UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 10-Q

 

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

For the quarterly period ended September 30, 2018

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      No    

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes      No  

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

Large accelerated filer            

 

Accelerated filer

Non-accelerated filer              

 

Smaller reporting company

 

 

 

Emerging growth company

 

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

As of October 31, 2018, there were 139,153,798 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, 2018 and December 31, 2017

1

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017

2

 

Condensed Consolidated Statement of Changes in Shareholders’ Deficit for the Nine Months Ended September 30, 2018

3

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017

4

 

Notes to Condensed Consolidated Financial Statements

5

Item 2.

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

36

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

50

Item 4.

Controls and Procedures

51

 

 

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

51

Item 1A.

Risk Factors

51

Item 6.

Exhibits

53

 

 

SIGNATURE

55

 

 

 

 

 

 


 

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

September 30,

 

 

December 31,

 

 

2018

 

 

2017

 

Assets

(Unaudited)

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

339,063

 

 

$

99,058

 

Receivables:

 

 

 

 

 

 

 

Oil and natural gas sales

 

49,482

 

 

 

45,443

 

Joint interest

 

16,493

 

 

 

19,754

 

Income taxes

 

65,240

 

 

 

13,006

 

Total receivables

 

131,215

 

 

 

78,203

 

Prepaid expenses and other assets (Note 1)

 

19,699

 

 

 

13,419

 

Total current assets

 

489,977

 

 

 

190,680

 

 

 

 

 

 

 

 

 

Oil and natural gas properties and other, net - at cost: (Note 1)

 

522,781

 

 

 

579,016

 

Restricted deposits for asset retirement obligations

 

20,577

 

 

 

25,394

 

Income taxes receivable

 

 

 

 

52,097

 

Other assets (Note 1)

 

69,014

 

 

 

60,393

 

Total assets

$

1,102,349

 

 

$

907,580

 

Liabilities and Shareholders’ Deficit

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

95,502

 

 

$

79,667

 

Undistributed oil and natural gas proceeds

 

34,225

 

 

 

20,129

 

Advances from joint interest partners

 

31,012

 

 

 

3,998

 

Asset retirement obligations

 

30,207

 

 

 

23,613

 

Current maturities of long-term debt: (Note 2)

 

 

 

 

 

 

 

Principal

 

189,829

 

 

 

 

Carrying value adjustments

 

34,985

 

 

 

22,925

 

Current maturities of long-term debt  - carrying value

 

224,814

 

 

 

22,925

 

Accrued liabilities (Note 1)

 

31,058

 

 

 

17,930

 

Total current liabilities

 

446,818

 

 

 

168,262

 

Long-term debt: (Note 2)

 

 

 

 

 

 

 

Principal

 

713,365

 

 

 

889,790

 

Carrying value adjustments

 

45,758

 

 

 

79,337

 

Long term debt, less current portion - carrying value

 

759,123

 

 

 

969,127

 

 

 

 

 

 

 

 

 

Asset retirement obligations, less current portion

 

283,009

 

 

 

276,833

 

Other liabilities (Note 1)

 

73,175

 

 

 

66,866

 

Commitments and contingencies (Note 11)

 

 

 

 

 

Shareholders’ deficit:

 

 

 

 

 

 

 

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

   September 30, 2018 and December 31, 2017

 

 

 

 

 

Common stock, $0.00001 par value; 200,000,000 shares authorized;

   142,022,971 issued and 139,153,798 outstanding at September 30, 2018 and

   141,960,462 issued and 139,091,289 outstanding December 31, 2017

 

1

 

 

 

1

 

Additional paid-in capital

 

549,569

 

 

 

545,820

 

Retained earnings (deficit)

 

(985,179

)

 

 

(1,095,162

)

Treasury stock, at cost; 2,869,173 shares for both dates presented

 

(24,167

)

 

 

(24,167

)

Total shareholders’ deficit

 

(459,776

)

 

 

(573,508

)

Total liabilities and shareholders’ deficit

$

1,102,349

 

 

$

907,580

 

 

See Notes to Condensed Consolidated Financial Statements.

1


 

W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

(In thousands except per share data)

 

 

(Unaudited)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil

$

119,482

 

 

$

78,055

 

 

$

333,406

 

 

$

248,648

 

NGLs

 

10,087

 

 

 

6,605

 

 

 

28,481

 

 

 

22,401

 

Natural gas

 

22,641

 

 

 

24,113

 

 

 

71,485

 

 

 

83,129

 

Other

 

1,249

 

 

 

1,508

 

 

 

3,912

 

 

 

3,819

 

Total revenues

 

153,459

 

 

 

110,281

 

 

 

437,284

 

 

 

357,997

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease operating expenses

 

37,430

 

 

 

35,134

 

 

 

109,855

 

 

 

106,817

 

Production taxes

 

432

 

 

 

340

 

 

 

1,326

 

 

 

1,304

 

Gathering and transportation

 

5,779

 

 

 

4,108

 

 

 

15,764

 

 

 

15,635

 

Depreciation, depletion, amortization and accretion

 

36,969

 

 

 

36,489

 

 

 

114,807

 

 

 

116,843

 

General and administrative expenses

 

15,990

 

 

 

15,631

 

 

 

45,248

 

 

 

45,379

 

Derivative (gain) loss

 

(288

)

 

 

2,879

 

 

 

5,931

 

 

 

(4,765

)

Total costs and expenses

 

96,312

 

 

 

94,581

 

 

 

292,931

 

 

 

281,213

 

Operating income

 

57,147

 

 

 

15,700

 

 

 

144,353

 

 

 

76,784

 

Interest expense

 

11,630

 

 

 

11,554

 

 

 

35,100

 

 

 

34,284

 

Gain on exchange of debt

 

 

 

 

 

 

 

 

 

 

7,811

 

Other (income) expense, net

 

(885

)

 

 

(41

)

 

 

(1,093

)

 

 

5,073

 

Income before income tax expense (benefit)

 

46,402

 

 

 

4,187

 

 

 

110,346

 

 

 

45,238

 

Income tax expense (benefit)

 

142

 

 

 

5,484

 

 

 

363

 

 

 

(11,079

)

Net income (loss)

$

46,260

 

 

$

(1,297

)

 

$

109,983

 

 

$

56,317

 

 

Basic and diluted earnings (loss) per common share

$

0.32

 

 

$

(0.01

)

 

$

0.76

 

 

$

0.39

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

2


 

W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

Outstanding

 

 

Additional

Paid-In

 

 

Retained

Earnings

 

 

Treasury Stock

 

 

Total

Shareholders’

 

 

Shares

 

 

Value

 

 

Capital

 

 

(Deficit)

 

 

Shares

 

 

Value

 

 

Deficit

 

 

(In thousands)

 

 

(Unaudited)

 

Balances at December 31, 2017

 

139,091

 

 

$

1

 

 

$

545,820

 

 

$

(1,095,162

)

 

 

2,869

 

 

$

(24,167

)

 

$

(573,508

)

Share-based compensation

 

 

 

 

 

 

 

3,808

 

 

 

 

 

 

 

 

 

 

 

 

3,808

 

Stock Issued

 

63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RSUs surrendered

  for payroll taxes

 

 

 

 

 

 

 

(59

)

 

 

 

 

 

 

 

 

 

 

 

(59

)

Net income

 

 

 

 

 

 

 

 

 

 

109,983

 

 

 

 

 

 

 

 

 

109,983

 

Balances at September 30, 2018

 

139,154

 

 

$

1

 

 

$

549,569

 

 

$

(985,179

)

 

 

2,869

 

 

$

(24,167

)

 

$

(459,776

)

 

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,

 

 

2018

 

 

2017

 

 

(In thousands)

 

 

(Unaudited)

 

Operating activities:

 

 

 

 

 

 

 

Net income

$

109,983

 

 

$

56,317

 

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

Depreciation, depletion, amortization and accretion

 

114,807

 

 

 

116,843

 

Gain on exchange of debt

 

 

 

 

(7,811

)

Amortization of debt items and other items

 

1,796

 

 

 

1,271

 

Share-based compensation

 

3,808

 

 

 

5,449

 

Derivative (gain) loss

 

5,931

 

 

 

(4,765

)

Cash receipts (payments) on derivative settlements, net

 

(3,091

)

 

 

3,924

 

Deferred income taxes

 

363

 

 

 

321

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Oil and natural gas receivables

 

(4,039

)

 

 

3,906

 

Joint interest receivables

 

3,261

 

 

 

8

 

Insurance reimbursements

 

 

 

 

31,740

 

Income taxes

 

(139

)

 

 

320

 

Prepaid expenses and other assets

 

(8,467

)

 

 

2,194

 

Escrow deposit - Apache lawsuit

 

 

 

 

(49,500

)

Asset retirement obligation settlements

 

(22,764

)

 

 

(56,226

)

Cash advances from JV partners

 

27,014

 

 

 

(786

)

Accounts payable, accrued liabilities and other

 

66,389

 

 

 

27,115

 

Net cash provided by operating activities

 

294,852

 

 

 

130,320

 

Investing activities:

 

 

 

 

 

 

 

Investment in oil and natural gas properties and equipment

 

(59,161

)

 

 

(79,088

)

Changes in operating assets and liabilities associated with investing activities

 

(20,261

)

 

 

5,679

 

Acquisition of property interest

 

(16,782

)

 

 

 

Proceeds from sale of assets

 

50,474

 

 

 

 

Purchases of furniture, fixtures and other

 

 

 

 

(905

)

Net cash used in investing activities

 

(45,730

)

 

 

(74,314

)

Financing activities:

 

 

 

 

 

 

 

Payment of interest on 1.5 Lien Term Loan

 

(6,171

)

 

 

(6,170

)

Payment of interest on 2nd Lien PIK Toggle Notes

 

(2,920

)

 

 

(7,335

)

Payment of interest on 3rd Lien PIK Toggle Notes

 

 

 

 

(6,201

)

Other

 

(26

)

 

 

(372

)

Net cash used in financing activities

 

(9,117

)

 

 

(20,078

)

Increase  in cash  and cash equivalents

 

240,005

 

 

 

35,928

 

Cash and cash equivalents, beginning of period

 

99,058

 

 

 

70,236

 

Cash and cash equivalents, end of period

$

339,063

 

 

$

106,164

 

See Notes to Condensed Consolidated Financial Statements.

 

 

4


 

W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLID
ATED 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 with substantially all of its operations offshore in the Gulf of Mexico.  The Company is active in the exploration, development and acquisition of oil and natural gas properties.  Our interests 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”) and through our proportionately consolidated interest in Monza Energy LLC (“Monza”), as described in more detail in Note 4.  

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, 2017.

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 Events.  The price we receive for our crude oil, natural gas liquids (“NGLs”) and natural gas production directly affects our revenues, profitability, cash flows, liquidity, access to capital, proved reserves and future rate of growth.  The average realized prices of crude oil and NGLs improved during the nine months ended September 30, 2018 compared to the average realized prices in the nine months ended September 30, 2017.  

On October 18, 2018, we issued $625.0 million of 9.75% Senior Second Lien Notes due 2023 (the “Senior Second Lien Notes”) which substantially changed our capital structure.  The Senior Second Lien Notes were issued at par and have a maturity date of November 1, 2023.  Concurrently with the issuance of the Senior Second Lien Notes, we entered into the Sixth Amended and Restated Credit Agreement (as amended, the “New Revolving Credit Agreement”) which provides us with a revolving bank credit facility with an initial borrowing base of $250.0 million (increasing from $150.0 million under our prior facility).  Letters of credit may be issued in amounts up to $30.0 million provided availability exists.  The New Revolving Credit Agreement matures on October 18, 2022.  The proceeds from the issuance of the Senior Second Lien Notes, cash on hand and borrowings under the New Revolving Credit Agreement were used to repurchase and retire, repay or irrevocably redeem all of our existing notes and term loans outstanding and fund debt issuance costs.  We refer to these transactions and the related repurchases and retirements, repayments and redemptions of all of our outstanding notes and term loans collectively as the “2018 Refinancing Transaction.”  See Note 12, Subsequent Events, for additional information.  

We believe we will have adequate available liquidity to fund our operations through November 2019, the period of assessment to qualify as a going concern.  However, we cannot predict the potential changes in commodity prices or future Bureau of Ocean Energy Management (“BOEM”) bonding requirements, either of which could affect our operations, liquidity levels and compliance with debt covenants.


5


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

 

See our Annual Report on Form 10-K for the year ended December 31, 2017 concerning risks related to our business and events occurring during 2017 and other information and the Notes herein for additional information.  

Accounting Standard Updates Effective January 1, 2018:  

   Accounting Standards Update No. 2017-01, Business Combinations (Topic 805) – Clarifying the Definition of a Business (“ASU 2017-01”), became effective for us as of January 1, 2018.  The new guidance is intended to assist with the evaluation of whether a set of transferred assets and activities is a business.  In application of the revised guidance under ASU 2017-01 for our acquisition of a non-operated interest in the Heidelberg field described in Note 5, we determined the transaction should be treated as an asset purchase rather than the purchase of a business.          

Accounting Standard Update No. 2014-09, Revenue from Customers (Topic 606) (“ASU 2014-09”), became effective for us in the period ending March 31, 2018.  We reviewed our contracts using the five-step revenue recognition model, which did not identify any changes required as to the amount or timing of revenue recognition.  We adopted the new standard using the modified retrospective approach which did not result in any cumulative-effect adjustment on the date of adoption.  The implementation of ASU 2014-09 resulted in a change in our reporting in the Condensed Consolidated Statement of Operations so that we now report revenue streams separately for crude oil, NGLs, natural gas and other revenues in compliance with the new standard.     

Revenue Recognition.  We recognize revenue from the sale of crude oil, NGLs, and natural gas when our performance obligations are satisfied.  Our contracts with customers are primarily short-term (less than 12 months).  Our responsibilities to deliver a unit of crude oil, NGL, and natural gas under these contracts represent separate, distinct performance obligations.  These performance obligations are satisfied at the point in time control of each unit is transferred to the customer.  Pricing is primarily determined utilizing a particular pricing or market index, plus or minus adjustments reflecting quality or location differentials.

Reclassification.  Certain reclassifications have been made to prior periods’ financial statements to conform to the current presentation as follows:  Within the Net Cash Provided by Operating Activities of the Condensed Consolidated Statements of Cash Flows, adjustments were made to certain line items, of which did not change the total amount previous reported.  The adjustments did not affect the Condensed Consolidated Balance Sheets or the Condensed Consolidated Statements of Operations.

Prepaid Expenses and Other Assets.  The amounts recorded are expected to be realized within one year and the major categories are presented in the following table (in thousands):

 

 

September 30,

 

 

December 31,

 

 

2018

 

 

2017

 

Prepaid/accrued insurance

$

4,214

 

 

$

2,401

 

Surety bond unamortized premiums

 

2,847

 

 

 

2,676

 

Prepaid deposits related to royalties

 

9,698

 

 

 

6,456

 

Advances for capital expenditures

 

860

 

 

 

 

Derivative contract premiums

 

791

 

 

 

 

Other

 

1,289

 

 

 

1,886

 

Prepaid expenses and other assets

$

19,699

 

 

$

13,419

 

 

6


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

Oil and Natural Gas Properties and Other, Net – at cost.  Oil and natural gas properties and equipment are recorded at cost using the full cost method.  There were no amounts excluded from amortization as of the dates presented in the following table (in thousands):

 

 

September 30,

 

 

December 31,

 

 

2018

 

 

2017

 

Oil and natural gas properties and equipment

$

8,146,742

 

 

$

8,102,044

 

Furniture, fixtures and other

 

20,227

 

 

 

21,831

 

Total property and equipment

 

8,166,969

 

 

 

8,123,875

 

Less accumulated depreciation, depletion

   and amortization

 

7,644,188

 

 

 

7,544,859

 

Oil and natural gas properties and other, net

$

522,781

 

 

$

579,016

 

Other Assets (long-term).  The major categories are presented in the following table (in thousands):

 

 

September 30,

 

 

December 31,

 

 

2018

 

 

2017

 

Escrow deposit - Apache lawsuit

$

49,500

 

 

$

49,500

 

Appeal bond deposits

 

6,925

 

 

 

6,925

 

Investment in White Cap, LLC

 

2,648

 

 

 

2,511

 

Deposit related to letters of credit

 

4,702

 

 

 

 

Unamortized brokerage fee for Monza

 

1,981

 

 

 

 

Proportional consolidation of Monza's

   other assets  (Note 4)

 

2,212

 

 

 

 

Other

 

1,046

 

 

 

1,457

 

Total other assets

$

69,014

 

 

$

60,393

 

Accrued Liabilities.  The major categories are presented in the following table (in thousands):

 

 

September 30,

 

 

December 31,

 

 

2018

 

 

2017

 

Accrued interest

$

15,041

 

 

$

4,200

 

Accrued salaries/payroll taxes/benefits

 

2,291

 

 

 

2,454

 

Incentive compensation plans

 

6,452

 

 

 

7,366

 

Litigation accruals

 

3,604

 

 

 

3,480

 

Derivative contracts

 

3,252

 

 

 

84

 

Other

 

418

 

 

 

346

 

Total accrued liabilities

$

31,058

 

 

$

17,930

 

 

Other Liabilities (long-term).  The major categories are presented in the following table (in thousands):

 

 

September 30,

 

 

December 31,

 

 

2018

 

 

2017

 

Apache lawsuit

$

49,500

 

 

$

49,500

 

Uncertain tax positions including interest/penalties

 

11,379

 

 

 

11,015

 

Dispute related to royalty deductions

 

4,687

 

 

 

 

Dispute related to royalty-in-kind

 

2,100

 

 

 

914

 

Other

 

5,509

 

 

 

5,437

 

Total other liabilities (long-term)

$

73,175

 

 

$

66,866

 

7


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

 

Recent Accounting Developments.  In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”).  Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months.  Consistent with current GAAP, the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a financing or operating lease.  However, unlike current GAAP, which requires only capital or financing leases to be recognized on the balance sheet, ASU 2016-02 will require both types of leases to be recognized on the balance sheet.  ASU 2016-02 also will require disclosures to help investors and other financial statement users to better understand the amount, timing and uncertainty of cash flows arising from leases.  These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements.  ASU 2016-02 does not apply for leases for oil and gas properties, but does apply to equipment used to explore and develop oil and gas resources.  ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018 and is to be applied using the modified retrospective approach.  Our current operating leases that will be impacted by ASU 2016-02 are leases for office space, which is primarily in Houston, Texas, although ASU 2016-02 may impact the accounting for leases related to equipment depending on the term of the lease.  We currently do not have any leases classified as financing leases nor do we have any leases recorded on the Condensed Consolidated Balance Sheets.  We have not yet fully determined or quantified the effect ASU 2016-02 will have on our financial statements.

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326) (“ASU 2016-13”).  The new guidance eliminates the probable recognition threshold and broadens the information to consider past events, current conditions and forecasted information in estimating credit losses.  ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted for fiscal years beginning after December 15, 2018.  We have not yet fully determined or quantified the effect ASU 2016-13 will have on our financial statements.

In August 2017, the FASB issued Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815) – Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”).  The amendments in ASU 2017-12 require an entity to present the earnings effect of the hedging instrument in the same income statement line in which the earning effect of the hedged item is reported.  This presentation enables users of financial statements to better understand the results and costs of an entity’s hedging program.  Also, relative to current GAAP, this approach simplifies the financial statement reporting for qualifying hedging relationships.  ASU 2017-12 is effective for fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020.  Early adoption is permitted, including adoption in an interim period.  As we do not designate our commodity derivative instruments as qualifying hedging instruments, our assessment is this amendment will not impact the presentation of the changes in fair values of our commodity derivative instruments on our financial statements.      

 

 

8


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

2.  Long-Term Debt

The components of our long-term debt are presented in the following table (in thousands):

 

September 30, 2018

 

 

December 31, 2017

 

 

 

 

 

 

Adjustments to

 

 

 

 

 

 

 

 

 

 

Adjustments to

 

 

 

 

 

 

 

 

 

 

Carrying

 

 

Carrying

 

 

 

 

 

 

Carrying

 

 

Carrying

 

 

Principal

 

 

Value (1)

 

 

Value

 

 

Principal

 

 

Value (1)

 

 

Value

 

11.00% 1.5 Lien Term Loan,

     due November 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal

$

75,000

 

 

$

 

 

$

75,000

 

 

$

75,000

 

 

$

 

 

$

75,000

 

Future interest payments

 

 

 

 

9,425

 

 

 

9,425

 

 

 

 

 

 

15,596

 

 

 

15,596

 

Subtotal

 

75,000

 

 

 

9,425

 

 

 

84,425

 

 

 

75,000

 

 

 

15,596

 

 

 

90,596

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9.00 % Second Lien Term Loan,

    due May 2020:

 

300,000

 

 

 

 

 

 

300,000

 

 

 

300,000

 

 

 

 

 

 

300,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9.00%/10.75% Second Lien

    PIK Toggle Notes, due May 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal

 

177,513

 

 

 

 

 

 

177,513

 

 

 

171,769

 

 

 

 

 

 

171,769

 

Future payments-in-kind

 

 

 

 

 

 

 

 

 

 

 

 

 

5,745

 

 

 

5,745

 

Future interest payments

 

 

 

 

31,952

 

 

 

31,952

 

 

 

 

 

 

34,872

 

 

 

34,872

 

Subtotal

 

177,513

 

 

 

31,952

 

 

 

209,465

 

 

 

171,769

 

 

 

40,617

 

 

 

212,386

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8.50%/10.00% Third Lien

  PIK Toggle Notes, due June 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal

 

160,852

 

 

 

 

 

 

160,852

 

 

 

153,192

 

 

 

 

 

 

153,192

 

Future payments-in-kind

 

 

 

 

3,664

 

 

 

3,664

 

 

 

 

 

 

11,323

 

 

 

11,323

 

Future interest payments

 

 

 

 

38,682

 

 

 

38,682

 

 

 

 

 

 

38,682

 

 

 

38,682

 

Subtotal

 

160,852

 

 

 

42,346

 

 

 

203,198

 

 

 

153,192

 

 

 

50,005

 

 

 

203,197

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8.50% Unsecured Senior Notes,

    due June 2019

 

189,829

 

 

 

 

 

 

189,829

 

 

 

189,829

 

 

 

 

 

 

189,829

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt premium, discount,

     issuance costs, net of amortization

 

 

 

 

(2,980

)

 

 

(2,980

)

 

 

 

 

 

(3,956

)

 

 

(3,956

)

Total long-term debt

 

903,194

 

 

 

80,743

 

 

 

983,937

 

 

 

889,790

 

 

 

102,262

 

 

 

992,052

 

Current maturities of long-term debt (2)

 

189,829

 

 

 

34,985

 

 

 

224,814

 

 

 

 

 

 

22,925

 

 

 

22,925

 

Long term debt, less current

   maturities

$

713,365

 

 

$

45,758

 

 

$

759,123

 

 

$

889,790

 

 

$

79,337

 

 

$

969,127

 

 

 

(1)

Future interest payments and future payments-in-kind are recorded on an undiscounted basis.

 

(2)

Represents principal of the 8.50% Unsecured Senior Notes due June 15, 2019 and future interest payments on the 1.5 Lien Term Loan, Second Lien PIK Toggle Notes and Third Lien PIK Toggle Notes due within twelve months.

 

 

9


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

Debt Issuance, Repayment of Long-Term Debt and the New Revolving Credit Agreement

As described in Note 12, Subsequent Events, on October 18, 2018, we issued the Senior Second Lien Notes and entered into the New Revolving Credit Agreement.  The proceeds from the issuance of the Senior Second Lien Notes, cash on hand and borrowings under the New Revolving Credit Agreement were used to repurchase and retire, repay or irrevocably redeem all of our existing notes and term loans outstanding and fund debt issuance costs.  

The following discussion and descriptions relate to our long-term debt as of September 30, 2018:  

Accounting for Certain Debt Instruments

We accounted for a transaction executed on September 7, 2016 as a Troubled Debt Restructuring pursuant to the guidance under Accounting Standard Codification 470-60, Troubled Debt Restructuring (“ASC 470-60”).  Under ASC 470-60, the carrying value of the 9.00/ 10.75% Second Lien Payment-In-Kind (“PIK”) Toggle Notes, due May 15, 2020, (the “Second Lien PIK Toggle Notes”); the 8.50%/10.00% Third Lien PIK Toggle Notes, due June 15, 2021, (the “Third Lien PIK Toggle Notes”) and the 11.00% 1.5 Lien Term Loan, due November 15, 2019 (the “1.5 Lien Term Loan”) (collectively, the “2016 Restructuring Transactions”) are measured using all future undiscounted payments (principal and interest); therefore, no interest expense has been recorded for the 2016 Restructuring Transactions in the Condensed Consolidated Statements of Operations for the periods presented.  Additionally, no interest expense related to the 2016 Restructuring Transactions will be recorded in the fourth quarter of 2018 as payments of interest on the 2016 Restructuring Transactions will be recorded as a reduction in the carrying amount; thus, our reported interest expense will be significantly less than the contractual interest payments.  Under ASC 470-60, payments related to the 2016 Restructuring Transactions are reported in the financing section of the Condensed Consolidated Statements of Cash Flows.

The primary terms of our long-term debt are described below:    

Prior Credit Agreement.  The Fifth Amended and Restated Credit Agreement, (the “Prior Credit Agreement”) provided a revolving bank credit facility and would have expired by its term on November 8, 2018.  The primary items of the Prior Credit Agreement are as follows, with certain terms defined under the Prior Credit Agreement:

 

The Borrowing Base of $150.0 million.

 

Letters of credit limit of up to $150.0 million, provided availability under the revolving bank credit facility exists.      

 

The First Lien Leverage Ratio limit of 2.00 to 1.00.

 

The Current Ratio, as defined in the Prior Credit Agreement, was required to be greater than 1.00 to 1.00.

 

Deposit accounts could only be established with banks under the Prior Credit Agreement with certain exceptions.

 

We could not have unrestricted cash balances above $35.0 million if outstanding balances under the Prior Credit Agreement (including letters of credit) are greater than $5.0 million.

 

To the extent there are borrowings, they were primarily executed as Eurodollar Loans, and the applicable margins range from 3.00% to 4.00%.

 

The commitment fee was 50 basis points for all levels of utilization.

  As of September 30, 2018 and December 31, 2017, we did not have any borrowings outstanding under the Prior Credit Agreement and had $9.7 million and $0.3 million of letters of credit outstanding, respectively.  Available credit as of September 30, 2018 was $140.3 million.  As of September 30, 2018, we had on deposit $4.7 million with the lead bank in compliance with the terms of the Prior Credit Agreement, as letters of credit are considered borrowings and our unrestricted cash balance exceeded $35.0 million.  On October 18, 2018, the Prior Credit Agreement was replaced by the New Revolving Credit Agreement, as described in Note 12, Subsequent Events.  

 

10


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

1.5 Lien Term Loan.  In September 2016, we entered into the 1.5 Lien Term Loan with a maturity date of November 15, 2019.    Interest accrued at 11.00% per annum and is payable quarterly in cash.  The 1.5 Lien Term Loan was secured by a 1.5 priority lien on all of our assets pledged under the Prior Credit Agreement.  The lien securing the 1.5 Lien Term Loan was subordinated to the liens securing the Prior Credit Agreement and has priority above the liens securing the Second Lien Term Loan (defined below), the Second Lien PIK Toggle Notes and the Third Lien PIK Toggle Notes.  All future undiscounted cash flows as of September 30, 2018 have been included in the carrying value under ASC 470-60.  On October 18, 2018, the 1.5 Lien Term Loan was repaid in full, as described in Note 12, Subsequent Events.

Second Lien Term Loan.  In May 2015, we entered into the 9.00% Term Loan (the “Second Lien Term Loan”), which had an annual interest rate of 9.00%.  The Second Lien Term Loan was issued at a 1.0% discount to par with a maturity date of May 15, 2020 and has been recorded at its carrying value consisting of principal, unamortized discount and unamortized debt issuance costs as of September 30, 2018.  Interest on the Second Lien Term Loan was payable in arrears semi-annually on May 15 and November 15.  The estimated annual effective interest rate on the Second Lien Term Loan was 9.6%, which included amortization of debt issuance costs and discounts.  The Second Lien Term Loan was secured by a second-priority lien on all of our assets that are secured under the Prior Credit Agreement.  The Second Lien Term Loan was effectively subordinate to the Prior Credit Agreement and the 1.5 Lien Term Loan (discussed above) and was effectively pari passu with the Second Lien PIK Toggle Notes (discussed below).   On October 18, 2018, the Second Lien Term Loan was repaid in full, as described in Note 12, Subsequent Events.    

Second Lien PIK Toggle Notes.  In September 2016, we issued Second Lien PIK Toggle Notes with a maturity date of May 15, 2020.  Interest was payable on May 15 and November 15 of each year.  For the interest period from November 15, 2017 up to and including March 6, 2018, we had the option to pay all or a portion of interest in-kind at the rate of 10.75% per annum, which if so exercised, is added to the principal amount.  After March 6, 2018, interest was payable in cash at the rate of 9.00% per annum.  The Second Lien PIK Toggle Notes were secured by a second-priority lien on all of our assets that are pledged under the Prior Credit Agreement.  The Second Lien PIK Toggle Notes were effectively subordinate to the Prior Credit Agreement and the 1.5 Lien Term Loan and were effectively pari passu with the Second Lien Term Loan.  On October 18, 2018, all of the outstanding Second Lien PIK Toggle Notes were repurchased by the Company and retired or irrevocably called for redemption, as described in Note 12, Subsequent Events.

Third Lien PIK Toggle Notes.  In September 2016, we issued Third Lien PIK Toggle Notes with a maturity date of June 15, 2021.  For the interest periods up to and including September 6, 2018, if we so elected, we had the option to pay all or a portion of interest in-kind at a rate of 10.00% per annum.  If so elected, such in-kind were added to the principal amount.  After September 6, 2018, interest was payable in cash at the rate of 8.50% per annum.  The Third Lien PIK Toggle Notes were secured by a third-priority lien on all of our assets that were secured under the Prior Credit Agreement.  The Third Lien PIK Toggle Notes were effectively subordinate to the Second Lien Term Loan and the Second Lien PIK Toggle Notes.  On October 18, 2018, all of the outstanding Third Lien PIK Toggle Notes were repurchased by the Company and retired or irrevocably called for redemption, as described in Note 12, Subsequent Events.  

Unsecured Senior Notes.  Our 8.500% Unsecured Senior Notes outstanding, which had an annual interest rate of 8.50% and maturity date of June 15, 2019, (the “Unsecured Senior Notes”), were recorded at their carrying value, which includes unamortized debt premium and unamortized debt issuance costs.  Interest on the Unsecured Senior Notes was payable semi-annually in arrears on June 15 and December 15.  The estimated annual effective interest rate on the Unsecured Senior Notes was 8.4%, which included amortization of premiums and debt issuance costs.  On October 18, 2018, all of the outstanding Unsecured Senior Notes were repurchased by the Company and retired or irrevocably called for redemption, as described in Note 12, Subsequent Events.  

Covenants.  We were in compliance with all applicable covenants for all of our debt instruments as of September 30, 2018.

For information about fair value measurements for our long-term debt, refer to Note 3, Fair Value Measurements.

11


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

3.  Fair Value Measurements  

We measure the fair value of our open derivative financial instruments by applying the income approach, using models with inputs that are classified within Level 2 of the valuation hierarchy.  The fair value of the 1.5 Lien Term Loan was estimated using the carrying value of the principal as only one entity has been the holder of the 1.5 Lien Term Loan.  The fair values of our Second Lien Term Loan, Second Lien PIK Toggle Notes, Third Lien PIK Toggle Notes and Unsecured Senior Notes were based on quoted prices, although the market is not a very active market; therefore, the fair value is classified within Level 2.  

The following table presents the fair value of our long-term debt, all of which are classified as Level 2 within the valuation hierarchy (in thousands):

 

Hierarchy

 

September 30, 2018

 

 

December 31, 2017

 

11.00% 1.5 Lien Term Loan, due November 2019

Level 2

 

$

75,000

 

 

$

75,000

 

9.00 % Second Lien Term Loan, due May 2020

Level 2

 

 

303,000

 

 

 

288,000

 

9.00%/10.75% Second Lien PIK Toggle Notes, due May 2020

Level 2

 

 

179,289

 

 

 

162,322

 

8.50%/10.00% Third Lien PIK Toggle Notes, due June 2021

Level 2

 

 

165,677

 

 

 

119,490

 

8.50% Unsecured Senior Notes, due June 2019

Level 2

 

 

188,880

 

 

 

178,439

 

The long-term debt items are reported on the Condensed Consolidated Balance Sheets at their carrying value as described in Note 2, Long-Term Debt.  See Note 7, Derivative Financial Instruments, for the fair value of our open derivative contracts, which is classified as Level 2 in the reporting hierarchy and is reported in the Condensed Consolidated Balance Sheets using fair value.

4.  Drilling Program Joint Venture

On March 12, 2018, W&T and two other initial members formed and initially funded a limited liability company, Monza Energy LLC, a Delaware limited liability company, that will jointly participate with us in the exploration, drilling and development of up to 14 identified drilling projects (the “JV Drilling Program”) in the Gulf of Mexico over the next three years.  W&T initially contributed 88.94% of its working interest in 14 identified undeveloped drilling projects to Monza and retained 11.06% of its working interest.  The Monza board has approved the substitution of one of these identified undeveloped drilling projects, the Viosca Knoll 823 (“VK 823”) A-14 well, with the VK 823 A-13 well, which is in the process of being contributed to Monza through the conveyance by W&T of 58.71% of its working interest in such well to Monza and retaining 41.29% of its working interest in such well.  The interest in the VK823 A-14 well is in process of being reconveyed to W&T.  Since the initial closing, additional investors have joined as members of Monza and as of September 30, 2018, total commitments by all members, including W&T, are $361.4 million.  Monza has closed off funding from additional investors.  The JV Drilling Program is structured so that we initially receive an aggregate of 30.0% of the revenues less expenses, through both our direct ownership of our working interest in the projects and our indirect interest through our interest in Monza, for contributing 20.0% of the estimated total well costs plus associated leases and providing access to available infrastructure at agreed upon rates.  For one well in the JV Drilling Program, a modification was approved exempting W&T from funding certain cost overruns and W&T is receiving 20% of the revenues less expenses of its prior interest on a combined basis, which removes W&T’s promote in this well.  W&T will be the operator of each well in the JV Drilling Program unless there is already a designated third-party operator.

The members of Monza are made up of third-party investors, W&T and an entity owned and controlled by Mr. Tracy W. Krohn, our Chairman and Chief Executive Officer.  The Krohn entity invested as a minority investor on the same terms and conditions as the third-party investors and its investment is limited to 4.5% of total invested capital within Monza.  The entity affiliated with Mr. Krohn has made a capital commitment to Monza of $14.5 million.  

At the inception of Monza, W&T received a net reimbursement of approximately $20 million for the capital expenditures incurred prior to the close date for projects in the JV Drilling Program.  W&T may be obligated to fund certain cost overruns, subject to certain exceptions, on JV Drilling Program wells above budgeted and contingency amounts.  As of September 30, 2018, members of Monza made partner capital contribution payments to Monza totaling $114.7 million.

12


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

Information on the structure and relationship follows:

Board Structure and Authority.  Under the Monza limited liability agreement, the business and affairs of Monza are managed by a board of five directors, which will consist of three directors selected by the third-party investors, Mr. Krohn, and an additional independent director will be selected by a majority of the third-party investors in Monza subject to consent by W&T.  The independent director and one of the directors to be selected by the investors have not yet been selected.  The day-to-day operations of Monza are being managed by W&T, under the direction of the Monza board, pursuant to a services agreement.  W&T has no control over the decisions of the Monza board.  W&T has veto rights for certain decisions, but does not have the ability to unilaterally make decisions for Monza, except for day-to-day decisions as permitted under the services agreement.  The Monza board is responsible for the management of Monza and for making decisions with respect to its interest in the 14 drilling projects, including approval of the budgets.    

Accounting Methodology and Carrying Amounts.  Our interest in Monza is considered to be a variable interest entity that we account for using proportional consolidation.  We do not fully consolidate Monza because we are not considered the primary beneficiary and we utilize proportional consolidation to account for our interest in the Monza properties.  As of September 30, 2018, in the Condensed Consolidated Balance Sheet, we recorded $7.5 million, net, in oil and natural gas properties, $2.2 million in other assets and $2.6 million, net, increase in working capital in connection with our proportional interest in Monza’s assets and liabilities.  For the nine months ended September 30, 2018, we recorded $2.2 million in revenue, $1.1 million in operating expense and $0.3 million, net, in other expense in connection with our proportional interest in Monza’s operations.

Maximum Exposure. Our contribution to Monza as of September 30, 2018 was $53.5 million, which consisted of cash and the conveyance of the Company’s working interest in the 14 projects.  We may also take responsibility for certain drilling and completion cost overruns, subject to certain limitations and certain exceptions, of which the total exposure cannot be estimated at this time.

5. Acquisitions and Divestitures  

  Heidelberg Field.  On April 5, 2018, we closed on the purchase from Cobalt International Energy, Inc. of a 9.375% non-operated working interest in the Heidelberg field located in Green Canyon blocks 859, 903 and 904.  The gross purchase price was $31.1 million which was adjusted for certain closing items and an effective date of January 1, 2018.  Cash flows generated by the acquired interest between the effective date and the closing date reduced the net purchase price to $16.8 million.  We determined that the assets acquired did not meet the definition of a business; therefore, the transaction was accounted for as an asset acquisition.  In connection with this transaction, we were required to furnish a letter of credit of $9.4 million to a pipeline company as consignee.  We recognized asset retirement obligations (“ARO”) of $3.6 million as a component of the transaction.  In conjunction with the purchase of an interest in the Heidelberg field, we assumed contracts with certain pipeline companies that contain minimum quantities obligations through 2028 resulting in an estimated commitment of $19.6 million.  

Permian Basin.  On September 28, 2018, we closed on the divestiture of all of our ownership in an overriding royalty interests in the Permian Basin.  The net proceeds received were $50.5 million, which was recorded as a reduction to our full-cost pool.  We may receive additional proceeds of up to $6.4 million from the transaction if certain title defects are cured during the 90 days following the closing date.    

13


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

6.  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.  

A summary of the changes to our ARO is as follows (in thousands):  

 

Balance, December 31, 2017

$

300,446

 

Liabilities settled