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 September 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 November 5, 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 September 30, 2013 and December 31, 2012  

 

 1

   

   

   

   

Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2013 and 2012  

 

 2

   

   

   

   

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

 

 3

   

   

   

   

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 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  

 

 27

   

   

   

Item 3.

Quantitative and Qualitative Disclosures About Market Risk  

 

 40

   

   

   

Item 4.

Controls and Procedures  

 

 41

   

   

PART II – OTHER INFORMATION

   

   

   

   

Item 1.

Legal Proceedings  

 

 42

   

   

   

Item 1A.

Risk Factors  

 

 42

   

   

   

Item 6.

Exhibits  

 

 43

   

   

SIGNATURE  

 

 44

   

   

EXHIBIT INDEX  

 

 45

   

   

   

           

 

   


PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

   

 

   

September 30,

2013

   

   

December 31,

2012

   

   

(In thousands, except share data)

   

   

(Unaudited)

   

Assets

   

Current assets:

   

   

   

   

   

   

   

Cash and cash equivalents

$

15,227

   

   

$

12,245

   

Receivables:

   

   

   

   

   

   

   

Oil and natural gas sales

   

85,221

   

   

   

97,733

   

Joint interest and other

   

31,492

   

   

   

56,439

   

Income taxes

   

—  

   

   

   

47,884

   

Total receivables

   

116,713

   

   

   

202,056

   

Restricted cash and cash equivalents

   

16,459

   

   

   

—  

   

Prepaid expenses and other assets

   

32,850

   

   

   

25,822

   

Total current assets

   

181,249

   

   

   

240,123

   

Property and equipment – at cost:

   

   

   

   

   

   

   

Oil and natural gas properties and equipment (full cost method, of which $129,584 at September 30, 2013 and $123,503 at December 31, 2012 were excluded from amortization)

   

7,120,086

   

   

   

6,694,510

   

Furniture, fixtures and other

   

21,325

   

   

   

21,786

   

Total property and equipment

   

7,141,411

   

   

   

6,716,296

   

Less accumulated depreciation, depletion and amortization

   

4,950,768

   

   

   

4,655,841

   

Net property and equipment

   

2,190,643

   

   

   

2,060,455

   

Restricted deposits for asset retirement obligations

   

34,966

   

   

   

28,466

   

Other assets

   

16,842

   

   

   

19,943

   

Total assets

$

2,423,700

   

   

$

2,348,987

   

Liabilities and Shareholders’ Equity

   

   

   

   

   

   

   

Current liabilities:

   

   

   

   

   

   

   

Accounts payable

$

129,988

   

   

$

123,885

   

Undistributed oil and natural gas proceeds

   

41,278

   

   

   

37,073

   

Asset retirement obligations

   

95,014

   

   

   

92,630

   

Accrued liabilities

   

51,048

   

   

   

21,021

   

Total current liabilities

   

317,328

   

   

   

274,609

   

Long-term debt

   

1,052,984

   

   

   

1,087,611

   

Asset retirement obligations, less current portion

   

267,093

   

   

   

291,423

   

Deferred income taxes

   

177,404

   

   

   

145,249

   

Other liabilities

   

15,859

   

   

   

8,908

   

Commitments and contingencies

   

—  

   

   

   

—  

   

Shareholders’ equity:

   

   

   

   

   

   

   

Preferred stock, $0.00001 par value; 20,000,000 shares authorized; 0 issued at September 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 September 30, 2013, and 78,118,803 issued and 75,249,630 outstanding at December 31, 2012

   

1

   

   

   

1

   

Additional paid-in capital

   

404,604

   

   

   

396,186

   

Retained earnings

   

212,594

   

   

   

169,167

   

Treasury stock, at cost

   

(24,167

)

   

   

(24,167

)

Total shareholders’ equity

   

593,032

   

   

   

541,187

   

Total liabilities and shareholders’ equity

$

2,423,700

   

   

$

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

September 30,

   

   

Nine Months Ended

September 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

   

(In thousands, except per share data)

   

   

(Unaudited)

   

Revenues

$

244,555

   

   

$

185,946

   

   

$

739,160

   

   

$

637,345

   

Operating costs and expenses:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Lease operating expenses

   

67,346

   

   

   

53,411

   

   

   

194,935

   

   

   

170,349

   

Production taxes

   

1,807

   

   

   

1,353

   

   

   

5,375

   

   

   

4,174

   

Gathering and transportation

   

3,611

   

   

   

2,810

   

   

   

12,663

   

   

   

11,140

   

Depreciation, depletion,  amortization and accretion

   

104,143

   

   

   

77,462

   

   

   

312,911

   

   

   

251,894

   

General and administrative expenses

   

20,024

   

   

   

18,691

   

   

   

60,979

   

   

   

62,793

   

Derivative loss

   

15,659

   

   

   

24,659

   

   

   

6,186

   

   

   

14,421

   

Total costs and expenses

   

212,590

   

   

   

178,386

   

   

   

593,049

   

   

   

514,771

   

Operating income

   

31,965

   

   

   

7,560

   

   

   

146,111

   

   

   

122,574

   

Interest expense:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Incurred

   

21,373

   

   

   

14,791

   

   

   

64,157

   

   

   

43,409

   

Capitalized

   

(2,573

)

   

   

(3,383

)

   

   

(7,537

)

   

   

(9,899

)

Other income

   

9,062

   

   

   

202

   

   

   

9,075

   

   

   

210

   

Income (loss) before income tax expense

   

22,227

   

   

   

(3,646

)

   

   

98,566

   

   

   

89,274

   

Income tax expense (benefit)

   

8,033

   

   

   

(2,175

)

   

   

35,358

   

   

   

33,959

   

Net income (loss)

$

14,194

   

   

$

(1,471

)

   

$

63,208

   

   

$

55,315

   

Basic and diluted earnings (loss) per common share

$

0.19

   

   

$

(0.02

)

   

$

0.83

   

   

$

0.73

   

Dividends declared per common share

$

0.09

   

   

$

0.08

   

   

$

0.26

   

   

$

0.24

   

   

   

   

   

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

—  

   

   

   

—  

   

   

   

—  

   

   

   

(19,570

)

   

—  

   

   

   

—  

   

   

   

(19,570

)

Share-based compensation

—  

   

   

   

—  

   

   

   

8,457

   

   

   

—  

   

   

—  

   

   

   

—  

   

   

   

8,457

   

Other

27

   

   

   

—  

   

   

   

(39

)

   

   

(211

)

   

—  

   

   

   

—  

   

   

   

(250

)

Net income

—  

   

   

   

—  

   

   

   

—  

   

   

   

63,208

   

   

—  

   

   

   

—  

   

   

   

63,208

   

Balances at September 30, 2013

75,277

   

   

$

1

   

   

$

404,604

   

   

$

212,594

   

   

2,869

   

   

$

(24,167

)

   

$

593,032

   

   

   

   

   

See Notes to Condensed Consolidated Financial Statements.

   

   

       

 

 3 


   

W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

   

 

   

Nine Months Ended September 30,

   

   

2013

   

   

2012

   

   

(In thousands)

   

   

(Unaudited)

   

Operating activities:

   

   

   

   

   

   

   

Net income

$

63,208

   

   

$

55,315

   

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

   

   

   

   

   

   

   

Depreciation, depletion, amortization and accretion

   

312,911

   

   

   

251,894

   

Amortization of debt issuance costs and premium

   

1,366

   

   

   

2,046

   

Share-based compensation

   

8,457

   

   

   

9,137

   

Derivative loss

   

6,186

   

   

   

14,421

   

Cash payments on derivative settlements

   

(6,855

)

   

   

(6,960

)

Deferred income taxes

   

31,581

   

   

   

44,465

   

Changes in operating assets and liabilities:

   

   

   

   

   

   

   

Oil and natural gas receivables

   

12,511

   

   

   

30,320

   

Joint interest and other receivables

   

24,947

   

   

   

3,935

   

Insurance receivables

   

5,117

   

   

   

500

   

Income taxes

   

53,433

   

   

   

(24,327

)

Prepaid expenses and other assets

   

(10,815

)

   

   

670

   

Asset retirement obligation settlements

   

(59,188

)

   

   

(63,150

)

Accounts payable, accrued liabilities and other

   

32,974

   

   

   

33,223

   

Net cash provided by operating activities

   

475,833

   

   

   

351,489

   

Investing activities:

   

   

   

   

   

   

   

Investment in oil and natural gas properties and equipment

   

(423,092

)

   

   

(312,372

)

Proceeds from sales of assets and other, net

   

21,011

   

   

   

30,453

   

Change in restricted cash

   

(16,459

)

   

   

(24,026

)

Deposit for acquisition

   

—  

   

   

   

(22,800

)

Purchases of furniture, fixtures and other

   

(1,327

)

   

   

(2,125

)

Net cash used in investing activities

   

(419,867

)

   

   

(330,870

)

Financing activities:

   

   

   

   

   

   

   

Borrowings of long-term debt – revolving bank credit facility

   

335,000

   

   

   

316,000

   

Repayments of long-term debt – revolving bank credit facility

   

(368,000

)

   

   

(314,000

)

Debt issuance costs

   

(164

)

   

   

(2,081

)

Dividends to shareholders

   

(19,570

)

   

   

(17,848

)

Other

   

(250

)

   

   

(209

)

Net cash used in financing activities

   

(52,984

)

   

   

(18,138

)

Increase in cash and cash equivalents

   

2,982

   

   

   

2,481

   

Cash and cash equivalents, beginning of period

   

12,245

   

   

   

4,512

   

Cash and cash equivalents, end of period

$

15,227

   

   

$

6,993

   

   

   

   

   

   

   

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.  Deferred income taxes – current asset was combined with Prepaid expenses and other assets on the Balance Sheet, Income taxes payable 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.  The Company’s derivative financial instruments are subject to master netting agreements and the Company records its derivative financial instruments on a gross basis by contract; therefore, the revisions relate to disclosure of the Company’s derivative financial instruments on a net basis.  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)

   

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740); Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a similar Tax Loss, or a Tax Credit Carryforward Exists a consensus of the FASB Emerging Task Force, which provided guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists.  This guidance requires an entity to present an unrecognized tax benefit as a liability in the financial statements if (i) a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, or (ii) the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset to settle any additional income taxes that would result from the disallowance of a tax position. Otherwise, an unrecognized tax benefit is required to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward.  Previously, there was diversity in practice as no explicit guidance existed. The amendment is effective for annual periods and interim periods beginning after December 15, 2013.  Early adoption is permitted and the amendment is to be applied prospectively.  The Company is currently assessing the impact of ASU 2013-11 to determine the effects on the balance sheet and disclosures, if any.  

Other income.  For the three and nine months ended September 30, 2013, the amounts reported consisted primarily of $9.2 million received in conjunction with a payment to W&T for an option exercised by a counterparty.  Partially offsetting the proceeds were related third-party expenses of $0.1 million.   

   

2.  Acquisitions and Divestitures

2013 Divestitures.   On July 11, 2013, we sold our non-operated working interest in two offshore fields located in the Gulf of Mexico; the Green Canyon 60 field and the Green Canyon 19 field.  The effective date was October 1, 2011 and we retained the deep rights in both fields.  Due to the length of time from the effective date, we paid $4.3 million to sell the properties as revenues exceeded operating expenses and the purchase price for the period between the effective date and the close date.  In connection with the sale, we reversed $15.6 million of our asset retirement obligations (“ARO”).

On September 26, 2013, we sold our working interests in the West Delta area block 29 with an effective date of January 1, 2013.  The property is located in the Gulf of Mexico.  Including adjustments for the effective date, the net proceeds were $16.5 million.   The transaction was structured as a like-kind exchange under the Internal Revenue Service Code (“IRC”) Section 1031 and other applicable regulations, with funds held by a qualified intermediary until replacement purchases are made.  Replacement purchases are expected to be consummated within the replacement periods defined under the IRC.  The net proceeds are recorded on the Balance Sheet in Restricted cash and cash equivalents due to the restrictions on the use of the cash under IRC regulations for like-kind exchanges.  In connection with this sale, we reversed $3.9 million of ARO.   

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).  Including adjustments from an effective date of July 1, 2012, the adjusted purchase price was $205.7 million and we assumed the future ARO associated with the Newfield Properties.  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 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 nine months ended September 30, 2013.  

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,

 

 6 


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

   

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.

Revenues, 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 September 30, 2013, the Newfield Properties accounted for $31.9 million of revenues, $5.5 million of direct operating expenses, $14.7 million of depreciation, depletion, amortization and accretion (“DD&A”) and $4.1 million of income taxes, resulting in $7.6 million of net income.  For the nine months ended September 30, 2013, the Newfield Properties accounted for $94.2 million of revenues, $19.6 million of direct operating expenses, $41.1 million of DD&A and $11.7 million of income taxes, resulting in $21.8 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.  Expenses associated with acquisition activities and transition activities related to the acquisition of the Newfield Properties were less than $0.1 million for the three and nine months ended September 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 statements for annual periods, W&T’s unaudited historical condensed consolidated financial statements 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; the realized sales prices for oil, natural gas liquids (“NGLs”) and natural gas may have been different; and the 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
September 30, 2012

   

   

Nine Months Ended
September 30, 2012

   

Revenues

$

217,714

      

   

$

741,808

   

Net income

   

508

   

   

   

59,897

   

Basic and diluted earnings per common share

   

0.01

   

   

   

0.79

   

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

 

 7 


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

   

   

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

   

 

   

Three Months Ended
September 30, 2012

      

   

Nine Months Ended
September 30, 2012

   

Revenues (a)

$

31,768

   

   

$

104,463

   

Direct operating expenses (a) 

   

9,026

   

   

   

33,089

   

Insurance and acquisition costs, net (b) 

   

128

   

   

   

444

   

DD&A (c) 

   

15,757

   

   

   

52,634

   

Interest expense (d) 

   

3,960

   

   

   

11,881

   

Capitalized interest (e)

   

148

   

   

   

634

   

Income tax expense (f) 

   

1,066

   

   

   

2,467

   

   

 

   

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 exclude insurance costs.  Expenses were reduced for acquisition costs incurred.  

   

(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 IRC Section 1031 and other applicable regulations, with 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.   

 

 8 


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

   

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 September 30, 2013, we have received $147.3 million from our insurance underwriters related to 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

   

(59,188

)

Accretion of discount

   

16,236

   

Disposition of properties

   

(19,564

)

Liabilities incurred

   

372

   

Revisions of estimated liabilities due to Hurricane Ike (1) 

   

5,526

   

Revisions of estimated liabilities – all other (1)

   

34,672

   

Balance, September 30, 2013

   

362,107

   

Less current portion

   

95,014

   

Long-term

$

267,093

   

   

 

   

(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 (“BSEE”).

   

   

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 our oil and natural gas and interest rate risk from floating interest rates on our revolving bank credit facility. 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.

In accordance with GAAP, we record each derivative contract on the balance sheet as an asset or a liability at its fair value.  For additional information about fair value measurements, refer to Note 7.  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.  The cash flows of all of our commodity derivative contracts are included in Net cash provided by operating activities on the statement of cash flows.  

 

 9 


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

   

   

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 nine months ended September 30, 2013 and 2012, our derivative contracts consisted entirely of crude oil swap 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 swap contracts are priced off the Brent crude oil price quoted on the IntercontinentalExchange, known as ICE.  The WTI based swap contracts 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 September 30, 2013, our open commodity derivative 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:

4th quarter

      

294,400

      

$

101.98

      

520,000

      

$

97.38

   

2014:

1st quarter

            

180,000

            

   

97.38

               

762,000

            

   

97.39

   

   

2nd quarter

   

172,900

   

   

97.38

   

455,000

   

   

97.17

   

   

3rd quarter

   

165,600

   

   

97.38

   

155,000

   

   

97.00

   

   

4th quarter

   

156,400

   

   

97.37

   

—  

   

   

—  

   

   

   

   

969,300

   

$

98.77

   

1,892,000

   

$

97.30

   

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):

   

 

   

September 30,
2013

   

December 31,
2012

   

Prepaid and other assets

$

317

   

$

—  

   

Accrued liabilities

   

8,611

   

   

6,355

   

Other liabilities (noncurrent)  

   

439

   

   

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
September 30,

   

   

Nine Months Ended
September 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

Derivative (gain) loss:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Realized

$

4,545

   

   

$

875

   

   

$

6,855

   

   

$

6,960

   

Unrealized

   

11,114

   

   

   

23,784

   

   

   

(669

)

   

   

7,461

   

Total

$

15,659

   

   

$

24,659

   

   

$

6,186

   

   

$

14,421

   

   

 

 10 


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

   

Offsetting Commodity Derivatives.  As of September 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 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 September 30, 2013 (in thousands):

   

 

   

   

Derivative

Assets

   

   

   

Derivative

Liabilities

   

Gross amounts presented in the balance sheet

$

317

   

   

$

9,050

   

Amounts not offset in the balance sheet

   

(317

)

   

   

(317

)

Net amounts

$

—  

   

   

$

8,733

   

   

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):

   

 

   

September 30,
2013

   

   

December 31,
2012

   

8.50% Senior Notes

$

900,000

   

   

$

900,000

   

Debt premiums, net of amortization

   

15,984

   

   

   

17,611

   

Revolving bank credit facility

   

137,000

   

   

   

170,000

   

Total long-term debt

   

1,052,984

   

   

   

1,087,611

   

Current maturities of long-term debt

   

—  

   

   

   

—  

   

Long-term debt, less current maturities

$

1,052,984

   

   

$

1,087,611

   

At September 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 September 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.  See Note 13 for information regarding a new credit agreement executed subsequent to September 30, 2013.  

At September 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 3.9% for the nine months ended September 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 September 30, 2013, our borrowing base was $800.0 million and our borrowing availability was $662.9 million.  

 

 11 


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

   

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 September 30, 2013.

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

   

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).

   

 

   

   

   

   

September 30, 2013

   

   

December 31, 2012

   

   

Hierarchy

   

   

Assets

   

   

Liabilities

   

   

Assets

   

   

Liabilities

   

Derivatives

Level 2

   

   

$

317

   

   

$

9,050

   

   

$

—  

   

   

$

9,401

   

8.50% Senior Notes

Level 2

   

   

   

—  

   

   

   

977,625

   

   

   

—  

   

   

   

963,000

   

Revolving bank credit facility

Level 2

   

   

   

—  

   

   

   

137,000

   

   

   

—  

   

   

   

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.

 

 12 


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

   

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 September 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 September 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 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 in 2013 related to restricted stock is as follows:

   

 

   

Restricted Stock

   

   

Shares

   

Weighted

 Average
Grant Date

 Fair 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, September 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 September 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 nine months ended September 30, 2013 and 2012 was $0.3 million and $0.4 million, respectively.  The fair value of restricted shares that vested during the nine months ended September 30, 2013 and 2012 was $0.4 million and $0.5 million, respectively.

Restricted Stock Units.  As of September 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 September 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.  

 

 13 


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

   

   

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 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 in 2013 related to RSUs is as follows:

   

 

   

Restricted Stock Units

   

   

Units

   

Weighted

 Average

Grant Date

 Fair Value

 Per Unit

   

Outstanding RSUs, December 31, 2012

969,820

   

$

22.70

   

Granted

969,919

   

   

13.23

   

Forfeited

(33,042

)

   

18.86

   

Outstanding RSUs, September 30, 2013

1,906,697

   

$

17.95

   

   

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

   

 

   

Units

   

2013 – subject to service requirements

470,536

   

2014 – subject to service requirements

335,555

   

2014 – subject to service and other requirements (1)

138,330

   

2015 – subject to service requirements

23,500

   

2015 – subject to service and other requirements  (2)

657,143

   

2015 – subject to service and other requirements  (3)

281,633

   

Total

1,906,697

   

   

 

(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.

   

 

 14 


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

   

   

The grant date fair value of RSUs granted during the nine months ended September 30, 2013 and 2012 was $12.8 million and $14.2 million, respectively.  During the nine months ended September 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

September 30,

   

   

Nine Months Ended

September 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

Share-based compensation expense from:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Restricted stock

$

99

   

   

$

110

   

   

$

297

   

   

$

324

   

Restricted stock units

   

3,408

   

   

   

3,209

   

   

   

8,160

   

   

   

8,813

   

Total

$

3,507

   

   

$

3,319

   

   

$

8,457

   

   

$

9,137

   

Share-based compensation tax benefit:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Tax benefit computed at the statutory rate

$

1,227

   

   

$

1,162

   

   

$

2,960

   

   

$

3,198

   

Unrecognized Share-Based Compensation.  As of September 30, 2013, unrecognized share-based compensation expense related to our outstanding restricted shares and RSUs was $0.6 million and $16.1 million, respectively.   Unrecognized share-based compensation expense will be recognized through April 2016 for restricted shares and November 2015 for RSUs.

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

September 30,

   

   

Nine Months Ended

September 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

Share-based compensation expense included in:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

General and administrative—charge to operating income

$

3,507

   

   

$

3,319

   

   

$

8,457

   

   

$

9,137

   

Cash-based incentive compensation included in:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Lease operating expense

   

724

   

   

   

947

   

   

   

2,864

   

   

   

2,846

   

General and administrative

   

2,191

   

   

   

3,048

   

   

   

7,745

   

   

   

4,926

   

Total charged to operating income

   

2,915

   

   

   

3,995

   

   

   

10,609

   

   

   

7,772

   

Total incentive compensation charged to operating income

$

6,422

   

   

$

7,314

   

   

$

19,066

   

   

$

16,909

   

   

   

9.  Income Taxes  

Income tax expense of $8.0 million and $35.4 million was recorded during the three and nine months ended September 30, 2013, respectively.  Our effective tax rate for the three and nine months ended September 30, 2013 was 36.1% and 35.9%, respectively, and differed from the federal statutory rate of 35.0% primarily as a result of state income taxes.  Income tax benefit of $2.2 million and income tax expense of $34.0 million was recorded during the three and nine months ended September 30, 2012, respectively.  The effective tax rate for the three months ended September 30, 2012 was 59.7%, which exceeded the amount computed at the statutory rate as a result of a decrease in our full year forecasted effective tax rate.  Our effective tax rate for the nine months ended September 30, 2012 was 38.0% 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 result of loss carrybacks to prior years.

   

 

 15 


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

   

During the three and nine months ended September 30, 2013, we received refunds of $59.1 million and of which $9.5 million of these refunds have been accounted for as unrecognized tax benefits.  We recognize interest and penalties related to unrecognized tax benefits in income tax expense.  During the three months and nine months ended September 30, 2013, we had less than $0.1 million of accrued interest related to our unrecognized tax benefit.  We did not have an unrecognized tax benefit at December 31, 2012.  As of September 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.

   

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
September 30,

   

   

Nine Months Ended
September 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

Net income (loss)

$

14,194

   

   

$

(1,471

)

   

$

63,208

   

   

$

55,315

   

Less portion allocated to nonvested shares

   

159

   

   

   

90

   

   

   

713

   

   

   

1,128

   

Net income (loss) allocated to common shares

$

14,035

   

   

$

(1,561

)

   

$

62,495

   

   

$

54,187

   

Weighted average common shares outstanding

   

75,233

   

   

   

74,327

   

   

   

75,221

   

   

   

74,315

   

Basic and diluted earnings (loss) per common share

$

0.19

   

   

$

(0.02

)

   

$

0.83

   

   

$

0.73

   

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

   

851

   

   

   

1,866

   

   

   

860

   

   

   

1,823

   

   

   

11.  Dividends

During the nine months ended September 30, 2013 and 2012, we paid regular cash dividends per common share of $0.26 and $0.24, respectively.  On November 6, 2013, our board of directors declared a cash dividend of $0.10 per common share, payable on December 3, 2013 to shareholders of record on November 18, 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 nine months ended September 30, 2013, we settled claims with certain landowners and paid $10.0 million and $1.3 million, respectively.      

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. This matter was more fully described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.  

On November 5, 2013, the court granted the Company’s motion to dismiss and the complaint was dismissed with prejudice.  If a motion for reconsideration or an appeal is made, the Company intends to vigorously defend the claims made in this lawsuit. The Company has determined that the likelihood of an adverse outcome is remote, and accordingly, no accrual has been made.  

 

 16 


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

   

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 September 30, 2013, we have spent $45.3 million to date and expect to incur an additional $2.1 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 have appealed 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 $0.3 million for the nine months ended September 30, 2013 and $8.8 million for the nine months ended September 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 September 30, 2013 and December 31, 2012, we have recorded $0.1 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.

   

 

 17 


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

   

13.  Subsequent Events

2013 Acquisition.   On October 17, 2013, W&T entered into a purchase and sale agreement to acquire certain oil and natural gas property interests from Callon Petroleum Operating Company (“Callon”), referred to herein as the “Callon Properties.”  Pursuant to the purchase and sale agreement, transactions covering the transfer of certain properties that had no preferential rights were consummated on November 5, 2013 (the “First Closing”).  The First Closing included the majority of the value of the Callon Properties.  A final close is expected to be consummated by the end of November 2013 for properties that have preferential rights which are not exercised.  The effective date of the transaction was July 1, 2013.  After customary effective date adjustments and closing adjustments, the cash consideration paid was $76.4 million, which is subject to further post-closing adjustments.  In addition, we assumed the related ARO, which is set forth in the table below.  The acquisition was funded from borrowings under our revolving bank credit facility and cash on hand. The First Closing of the Callon Properties consists of a 15% working interest in the Medusa field (deepwater Mississippi Canyon blocks 582 and 583), interest in associated production facilities and various interests in other non-operated fields. All of these properties are located in the Gulf of Mexico.    

The following table presents the preliminary purchase price allocation, including estimated adjustments, for the acquisition of the Callon Properties including in the First Closing (in thousands):

   

 

Oil and natural gas properties and equipment

$

79,136

   

Asset retirement obligations – current

   

(15

)

Asset retirement obligations – non-current

   

(2,713

)

Total cash paid

$

76,408

   

   

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 Callon Properties acquisition related to the First Closing.       

Revenues, Net Income and Pro Forma Financial Information — Unaudited

The Callon Properties were not included in our consolidated results for the quarter ended September 30, 2013 as the acquisition closing date was subsequent to such date.   There were no expenses associated with acquisition activities and transition activities related to the acquisition of the Callon Properties for the nine months ended September 30, 2013.   

The unaudited pro forma financial information was computed as if the acquisition of the Callon Properties had been completed on January 1, 2012.  The financial information was derived from W&T’s unaudited historical condensed consolidated financial statements and Callon Properties’ unaudited historical financial statement for the periods presented.

The pro forma adjustments were based on estimates by management and information believed to be directly related to the purchase of the Callon Properties.  The pro forma financial information is not necessarily indicative of the results of operations had the purchase occurred on January 1, 2012.  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 Callon; the realized sales prices for oil, NGLs and natural gas may have been different; and the costs of operating the Callon Properties may have been different.  The properties used in the pro forma financial information are from the First Closing and exclude properties with outstanding preferential rights by third parties.  

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

   

 

   

Three Months Ended
September 30,

   

   

Nine Months Ended
September 30,

   

   

   

2013

   

   

   

2012

   

   

   

2013

   

   

   

2012

   

Revenues

$

254,092

   

   

$

197,076

   

   

$

766,801

   

   

$

670,881

   

Net income

   

16,513

   

   

   

858

   

   

   

69,310

   

   

   

63,801

   

Basic and diluted earnings per common share

   

0.22

   

   

   

0.01

   

   

   

0.91

   

   

   

0.84

   

   

 

 18 


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

   

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 Callon Properties included in the First Closing (in thousands):

   

 

   

Three Months Ended
September 30,

   

   

Nine Months Ended
September 30,

   

   

   

2013

   

   

   

2012

   

   

   

2013

   

   

   

2012

   

Revenues (a)

$

9,537

   

   

$

11,130

   

   

$

27,641

   

   

$

33,536

   

Direct operating expenses (a)

   

1,459

   

   

   

1,614

   

   

   

4,915

   

   

   

4,628

   

Insurance costs (b)

   

510

   

   

   

510

   

   

   

1,531

   

   

   

1,214

   

DD&A (c)

   

3,615

   

   

   

4,822

   

   

   

10,735

   

   

   

13,095

   

Interest expense (d)

   

382

   

   

   

382

   

   

   

1,146

   

   

   

1,146

   

Capitalized interest (e)

   

4

   

   

   

219

   

   

   

(74

)

   

   

398

   

Income tax expense (f)

   

1,248