UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 10-Q/A

Amendment No. 1

þ

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

For the quarterly period ended June 30, 2015

OR

¨

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

For the transition period from _______________ to ________________

Commission File Number 1-32414

 

W&T OFFSHORE, INC.

(Exact name of registrant as specified in its charter)

 

 

Texas

72-1121985

(State of incorporation)

(IRS Employer

Identification Number)

 

 

Nine Greenway Plaza, Suite 300

Houston, Texas

77046-0908

(Address of principal executive offices)

(Zip Code)

(713) 626-8525

(Registrant’s telephone number, including area code)

 

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

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

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

 

Large accelerated filer

¨

Accelerated filer

þ

Non-accelerated filer

¨

Smaller reporting company

¨

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

As of August 3, 2015, there were 76,010,554 shares outstanding of the registrant’s common stock, par value $0.00001.

 

 

 


W&T OFFSHORE, INC. AND SUBSIDIARIES

EXPLANATORY NOTE FOR FORM 10Q/A

 

This Form 10-Q/A (Amendment No. 1) amends our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015 as filed with the Securities and Exchange Commission (the “SEC”) on August 6, 2015 and is being filed to amend and restate our Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and to amend related disclosures.  

In connection with the preparation of our Quarterly Report on Form 10-Q for the period ended September 30, 2015, we determined that we had been incorrectly presenting Net cash provided by operating activities and Net cash used in investing activities on the Condensed Consolidated Statements of Cash Flows by not properly adjusting amounts for non-cash activities related to investing activities.  This resulted in Net cash provided by operating activities being understated and Net cash used in investing activities being understated for the six month period ended June 30, 2015.  On November 4, 2015, the Audit Committee of our Board of Directors and management determined the incorrect presentation was material and, as a result, are filing this Form 10-Q/A.  We determined that the impact of the incorrect presentation was not material to periods prior to 2015.  

Our Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015 has been restated; resulting in an increase of approximately $50.8 million in Net cash provided operating activities and a corresponding increase in Net cash used in investing activities. In addition, adjustments were made to corresponding line items totaling $50.8 million for the entities presented in the Condensed Consolidating Statements of Cash Flows contained within the Supplemental Guarantor Information included in the notes to our condensed consolidated financial statements.  These adjustments did not have any effect on our Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Changes in Shareholders’ Equity (Deficit), Condensed Consolidating Balance Sheets or the Condensed Consolidating Statements of Operations, as of and for the three month and six month periods ended June 30, 2015.  The adjustments had no effect on our cash balances or liquidity.

Corresponding amounts derived from the restated Condensed Consolidating Statements of Cash Flows included within Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations have been revised to the restated amounts where applicable.  Part I, Item 4, Controls and Procedures, has been modified as a result of the restatements and related material weakness in internal controls over financial controls described therein.  New certifications of our principal executive office and principal financial officer are also filed as exhibits to this Form 10-Q/A.

In summary, this Form 10-Q/A contains modified or updated disclosures from the original Form 10-Q related only to (i) our Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and the Condensed Consolidating Statements of Cash Flows for such period included in the notes to our condensed consolidated financial statements, (ii) corresponding changes to items derived from such statements in Part I, Item 2, Management’s Discussions and Analysis of Financial Condition and Results of Operations and (ii) revised disclosures contained in Part 1, Item 4, Controls and Procedures.  Information relating to events occurring after August 6, 2015 is not contained in this report and this information is included in our subsequent filings, including our Quarterly Report on Form 10-Q for the period ended September 30, 2015 and Current Reports on Form 8-K.  Facts, events and forward looking statements have not been revised from the disclosures in the originally filed Form 10-Q, except as discussed above and presented in Part I, Item 1 Financial Statements – Note 1 – Basis of Presentation  – Restatement of Previously Filed Interim Financial Statements .

 


 

 

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, 2015 and December 31, 2014

1

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2015 and 2014

2

 

 

 

 

Condensed Consolidated Statement of Changes in Shareholders’ Equity (Deficit) for the Six Months Ended June 30, 2015

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014

4

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5

 

 

 

Item 2.

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

31

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

45

 

 

 

Item 4.

Controls and Procedures

46

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

47

 

 

 

Item 1A.

Risk Factors

47

 

 

 

Item 6.

Exhibits

47

 

 

SIGNATURE

48

 

 

EXHIBIT INDEX

49

 

 

 

 


PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

 

June 30,

 

 

December 31,

 

 

2015

 

 

2014

 

 

(Unaudited)

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

5,671

 

 

$

23,666

 

Receivables:

 

 

 

 

 

 

 

Oil and natural gas sales

 

51,957

 

 

 

67,242

 

Joint interest and other

 

32,608

 

 

 

43,645

 

Total receivables

 

84,565

 

 

 

110,887

 

Deferred income taxes

 

6,820

 

 

 

11,662

 

Prepaid expenses and other assets

 

27,290

 

 

 

36,347

 

Total current assets

 

124,346

 

 

 

182,562

 

Property and equipment - at cost:

 

 

 

 

 

 

 

Oil and natural gas properties and equipment (full cost method, of which $110,400 at

   June 30, 2015 and $109,824 at December 31, 2014 were excluded from

   amortization)

 

8,207,165

 

 

 

8,045,666

 

Furniture, fixtures and other

 

23,981

 

 

 

23,269

 

Total property and equipment

 

8,231,146

 

 

 

8,068,935

 

Less accumulated depreciation, depletion and amortization

 

6,306,119

 

 

 

5,575,078

 

Net property and equipment

 

1,925,027

 

 

 

2,493,857

 

Restricted deposits for asset retirement obligations

 

15,538

 

 

 

15,444

 

Other assets

 

20,066

 

 

 

17,244

 

Total assets

$

2,084,977

 

 

$

2,709,107

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

135,165

 

 

$

194,109

 

Undistributed oil and natural gas proceeds

 

29,693

 

 

 

37,009

 

Asset retirement obligations

 

41,494

 

 

 

36,003

 

Accrued liabilities

 

13,120

 

 

 

17,377

 

Total current liabilities

 

219,472

 

 

 

284,498

 

Long-term debt, less current maturities

 

1,468,870

 

 

 

1,360,057

 

Asset retirement obligations, less current portion

 

348,573

 

 

 

354,565

 

Deferred income taxes

 

34,290

 

 

 

186,988

 

Other liabilities

 

14,560

 

 

 

13,691

 

Commitments and contingencies

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.00001 par value; 20,000,000 shares authorized; 0 issued at

   June 30, 2015 and December 31, 2014

 

 

 

 

 

Common stock, $0.00001 par value; 118,330,000 shares authorized;

   78,879,727 issued and 76,010,554 outstanding at June 30, 2015;

   78,768,588 issued and 75,899,415 outstanding at December 31, 2014

 

1

 

 

 

1

 

Additional paid-in capital

 

420,028

 

 

 

414,580

 

Retained earnings (deficit)

 

(396,650

)

 

 

118,894

 

Treasury stock, at cost

 

(24,167

)

 

 

(24,167

)

Total shareholders’ equity (deficit)

 

(788

)

 

 

509,308

 

Total liabilities and shareholders’ equity

$

2,084,977

 

 

$

2,709,107

 

 

See Notes to Condensed Consolidated Financial Statements.

1


W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

(In thousands except per share data)

 

 

(Unaudited)

 

Revenues

$

149,066

 

 

$

262,994

 

 

$

276,973

 

 

$

517,510

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease operating expenses

 

45,130

 

 

 

61,765

 

 

 

98,461

 

 

 

117,384

 

Production taxes

 

1,000

 

 

 

1,842

 

 

 

1,637

 

 

 

3,834

 

Gathering and transportation

 

4,793

 

 

 

3,985

 

 

 

9,617

 

 

 

9,281

 

Depreciation, depletion, amortization and accretion

 

103,342

 

 

 

128,236

 

 

 

228,809

 

 

 

251,542

 

Ceiling test write-down of oil and natural gas properties

 

252,772

 

 

 

 

 

 

513,162

 

 

 

 

General and administrative expenses

 

19,757

 

 

 

19,682

 

 

 

40,523

 

 

 

43,270

 

Derivative loss

 

1,078

 

 

 

13,079

 

 

 

1,078

 

 

 

20,571

 

Total costs and expenses

 

427,872

 

 

 

228,589

 

 

 

893,287

 

 

 

445,882

 

Operating income (loss)

 

(278,806

)

 

 

34,405

 

 

 

(616,314

)

 

 

71,628

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Incurred

 

26,116

 

 

 

21,454

 

 

 

49,062

 

 

 

42,912

 

Capitalized

 

(2,024

)

 

 

(2,159

)

 

 

(3,807

)

 

 

(4,231

)

Debt issuance costs write-off and other, net

 

1,685

 

 

 

 

 

 

1,683

 

 

 

 

Income (loss) before income tax expense (benefit)

 

(304,583

)

 

 

15,110

 

 

 

(663,252

)

 

 

32,947

 

Income tax expense (benefit)

 

(44,134

)

 

 

5,273

 

 

 

(147,708

)

 

 

11,921

 

Net income (loss)

$

(260,449

)

 

$

9,837

 

 

$

(515,544

)

 

$

21,026

 

 

Basic and diluted earnings (loss) per common share

$

(3.43

)

 

$

0.13

 

 

$

(6.79

)

 

$

0.28

 

Dividends declared per common share

$

 

 

$

0.10

 

 

$

 

 

$

0.20

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

2


 

W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

Outstanding

 

 

Additional

Paid-In

 

 

Retained

Earnings

 

 

Treasury Stock

 

 

Total

Shareholders’

Equity

 

 

Shares

 

 

Value

 

 

Capital

 

 

(Deficit)

 

 

Shares

 

 

Value

 

 

(Deficit)

 

 

(In thousands)

 

 

(Unaudited)

 

Balances at December 31, 2014

 

75,899

 

 

$

1

 

 

$

414,580

 

 

$

118,894

 

 

 

2,869

 

 

$

(24,167

)

 

$

509,308

 

Share-based compensation

 

 

 

 

 

 

 

5,708

 

 

 

 

 

 

 

 

 

 

 

 

5,708

 

Other

 

112

 

 

 

 

 

 

(260

)

 

 

 

 

 

 

 

 

 

 

 

(260

)

Net loss

 

 

 

 

 

 

 

 

 

 

(515,544

)

 

 

 

 

 

 

 

 

(515,544

)

Balances at June 30, 2015

 

76,011

 

 

$

1

 

 

$

420,028

 

 

$

(396,650

)

 

 

2,869

 

 

$

(24,167

)

 

$

(788

)

 

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,

 

 

2015

 

 

2014

 

 

Restated

 

 

 

 

 

 

(In thousands)

 

 

(Unaudited)

 

Operating activities:

 

 

 

 

 

 

 

Net income (loss)

$

(515,544

)

 

$

21,026

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation, depletion, amortization and accretion

 

228,809

 

 

 

251,542

 

Ceiling test write-down of oil and gas properties

 

513,162

 

 

 

 

Debt issuance costs write-off/amortization of debt items

 

2,432

 

 

 

366

 

Share-based compensation

 

5,708

 

 

 

7,644

 

Derivative loss

 

1,078

 

 

 

20,571

 

Cash payments on derivative settlements

 

 

 

 

(14,310

)

Deferred income taxes

 

(147,708

)

 

 

11,921

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Oil and natural gas receivables

 

15,285

 

 

 

2,335

 

Joint interest and other receivables

 

11,036

 

 

 

3,550

 

Income taxes

 

(325

)

 

 

2,918

 

Prepaid expenses and other assets

 

8,929

 

 

 

4,439

 

Asset retirement obligation settlements

 

(21,939

)

 

 

(30,338

)

Accounts payable, accrued liabilities and other

 

(20,013

)

 

 

(7,204

)

Net cash provided by operating activities

 

80,910

 

 

 

274,460

 

Investing activities:

 

 

 

 

 

 

 

Acquisition of property interest in oil and natural gas properties

 

 

 

 

(53,363

)

Investment in oil and natural gas properties and equipment

 

(150,994

)

 

 

(212,680

)

Changes in operating assets and liabilities associated with investing activities

 

(50,849

)

 

 

(3,410

)

Purchases of furniture, fixtures and other

 

(709

)

 

 

(1,715

)

Net cash used in investing activities

 

(202,552

)

 

 

(271,168

)

Financing activities:

 

 

 

 

 

 

 

Borrowings of long-term debt - revolving bank credit facility

 

194,000

 

 

 

220,000

 

Repayments of long-term debt - revolving bank credit facility

 

(381,000

)

 

 

(200,000

)

Issuance of 9.00% Term Loan

 

297,000

 

 

 

 

Debt issuance costs

 

(6,407

)

 

 

 

Dividends to shareholders

 

 

 

 

(15,129

)

Other

 

54

 

 

 

(116

)

Net cash provided by financing activities

 

103,647

 

 

 

4,755

 

Increase (decrease) in cash and cash equivalents

 

(17,995

)

 

 

8,047

 

Cash and cash equivalents, beginning of period

 

23,666

 

 

 

15,800

 

Cash and cash equivalents, end of period

$

5,671

 

 

$

23,847

 

 

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. (with subsidiaries referred to herein as “W&T,” “we,” “us,” “our,” 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.  Our interest in fields, leases, structures and equipment are primarily owned by W&T Offshore, Inc. (on a stand-alone basis, the “Parent Company”) and its 100%-owned subsidiary, W & T Energy VI, LLC (“Energy VI”).

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, 2014.

Restatement of Previously Filed Interim Financial Statements.  The Condensed Consolidated Statements of Cash Flows in the accompanying unaudited condensed consolidated financial statements and the Condensed Consolidating Statements of Cash Flows contained within Note 12 Supplemental Guarantor Information have been restated.  In connection with the preparation of the financial statements for our Quarterly Report on Form 10-Q for the period ended September 30, 2015, we determined that we had been incorrectly presenting Net cash provided by operating activities and Net cash used in investing activities on the Condensed Consolidated Statements of Cash Flows by not properly adjusting amounts for non-cash activity related to investing activities.  This resulted in Net cash provided by operating activities being understated and Net cash used in investing activities being understated for the three month period ended March 31, 2015 and the six month period ended June 30, 2015.  In addition, the Condensed Consolidating Statements of Cash Flows contained within Note 12 Supplemental Guarantor Information had the same items understated for the same periods.  As a result, we are also filing contemporaneously a Form 10-Q/A amending our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015.  

The restatements did not have any effect on our Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Changes in Shareholders’ Equity (Deficit), or the Condensed Consolidating Balance Sheets and Condensed Consolidating Statements of Operations contained within the Supplemental Guarantor Information included herein.  The adjustments had no effect on our cash balances or liquidity.

The following table reflects the affected line items of the Condensed Consolidated Statements of Cash Flows and the adjustments to restated amounts.  Net cash provided by financing activities; decrease in cash and cash equivalents; and cash and cash equivalents are also included to clarify that no restatement adjustments were made to those line items.  The adjustments are as follows (in thousands):

 

 

Six Months Ended June 30, 2015

 

 

As Previously Reported

 

 

Adjustment

 

 

As Restated

 

Condensed Consolidated Cash Flows (W&T including subsidiaries):

 

 

 

 

 

 

 

 

 

 

 

Accounts payable, accrued liabilities and other

 

(70,862

)

 

 

50,849

 

 

 

(20,013

)

Net cash provided by operating activities

 

30,061

 

 

 

50,849

 

 

 

80,910

 

Changes in operating assets and liabilities associated with investing activities

 

 

 

 

(50,849

)

 

 

(50,849

)

Net cash used in investing activities

 

(151,703

)

 

 

(50,849

)

 

 

(202,552

)

Net cash provided by financing activities

 

103,647

 

 

 

 

 

 

103,647

 

Decrease in cash and cash equivalents

 

(17,995

)

 

 

 

 

 

(17,995

)

Cash and cash equivalents, end of period

 

5,671

 

 

 

 

 

 

5,671

 

 

5


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

 

The following tables reflect the affected line items of the Condensed Consolidating Statements of Cash Flows contained within Note 12 Supplemental Guarantor Information, and the adjustments to restated amounts.  Net cash provided by financing activities; decrease in cash and cash equivalents; and cash and cash equivalents are also included to clarify that no restatement adjustments were made to those line items.  The adjustments are as follows (in thousands):

 

 

Six Months Ended June 30, 2015

 

 

As Previously Reported

 

 

Adjustment

 

 

As Restated

 

Condensed Consolidating Cash Flows (Parent Company):

 

 

 

 

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

(8,913

)

 

 

(22,178

)

 

 

(31,091

)

Accounts payable, accrued liabilities  and other

 

(125,219

)

 

 

50,849

 

 

 

(74,370

)

Net cash used in operating activities

 

(94,175

)

 

 

28,671

 

 

 

(65,504

)

Changes in operating assets and liabilities associated with investing activities

 

-

 

 

 

(28,671

)

 

 

(28,671

)

Net cash used in investing activities

 

(27,467

)

 

 

(28,671

)

 

 

(56,138

)

Net cash provided by financing activities

 

103,647

 

 

 

 

 

 

103,647

 

Decrease in cash and cash equivalents

 

(17,995

)

 

 

 

 

 

(17,995

)

Cash and cash equivalents, end of period

 

5,671

 

 

 

-

 

 

 

5,671

 

 

 

Six Months Ended June 30, 2015

 

 

As Previously Reported

 

 

Adjustment

 

 

As Restated

 

Condensed Consolidating Cash Flows (Energy VI):

 

 

 

 

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

72,712

 

 

 

22,178

 

 

 

94,890

 

Net cash provided by operating activities

 

124,236

 

 

 

22,178

 

 

 

146,414

 

Changes in operating assets and liabilities associated with investing activities

 

 

 

 

(22,178

)

 

 

(22,178

)

Net cash used in investing activities

 

(125,681

)

 

 

(22,178

)

 

 

(147,859

)

Net cash provided by financing activities

 

1,445

 

 

 

 

 

 

1,445

 

Decrease in cash and cash equivalents

 

-

 

 

 

 

 

 

-

 

Cash and cash equivalents, end of period

 

-

 

 

 

 

 

 

-

 

 

Immaterial Error Corrections.  We made adjustments to the prior period’s financial statements to correct immaterial errors in the Condensed Consolidated Statements of Cash Flows.  In the Condensed Consolidated Statements of Cash Flows, Net cash provided by operating activities was increased by $3.4 million and Net cash used in investing activities was increased by $3.4 million for the six months ended June 30, 2014 to account for the non-cash activities related to investing activities.

Transactions between Entities under Common Control.  The prior period financial information for the three and six months ended June 30, 2014 presented in Note 12, Supplemental Guarantor Information, has been retrospectively adjusted due to transactions between entities under common control, as required under authoritative guidance.

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.

6


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

 

Ceiling Test Write-Down.  Under the full cost method of accounting, we are required to periodically perform a “ceiling test,” which determines a limit on the book value of our oil and natural gas properties.  If the net capitalized cost of oil and natural gas properties (including capitalized asset retirement obligations (“ARO”)) net of related deferred income taxes exceeds the ceiling test limit, the excess is charged to expense on a pre-tax basis and separately disclosed.  Any such write downs are not recoverable or reversible in future periods.  The ceiling test limit is calculated as: (i) the present value of estimated future net revenues from proved reserves, less estimated future development costs, discounted at 10%; (ii) plus the cost of unproved oil and natural gas properties not being amortized; (iii) plus the lower of cost or estimated fair value of unproved oil and natural gas properties included in the amortization base; and (iv) less related income tax effects.  Estimated future net revenues used in the ceiling test for each period are based on current prices, defined by the SEC as the unweighted average of first-day-of-the-month commodity prices over the prior twelve months for that period. All prices are adjusted by field for quality, transportation fees, energy content and regional price differentials.

Due primarily to declines in the unweighted rolling 12-month average of first-day-of-the-month commodity prices for oil and natural gas for the first and second quarters of 2015, we recorded ceiling test write-downs which are reported as a separate line in the Condensed Consolidated Statements of Operations.  We did not have a ceiling test write-down during 2014.  In light of the significantly lower oil and natural gas prices experienced in late 2014 and in the current year, we expect to have an additional significant ceiling test write-down during the third quarter of 2015 and, assuming such prices do not increase dramatically in the last three months of this year, it is possible we could incur a further write-down in the fourth quarter of 2015 as well.

Recent Events.  The price we receive for our oil, natural gas liquids (“NGLs”) and natural gas production directly affects our revenues, profitability, cash flows, liquidity, access to capital and future rate of growth.  The prices of these commodities began falling in the second half of 2014 and were significantly lower during the first half of 2015 compared to the last few years.  

We have taken several steps to mitigate the effects of these lower prices including: (i) significantly reducing the 2015 capital budget from the previous year; (ii) suspending our drilling and completion activities at several locations; (iii) suspending the regular quarterly common stock dividend and (iv) implementing numerous cost reduction projects to reduce our operating costs.  

During the second quarter of 2015, we entered into two Amendments to our Fifth Amended and Restated Credit Agreement (as amended, the “Credit Agreement”), which, among other things, revised certain financial covenants to be less restrictive, modified the borrowing base adjustment for additional debt and authorized the administrative agent under the Credit Agreement to enter into an Intercreditor Agreement among the Company, the lenders under the Credit Agreement and the lenders under the second lien term loan (the “9.00% Term Loan”).  The borrowing base of the revolving bank credit facility under the Credit Agreement is currently set at $500.0 million.  The 9.00% Term Loan was entered into in the second quarter of 2015, with a principal amount of $300.0 million and matures on May 15, 2020.  See Note 5 for additional information on our debt.  

We have assessed our financial condition, the current capital markets and options given different scenarios of commodity prices and believe we will have adequate liquidity to fund our operations through June 30, 2016.  However, we cannot predict how an extended period of commodity prices at existing levels or a significant reduction in our borrowing base will affect our operations and liquidity levels.

 


7


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

 

Recent Accounting Developments.  In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2015-03 (“ASU 2015-03”), Interest – Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs.  The guidance seeks to simplify the presentation of debt issuance costs.  The amendment would require debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of liability, consistent with debt discounts or premiums.  The guidance was further clarified to state that debt issuance costs related to credit facilities could be reported as an asset regardless of the balance outstanding.  The recognition and measurement guidance for debt issuance costs would not be affected by the amendment.  ASU 2015-03 is effective in 2016 and should be applied on a retrospective basis.  Early adoption is permitted.  We do not expect the revised guidance to materially affect our balance sheets as amounts will be reclassified from long-term assets to partial offsets of long-term debt.  The revised guidance will not affect the statements of operations or the statements of cash flows.  

In August 2014, the FASB issued Accounting Standards Update No. 2014-15 (“ASU 2014-15”), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40).  The guidance addresses management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures.  ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter.  We do not expect the revised guidance to materially affect our evaluation as to being a going concern, or have an effect on our financial statements or related disclosures.  

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (“ASU 2014-09”), Summary and Amendments that Create Revenue from Contracts and Customers (Topic 606).  ASU 2014-09 amends and replaces current revenue recognition requirements, including most industry-specific guidance.  The revised guidance establishes a five step approach to be utilized in determining when, and if, revenue should be recognized.  ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2017.  Upon application, an entity may elect one of two methods, either restatement of prior periods presented or recording a cumulative adjustment in the initial period of application.  We have not determined the effect ASU 2014-09 will have on the recognition of our revenue, if any, nor have we determined the method we will utilize upon adoption, which would be in the first quarter of 2018.

    


8


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

 

    

2.  Acquisitions and Divestitures

2014 Acquisitions

Fairway  

On September 15, 2014, the Parent Company entered into an asset purchase agreement with a third party to increase its ownership interest from 64.3% to 100% in the Mobile Bay blocks 113 and 132 (the “Fairway Field”) and the associated Yellowhammer gas processing plant (collectively, “Fairway”).  The Fairway Field is located in the state waters of Alabama and the Yellowhammer gas processing plant is located in the state of Alabama.  The effective date of the transaction was July 1, 2014.  The transaction included customary adjustments for the effective date, certain closing adjustments and our assumption of the related ARO.  A net purchase price increase of $1.3 million for customary final closing adjustments was recorded in 2015.  The acquisition was funded from borrowings under our revolving bank credit facility and cash on hand.

The following table presents the purchase price allocation, including adjustments, for the increased ownership interest in Fairway (in thousands):  

Cash consideration:

 

 

 

Evaluated properties including equipment

$

18,693

 

Non-cash consideration:

 

 

 

Asset retirement obligations - non-current

 

6,124

 

Total consideration

$

24,817

 

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 in connection with this acquisition of an additional working interest in Fairway.

Woodside Properties  

On May 20, 2014, Energy VI entered into a purchase and sale agreement to acquire certain oil and natural gas property interests from Woodside Energy (USA) Inc. (“Woodside”).  The properties acquired from Woodside (the “Woodside Properties”) consisted of a 20% non-operated working interest in the producing Neptune field (deepwater Atwater Valley blocks 574, 575 and 618), along with an interest in the Neptune tension-leg platform, associated production facilities and various interests in 24 other deepwater lease blocks.  All of the Woodside Properties are located in the Gulf of Mexico.  The effective date of the transaction was November 1, 2013.  The transaction included customary adjustments for the effective date, certain closing adjustments and our assumption of the related ARO.  A net purchase price increase of $0.2 million for customary final closing adjustments was recorded in 2015.  The acquisition was funded from borrowings under our revolving bank credit facility and cash on hand.

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

 

Cash consideration:

 

 

 

Evaluated properties including equipment

$

52,329

 

Unevaluated properties

 

2,660

 

Sub-total cash consideration

 

54,989

 

Non-cash consideration:

 

 

 

Asset retirement obligations - current

 

782

 

Asset retirement obligations - non-current

 

10,543

 

Sub-total non-cash consideration

 

11,325

 

Total consideration

$

66,314

 

 

9


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

 

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 in connection with the Woodside Properties acquisition.

2014 Acquisitions — Revenues, Net Income and Pro Forma Financial Information  

The increase in working interest ownership for Fairway was not included in our consolidated results until the property transfer date, which occurred in September 2014 and the incremental revenue and operating expenses were immaterial for the three and six month periods ended June 30, 2015.  Unaudited pro forma information showing the effect of the acquisition of an additional Fairway working interest is not presented as the pro forma information is not materially different from the reported results presented for the three and six month periods ended June 30, 2014.  

The Woodside Properties were not included in our consolidated results until the property transfer date, which occurred in May 2014.  For the three months ended June 30, 2015, the Woodside Properties accounted for $7.9 million of revenues, $1.8 million of direct operating expenses, $3.9 million of depreciation, depletion, amortization and accretion (“DD&A”) and $0.8 million of income tax expense, resulting in $1.4 million of net income.  For the six months ended June 30, 2015, the Woodside Properties accounted for $13.4 million of revenues, $5.1 million of direct operating expenses, $8.0 million of DD&A and $0.1 million of income tax expense, resulting in $0.2 million of net income.  The net income attributable to the Woodside Properties does not reflect certain expenses, such as general and administrative expenses (“G&A”) 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 Woodside Properties are not recorded in a separate entity for tax purposes; therefore, income tax was estimated using the federal statutory tax rate.    

In accordance with the applicable accounting guidance, we have included herein certain unaudited pro forma financial information giving pro forma effect to the acquisition of the Woodside Properties computed as if the acquisition had been completed on January 1, 2013.  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 interim periods, and the Woodside Properties’ unaudited historical financial statements for the annual and interim periods.

The pro forma adjustments were based on estimates by management and information believed to be directly related to the purchase of the Woodside Properties.  The pro forma financial information is not necessarily indicative of the results of operations had the purchase occurred on January 1, 2013.  Had we owned the Woodside Properties during the periods indicated, the results may have been substantially different.  For example, we may have operated the assets differently than Woodside; the realized sales prices for oil, NGLs and natural gas may have been different; and the costs of operating the Woodside Properties may have been different.

The following table presents a summary of our pro forma financial information giving pro forma effect to the Woodside Properties acquisition (in thousands, except earnings per share):

 

 

 

(unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2014

 

 

June 30, 2014

 

Revenue

 

$

272,022

 

 

$

540,397

 

Net income

 

 

12,150

 

 

 

27,120

 

Basic and diluted earnings per common share

 

 

0.16

 

 

 

0.35

 

 

For the pro forma financial information, certain information was derived from our financial records, Woodside’s financial records and certain information was estimated.  

10


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 Woodside Properties (in thousands):

 

 

 

(unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2014 (a)

 

 

June 30, 2014 (a)

 

Revenues (b)

 

$

9,028

 

 

$

22,887

 

Direct operating expenses (b)

 

 

1,805

 

 

 

4,417

 

DD&A (c)

 

 

3,387

 

 

 

8,384

 

G&A (d)

 

 

200

 

 

 

400

 

Interest expense (e)

 

 

82

 

 

 

330

 

Capitalized interest (f)

 

 

(5

)

 

 

(19

)

Income tax expense (g)

 

 

1,246

 

 

 

3,281

 

 

The sources of information and significant assumptions are described below:

 

(a)

The adjustments for the periods presented are from the beginning of the period to May 20, 2014.  

 

(b)

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

 

(c)

DD&A was estimated using the full-cost method and determined as the incremental DD&A expense due to adding the Woodside Properties’ costs, reserves and production into our full cost pool in order to compute such amounts.  The purchase price allocated to unevaluated properties for oil and natural gas interests was excluded from the DD&A expense estimation.  ARO was estimated by W&T management.

 

(d)

Consists of estimated incremental insurance costs related to the Woodside Properties.

 

(e)

The Woodside Properties acquisition was assumed to be funded entirely with borrowed funds.  Interest expense was computed using assumed borrowings of $55.0 million, which equates to the cash component of the acquisition purchase price, and an interest rate of 1.8%, which equates to the rates applied to incremental borrowings on the revolving bank credit facility.

 

(f)

The change to capitalized interest was computed for the addition to the pool of unevaluated properties and the capitalization interest rate was adjusted for the assumed borrowings.  The negative amount represents a decrease to net expenses.

 

(g)

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

The pro forma adjustments do not include adjustments related to any other acquisitions or divestitures.

 

11


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

 

 

3.  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, 2014

$

390,568

 

Liabilities settled

 

(21,939

)

Accretion of discount

 

10,930

 

Disposition of properties

 

(965

)

Liabilities assumed through acquisition

 

2,944

 

Liabilities incurred

 

4,671

 

Revisions of estimated liabilities (1)

 

3,858

 

Balance, June 30, 2015

 

390,067

 

Less current portion

 

41,494

 

Long-term

$

348,573

 

 

 

(1) Revisions were primarily attributable to increases from non-operated properties.

 

 

4.  Derivative Financial Instruments

Our market risk exposure relates primarily to commodity prices and from time to time, we use various derivative instruments to manage our exposure to this commodity price risk from sales of our oil and natural gas.  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.

We have elected not to designate our commodity derivative contracts as hedging instruments; therefore, all changes in the fair value of derivative contracts were recognized currently in earnings during the periods presented.  The cash flows of all of our commodity derivative contracts are included in Net cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows.

For information about fair value measurements, refer to Note 6.

Commodity Derivatives

During the second quarter of 2015, we entered into crude oil derivative contracts and natural gas derivative contracts for a portion of our anticipated future production.  Some of the commodity derivative contracts are known as “three-way collars” consisting of a purchased put option, a sold call option and a purchased call option, each at varying strike prices.  The strike prices of the contracts were set so that the contracts were premium neutral (“costless”), which means no net premium was paid to or received from a counterparty.  The three-way collar contracts are structured to provide price risk protection if the commodity price falls below the strike price of the put option and provides us the opportunity to benefit if the commodity price rises above the strike price of the purchased call option.  These contracts may have the effect of reducing some of our incremental income from favorable price movements if the commodity price is above certain levels, but have unlimited upside potential if prices rise above those levels.  In addition, we entered into oil derivative contracts known as “two-way”, “costless” collars, which consist of a purchased put option and a sold call option.  These two-way collars provide price risk protection if crude oil prices fall below certain levels, but may limit incremental income from favorable price movements above certain limits.  The oil contracts are based on West Texas Intermediate (“WTI”) crude oil prices as quoted off the New York Mercantile Exchange, known as NYMEX.  The natural gas contracts are based on Henry Hub natural gas prices as quoted off the NYMEX.  


12


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

 

As of December 31, 2014, we did not have any open derivative contracts.  During 2014, we used crude oil swap contracts and have used various derivative instruments in prior years to manage our exposure to commodity price risk from sales of our oil and natural gas.  While these contracts were intended to reduce the effects of price volatility, they may have limited incremental income from favorable price movements.

As of June 30, 2015, our open commodity derivative contracts were as follows:

 

Crude Oil:  Three-way collars, Priced off WTI (NYMEX)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional

 

 

Notional

 

 

Weighted Average Contract Price

 

 

 

 

Quantity

 

 

Quantity

 

 

Put Option

 

 

Call Option

 

 

Call Option

 

Termination Period

 

(Bbls/day)

 

 

(Bbls)

 

 

(Bought)

 

 

(Sold)

 

 

(Bought)

 

2015:

3rd Quarter

 

 

6,000

 

 

 

552,000

 

 

$

50.00

 

 

$

60.00

 

 

$

62.30

 

 

4th Quarter

 

 

6,000

 

 

 

552,000

 

 

 

50.00

 

 

 

60.00

 

 

 

62.30

 

 

 

 

 

 

 

 

 

1,104,000

 

 

 

50.00

 

 

 

60.00

 

 

 

62.30

 

 

Crude Oil:  Two-way collars, Priced off WTI (NYMEX)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional

 

 

Notional

 

 

Weighted Average Contract Price

 

 

 

 

Quantity

 

 

Quantity

 

 

Put Option

 

 

Call Option

 

Termination Period

 

(Bbls/day)

 

 

(Bbls)

 

 

(Bought)

 

 

(Sold)

 

2016:

1st Quarter

 

 

5,000

 

 

 

455,000

 

 

$

40.00

 

 

$

81.47

 

 

2nd Quarter

 

 

5,000

 

 

 

455,000

 

 

 

40.00

 

 

 

81.47

 

 

3rd Quarter

 

 

5,000

 

 

 

460,000

 

 

 

40.00

 

 

 

81.47

 

 

4th Quarter

 

 

5,000

 

 

 

460,000

 

 

 

40.00

 

 

 

81.47

 

 

 

 

 

 

 

 

 

1,830,000

 

 

 

40.00

 

 

 

81.47

 

 

Natural Gas:  Three-way collars, Priced off Henry Hub (NYMEX) (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional

 

 

Notional

 

 

Weighted Average Contract Price

 

 

 

 

Quantity

 

 

Quantity

 

 

Put Option

 

 

Call Option

 

 

Call Option

 

Termination Period

 

(MMBTUs/day)

 

 

(MMBTUs)

 

 

(Bought)

 

 

(Sold)

 

 

(Bought)

 

2015:

3rd Quarter

 

 

30,000

 

 

 

1,830,000

 

 

$

2.25

 

 

$

3.25

 

 

$

3.51

 

 

4th Quarter

 

 

30,000

 

 

 

2,760,000

 

 

 

2.25

 

 

 

3.25

 

 

 

3.51

 

2016:

1st Quarter

 

 

40,000

 

 

 

3,640,000

 

 

 

2.25

 

 

 

3.50

 

 

 

3.77

 

 

2nd Quarter

 

 

40,000

 

 

 

3,640,000

 

 

 

2.25

 

 

 

3.50

 

 

 

3.77

 

 

3rd Quarter

 

 

40,000

 

 

 

3,680,000

 

 

 

2.25

 

 

 

3.50

 

 

 

3.77

 

 

4th Quarter

 

 

40,000

 

 

 

3,680,000

 

 

 

2.25

 

 

 

3.50

 

 

 

3.77

 

 

 

 

 

 

 

 

 

19,230,000

 

 

 

2.25

 

 

 

3.44

 

 

 

3.70

 

 

(1)

The natural gas derivative contracts are priced and closed in the last week prior to the related production month.  Natural gas derivative contracts related to July 2015 production were priced and closed in June 2015 and are not included in the above table as these were not open derivative contracts as of June 30, 2015.


13


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

 

 

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

 

June 30,

 

 

December 31,

 

 

2015

 

 

2014

 

Accrued liabilities

$

535

 

 

$

 

Other liabilities (noncurrent)

 

544

 

 

 

 

Changes in the fair value of our commodity derivative contracts were as follows (in thousands):

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Derivative loss

$

1,078

 

 

$

13,079

 

 

$

1,078