

   $ 330,096      $ 19,156       $ —        $ 349,252   
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating costs and expenses:

         

Lease operating expenses

     81,912        5,911         —          87,823   

Production taxes

     512        —           —          512   

Gathering and transportation

     8,099        214         —          8,313   

Depreciation, depletion and amortization

     126,755        6,064         —          132,819   

Asset retirement obligation accretion

     12,316        96         —          12,412   

General and administrative expenses

     23,481        1,273         —          24,754   

Derivative (gain)

     (13,270     —           —          (13,270
  

 

 

   

 

 

    

 

 

   

 

 

 

Total costs and expenses

     239,805        13,558         —          253,363   
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating income

     90,291        5,598         —          95,889   

Earnings of affiliates

     3,639        —           (3,639     —     

Interest expense:

         

Incurred

     21,834        —           —          21,834   

Capitalized

     (2,745     —           —          (2,745

Interest income

     482        —           —          482   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before income tax expense

     75,323        5,598         (3,639     77,282   

Income tax expense

     5,138        1,959         —          7,097   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 70,185      $ 3,639       $ (3,639   $ 70,185   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Began operations on May 1, 2010. Includes only May and June of 2010.

 

20


Table of Contents

W&T OFFSHORE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Condensed Consolidating Statement of Cash Flows for the Six Months Ended June 30, 2011

 

     Parent
Company
    Guarantor
Subsidiaries
    Eliminations     Consolidated
W&T

Offshore,  Inc.
 
     (In thousands)  

Operating activities:

        

Net income

   $ 73,824      $ 40,770      $ (40,770   $ 73,824   

Adjustments to reconcile net income to net cash provided by operating activities:

        

Depreciation, depletion, amortization and accretion

     114,627        42,835        —          157,462   

Amortization of debt issuance costs and discount on indebtedness

     815        —          —          815   

Loss on extinguishment of debt

     20,663        —          —          20,663   

Share-based compensation

     3,662        —          —          3,662   

Derivative loss

     6,508        —          —          6,508   

Cash payments on derivative settlements

     (8,322     —          —          (8,322

Deferred income taxes

     42,154        (6,428     —          35,726   

Earnings of affiliates

     (40,770     —          40,770        —     

Changes in operating assets and liabilities:

        

Oil and natural gas receivables

     (18,779     7,173        —          (11,606

Joint interest and other receivables

     14,107        —          —          14,107   

Insurance receivables

     12,583        —          —          12,583   

Income taxes

     (43,339     28,382        —          (14,957

Prepaid expenses and other assets

     (24,650     (108,643     108,643        (24,650

Asset retirement obligations

     (29,703     —          —          (29,703

Accounts payable and accrued liabilities

     (4,665     (1,717     —          (6,382

Other liabilities

     108,758        —          (108,643     115   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     227,473        2,372        —          229,845   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities:

        

Acquisition of significant property interest in oil and natural gas properties

     (396,976     —          —          (396,976

Investment in oil and natural gas properties and equipment

     (83,429     (2,372     —          (85,801

Purchases of furniture, fixtures and other

     (178     —          —          (178
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (480,583     (2,372     —          (482,955
  

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities:

        

Issuance of 8.5% Senior Notes

     600,000        —          —          600,000   

Repurchase of 8.25% Senior Notes

     (406,150     —          —          (406,150

Borrowings of long-term debt – revolving bank credit facility

     310,000        —          —          310,000   

Repayments of long-term debt – revolving bank credit facility

     (235,000     —          —          (235,000

Repurchase premium and debt issuance costs

     (29,728     —          —          (29,728

Dividends to shareholders

     (5,957     —          —          (5,957
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     233,165        —          —          233,165   
  

 

 

   

 

 

   

 

 

   

 

 

 

Increase in cash and cash equivalents

     (19,945     —          —          (19,945

Cash and cash equivalents, beginning of period

     28,655        —          —          28,655   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 8,710      $ —        $ —        $ 8,710   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

W&T OFFSHORE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Condensed Consolidating Statement of Cash Flows for the Six Months Ended June 30, 2010

 

     Parent
Company
    Guarantor
Subsidiaries
(1)
    Eliminations     Consolidated
W&T
Offshore, Inc.
 
     (In thousands)  

Operating activities:

        

Net income

   $ 70,185      $ 3,639      $ (3,639   $ 70,185   

Adjustments to reconcile net income to net cash provided by operating activities:

        

Depreciation, depletion, amortization and accretion

     139,071        6,160        —          145,231   

Amortization of debt issuance costs and discount on indebtedness

     669        —          —          669   

Share-based compensation

     1,943        —          —          1,943   

Derivative gain

     (13,270     —          —          (13,270

Cash payments on derivative settlements

     (442     —          —          (442

Deferred income taxes

     144        2,801        —          2,945   

Earnings of affiliates

     (3,639     —          3,639        —     

Changes in operating assets and liabilities:

        

Oil and natural gas receivables

     (2,140     (9,599     —          (11,739

Joint interest and other receivables

     21,931        —          —          21,931   

Insurance receivables

     29,879        —          —          29,879   

Income taxes

     92,355        (842     —          91,513   

Prepaid expenses and other assets

     (9,129     (5,154     5,154        (9,129

Asset retirement obligations

     (35,210     —          —          (35,210

Accounts payable and accrued liabilities

     (65,537     2,995        —          (62,542

Other liabilities

     17,508        —          (5,154     12,354   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     244,318        —          —          244,318   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities:

        

Acquisition of significant property interests in oil and natural gas properties

     —          (116,589     —          (116,589

Investment in oil and natural gas properties and equipment

     (89,705     —          —          (89,705

Proceeds from sales of oil and natural gas properties and equipment

     1,335        —          —          1,335   

Investment in subsidiary

     (116,589     —          116,589        —     

Purchases of furniture, fixtures and other

     (167     —          —          (167
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (205,126     (116,589     116,589        (205,126
  

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities:

        

Borrowings of long-term debt – revolving bank credit facility

     285,000        —          —          285,000   

Repayments of long-term debt – revolving bank credit facility

     (285,000     —          —          (285,000

Dividends to shareholders

     (4,481     —          —          (4,481

Investment from parent

     —          116,589        (116,589     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (4,481     116,589        (116,589     (4,481
  

 

 

   

 

 

   

 

 

   

 

 

 

Increase in cash and cash equivalents

     34,711        —          —          34,711   

Cash and cash equivalents, beginning of period

     38,187        —          —          38,187   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 72,898      $ —        $ —        $ 72,898   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Began operations on May 1, 2010. Includes only May and June of 2010.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

The following discussion and analysis should be read in conjunction with our accompanying unaudited condensed consolidated financial statements and the notes to those financial statements included in Item 1 of this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act, that involve risks, uncertainties and assumptions. If the risks or uncertainties materialize or the assumptions prove incorrect, our results may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, such as those statements that address activities, events or developments that we expect, believe or anticipate will or may occur in the future. These statements are based on certain assumptions and analyses made by us in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate in the circumstances. Certain factors that may affect our financial condition and results of operations are discussed in Item 1A “Risk Factors” and Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the year ended December 31, 2010 and may be discussed or updated from time to time in subsequent reports filed with the SEC. We assume no obligation, nor do we intend, to update these forward-looking statements. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “W&T,” “we,” “us,” “our” and the “Company” refer to W&T Offshore, Inc. and its consolidated subsidiaries.

Overview

W&T is an independent oil and natural gas producer focused primarily in the Gulf of Mexico. W&T has grown through acquisitions, exploitation and exploration and currently holds working interests in approximately 67 producing or capable of producing fields in federal and state waters. The majority of our daily production was derived from offshore wells we operate. In May 2011, we closed on the acquisition of the Permian Basin Properties as described below. After completing this acquisition, we now hold working interests in over 30,000 net acres onshore primarily in the West Texas Permian Basin. Acquiring these onshore properties has diversified our business by having both significant offshore and onshore operations.

Our financial condition, cash flow and results of operations are significantly affected by the volume of our oil and natural gas production and the price that we receive for such production. Our production volumes for the first six months of 2011 was comprised of approximately 47% oil, condensate and natural gas liquids and 53% natural gas, determined using the ratio of six thousand cubic feet (“Mcf”) of natural gas to one barrel (“Bbl”) of crude oil, condensate or natural gas liquids. The conversion ratio does not assume price equivalency, and the price per one thousand cubic feet equivalent (“Mcfe”) for oil and natural gas liquids may differ significantly from the price per Mcf for natural gas. For example, for the first six months of 2011, our average realized price for oil and NGLs on a Mcfe basis was $15.72 compared to $4.37 per Mcf for natural gas. For the first six months of 2011, our combined total production of oil, condensate, natural gas liquids and natural gas was approximately 11.0% higher on a Mcfe basis than during the same period in 2010.

During May 2011, we completed the acquisition of approximately 21,900 gross acres (21,500 net acres) of oil and gas leasehold interests in the Permian Basin Properties from Opal. The stated purchase price was $366.3 million, subject to certain adjustments, including adjustments from an effective date of January 1, 2011. Taking into account adjustments through June 30, 2011, the purchase price was $399.5 million. The increase of $33.2 million primarily reflects drilling costs in excess of cash flow from the effective date of January 1, 2011 to the closing date of May 11, 2011. The purchase price is subject to further adjustments and we expect final settlement could occur as early as the third quarter of 2011. We acquired estimated proved reserves of approximately 30 million barrels of oil equivalent (182 Bcfe) (using a 6 to 1 Mcf to barrel equivalency) as of December 31, 2010, comprised of approximately 91% oil and natural gas liquids and which are approximately 78% proved undeveloped. The properties include interests in producing wells, which produced approximately 2,534 net barrels of oil equivalents per day for the month of June 2011. Capital expenditures associated with planned development activities for these properties from the closing date of May 11, 2011 to December 31, 2011 are currently estimated to be between $40 million and $50 million. The acquisition was funded from cash on hand and borrowings under our revolving bank credit facility.

During 2010, we closed on two major acquisitions. In April 2010, we acquired property interests from Total and in November 2010, we acquired property interests from Shell. These transactions are described in Financial Statements - Note 2 – Acquisitions under Part I, Item 1 of this Form 10-Q.

 

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On March 31, 2011, the third-party pipeline used by our Main Pass 108, 98 and 180 fields, which had been offline since June 2010, became operational. In the second quarter of 2011, we gradually increased production in this area and in June 2011, it produced approximately 41 MMcfe per day, made up of 29,700 Mcf of natural gas and 1,937 barrels of oil/NGLs per day. Production in the second quarter of 2011 was impacted due to a shut down of our Matterhorn field for approximately one month for repairs, which had an average production of approximately 3,900 Boe per day in the month prior to the shutdown.

Prices for oil have continued to be volatile in 2011. The West Texas Intermediate posted spot price for oil was $98.08 per barrel for the first six months of 2011, representing an increase of 25.3% from $78.30 for the first six months of 2010. The price for oil during the first six months of 2011 ranged from a low of $83.13 per barrel to a high of $113.39 per barrel and during the first six months of 2010 prices ranged from $64.78 to $86.54 per barrel. For the first six months of 2011, our average realized sales price for oil and NGLs increased by 33.8% over the comparable period in 2010. Oil prices continue to be impacted by market fundamentals such as supply and demand and also by political events and disruptions throughout the world such as events in Japan, Africa and the Middle East. Long-term forecasts for oil demand, and therefore global oil prices, continue to be favorable in several key growing markets, specifically China and India.

The wide spreads between West Texas Intermediate crude and other crudes have continued since the early part of 2011. A significant majority of our oil production, which is located in south Louisiana, has received price premiums between $7.00 and $15.00 per barrel in the first six months of 2011. In comparison, the average premium spread between Light Louisiana Sweet crude and West Texas Intermediate crude was approximately $3.00 per barrel during 2010. We may continue to experience higher premiums to West Texas Intermediate crude in our future sales of crude oil until such time as the causative factors are resolved. We cannot predict with any certainty how long such pricing conditions will last.

Natural gas prices are much more affected by domestic issues, such as supply, local demand issues and domestic economic conditions. The Henry Hub posted spot price for natural gas was $4.27 per MMBtu for the first six months of 2011, representing a decrease of 9.3% from $4.71 per MMBtu for the first six months of 2010. The price for natural gas in the first six months of 2011 ranged from a low of $3.70 per MMBtu to a high of $4.92 per MMBtu and the range in the first six months of 2010 was from $3.72 to $7.51 per MMBtu. During the first six months of 2011, the average realized sales price of our natural gas decreased 10.5% from the comparable period of 2010. We are expecting continued weakness in natural gas prices unless demand for natural gas increases as a result of a strong economic recovery, drilling activity subsides dramatically or forced production shut-ins occur. There is also a risk that, as a result of successful exploration and development activities in the shale areas coupled with the availability of increasing amounts of liquefied natural gas, increased supplies of natural gas will offset or mitigate the impact of any natural gas shut-ins or demand increases resulting from improved economic conditions. According to industry sources, the rig count for horizontal drilling rigs, used primarily in the shale formation areas such as Louisiana, Arkansas, Texas, North Dakota and Pennsylvania, has reached or exceeded record levels. Natural gas production and supply continues to exceed demand. Onshore natural gas producers have continued to drill in attempts to yield production sufficient to preserve existing leases. Seasonal weather conditions also impact the demand for and price of natural gas.

Should prices decline for oil and natural gas in the future, it would negatively impact our future oil and natural gas revenues, earnings and liquidity, and could result in ceiling test write-downs of the carrying value of our oil and natural gas properties, create issues with financial ratio compliance, and result in a reduction of the borrowing base associated with our credit agreement, depending on the severity of such declines. If those were to occur and were significant, it may limit the willingness of financial institutions and investors to provide capital to us and others in the oil and natural gas industry.

In April 2010, there was a fire and explosion aboard the Deepwater Horizon drilling platform operated by BP in ultra deep water in the Gulf of Mexico. As a result of the explosion and ensuing fire, the rig sank, causing loss of life, and created a major oil spill that produced economic, environmental and natural resource damage in the Gulf Coast region. In response to the explosion and spill, the Bureau of Ocean Energy Management, Regulation and Enforcement (the “BOEMRE”) issued a series of “Notices to Lessees” (“NTLs”), and other significant changes in regulations. In addition, the BOEMRE implemented a six-month moratorium on drilling activities which began in May 2010. There also continue to be many proposed changes in laws, regulations, guidance and policy in response to the Deepwater Horizon explosion and spill. After the moratorium ended in 2010, it was not until March 2011 that deep water drilling permits began to be issued, and even then only sporadically, to continue drilling activities that had commenced prior to the Deepwater Horizon incident. Since March 2011, a small number of deepwater drilling permits have been issued, but at a much lower rate than prior to the Deepwater Horizon event. The most significant regulation changes since the Deepwater Horizon event are regulations related to assessing the potential environmental impact of future spills using worse case discharge scenarios, spill response documentation, compliance reviews, operator practices related to safety and implementing a safety and environmental

 

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management system. The new regulations and increased review process increases the time it takes to obtain drilling permits and increases the cost of operations. As these new regulations and guidance continue to evolve, we cannot estimate the cost and impact to our business at this time. The permitting process is also slow and inconsistent for shallow water work as well. We have not experienced delays in obtaining permits related to our onshore operations.

Results of Operations

The following table sets forth selected financial data for the periods indicated (all values are net to our interest unless indicated otherwise):

 

     Three Months Ended     Six Months Ended  
     June 30, (1)     June 30, (1)  
     2011     2010     Change     %     2011      2010     Change     %  
     (In thousands, except percentages and per share data)  

Financial:

                 

Revenues:

                 

Oil and NGLs

   $ 193,944      $ 124,762      $ 69,182        55.5   $ 353,431       $ 240,242      $ 113,189        47.1

Natural gas

     58,661        54,719        3,942        7.2     109,579         108,789        790        0.7

Other

     317        186        131        70.4     767         221        546        247.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     252,922        179,667        73,255        40.8     463,777         349,252        114,525        32.8

Operating costs and expenses:

                 

Lease operating expenses (2)

     48,597        52,457        (3,860     (7.4 %)      101,002         87,823        13,179        15.0

Production taxes

     845        283        562        198.6     1,133         512        621        121.3

Gathering and transportation

     3,797        3,726        71        1.9     8,350         8,313        37        0.4

Depreciation, depletion, amortization and accretion

     83,370        76,022        7,348        9.7     157,462         145,231        12,231        8.4

General and administrative expenses

     18,002        14,375        3,627        25.2     36,131         24,754        11,377        46.0

Derivative (gain) loss

     (17,332     (7,374     (9,958     135.0     6,508         (13,270     19,778        NM   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total costs and expenses

     137,279        139,489        (2,210     (1.6 %)      310,586         253,363        57,223        22.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating income

     115,643        40,178        75,465        187.8     153,191         95,889        57,302        59.8

Interest expense, net of amounts capitalized

     9,977        9,585        392        4.1     18,701         19,089        (388     (2.0 %) 

Loss on extinguishment of debt (3)

     20,663        —          20,663        NM        20,663         —          20,663        NM   

Other income

     9        354        (345     (97.5 %)      16         482        (466     (96.7 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income before income tax expense

     85,012        30,947        54,065        174.7     113,843         77,282        36,561        47.3

Income tax expense

     29,837        3,077        26,760        NM        40,019         7,097        32,922        463.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 55,175      $ 27,870      $ 27,305        98.0   $ 73,824       $ 70,185      $ 3,639        5.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Basic and diluted earnings per common share

   $ 0.73      $ 0.37      $ 0.36        97.3   $ 0.98       $ 0.94      $ 0.04        4.3

 

(1) During the second quarter of 2011, we acquired the Permian Basin Properties. During 2010, we acquired property interests from Total in the second quarter and property interests from Shell in the fourth quarter. These acquisitions affect the comparability of results between time periods.

 

(2) Included in lease operating expenses are repair expenses, insurance reimbursements and other items related to hurricane damage. For additional details about our hurricane related items, refer to Financial Statements – Note 3 – Hurricane Remediation and Insurance Claims under Part I, Item 1 of this Form 10-Q.

 

(3) In May 2011, we entered into the Fourth Amended and Restated Credit Agreement, which replaced the Prior Credit Agreement. Unamortized debt issuance costs of $0.7 million related to the Prior Credit Agreement were expensed. In June 2011, we conducted a tender offer for our 8.25% Senior Notes, pursuant to which $406.2 million of the $450 million were tendered and repurchased, which resulted in loss on extinguishment of debt of $20.0 million.

NM = percentage change not meaningful

 

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The following table sets forth selected financial and operating data for the periods indicated (all values are net to our interest unless indicated otherwise):

 

     Three Months Ended     Six Months Ended  
     June 30, (1)     June 30, (1)  
     2011      2010      Change     %     2011      2010      Change     %  

Operating:

                    

Net sales:

                    

Natural gas (Bcf)

     13.2         12.3         0.9        7.3     25.1         22.3         2.8        12.6

Oil and NGLs (MMBbls)

     1.9         1.7         0.2        11.8     3.7         3.4         0.3        8.8

Total natural gas and oil (Bcfe) (2)

     24.8         22.8         2.0        8.8     47.5         42.8         4.7        11.0

Total natural gas and oil (MMBoe) (2)

     4.1         3.8         0.3        7.9     7.9         7.1         0.8        11.3

Average daily equivalent sales (MMcfe/d)

     273.0         250.5         22.5        9.0     262.7         236.2         26.5        11.2

Average realized sales prices (Unhedged):

                    

Natural gas ($/Mcf)

   $ 4.45       $ 4.47       $ (0.02     (0.4 %)    $ 4.37       $ 4.88       $ (0.51     (10.5 %) 

Oil and NGLs($/Bbl)

     99.72         70.97         28.75        40.5     94.29         70.48         23.81        33.8

Natural gas equivalent ($/Mcfe)

     10.17         7.87         2.30        29.2     9.74         8.16         1.58        19.4

Average realized sales prices (Hedged):

                    

Natural gas ($/Mcf)

   $ 4.45       $ 4.65       $ (0.20     (4.3 %)    $ 4.37       $ 5.06       $ (0.69     (13.6 %) 

Oil and NGLs ($/Bbl)

     96.59         70.90         25.69        36.2     92.07         70.21         21.86        31.1

Natural gas equivalent ($/Mcfe)

     9.92         7.97         1.95        24.5     9.56         8.24         1.32        16.0

Average per Mcfe ($/Mcfe):

                    

Lease operating expenses

   $ 1.96       $ 2.30       $ (0.34     (14.8 %)    $ 2.13       $ 2.05       $ 0.08        3.9

Gathering and transportation

     0.15         0.16         (0.01     (6.3 %)      0.18         0.19         (0.01     (5.3 %) 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Production costs

     2.11         2.46         (0.35     (14.2 %)      2.31         2.24         0.07        3.1

Production taxes

     0.03         0.01         0.02        200.0     0.02         0.01         0.01        100.0

Depreciation, depletion, amortization and accretion

     3.36         3.33         0.03        0.9     3.31         3.40         (0.09     (2.6 %) 

General and administrative expenses

     0.73         0.63         0.10        15.9     0.76         0.58         0.18        31.0
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
   $ 6.23       $ 6.43       $ (0.20     (3.1 %)    $ 6.40       $ 6.23       $ 0.17        2.7
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total number of offshore wells drilled (gross)

     2         2         —          —          3         5         (2     (40.0 %) 

Total number of onshore wells drilled (gross)

     9         —           9        NM        10         —           10        NM   

Total number of offshore productive wells drilled (gross)

     2         2         —          —          3         4         (1     (25.0 %) 

Total number of onshore productive wells drilled (gross)

     9         —           9        NM        10         —           10        NM   

 

(1) During the second quarter of 2011, we acquired the Permian Basin Properties. During 2010, we acquired property interests from Total in the second quarter and property interests from Shell in the fourth quarter. These acquisitions affect the comparability of results between time periods.
(2) The conversion to cubic feet equivalent and barrels of equivalent measures determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids (totals may not compute due to rounding). The conversion ratio does not assume price equivalency, and the price per Mcfe for oil and natural gas liquids may differ significantly from the price per Mcf for natural gas.

NM = percentage change not meaningful

 

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Three Months Ended June 30, 2011 Compared to the Three Months Ended June 30, 2010

Revenues. Total revenues increased $73.3 million, or 40.8%, to $252.9 million for the second quarter of 2011 as compared to the same period in 2010. Oil and NGL revenues increased $69.2 million, natural gas revenues increased $3.9 million and other revenues increased $0.2 million. The oil and NGL revenue increase was attributable to a 40.5% increase in the average realized sales price to $99.72 per barrel for the three months ended June 30, 2011 from $70.97 per barrel for the same period in 2010, combined with an increase of 11.8% in sales volumes. The sales volume increase for oil and NGL is primarily attributable to increases associated with the properties purchased from Shell in November of 2010. The increase in natural gas revenue resulted from a 7.3% increase in sales volumes, partially offset by a 0.4% decrease in the average realized natural gas sales price. For the three months ended June 30, 2011, the natural gas average realized sales price was $4.45 per Mcf compared to $4.47 per Mcf for the same period in 2010. The sales volume increase for natural gas is primarily attributable to increases associated with the properties acquired from Shell in 2010.

Lease operating expenses. Lease operating expenses, which include base lease operating expenses, insurance, workovers, maintenance on our facilities, and hurricane remediation costs net of insurance claims, decreased $3.9 million to $48.6 million in the second quarter of 2011 compared to the second quarter of 2010. On a per Mcfe basis, lease operating expenses decreased to $1.96 per Mcfe during the second quarter of 2011 compared to $2.30 per Mcfe during the second quarter of 2010. On a component basis, hurricane remediation costs net of insurance claims, base lease operating expenses, insurance premiums and workover costs decreased $2.6 million, $2.0 million, $1.8 million and $1.5 million, respectively, while facility expenses increased $4.1 million. Hurricane remediation costs net of insurance claims decreased due to lower repair expenses and higher claims submitted for reimbursement. The decrease in base lease operating expenses is primarily attributable to lower base operating expenses at the properties purchased from Total in 2010. The decrease in insurance resulted primarily from lower premiums on our insurance policies covering well control and hurricane damage. Workover costs decreased due to numerous projects undertaken in 2010 that did not reoccur in 2011. The increase in facility expenses is primarily attributable to work performed on the tendon tension monitoring system and mechanical repairs at our Matterhorn platform.

Production taxes. Production taxes increased to $0.8 million for the quarter compared to $0.3 million in the prior year due to the acquisition of the Permian Basin Properties and are currently not a large component of our operating costs. Most of our production is from federal waters where there are no production taxes while onshore operations are subject to production taxes.

Gathering and transportation costs. Gathering and transportation costs were basically flat for the quarter compared to the prior year.

Depreciation, depletion, amortization and accretion (“DD&A”). DD&A, including accretion for ARO, increased slightly to $3.36 per Mcfe for the second quarter of 2011 from $3.33 per Mcfe in the second quarter of 2010. On a nominal basis, DD&A increased to $83.4 million for the second quarter of 2011 from $76.0 million in the second quarter of 2010. The slight increase to DD&A on a per Mcfe basis was due to the acquisition of the Permian Basin Properties while DD&A on a nominal basis increased due to higher production volumes.

General and administrative expenses (“G&A”). G&A expenses increased to $18.0 million for the second quarter of 2011 from $14.4 million for the same period in 2010, primarily due to higher incentive compensation as a result of improved financial and operational performance, reduced overhead charges billed to joint interest operators and slightly higher salaries. On a per Mcfe basis, G&A was $0.73 per Mcfe for the second quarter of 2011, compared to $0.63 per Mcfe for the same period in 2010.

Derivative (gain)/loss. For the second quarter of 2011, our derivative gain of $17.3 million related entirely to a change in the fair value of our commodity derivatives as a result of changes in crude oil prices. For the second quarter of 2010, our derivative gain of $7.4 million related primarily to a gain from our commodity derivatives as a result of changes in crude oil and natural gas prices. For additional details about our derivatives, refer to Financial Statements – Note 5 – Derivative Financial Instruments under Part I, Item 1 of this Form 10-Q.

 

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Interest expense. Interest expense incurred increased to $12.1 million for the second quarter of 2011 from $10.9 million for the same period in 2010 primarily as a result of increased borrowings related to the funding of the acquisition of the Permian Basin Properties. Combined with cash on hand, funding was obtained initially through borrowings on the revolving bank credit facility. The borrowings on the revolving bank credit facility were subsequently reduced through the proceeds received from the issuance of our 8.5% Senior Notes. Additionally, the effective interest rate and outstanding principal of our long-term debt increased after consummation of the 8.5% Senior Notes issuance and the tender offer for the 8.25% Senior Notes (see Liquidity and Capital Resources below). During the second quarter of 2011 and 2010, $2.1 million and $1.3 million, respectively, of interest was capitalized to unevaluated oil and natural gas properties with the increase attributable to the acquisition of the Permian Basin Properties.

Loss on extinguishment of debt. The loss on extinguishment of debt of $20.7 million was attributable primarily to the repurchase premium related to the tender offer for the 8.25% Senior Notes. This offer was made concurrently with, and was funded using a portion of the proceeds from, the issuance of the 8.5% Senior Notes. The consent payment, unamortized debt issuance costs and other related expenses totaled $20.0 million. In addition, the previous revolving bank credit facility was replaced resulting in the write off of unamortized debt issuance costs of $0.7 million. For additional information about our long-term debt and revolving bank credit facility, refer to Financial Statements – Note 6 – Long-Term Debt under Part I, Item 1 of this Form 10-Q.

Income tax expense. Income tax expense increased to $29.8 million for the second quarter of 2011 compared to $3.1 million for the same period of 2010. Our effective tax rate for the second quarter of 2011 was 35.1%, which approximates the statutory rate. Our effective tax rate for the second quarter of 2010 was approximately 9.9% and primarily reflects a reduction in our valuation allowance that was recorded in prior years.

Six Months Ended June 30, 2011 Compared to the Six Months Ended June 30, 2010

Revenues. Total revenues increased $114.5 million, or 32.8%, to $463.8 million for the first six months of 2011 as compared to the same period in 2010. Oil and NGL revenues increased $113.2 million, natural gas revenues increased $0.8 million and other revenues increased $0.5 million. The oil and NGL revenue increase was attributable to a 33.8% increase in the average realized sales price to $94.29 per barrel for the six months ended June 30, 2011 from $70.48 per barrel for the same period in 2010, combined with an increase of 8.8% in sales volumes. The sales volume increase for oil and NGL is primarily attributable to increases associated with the properties purchased from Shell in November 2010 and Total in April of 2010. The increase in natural gas revenue resulted from a 12.6% increase in sales volumes, partially offset by a 10.5% decrease in the average realized natural gas sales price to $4.37 per Mcf for the six months ended June 30, 2011 from $4.88 per Mcf for the same period in 2010. The sales volume increase for natural gas is primarily attributable to increases associated with the properties purchased from Total and Shell in 2010.

Lease operating expenses. Lease operating expenses, which include base lease operating expenses, insurance, workovers, maintenance on our facilities, and hurricane remediation costs net of insurance claims, increased $13.2 million to $101.0 million in the first six months of 2011 compared to the first six months of 2010. On a per Mcfe basis, lease operating expenses increased to $2.13 per Mcfe during the first six months of 2011 compared to $2.05 per Mcfe during the first six months of 2010. On a component basis, facility expenses, base lease operating expenses, and hurricane remediation costs net of insurance claims, increased $9.6 million, $5.3 million and $5.0 million, respectively, while insurance premiums and workover costs decreased $4.6 million and $2.1 million, respectively. The increase in facility expenses is primarily attributable to work performed on the tendon tension monitoring system and mechanical repairs at our Matterhorn platform, the pipeline repairs at our Ship Shoal 300 field to remove paraffin and other work on newly acquired deepwater properties. The increase in base lease operating expenses is primarily attributable to the properties purchased from Shell in 2010, the acquisition of the Permian Basin Properties in 2011 and the final settlement adjustments related to properties sold in 2009 that served to reduce expenses in 2010. Hurricane remediation costs net of insurance claims increased due to the return of insurance reimbursements previously received by us related to prepayments based on preliminary estimates, reversal of previously recorded hurricane remediation accruals in the first quarter of 2010, and reductions in claims submitted for reimbursement. The decrease in insurance resulted primarily from lower premiums on our insurance policies covering well control and hurricane damage. Workover costs decreased due to numerous projects undertaken in 2010 that did not reoccur in 2011.

Production taxes. Production taxes increased to $1.1 million for the first six months of 2011 compared to $0.5 million in the prior year due to the acquisition of the Permian Basin Properties and are currently not a large component of our operating costs. Most of our production is from federal waters where there are no production taxes while onshore operations are subject to production taxes.

 

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Gathering and transportation costs. Gathering and transportation costs were basically flat for the first six months compared to the prior year.

Depreciation, depletion, amortization and accretion. DD&A, including accretion for ARO, decreased to $3.31 per Mcfe for the first six months of 2011 from $3.40 per Mcfe in the first six months of 2010. On a nominal basis, DD&A increased to $157.5 million for the first six months of 2011 from $145.2 million in the first six months of 2010. DD&A on a per Mcfe basis decreased due to an increase in proved reserves while DD&A on a nominal basis increased due to higher production volumes.

General and administrative expenses. General and administrative expenses increased to $36.1 million for the first six months of 2011 from $24.8 million for the same period in 2010, primarily due to higher incentive compensation as a result of improved financial and operational performance, higher salaries, surety premiums, fees paid to Shell for administrative services attributable to the properties purchased from Shell, reduced overhead charges billed to joint interest operators and service fee income received in 2010 attributable to a property divestiture. On a per Mcfe basis, G&A was $0.76 per Mcfe for the first six months of 2011, compared to $0.58 per Mcfe for the same period in 2010.

Derivative (gain)/loss. For the first six months of 2011, our derivative loss of $6.5 million related entirely to a change in the fair value of our commodity derivatives as a result of the changes in crude oil prices. For the first six months of 2010, our derivative gain of $13.3 million related to a gain from our commodity derivatives of $13.6 million and a loss of $0.3 million related to our interest rate swap. For additional details about our derivatives, refer to Item 1 Financial Statements – Note 5 – Derivative Financial Instruments under Part I, Item 1 of this Form 10-Q.

Interest expense. Interest expense incurred increased to $22.2 million for the first six months of 2011 from $21.8 million for the same period in 2010 primarily as a result of increased borrowings related to the funding of the acquisition of the Permian Basin Properties. During the first six months of 2011 and 2010, $3.5 million and $2.7 million, respectively, of interest was capitalized to unevaluated oil and natural gas properties with the increase attributable to the acquisition of the Permian Basin Properties.

Loss on extinguishment of debt. The loss on extinguishment of debt of $20.7 million was attributable primarily due to the repurchase premium related to the tender offer for the 8.25% Senior Notes. This offer was made concurrently with, and funded with a portion of the proceeds from, the issuance of the 8.5% Senior Notes. The consent payment, unamortized debt issuance costs and other related expenses totaled $20.0 million. In addition, the previous revolving bank credit facility was replaced resulting in the write off of unamortized debt issuance costs of $0.7 million. For additional information about our long-term debt and revolving bank credit facility, refer to Financial Statements – Note 6 – Long-Term Debt under Part I, Item 1 of this Form 10-Q.

Income tax expense. Income tax expense increased to $40.0 million for the first six months of 2011 compared to $7.1 million for the same period of 2010. Our effective tax rate for the first six months of 2011 was 35.2%, which approximates the statutory rate. Our effective tax rate for the first six months of 2010 was approximately 9.2% and primarily reflects a reduction in our valuation allowance that was recorded in prior years.

Liquidity and Capital Resources

Our primary liquidity needs are to fund capital expenditures and strategic property acquisitions to allow us to replace our oil and natural gas reserves, repay outstanding borrowings and make related interest payments. We have funded our capital expenditures, including acquisitions, with cash on hand, cash provided by operations, securities offerings and bank borrowings. These sources of liquidity have historically been sufficient to fund our ongoing cash requirements.

Cash flow and working capital. Net cash provided by operating activities for the first six months of 2011 was $229.8 million, compared to $244.3 million for the first six months of 2010. The decrease is primarily due to income tax payments in 2011 of $19.1 million compared to tax refunds of $99.8 million received in the 2010 period. Otherwise cash flow provided by operating activities is higher due to a significant improvement in operations attributable to higher prices and higher production. Our combined average realized sales price was 19.4% higher than the comparable 2010 period and our combined total production of oil, NGLs and natural gas during the first six months of 2011 was approximately 11.0% higher than the comparable 2010 period.

 

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Net cash used in investing activities totaled $483.0 million and $205.1 million during the first six months of 2011 and 2010, respectively, which primarily represents our investments in oil and natural gas properties. Major acquisitions consisted of the cash portion of the Permian Basin Properties purchased in 2011 ($397.0 million) and the offshore properties purchased from Total in 2010 ($116.6 million). In addition, investments in other oil and natural gas properties and equipment were $85.8 million in the first six months of 2011 compared to $89.7 million in the first six months of 2010. There were no proceeds from sales of assets in the first six months of 2011 and proceeds from asset sales were $1.3 million for the first six months of 2010.

Net cash provided by financing activities was $233.2 million during the first six months of 2011. Funds were provided through net borrowings on the revolving bank credit facility of $75 million and issuance of $600 million of 8.5% Senior Notes; partially offset by the purchase of $406.2 million of the 8.25% Senior Notes, repurchase premium and debt issuance costs of $29.7 million and the payment of dividends of $6.0 million. See Financial Statements – Note 6 – Long-Term Debt under Part I, Item 1 of this Form 10-Q for additional information on the Senior Notes transactions. Net cash used in financing activities during the first six months of 2010 was $4.5 million which reflects dividend payments during the period.

At June 30, 2011, we had a cash balance of $8.7 million and $412.0 million of undrawn capacity available under the new revolving bank credit facility.

Credit agreement and long-term debt. At June 30, 2011, there were $75 million borrowings outstanding under our revolving bank credit facility compared to zero at December 31, 2010. At June 30, there was $600 million of our 8.5% Senior Notes outstanding and $43.9 million of our 8.25% Senior Notes outstanding and at December 31, 2011 there was $450 million outstanding of our 8.25% Senior Notes. We believe that cash provided by operations, borrowings available under our revolving bank credit facility and other external sources of liquidity should be sufficient to fund our ongoing cash requirements.

On May 5, 2011, we entered into the Credit Agreement which provides a revolving bank credit facility with an initial borrowing base of $525 million collateralized by our oil and natural gas properties. The Credit Agreement terminates on May 5, 2015 and replaces the Prior Credit Agreement, which would have expired July 23, 2012. Fees and transactions costs related to the Credit agreement were approximately $5.6 million. The terms of the Credit Agreement are substantially similar to the terms of the Prior Credit Agreement. Availability under the Credit Agreement is subject to a semi-annual borrowing base determination set at the discretion of our lenders. The amount of the borrowing base is calculated by our lenders based on their evaluation of our proved reserves and their own internal criteria. Any determination by our lenders to change our borrowing base will result in a similar change in the availability under our revolving bank credit facility. As of June 30, 2011, our borrowing base was $487.5 million as the borrowing base was reduced due to the issuance of the 8.5% Senior Notes. The borrowing base will be increased by $50 million if we close on the acquisition of certain properties owned by Shell by September 2, 2011.

The Credit Agreement contains various financial covenants calculated as of the last day of each fiscal quarter, including a minimum current ratio and a maximum leverage ratio, as defined in the Credit Agreement. We were in compliance with all applicable covenants of the Credit Agreement as of June 30, 2011. During the first six months of 2011, borrowings outstanding on the revolving bank credit facility increased to $300 million to fund the acquisition of the Permian Basin Properties, which also included funding from cash on hand. These borrowings were subsequently reduced to $75 million as of June 30, 2011, by utilizing cash from operations and funds received from the senior note transactions described below. Letters of credit outstanding as of June 30, 2011 were $0.5 million.

On June 10, 2011, we issued $600 million of 8.5% Senior Notes and used a portion of the net proceeds to repurchase $406.2 million of the 8.25% Senior Notes. The net cash provided by these Senior Notes transactions as of June 30, 2011, which includes initial purchaser fees, consent payments and other transactions costs, was $169.7 million. These transactions extended the maturity date of our long-term debt and we used the remaining net proceeds to pay down outstanding borrowings under the revolving bank credit facility. The 8.5% Senior Notes mature on June 15, 2019. Interest is payable semi-annually in arrears on June 15 and December 15 of each year beginning on December 15, 2011. On July 18, 2011, we purchased the remaining $43.9 million of the 8.25% Senior Notes for $45.7 million, representing a redemption premium of 4.125% pursuant to the terms of the 8.25% Senior Notes.

For additional information about our credit agreement and long-term debt, refer to Financial Statements – Note 6 – Long-Term Debt under Part I, Item 1 of this Form 10-Q.

 

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Derivatives. From time to time, we use various derivative instruments to manage our exposure to commodity price risk from sales of oil and natural gas and interest rate risk from floating interest rates on our revolving bank credit facility. As of June 30, 2011, our derivative instruments outstanding consisted of commodity option contracts relating to approximately 0.6 MMBbls and 1.1 MMBbls of our anticipated oil production for the balance of 2011 and the full year of 2012, respectively. For additional details about our derivatives, refer to Item 1 Financial Statements – Note 5– Derivative Financial Instruments under Part I, Item 1 of this Form 10-Q.

Hurricane Remediation and Insurance Claims. During the third quarter of 2008, Hurricane Ike, and to a much lesser extent Hurricane Gustav, caused property damage and disruptions to our exploration and production activities. Our insurance coverage policy limits at the time of Hurricane Ike were $150 million for property damage due to named windstorms (excluding certain damage incurred at our marginal facilities) and $250 million for, among other things, removal of wreckage if mandated by any governmental authority. The policies in effect on the occurrence dates of Hurricanes Ike and Gustav had a retention requirement of $10 million per occurrence. In 2008, we satisfied our $10 million retention requirement for Hurricane Ike in connection with two platforms that were toppled and were deemed total losses. The damage we incurred as a result of Hurricane Gustav was below our retention amount.

We recognize insurance receivables with respect to capital, repair and plugging and abandonment costs as a result of hurricane damage when we deem those to be probable of collection. Our assessment of probability considers the review and approval of such costs by our insurance underwriters’ adjuster. Claims that have been processed in this manner have customarily been paid on a timely basis.

In the first six months of 2011 and the year 2010, we received cash of $11.9 million and $65.5 million, respectively, from our insurance carrier related to Hurricane Ike claims. We have recorded $6.9 million of insurance receivables as of June 30, 2011 for claims that have been submitted and approved for payment. As of June 30, 2011, we have recorded in ARO an estimate of $65.5 million for additional costs to be incurred related to Hurricane Ike and we estimate that this work will be completed by the end of 2012. We expect to receive reimbursement for a portion of these costs from our insurance carrier once the costs are incurred, claims are processed and payments are approved, but cannot estimate the amount of reimbursement to be received at this time. Should necessary expenditures exceed our insurance coverage for damages incurred as a result of Hurricane Ike, or claims are denied by our insurance carrier for other reasons, we expect that our available cash on hand, cash flow from operations and the availability under our revolving bank credit facility will be sufficient to meet these future cash needs.

For a discussion of our hurricane remediation costs related to lease operating expenses incurred during the first six months of 2011 and 2010, refer to Financial Statements – Note 3 – Hurricane Remediation and Insurance Claims under Part I, Item 1 of this Form 10-Q. Lease operating expenses will be offset in future periods to the extent that these costs incurred are approved for payment under our insurance policies.

We currently carry three layers of insurance coverage for our operating activities in the Gulf of Mexico. The current policy limits for well control and hurricane damage (defined as named windstorm in our policies) are up to $100 million and $120 million, respectively, and the policies are effective until June 1, 2012. We carry an additional $100 million of well control coverage effective until June 1, 2012 on certain wells at our Mahogany, Matterhorn, Virgo, Tahoe and SE Tahoe fields. A retention amount of $5 million for well control events and $37.5 million per hurricane occurrence must be satisfied by us before we are indemnified for losses. Certain properties we have deemed as non-core are not covered for hurricane damage; however, properties representing approximately 96% of our present value of estimated future net revenues discounted at 10% (“PV-10”) at December 31, 2010 are covered under our insurance policies for hurricane damage. Pollution causing a negative environmental impact is characterized as a covered component of each of the well control and hurricane sections of the policy.

Our general and excess liability policy provides for $250 million of liability coverage for bodily injury and property damage, including liability claims resulting from seepage, pol