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, 2013

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

þ

Accelerated filer

¨

Non-accelerated filer

¨

Smaller reporting company

¨

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

As of August 6, 2013, there were 75,277,080 shares outstanding of the registrant’s common stock, par value $0.00001.

   

   

   

   

   


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, 2013 and December 31, 2012  

 

 1

   

Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2013 and 2012  

 

 2

   

Condensed Consolidated Statement of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2013  

 

 3

   

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012  

 

 4

   

Notes to Condensed Consolidated Financial Statements  

 

 5

Item 2.

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

 

 24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk  

 

 35

Item 4.

Controls and Procedures  

 

 36

PART II – OTHER INFORMATION

   

Item 1.

Legal Proceedings  

 

 37

Item 1A.

Risk Factors  

 

 38

Item 6.

Exhibits  

 

 38

SIGNATURE  

 

 39

EXHIBIT INDEX  

 

 40

   

   

   

           

 

   


PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

   

 

   

June 30,

2013

   

   

December 31,

2012

   

   

(In thousands, except share data)

   

   

(Unaudited)

   

Assets

   

   

   

   

   

   

   

Current assets:

   

   

   

   

   

   

   

Cash and cash equivalents

$

9,276

   

   

$

12,245

   

Receivables:

   

   

   

   

   

   

   

Oil and natural gas sales

   

80,670

   

   

   

97,733

   

Joint interest and other

   

22,921

   

   

   

56,439

   

Income taxes

   

39,556

   

   

   

47,884

   

Total receivables

   

143,147

   

   

   

202,056

   

Deferred income taxes—current

   

—  

   

   

   

267

   

Prepaid expenses and other assets

   

37,214

   

   

   

25,555

   

Total current assets

   

189,637

   

   

   

240,123

   

Property and equipment – at cost:

   

   

   

   

   

   

   

Oil and natural gas properties and equipment (full cost method, of which $127,918 at June 30, 2013 and $123,503 at December 31, 2012 were excluded from amortization)

   

7,009,835

   

   

   

6,694,510

   

Furniture, fixtures and other

   

20,848

   

   

   

21,786

   

Total property and equipment

   

7,030,683

   

   

   

6,716,296

   

Less accumulated depreciation, depletion and amortization

   

4,851,973

   

   

   

4,655,841

   

Net property and equipment

   

2,178,710

   

   

   

2,060,455

   

Restricted deposits for asset retirement obligations

   

33,469

   

   

   

28,466

   

Other assets

   

18,198

   

   

   

19,943

   

Total assets

$

2,420,014

   

   

$

2,348,987

   

   

   

   

   

   

   

   

   

Liabilities and Shareholders’ Equity

   

   

   

   

   

   

   

Current liabilities:

   

   

   

   

   

   

   

Accounts payable

$

123,070

   

   

$

123,885

   

Undistributed oil and natural gas proceeds

   

42,068

   

   

   

37,073

   

Asset retirement obligations

   

74,687

   

   

   

92,630

   

Accrued liabilities

   

13,984

   

   

   

21,021

   

Deferred income tax – current

   

5,760

   

   

   

—  

   

Total current liabilities

   

259,569

   

   

   

274,609

   

Long-term debt

   

1,099,537

   

   

   

1,087,611

   

Asset retirement obligations, less current portion

   

309,918

   

   

   

291,423

   

Deferred income taxes

   

162,948

   

   

   

145,249

   

Other liabilities

   

5,864

   

   

   

8,908

   

Commitments and contingencies

   

—  

   

   

   

—  

   

Shareholders’ equity:

   

   

   

   

   

   

   

Preferred stock, $0.00001 par value; 20,000,000 shares authorized; 0 issued at June 30, 2013 and December 31, 2012

   

—  

   

   

   

—  

   

Common stock, $0.00001 par value; 118,330,000 shares authorized; 78,146,253 issued and 75,277,080 outstanding at June 30, 2013, and 78,118,803 issued and 75,249,630 outstanding at December 31, 2012

   

1

   

   

   

1

   

Additional paid-in capital

   

401,097

   

   

   

396,186

   

Retained earnings

   

205,247

   

   

   

169,167

   

Treasury stock, at cost

   

(24,167

)

   

   

(24,167

)

Total shareholders’ equity

   

582,178

   

   

   

541,187

   

Total liabilities and shareholders’ equity

$

2,420,014

   

   

$

2,348,987

   

   

See Notes to Condensed Consolidated Financial Statements.

 

 1 


W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

   

 

   

Three Months Ended

June 30,

   

   

Six Months Ended

June 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

   

(In thousands, except per share data)

   

   

(Unaudited)

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Revenues

$

235,383

   

   

$

215,513

   

   

$

494,605

   

   

$

451,399

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Operating costs and expenses:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Lease operating expenses

   

68,248

   

   

   

60,276

   

   

   

127,590

   

   

   

116,938

   

Production taxes

   

1,780

   

   

   

1,335

   

   

   

3,569

   

   

   

2,821

   

Gathering and transportation

   

4,608

   

   

   

4,110

   

   

   

9,052

   

   

   

8,330

   

Depreciation, depletion,  amortization and accretion

   

99,896

   

   

   

85,941

   

   

   

208,767

   

   

   

174,432

   

General and administrative expenses

   

19,868

   

   

   

14,623

   

   

   

40,955

   

   

   

44,102

   

Derivative gain

   

(12,840

)

   

   

(49,872

)

   

   

(9,473

)

   

   

(10,238

)

Total costs and expenses

   

181,560

   

   

   

116,413

   

   

   

380,460

   

   

   

336,385

   

Operating income

   

53,823

   

   

   

99,100

   

   

   

114,145

   

   

   

115,014

   

Interest expense:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Incurred

   

21,536

   

   

   

14,706

   

   

   

42,770

   

   

   

28,612

   

Capitalized

   

(2,532

)

   

   

(3,326

)

   

   

(4,964

)

   

   

(6,517

)

Income before income tax expense

   

34,819

   

   

   

87,720

   

   

   

76,339

   

   

   

92,919

   

Income tax expense

   

12,423

   

   

   

34,153

   

   

   

27,325

   

   

   

36,134

   

Net income

$

22,396

   

   

$

53,567

   

   

$

49,014

   

   

$

56,785

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Basic and diluted earnings per common share

$

0.29

   

   

$

0.70

   

   

$

0.64

   

   

$

0.75

   

Dividends declared per common share

$

0.09

   

   

$

0.08

   

   

$

0.17

   

   

$

0.16

   

   

   

   

   

See Notes to Condensed Consolidated Financial Statements.

   

   

   

 

 2 


   

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, 2012

75,250

   

   

$

1

   

   

$

396,186

   

   

$

169,167

   

   

2,869

   

   

$

(24,167

)

   

$

541,187

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Cash dividends

—  

   

   

   

—  

   

   

   

—  

   

   

   

(12,795

)

   

—  

   

   

   

—  

   

   

   

(12,795

)

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Share-based compensation

—  

   

   

   

—  

   

   

   

4,950

   

   

   

—  

   

   

—  

   

   

   

—  

   

   

   

4,950

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Other

27

   

   

   

—  

   

   

   

(39

)

   

   

(139

)

   

—  

   

   

   

—  

   

   

   

(178

)

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Net income

—  

   

   

   

—  

   

   

   

—  

   

   

   

49,014

   

   

—  

   

   

   

—  

   

   

   

49,014

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Balances at June 30, 2013

75,277

   

   

$

1

   

   

$

401,097

   

   

$

205,247

   

   

2,869

   

   

$

(24,167

)

   

$

582,178

   

   

   

   

   

See Notes to Condensed Consolidated Financial Statements.

   

   

       

 

 3 


   

W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

   

 

   

Six Months Ended June 30,

   

   

2013

   

   

2012

   

   

(In thousands)

   

   

(Unaudited)

   

Operating activities:

   

   

   

   

   

   

   

Net income

$

49,014

   

   

$

56,785

   

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

   

   

   

   

   

   

   

Depreciation, depletion, amortization and accretion

   

208,767

   

   

   

174,432

   

Amortization of debt issuance costs and premium

   

910

   

   

   

1,287

   

Share-based compensation

   

4,950

   

   

   

5,818

   

Derivative gain

   

(9,473

)

   

   

(10,238

)

Cash payments on derivative settlements

   

(2,310

)

   

   

(6,084

)

Deferred income taxes

   

23,726

   

   

   

48,120

   

Changes in operating assets and liabilities:

   

   

   

   

   

   

   

Oil and natural gas receivables

   

17,063

   

   

   

26,121

   

Joint interest and other receivables

   

33,620

   

   

   

3,630

   

Insurance receivables

   

5,015

   

   

   

500

   

Income taxes

   

8,579

   

   

   

(22,062

)

Prepaid expenses and other assets

   

(12,381

)

   

   

(14,110

)

Asset retirement obligation settlements

   

(32,886

)

   

   

(29,228

)

Accounts payable,  accrued liabilities and other

   

2,768

   

   

   

6,354

   

Net cash provided by operating activities

   

297,362

   

   

   

241,325

   

   

   

   

   

   

   

   

   

Investing activities:

   

   

   

   

   

   

   

Investment in oil and natural gas properties and equipment

   

(299,213

)

   

   

(187,284

)

Proceeds from sales of oil and natural gas properties and equipment

   

—  

   

   

   

30,453

   

Change in restricted cash

   

—  

   

   

   

(30,763

)

Purchases of furniture, fixtures and other

   

(981

)

   

   

(668

)

Net cash used in investing activities

   

(300,194

)

   

   

(188,262

)

   

   

   

   

   

   

   

   

Financing activities:

   

   

   

   

   

   

   

Borrowings of long-term debt – revolving bank credit facility

   

252,000

   

   

   

197,000

   

Repayments of long-term debt – revolving bank credit facility

   

(239,000

)

   

   

(234,000

)

Dividends to shareholders

   

(12,795

)

   

   

(11,898

)

Other

   

(342

)

   

   

(124

)

Net cash used in financing activities

   

(137

)

   

   

(49,022

)

Increase (decrease) in cash and cash equivalents

   

(2,969

)

   

   

4,041

   

Cash and cash equivalents, beginning of period

   

12,245

   

   

   

4,512

   

Cash and cash equivalents, end of period

$

9,276

   

   

$

8,553

   

   

   

   

   

   

   

See Notes to Condensed Consolidated Financial Statements.

   

   

   

       

 

 4 


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 focused primarily in the Gulf of Mexico and onshore Texas.  The Company is active in the exploration, development and acquisition of oil and natural gas properties.

Interim Financial Statements.  The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim periods 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 for annual periods.  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 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

Reclassifications.  Certain reclassifications have been made to the prior periods’ financial statements to conform to the current presentation.  Income taxes was combined with Accrued liabilities on the Balance Sheet and changes in Other liabilities was combined with the changes in Accounts payable and accrued liabilities on the Statement of Cash Flows.    

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.

Recent Accounting Developments.  In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities which applies to certain items in the statement of financial position (balance sheet), and was further clarified in January 2013 by ASU 2013-01, Balance Sheet (Topic 210):Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarified the scope of ASU 2011-11 to derivative instruments, repurchase agreements and securities lending transactions.  The effective date for the amendments is for annual periods beginning after January 1, 2013, and interim periods within those annual periods.  ASU 2011-11 requires disclosures of the gross and net amounts for items eligible for offset in the balance sheet.  Although the Company’s derivative financial instruments are subject to master netting agreements, the Company records its derivative financial instruments on a gross basis by contract; therefore, the ASUs did not significantly affect the Company’s disclosures.  Other items of the ASUs were not applicable to the Company.     

In February 2013, the FASB issued ASU 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date, which requires an entity that is joint and severally liable to measure the obligation as the sum of the amount the entity has agreed with co-obligors to pay and any additional amount it expects to pay on behalf of one or more co-obligors.  Required disclosures include a description of the nature of the arrangement, how the liability arose, the relationship with co-obligors and the terms and conditions of the arrangement.  The effective date for the amendment is for annual periods beginning after December 15, 2013, and interim periods within those annual periods.  The amendment is to be applied retrospectively to all prior periods presented.  The Company is currently assessing the impact of ASU 2013-04 to determine the effects on the balance sheet and disclosures, if any.

   

   

           

 

 5 


W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

   

2.  Acquisitions and Divestitures

2012 Acquisition.  On October 5, 2012, we acquired from Newfield Exploration Company and its subsidiary, Newfield Exploration Gulf Coast LLC (together, “Newfield”) certain oil and gas leasehold interests in the Gulf of Mexico (the “Newfield Properties”).  The Newfield Properties consist of leases covering 78 offshore blocks on approximately 416,000 gross acres (268,000 net acres) (excluding overriding royalty interests), comprised of 65 blocks in the deepwater, six of which are producing, 10 blocks on the conventional shelf, four of which are producing, and an overriding royalty interest in three deepwater blocks, two of which are producing.  Including adjustments from an effective date of July 1, 2012, the adjusted purchase price was $205.7 million and we assumed the future asset retirement obligations (“ARO”) associated with the Newfield Properties.  The purchase price was finalized during the second quarter of 2013 and no further adjustments are expected.  Adjustments to the purchase price of a net increase of $0.2 million were recorded in the six months ended June 30, 2013.  The acquisition was funded from borrowings under our revolving bank credit facility and cash on hand.  Subsequently in the same month, the amounts borrowed under our revolving bank credit facility were paid down with funds provided from the issuance of long-term debt in October 2012.  See Note 6 for information on long-term debt.

The following table presents the purchase price allocation, including adjustments, for the acquisition of the Newfield Properties (in thousands):

   

 

Oil and natural gas properties and equipment

$

237,396

   

Asset retirement obligations – current

   

(7,250

)

Asset retirement obligations – non-current

   

(24,414

)

Total cash paid

$

205,732

   

The acquisition was recorded at fair value, which was determined by applying the market and income approaches using Level 3 inputs.  The Level 3 inputs were: (i) analysis of comparable transactions obtained from various third-parties, (ii) estimates of ultimate recoveries of reserves and (iii) estimates of discounted cash flows based on estimated reserve quantities, reserve categories, timing of production, costs to produce and develop reserves, future prices, ARO and discount rates.  The estimates and assumptions were determined by management and third-parties.  The fair value is based on subjective estimates and assumptions, which are inherently imprecise, and the actual realized values could vary significantly from these estimates.  No goodwill was recorded for the Newfield Properties acquisition.

Revenue, Net Income and Pro Forma Financial Information — Unaudited

The Newfield Properties were not included in our consolidated results until the closing date of October 5, 2012.  For the three months ended June 30, 2013, the Newfield Properties accounted for $33.7 million of revenue, $7.6 million of direct operating expenses, $15.8 million of depreciation, depletion, amortization and accretion (“DD&A”) and $3.6 million of income taxes, resulting in $6.7 million of net income.  For the six months ended June 30, 2013, the Newfield Properties accounted for $62.3 million of revenue, $14.1 million of direct operating expenses, $26.4 million of DD&A and $7.6 million of income taxes, resulting in $14.2 million of net income.  The net income attributable to these properties does not reflect certain expenses, such as general and administrative (“G&A”) expense 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 Newfield Properties are not recorded in a separate entity for tax purposes; therefore, income tax was estimated using the federal statutory tax rate.  There were no expenses associated with acquisition activities and transition activities related to the acquisition of the Newfield Properties for the three and six months ended June 30, 2012.

Consistent with the computation of pro forma financial information presented in Item 8, Financial Statements and Supplementary Data, in the Annual Report on Form 10-K for the year end December 31, 2012, the unaudited pro forma financial information was computed as if the acquisition of the Newfield Properties had been completed on January 1, 2011.  The financial information was derived from W&T’s audited historical consolidated financial statement for annual periods, W&T’s unaudited historical condensed consolidated financial statement for the interim periods, the Newfield Properties’ audited historical financial statement for 2011 and the Newfield Properties’ unaudited historical financial statements for the 2012 interim periods.

The pro forma adjustments were based on estimates by management and information believed to be directly related to the purchase of the Newfield Properties.  The pro forma financial information is not necessarily indicative of the results of operations had the purchase occurred on January 1, 2011.  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 Newfield;

 

 6 


W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

   

realized sales prices for oil, natural gas liquids (“NGLs”) and natural gas may have been different; and costs of operating the Newfield Properties may have been different.  

The following table presents a summary of our pro forma financial information (in thousands except earnings per share):

   

 

   

Three Months
Ended
June 30, 2012

   

Six Months
Ended
June 30, 2012

Revenue

$

244,987

      

$

524,094

Net income

   

51,226

   

   

59,387

Basic and diluted earnings per common share

   

0.67

   

   

0.78

For the pro forma financial information, certain information was derived from financial records and certain information was estimated.  

The following table presents incremental items included in the pro forma information reported above for the Newfield Properties (in thousands):

   

 

   

Three Months

Ended

June 30,

2012

      

   

Six Months

Ended

June 30,

2012

Revenue (a)

$

29,474

   

   

$

72,695

Direct operating expense (a) 

   

12,771

   

   

   

24,063

Insurance costs (b) 

   

157

   

   

   

316

DD&A (c) 

   

16,429

   

   

   

36,877

Interest expense (d) 

   

3,960

   

   

   

7,921

Capitalized interest (e)

   

241

   

   

   

485

Income tax expense (benefit) (f) 

   

(1,261

)

   

   

1,401

   

 

   

The sources of information and significant assumptions are described below:

   

(a)

Revenues and direct operating expenses for the Newfield Properties were derived from the historical financial records of Newfield.  

   

(b)

Incremental costs for insurance were estimated using the incremental costs to add the Newfield Properties to W&T’s insurance programs.  The direct operating expenses for the Newfield Properties described above excluded insurance costs.  

   

(c)

DD&A was estimated using the full-cost method and determined as the incremental DD&A expense due to adding the Newfield Properties’ costs, reserves and production into our currently existing full cost pool in order to compute such amounts.  The purchase price allocation included $13.1 million that was allocated to the pool of unevaluated properties for oil and natural gas interests.  Accordingly, no DD&A expense was estimated for the unevaluated properties.  ARO was estimated by W&T management.  

   

(d)

The acquisition was assumed to be funded entirely with borrowed funds.  Interest expense was computed using assumed borrowings of $205.7 million, which equates to the cash paid including purchase price adjustments and an interest rate of 7.7%, which equates to the effective yield on net proceeds for the additional senior notes issued shortly after the acquisition closed.  

   

(e)

Incremental capitalized interest was computed for the addition to the pool of unevaluated properties and the capitalization interest rate was adjusted for the assumed borrowings.  

   

(f)

Income tax expense was computed using the 35% federal statutory rate.  

2012 Divestiture.   On May 15, 2012, we sold our 40%, non-operated working interest in the South Timbalier 41 field located in the Gulf of Mexico for $30.5 million with an effective date of April 1, 2012.  The transaction was structured as a like-kind exchange under the Internal Revenue Service Code (“IRC”) Section 1031 and other applicable regulations, with

 

 7 


W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

   

funds held by a qualified intermediary until replacement purchases could be executed.  Replacement purchases were consummated during 2012.  In connection with this sale, we reversed $4.0 million of ARO.   

   

3.  Hurricane Remediation and Insurance Claims

During the third quarter of 2008, Hurricane Ike caused substantial damage to certain of our properties and we continue to incur costs and submit claims to our insurance underwriters related to repairing such damage.  Our insurance policies in effect on the occurrence date of Hurricane Ike had a retention requirement of $10.0 million per occurrence, which has been satisfied, and coverage policy limits of $150.0 million for property damage due to named windstorms (excluding damage at certain facilities) and $250.0 million for, among other things, removal of wreckage if mandated by any governmental authority.   

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, which arises when our insurance underwriters’ adjuster reviews and approves such costs for payment by the underwriters.  Claims that have been processed in this manner have customarily been paid on a timely basis.  

 From the third quarter of 2008 through June 30, 2013, we have received $147.2 million from our insurance underwriters related to Hurricane Ike.  To the extent that additional remediation costs or plug and abandonment costs are incurred that are not covered by insurance, 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.  See Note 4 for additional information about the impact of hurricane related items on our ARO.   See Note 12 for information regarding legal actions taken by certain insurers and the Company.

   

4.  Asset Retirement Obligations

Our ARO primarily represents 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 ARO is as follows (in thousands):

   

 

Balance, December 31, 2012

$

384,053

   

Liabilities settled

   

(32,886

)

Accretion of discount

   

10,924

   

Liabilities incurred

   

372

   

Revisions of estimated liabilities due to Hurricane Ike

   

4,160

   

Revisions of estimated liabilities – all other (1)

   

17,982

   

Balance, June 30, 2013

   

384,605

   

Less current portion

   

74,687

   

Long-term

$

309,918

   

   

 

   

(1) Revisions are primarily due to increases in the scope of work at several offshore locations required by the Bureau of Safety and Environmental Enforcement.

   

   

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. Our derivative financial instruments currently consist of crude oil swap contracts.  All of the derivative counterparties are also lenders or affiliates of lenders participating in our revolving bank credit facility.  We are exposed to credit loss in the event of nonperformance by the derivative counterparties; however, we currently anticipate that each of our derivative counterparties will be able to fulfill their contractual obligations. Additional collateral is not required by us due to the derivative counterparties’ collateral rights as lenders and we do not require collateral from our derivative counterparties.

 

 8 


W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

   

In accordance with GAAP, we record each derivative contract on the balance sheet as an asset or a liability at its fair value.  We have elected not to designate our commodity derivative contracts as hedging instruments; therefore, all changes in the fair value of derivative contracts are recognized currently in earnings. For additional information about fair value measurements, refer to Note 7.

Commodity Derivatives.  We have entered into commodity swap contracts to manage a portion of our exposure to commodity price risk from sales of oil through December 2014.  While these contracts are intended to reduce the effects of price volatility, they may also limit future income from favorable price movements.  During the six months ended June 30, 2013 and 2012, our derivative contracts consisted entirely of crude oil contracts.  The crude oil swap contracts are comprised of a portion based on Brent crude oil prices and a portion based on West Texas Intermediate (“WTI”) crude oil prices.  The Brent based swaps are priced off the Brent crude oil price quoted on the IntercontinentalExchange, known as ICE.  The WTI based swaps are priced off the New York Mercantile Exchange, known as NYMEX.  Although our Gulf of Mexico crude oil is based off the WTI crude oil price plus a premium, the realized prices received for our Gulf of Mexico crude oil have been closer to the Brent crude oil price because of competition with foreign supplied crude oil, which is based off the Brent crude oil price.  Therefore, a portion of the swap oil contracts are priced off the Brent crude oil price to mitigate a portion of the price risk associated with our Gulf of Mexico crude oil production.

As of June 30, 2013, our open commodity derivatives contracts were as follows:  

 

   

   

Swaps – Oil

   

   

Priced off Brent (ICE)

   

Priced off WTI (NYMEX)

Termination Period

   

Notional
Quantity  (Bbls)

   

Weighted
Average
Contract Price

   

Notional
Quantity  (Bbls)

   

Weighted
Average

Contract Price

2013:

3rd quarter

   

405,800

   

$

103.85

   

185,000

   

$

97.13

   

4th quarter

      

294,400

      

   

101.98

      

520,000

      

   

97.38

2014:

1st quarter

            

180,000

            

   

97.38

               

59,000

            

   

97.02

   

2nd quarter

   

172,900

   

   

97.38

   

—  

   

   

—  

   

3rd quarter

   

165,600

   

   

97.38

   

—  

   

   

—  

   

4th quarter

   

156,400

   

   

97.37

   

—  

   

   

—  

   

   

   

1,375,100

   

$

100.27

   

764,000

   

$

97.29

   

   

   

   

   

   

   

   

   

   

   

   

   Bbls = barrels

The following balance sheet line items included amounts related to the estimated fair value of our open derivative contracts as indicated in the following table (in thousands):

 

   

June 30,
2013

   

December 31,
2012

Prepaid and other assets

$

2,635

   

 $

—  

Other Assets (noncurrent)

   

221

   

   

—  

Accrued liabilities

   

475

   

   

6,355

Other liabilities (noncurrent)  

   

—  

   

   

3,046

Changes in the fair value of our commodity derivative contracts are recognized currently in earnings and were as follows (in thousands):

 

   

Three Months Ended
June 30,

   

   

Six Months Ended
June 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

Derivative (gain) loss:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

       Realized

$

(1,961

)

   

$

285

   

   

$

2,310

   

   

$

6,084

   

       Unrealized

   

(10,879

)

   

   

(50,157

)

   

   

(11,783

)

   

   

(16,322

)

       Total

$

(12,840

)

   

$

(49,872

)

   

$

(9,473

)

   

$

(10,238

)

   

Offsetting Commodity Derivatives.  As of June 30, 2013 and December 31, 2012, all of our derivative agreements allowed for netting of derivative gains and losses upon settlement.  In general, the terms of the agreements provide for offsetting of amounts payable or receivable between us and the counterparty, at the election of both parties, for transactions that occur on the same date and in the same currency.  If an event of default were to occur causing an acceleration of payment under our revolving bank credit facility, that event may also trigger an acceleration of settlement of our derivative instruments.   If we

 

 9 


W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

   

were required to settle all of our open derivative instruments, we would be able to net payments and receipts per counterparty pursuant to the derivative agreements.  Although our derivative agreements allow for netting, which would allow for recording assets and liabilities per counterparty on a net basis, we account for our derivative contracts on a gross basis per contract as either an asset or liability.  

The following table presents disclosures required by ASU 2011-11 and ASU 2013-01 and provides a reconciliation of the gross assets and liabilities reflected in the balance sheet and the potential effects of master netting agreements on the fair value of open derivative contracts as of June 30, 2013.

   

 

   

Derivative

Assets

   

Derivative

Liabilities

   

Gross amounts presented in the balance sheet

$

2,856

   

$

475

   

Amounts not offset in the balance sheet

   

(348

)

   

(348

)

Net amounts

$

2,508

   

$

127

   

   

There were no potential effects of master netting agreements on the fair value of open derivative contracts as of December 31, 2012 due to all open derivative contracts being valued as liabilities.

   

6.  Long-Term Debt

Our long-term debt was as follows (in thousands):

   

 

   

June 30,

2013

   

December 31,

2012

8.50% Senior Notes

$

900,000

   

$

900,000

Debt premiums, net of amortization

   

16,537

   

   

17,611

Revolving bank credit facility

   

183,000

   

   

170,000

Total long-term debt

   

1,099,537

   

   

1,087,611

Current maturities of long-term debt

   

—  

   

   

—  

Long-term debt, less current maturities

$

1,099,537

   

$

1,087,611

At June 30, 2013 and December 31, 2012, the balance outstanding of our senior notes, which bear an annual interest rate of 8.50% and mature on June 15, 2019 (the “8.50% Senior Notes”), was classified as long-term at their carrying value.  Interest on the 8.50% Senior Notes is payable semi-annually in arrears on June 15 and December 15.  The estimated annual effective interest rate on the 8.50% Senior Notes is 8.4%, which includes amortization of debt issuance costs and premiums.  We are subject to various financial and other covenants under the indenture governing the 8.50% Senior Notes and we were in compliance with those covenants as of June 30, 2013.  

The Fourth Amended and Restated Credit Agreement (the “Credit Agreement”) governs our revolving bank credit facility and terminates on May 5, 2015.  Borrowings under our revolving bank credit facility are secured by our oil and natural gas properties.  Availability under such facility is subject to a semi-annual redetermination of our borrowing base that occurs in the spring and fall of each year and is calculated by our lenders based on their evaluation of our proved reserves and their own internal criteria.  

At June 30, 2013 and December 31, 2012, we had $0.1 million of letters of credit outstanding under the revolving bank credit facility.  The estimated annual effective interest rate was 4.1% for the six months ended June 30, 2013 for borrowings under the revolving bank credit facility.  The estimated annual effective interest rate includes amortization of debt issuance costs and excludes commitment fees and other costs.  As of June 30, 2013, our borrowing base was $800.0 million and our borrowing availability was $616.9 million.  

Under the Credit Agreement, 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, each as defined in the Credit Agreement.  We were in compliance with all applicable covenants of the Credit Agreement as of June 30, 2013.

For information about fair value measurements for our 8.50% Senior Notes and revolving bank credit facility, refer to Note 7.  

 

 10 


W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

   

   

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.  The fair value of our 8.50% Senior Notes is based on quoted prices and the market is not an active market; therefore, the fair value is classified within Level 2.  The carrying amount of debt under our revolving bank credit facility approximates fair value because the interest rates are variable and reflective of market rates.

The following table presents the fair value of our derivative financial instruments, 8.50% Senior Notes and revolving bank credit facility for the periods indicated (in thousands).

   

 

   

   

   

June 30, 2013

   

December 31, 2012

   

Hierarchy

   

Assets

   

Liabilities

   

Assets

   

Liabilities

Derivatives

Level 2

   

$

2,856

   

$

475

   

$

—  

   

$

9,401

8.50% Senior Notes

Level 2

   

   

—  

   

   

936,000

   

   

—  

   

   

963,000

Revolving bank credit facility

Level 2

   

   

—  

   

   

183,000

   

   

—  

   

   

170,000

   

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 8.50% Senior Notes and revolving bank credit facility are reported in the balance sheet at their carrying value as described in Note 6.  

   

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 by our shareholders and amendments to the Plan were approved by our shareholders on May 7, 2013.  As allowed by the Plan, in 2013, 2012 and in 2011, the Company granted restricted stock units (“RSUs”) to certain of its employees.  RSUs are a long-term compensation component of the Plan, which are granted to only certain employees, and are subject to adjustments at the end of the applicable performance period based on the achievement of certain predetermined criteria.  Certain RSUs granted in 2013 (the “2013 RSUs”) are subject to performance criteria of Adjusted EBITDA, defined as net income before income tax expense, net interest expense, depreciation, depletion, amortization, accretion and certain other items, adjusted EBITDA as a percent of total revenue (“Adjusted EBITDA Margin”) and total shareholder return (“TSR”).  The RSUs granted in 2012 (the “2012 RSUs”) are subject to performance criteria of earnings per share and TSR, while the RSUs granted in 2011 (the “2011 RSUs”) are subject to only earnings per share performance measurement.  In 2013 and in prior years, restricted stock was granted to the Company’s non-employee directors under the Director Compensation Plan.  The restricted stock and RSUs each vest at the end of specified service periods.  In addition to share-based compensation, the Company may grant to 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 are expected to actually vest.

On May 7, 2013, after receiving shareholder approval, 4,000,000 shares of common stock were added to the amount available for issuance under the Plan.  At June 30, 2013, there were 5,393,602 shares of common stock available for issuance in satisfaction of awards under the Plan and 519,379 shares of common stock available for issuance in satisfaction of awards under the Director Compensation Plan. The shares available for both plans are reduced when restricted stock is granted.  RSUs will reduce the shares available in the Plan only when RSUs are settled in shares of common stock.  Although the Company has the option to settle RSUs in stock or cash at vesting, only common stock has been used to settle vested RSUs to date.   

Restricted Stock.   As of June 30, 2013, all of the unvested restricted shares outstanding were issued to the 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

 

 11 


W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

   

respect to such shares, including the right to vote and receive dividends or other distributions paid with respect to the shares.  The fair value of restricted stock was estimated by using the Company’s closing price on the grant date.

A summary of activity related to restricted stock is as follows:

   

 

   

Restricted Stock

   

   

   

   

   

Weighted Average

   

   

   

   

   

Grant Date Fair

   

   

Shares

   

   

Value Per Share

   

Outstanding restricted shares, December 31, 2012

43,687

   

$

18.69

   

Granted

27,450

   

   

12.75

   

Vested

(27,297

)

   

17.09

   

Outstanding restricted shares, June 30, 2013

43,840

   

$

15.96

   

Subject to the satisfaction of service conditions, the outstanding restricted shares issued to the non-employee directors as of June 30, 2013 are expected to vest as follows:

   

 

   

Shares

2014

19,445

2015

15,245

2016

9,150

Total

43,840

The grant date fair value of restricted shares granted during the six months ended June 30, 2013 and 2012 was $0.3 million and $0.4 million, respectively.  The fair value of restricted shares that vested during the six months ended June 30, 2013 and 2012 was $0.4 million and $0.5 million, respectively.

Restricted Stock Units.  As of June 30, 2013, the Company had outstanding RSUs issued to certain employees.  Certain 2013 RSUs are subject to pre-defined share performance measures comprised of Adjusted EBITDA and Adjusted EBITDA Margin for 2013 and TSR for defined periods in 2013, 2014 and 2015; therefore, no portion has been determined to be eligible for vesting as of June 30, 2013.  A portion of the 2012 RSUs remains subject to the certain pre-defined performance measures of TSR for the defined periods in 2013 and 2014; therefore, this portion will be determined whether eligible for vesting at the end of the respective performance periods.  TSR is determined based upon the change in the entity’s stock price and dividends for the performance period.  The TSR targets are the ranking of the Company’s TSR compared to the TSR of certain peer companies.  The TSR components have an issuance scale from 0% to 200%.  The portion of RSUs subject to TSR performance measurement is disclosed in the second table below.  

The fair value for the 2013 RSUs was determined separately for the component related to the Company specific performance measures (Adjusted EBITDA and Adjusted EBITDA Margin) and the component related to TSR targets.  The fair value of the 2013 RSUs component related to the Company specific performance measures was determined using the Company’s closing price on the grant date.  The fair value for the 2013 RSUs component related to TSR targets was determined by using a Monte Carlo simulation probabilistic model.  The inputs used in the probabilistic model for the Company and the peer companies were: average closing stock prices during January 2013; risk-free interest rates using the London Interbank Offered Rate (“LIBOR”) ranging from 0.27% to 0.91% over the service period; expected volatilities ranging from 30% to 63%; expected dividend yields ranging from 0.0% to 3.1%; and correlation factors ranging from (84%) to 95%.  The expected volatilities, expected dividends and correlation factors were developed using historical data.

A methodology similar to that employed  for the 2013 RSUs was used to determine the fair value for the 2012 RSUs.  The inputs used in the probabilistic model for the Company and the peer companies were: average closing stock prices during January 2012; risk-free interest rates using the LIBOR ranging from 0.15% to 0.72% over the service period; expected volatilities ranging from 33% to 74%; expected dividend yields ranging from 0.0% to 2.5%; and correlation factors ranging from (67%) to 94%.  The expected volatilities, expected dividends and correlation factors were developed using historical data.  The fair value of the 2011 RSUs, which contained only Company-specific performance measures, was estimated by using the Company’s closing price on the grant date.

The majority of RSUs are subject to predetermined performance criteria and all RSUs are subject to service requirements prior to vesting.  All RSUs awarded are subject to forfeiture until vested and cannot be sold, transferred or otherwise disposed

 

 12 


W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

   

of during the restricted period.  Dividend equivalents are earned at the same rate as dividends paid on our common stock after achieving the specified performance requirement for that component of the RSUs.

A summary of activity related to RSUs is as follows:

   

 

   

Restricted Stock Units

   

   

   

Weighted Average

   

   

   

Grant Date Fair

   

Units

   

Value Per Unit

Outstanding RSUs, December 31, 2012

969,820

   

$

22.70

Granted

964,780

   

   

13.22

Forfeited

(18,681

)

   

19.36

Outstanding RSUs, June 30, 2013

1,915,919

   

$

17.96

   

Subject to the satisfaction of service conditions, the RSUs outstanding as of June 30, 2013 are eligible to vest in the year indicated in the table below:    

   

 

   

Shares

2013 – subject to service requirements

474,044

2014 – subject to service requirements

339,033

2014 – subject to service and other requirements (1)

139,233

2015 – subject to service requirements

23,500

2015 – subject to service and other requirements  (2)

658,076

2015 – subject to service and other requirements  (3)

282,033

Total

1,915,919

   

 

(1)

   

In addition to service requirements, these RSUs are also subject to TSR performance requirements not yet measureable, with awards ranging from 0% to 150% of amounts granted.

   

(2)

   

In addition to service requirements, these RSUs are also subject to certain Company-specific performance requirements not yet measureable, with awards ranging from 0% to 150% of amounts granted.

   

(3)

   

In addition to service requirements, these RSUs are also subject to TSR performance requirements not yet measureable, with awards ranging from 0% to 200% of amounts granted.

   

The grant date fair value of RSUs granted during the six months ended June 30, 2013 and 2012 was $12.8 million and $14.1 million, respectively.  During the six months ended June 30, 2013 and 2012, there was no vesting of RSUs.

Share-Based Compensation.  

A summary of incentive compensation expense under share-based payment arrangements and the related tax benefit is as follows (in thousands):  

   

 

   

Three Months Ended
June 30,

   

   

Six Months Ended
June 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

Share-based compensation expense from:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Restricted stock

$

99

   

   

$

108

   

   

$

198

   

   

$

214

   

Restricted stock units

   

2,596

   

   

   

3,051

   

   

   

4,752

   

   

   

5,604

   

Total  

$

2,695

   

   

$

3,159

   

   

$

4,950

   

   

$

5,818

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Share-based compensation tax benefit:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Tax benefit computed at the statutory rate

$

943

   

   

$

1,106

   

   

$

1,733

   

   

$

2,036

   

Unrecognized Share-Based Compensation.  As of June 30, 2013, unrecognized share-based compensation expense related to our outstanding restricted shares and RSUs was $0.7 million and $19.2 million, respectively.   Unrecognized share-based compensation expense will be recognized through April 2016 for restricted shares and November 2015 for RSUs.

 

 13 


W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

   

Cash-Based Incentive Compensation.  As defined by the Plan, annual incentive awards may be granted to eligible employees payable in cash.  These awards are performance-based awards consisting of one or more business criteria or 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.

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

A summary of incentive compensation expense is as follows (in thousands):  

   

 

   

   

Three Months Ended
June 30,

   

   

   

Six Months Ended
June 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

Share-based compensation expense included in:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

General and administrative —charge to operating income

$

2,695

   

   

$

3,159

   

   

$

4,950

   

   

$

5,818

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Cash-based incentive compensation included in:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Lease operating expense

   

747

   

   

   

—  

   

   

   

2,140

   

   

   

1,900

   

General and administrative

   

2,024

   

   

   

—  

   

   

   

5,554

   

   

   

1,878

   

Total charged to operating income

   

2,771

   

   

   

—  

   

   

   

7,694

   

   

   

3,778

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Total incentive compensation charged to operating income

$

5,466

   

   

$

3,159

   

   

$

12,644

   

   

$

9,596

   

   

   

9.  Income Taxes  

Income tax expense of $12.4 million and $27.3 million was recorded during the three and six months ended June 30, 2013, respectively.  Our effective tax rate for the three and six months ended June 30, 2013 was 35.7% and 35.8%, respectively, and differed from the federal statutory rate of 35.0% primarily as a result of state income taxes.  Income tax expense of $34.2 million and $36.1 million was recorded during the three and six months ended June 30, 2012, respectively.  Our effective tax rate for the three and six months ended June 30, 2012 was 38.9% for both periods, and differed from the federal statutory rate primarily as a result of the recapture of deductions for qualified domestic production activities under Section 199 of the IRC as a function of loss carrybacks to prior years.  Income taxes receivables as of June 30, 2013 are comprised of $44.7 million of refunds related to tax loss carrybacks to 2010 and 2011, which are partially offset by $5.1 million of accrued taxes payable related to 2013 alternative minimum tax.

As of June 30, 2013 and December 31, 2012, we did not have any unrecognized tax benefit recorded.  As of June 30, 2013 and December 31, 2012, we had a valuation allowance related to state net operating losses.  The realization of these assets depends on recognition of sufficient future taxable income in specific tax jurisdictions in which those temporary differences or net operating losses are deductible.  The tax years from 2009 through 2012 remain open to examination by the tax jurisdictions to which we are subject.

   

 

 14 


W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

   

10.  Earnings Per Share

The following table presents the calculation of basic and diluted earnings per common share (in thousands, except per share amounts):

   

 

   

Three Months Ended
June 30,

   

   

Six Months Ended
June 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

Net income

$

22,396

   

   

$

53,567

   

   

$

49,014

   

   

$

56,785

   

Less portion allocated to nonvested shares

   

275

   

   

   

1,185

   

   

   

556

   

   

   

1,214

   

Net income allocated to common shares

$

22,121

   

   

$

52,382

   

   

$

48,458

   

   

$

55,571

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Weighted average common shares outstanding

   

75,223

   

   

   

74,318

   

   

   

75,215

   

   

   

74,309

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Basic and diluted earnings per common share

$

0.29

   

   

$

0.70

   

   

$

0.64

   

   

$

0.75

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

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

   

859

   

   

   

1,913

   

   

   

864

   

   

   

1,839

   

   

   

11.  Dividends

During the six months ended June 30, 2013 and 2012, we paid regular cash dividends per common share of $0.17 and $0.16, respectively.   On August 7, 2013, our board of directors declared a cash dividend of $0.09 per common share, payable on September 12, 2013 to shareholders of record on August 22, 2013.

   

12.  Contingencies

Cameron Parish Louisiana Claim.  Since 2009, certain Cameron Parish landowners have filed suits in the 38th Judicial District Court, Cameron Parish, Louisiana against the Company and its Chief Executive Officer, Tracy W. Krohn, as well as several other defendants unrelated to us.  In their lawsuits, plaintiffs alleged that property they own has been contaminated or otherwise damaged by the defendants’ oil and gas exploration and production activities and they are seeking compensatory and punitive damages.  During 2012 and for the six months ended June 30, 2013, we settled claims with certain landowners and paid $11.3 million.      

Qui Tam Litigation.  On September 21, 2012, the Company was served with a complaint in a qui tam action filed under the federal False Claims Act by an employee of a Company contractor.  The lawsuit, United States ex rel. Comeaux v. W&T Offshore, Inc., et al.; CA No. 10-494, was filed in the United States District Court for the Eastern District of Louisiana, against the Company and three other working interest owners related to claims associated with three of the Company’s operated production platforms.  A qui tam action, also known as a “whistleblower” action, is a lawsuit brought by a private citizen seeking civil penalties or damages against a person or company on behalf of the government for alleged violations of law.  If the claims are successful, the person filing the suit may recover a percentage of the damages or penalty from the lawsuit as a reward for exposing a wrongdoing and recovering funds on behalf of the government.  The complaint was originally filed in 2010 but kept under confidential seal in order for the federal government to decide if it wished to intervene and take over the prosecution of the qui tam action.  The government declined to intervene in this suit and the complaint was unsealed and made public in June 2012, thereby giving the plaintiff the opportunity to pursue the claims on behalf of the government.  The plaintiff is pursuing the claim.  

The complaint alleges that environmental violations at three of the Company’s operated production platforms in the Gulf of Mexico violate the federal offshore lease provisions so that the Company, among other things, wrongfully retained benefits under the applicable leases.  The alleged environmental violations include allegations of discharges of relatively small amounts of oil into the Gulf of Mexico, the failure to report and record such discharges, and falsification of certain produced water samples and related reports required under federal law.  The events are alleged to have occurred in 2009.  These are largely the same underlying environmental allegations that resulted in the plea agreement described in the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.  The Company has filed a motion to dismiss the plaintiff’s claims.  The plaintiff dismissed his claims against the three other working interest owners after they filed motions to dismiss.  The plaintiff conceded that certain of his claims should be dismissed in his reply to the Company’s motion to dismiss.  By order dated August 6, 2013, the court granted the Company’s

 

 15 


W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

   

motion to dismiss plaintiff’s claims without prejudice and allowed plaintiff twenty days to amend his complaint to remedy the deficiencies in his claims.  The court will dismiss with prejudice if the plaintiff cannot or does not correct the deficiencies in his claims.

The Company intends to vigorously defend the claims made in this lawsuit.  While the Company has determined that the likelihood of an adverse outcome may be reasonably possible, the range of potential loss cannot yet be estimated, and accordingly, no accrual has been made.

Insurance Claims. During the fourth quarter of 2012, underwriters of W&T’s excess liability policies (“Excess Policies”) (Indemnity Insurance Company of North America, New York Marine & General Insurance Company, Navigators Insurance Company, XL Specialty Insurance Company and Liberty Mutual Insurance Co.) filed declaratory judgment actions in the United States District Court for the Southern District of Texas seeking a determination that our Excess Policies cover removal of wreck and debris claims arising from Hurricane Ike to the extent we have first exhausted the limits of our Energy Package (defined as certain insurance policies relating to our oil and gas properties) with only removal of wreck and debris claims.  The court consolidated the various suits filed by the underwriters.  W&T has not yet filed any claim under such Excess Policies. As of June 30, 2013, we have spent $44.5 million and expect to incur an additional $2.6 million of costs for removal of wreck associated with platforms damaged by Hurricane Ike. In January 2013, we filed a motion for summary judgment seeking the court’s determination that such Excess Policies do not require us to exhaust the limits of our Energy Package policies with only removal of wreck and debris claims.  On July 31, 2013, the District Court ruled in favor of the underwriters, adopting their position that the Excess Policies cover removal of wreck and debris claims only to the extent the limits of our Energy Package policies have been exhausted with removal of wreck and debris claims.  We disagree with the Court’s ruling and intend to appeal the decision.  Removal of wreck costs are recorded in Oil and natural gas properties and equipment on the Balance Sheet.  If we are successful in our appeal, any recoveries from claims made on these Excess Policies related to this issue will be recorded as reductions in this line item, which will reduce the Company’s DD&A rate.  

Royalties.  In 2009, the Company recognized $5.3 million in allowable reductions of cash payments for royalties owed to the Office of Natural Resources Revenue (the “ONRR”) for transportation of their deepwater production through our subsea pipeline systems.  In 2010, the ONRR audited the calculations and support related to this usage fee, and in the third quarter of 2010, we were notified that the ONRR had disallowed approximately $4.7 million of the reductions taken.  We recorded a reduction to other revenue of $4.7 million in the third quarter of 2010 to reflect this disallowance; however, we disagree with the position taken by the ONRR and we are pursuing our claim to resolve the matter.

Other Claims.  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.

Contingent Liability Recorded.  Recognized expenses related to accrued and settled claims, complaints and fines were less than $ 0.1 million for the six months ended June 30, 2013 and $8.4 million for the six months ended June 30, 2012.  These expenses are reported in General and administrative expenses on the statement of income and reflect the items noted above and other various claims and complaints.  As of June 30, 2013 and December 31, 2012, we have recorded $0.0 million and $1.3 million, respectively, which are included in Accrued liabilities on the balance sheet, for the loss contingencies matters that include the events described above and other minor environmental and litigation matters which we are addressing in the normal course of business.

   

13.  Supplemental Guarantor Information

Our payment obligations under the 8.50% Senior Notes and the Credit Agreement (see Note 6) are fully and unconditionally guaranteed by certain of our wholly-owned subsidiaries, including W&T Energy VI, LLC and W&T Energy VII, LLC (together, the “Guarantor Subsidiaries”).  W&T Energy VII, LLC does not currently have any active operations.  Guarantees of the 8.50% Senior Notes will be released under certain circumstances, including:

 

 16 


W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

   

(1) in connection with any sale or other disposition of all or substantially all of the assets of a Guarantor Subsidiary (including by way of merger or consolidation) to a person that is not (either before or after giving effect to such transaction) the Company or a Restricted Subsidiary (as such term is defined in the indenture governing the 8.50% Senior Notes) of the Company, if the sale or other disposition does not violate the “Asset Sales” provisions of the indenture;

(2) in connection with any sale or other disposition of the capital stock of such Guarantor Subsidiary to a person that is not (either before or after giving effect to such transaction) the Company or a Restricted Subsidiary of the Company, if the sale or other disposition does not violate the “Asset Sales” provisions of the indenture and the Guarantor Subsidiary ceases to be a subsidiary of the Company as a result of such sales or disposition;

(3) if such Guarantor Subsidiary is a Restricted Subsidiary and the Company designates such Guarantor Subsidiary as an Unrestricted Subsidiary in accordance with the applicable provisions of the indenture;

(4) upon Legal Defeasance or Covenant Defeasance (as such terms are defined in the indenture) or upon satisfaction and discharge of the indenture;

(5) upon the liquidation or dissolution of such Guarantor Subsidiary, provided no event of default has occurred and is continuing; or

(6) at such time as such Guarantor Subsidiary is no longer required to be a Guarantor Subsidiary of the 8.50% Senior Notes as described in the indenture, provided no event of default has occurred and is continuing.

The following unaudited condensed consolidating financial information presents the financial condition, results of operations and cash flows of W&T Offshore, Inc. (the “Parent Company”) and the Guarantor Subsidiaries, together with consolidating adjustments necessary to present the Company’s results on a consolidated basis.

 

 17 


W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

   

Condensed Consolidating Balance Sheet as of June 30, 2013

   

 

   

Parent

Company

   

   

Guarantor

Subsidiaries

   

   

Eliminations

   

   

Consolidated

W&T

Offshore, Inc.

   

   

(In thousands)

   

Assets

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Current assets:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Cash and cash equivalents

$

9,276

   

   

$

—  

   

   

$

—  

   

   

$

9,276

   

Receivables:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Oil and natural gas sales

   

65,290

   

   

   

15,411

   

   

   

(31

)

   

   

80,670

   

Joint interest and other

   

22,921

   

   

   

—  

   

   

   

—  

   

   

   

22,921

   

Income taxes

   

165,239

   

   

   

—  

   

   

   

(125,683

)

   

   

39,556

   

Total receivables

   

253,450

   

   

   

15,411

   

   

   

(125,714

)

   

   

143,147

   

Prepaid expenses and other assets

   

37,214

   

   

   

—  

   

   

   

—  

   

   

   

37,214

   

Total current assets

   

299,940

   

   

   

15,411

   

   

   

(125,714

)

   

   

189,637

   

Property and equipment – at cost:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Oil and natural gas properties and equipment

   

6,624,347

   

   

   

385,488

   

   

   

—  

   

   

   

7,009,835

   

Furniture, fixtures and other

   

20,848

   

   

   

—  

   

   

   

—  

   

   

   

20,848

   

Total property and equipment

   

6,645,195

   

   

   

385,488

   

   

   

—  

   

   

   

7,030,683

   

Less accumulated depreciation, depletion and amortization

   

4,614,980

   

   

   

236,993

   

   

   

—  

   

   

   

4,851,973

   

Net property and equipment

   

2,030,215

   

   

   

148,495

   

   

   

—  

   

   

   

2,178,710

   

Restricted deposits for asset retirement obligations

   

33,469

   

   

   

—  

   

   

   

—  

   

   

   

33,469

   

Deferred income taxes

   

—  

   

   

   

8,689

   

   

   

(8,689

)

   

   

—  

   

Other assets

   

468,352

   

   

   

434,660

   

   

   

(884,814

)

   

   

18,198

   

Total assets

$

2,831,976

   

   

$

607,255

   

   

$

(1,019,217

)

   

$

2,420,014

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Liabilities and Shareholders’ Equity

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Current liabilities:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Accounts payable

$

123,101

   

   

$

—  

   

   

$

(31

)

   

$

123,070

   

Undistributed oil and natural gas proceeds

   

41,788

   

   

   

280

   

   

   

—  

   

   

   

42,068

   

Asset retirement obligations

   

74,687

   

   

   

—  

   

   

   

—  

   

   

   

74,687

   

Accrued liabilities

   

13,468

   

   

   

126,199

   

   

   

(125,683

)

   

   

13,984

   

Deferred income tax—current

   

5,760

   

   

   

—  

   

   

   

—  

   

   

   

5,760

   

Total current liabilities

   

258,804

   

   

   

126,479

   

   

   

(125,714

)

   

   

259,569

   

Long-term debt

   

1,099,537

   

   

   

—  

   

   

   

—  

   

   

   

1,099,537

   

Asset retirement obligations, less current portion

   

279,295

   

   

   

30,623

   

   

   

—  

   

   

   

309,918

   

Deferred income taxes

   

171,637

   

   

   

—  

   

   

   

(8,689

)