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 March 31, 2019

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.  

Securities registered pursuant to section 12(b) of the Act:

 

 

 

 

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.00001

 

WTI

 

New York Stock Exchange

As of April 29, 2019, there were 140,644,033 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 March 31, 2019 and December 31, 2018

1

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018

2

 

Condensed Consolidated Statement of Changes in Shareholders’ Deficit for the Three Months Ended       March 31, 2019 and 2018

3

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018

4

 

Notes to Condensed Consolidated Financial Statements

5

Item 2.

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

21

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

Item 4.

Controls and Procedures

32

 

 

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

33

Item 1A.

Risk Factors

33

Item 6.

Exhibits

34

 

 

SIGNATURE

35

 

 

 

 

 

 


 

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

March 31,

 

 

December 31,

 

 

2019

 

 

2018

 

Assets

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

86,116

 

 

$

33,293

 

Receivables:

 

 

 

 

 

 

 

Oil and natural gas sales

 

41,308

 

 

 

47,804

 

Joint interest, net

 

17,620

 

 

 

14,634

 

Income taxes

 

54,076

 

 

 

54,076

 

Total receivables

 

113,004

 

 

 

116,514

 

Prepaid expenses and other assets (Note 1)

 

34,127

 

 

 

76,406

 

Total current assets

 

233,247

 

 

 

226,213

 

 

 

 

 

 

 

 

 

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

 

514,765

 

 

 

515,421

 

Restricted deposits for asset retirement obligations

 

15,498

 

 

 

15,685

 

Other assets (Note 1)

 

79,005

 

 

 

91,547

 

Total assets

$

842,515

 

 

$

848,866

 

Liabilities and Shareholders’ Deficit

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

71,359

 

 

$

82,067

 

Undistributed oil and natural gas proceeds

 

22,014

 

 

 

28,995

 

Advances from joint interest partners

 

65,271

 

 

 

20,627

 

Asset retirement obligations

 

24,799

 

 

 

24,994

 

Accrued liabilities (Note 1)

 

35,197

 

 

 

29,611

 

Total current liabilities

 

218,640

 

 

 

186,294

 

 

 

 

 

 

 

 

 

Long-term debt (Note 2)

 

634,005

 

 

 

633,535

 

Asset retirement obligations, less current portion

 

289,363

 

 

 

285,143

 

Other liabilities (Note 1)

 

73,142

 

 

 

68,690

 

Commitments and contingencies (Note 10)

 

 

 

 

 

Shareholders’ deficit:

 

 

 

 

 

 

 

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

   for both dates presented

 

 

 

 

 

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

   143,513 issued and 140,644 outstanding for both dates presented

 

1

 

 

 

1

 

Additional paid-in capital

 

545,627

 

 

 

545,705

 

Retained deficit

 

(894,096

)

 

 

(846,335

)

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

 

(24,167

)

 

 

(24,167

)

Total shareholders’ deficit

 

(372,635

)

 

 

(324,796

)

Total liabilities and shareholders’ deficit

$

842,515

 

 

$

848,866

 

 

See Notes to Condensed Consolidated Financial Statements.

1


 

W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands except per share data)

(Unaudited)

 

Three Months Ended

 

 

March 31,

 

 

2019

 

 

2018

 

Revenues:

 

 

 

 

 

 

 

Oil

$

86,703

 

 

$

97,306

 

NGLs

 

6,448

 

 

 

9,660

 

Natural gas

 

21,838

 

 

 

25,867

 

Other

 

1,091

 

 

 

1,380

 

Total revenues

 

116,080

 

 

 

134,213

 

Operating costs and expenses:

 

 

 

 

 

 

 

Lease operating expenses

 

43,456

 

 

 

36,843

 

Production taxes

 

416

 

 

 

455

 

Gathering and transportation

 

6,423

 

 

 

5,057

 

Depreciation, depletion, amortization and accretion

 

33,766

 

 

 

38,081

 

General and administrative expenses

 

14,109

 

 

 

15,038

 

Derivative loss

 

48,886

 

 

 

 

Total costs and expenses

 

147,056

 

 

 

95,474

 

Operating (loss) income

 

(30,976

)

 

 

38,739

 

Interest expense, net

 

16,282

 

 

 

10,962

 

Other expense, net

 

331

 

 

 

28

 

(Loss) income before income tax expense

 

(47,589

)

 

 

27,749

 

Income tax expense

 

172

 

 

 

109

 

Net (loss) income

$

(47,761

)

 

$

27,640

 

 

Basic and diluted (loss) earnings per common share

$

(0.34

)

 

$

0.19

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

2


 

W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT

(In thousands)

(Unaudited)

 

 

Common Stock

Outstanding

 

 

Additional

Paid-In

 

 

Retained

 

 

Treasury Stock

 

 

Total

Shareholders’

 

 

Shares

 

 

Value

 

 

Capital

 

 

Deficit

 

 

Shares

 

 

Value

 

 

Deficit

 

Balances at December 31, 2018

 

140,644

 

 

$

1

 

 

$

545,705

 

 

$

(846,335

)

 

 

2,869

 

 

$

(24,167

)

 

$

(324,796

)

Share-based compensation

 

 

 

 

 

 

 

(78

)

 

 

 

 

 

 

 

 

 

 

 

(78

)

Net loss

 

 

 

 

 

 

 

 

 

 

(47,761

)

 

 

 

 

 

 

 

 

(47,761

)

Balances at March 31, 2019

 

140,644

 

 

$

1

 

 

$

545,627

 

 

$

(894,096

)

 

 

2,869

 

 

$

(24,167

)

 

$

(372,635

)

 

 

 

 

Common Stock

Outstanding

 

 

Additional

Paid-In

 

 

Retained

 

 

Treasury Stock

 

 

Total

Shareholders’

 

 

Shares

 

 

Value

 

 

Capital

 

 

Deficit

 

 

Shares

 

 

Value

 

 

Deficit

 

Balances at December 31, 2017

 

139,091

 

 

$

1

 

 

$

545,820

 

 

$

(1,095,162

)

 

 

2,869

 

 

$

(24,167

)

 

$

(573,508

)

Share-based compensation

 

 

 

 

 

 

 

1,219

 

 

 

 

 

 

 

 

 

 

 

 

1,219

 

Net income

 

 

 

 

 

 

 

 

 

 

27,640

 

 

 

 

 

 

 

 

 

27,640

 

Balances at March 31, 2018

 

139,091

 

 

$

1

 

 

$

547,039

 

 

$

(1,067,522

)

 

 

2,869

 

 

$

(24,167

)

 

$

(544,649

)

 

See Notes to Condensed Consolidated Financial Statements

 

 

 

 

3


 

W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

Three Months Ended

 

 

March 31,

 

 

2019

 

 

2018

 

Operating activities:

 

 

 

 

 

 

 

Net (loss) income

$

(47,761

)

 

$

27,640

 

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

 

 

 

 

 

 

 

Depreciation, depletion, amortization and accretion

 

33,766

 

 

 

38,081

 

Amortization of debt items and other items

 

1,152

 

 

 

466

 

Share-based compensation

 

(78

)

 

 

1,219

 

Derivative loss

 

48,886

 

 

 

 

Cash receipts on derivative settlements, net

 

11,948

 

 

 

 

Deferred income taxes

 

172

 

 

 

109

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Oil and natural gas receivables

 

6,496

 

 

 

501

 

Joint interest receivables

 

(2,986

)

 

 

1,919

 

Prepaid expenses and other assets

 

(4,269

)

 

 

(6,391

)

Asset retirement obligation settlements

 

(254

)

 

 

(7,022

)

Cash advances from JV partners

 

44,644

 

 

 

19,147

 

Accounts payable, accrued liabilities and other

 

(6,871

)

 

 

(688

)

Net cash provided by operating activities

 

84,845

 

 

 

74,981

 

Investing activities:

 

 

 

 

 

 

 

Investment in oil and natural gas properties and equipment

 

(31,581

)

 

 

(38,271

)

Deposit for acquisition

 

 

 

 

(3,000

)

Net cash used in investing activities

 

(31,581

)

 

 

(41,271

)

Financing activities:

 

 

 

 

 

 

 

Payment of interest on 1.5 Lien Term Loan

 

 

 

 

(2,057

)

Debt issuance costs

 

(441

)

 

 

 

Net cash used in financing activities

 

(441

)

 

 

(2,057

)

Increase in cash and cash equivalents

 

52,823

 

 

 

31,653

 

Cash and cash equivalents, beginning of period

 

33,293

 

 

 

99,058

 

Cash and cash equivalents, end of period

$

86,116

 

 

$

130,711

 

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. and its 100%-owned subsidiary, W & T Energy VI, LLC, 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, 2018.

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.

Leases.  In February 2016, Accounting Standards Update 2016-02, Leases (Topic 842) (“ASU 2016-02”) was issued requiring an entity to recognize a right-of-use (“ROU”) asset and lease liability for all leases.  The classification of leases as either a finance or operating lease determines the recognition, measurement and presentation of expenses.  ASU 2016-02 also requires certain quantitative and qualitative disclosures about leasing arrangements.  Leases acquired to explore for or extract oil or natural gas resources, including the right to explore for those natural resources and rights to use the land in which those natural resources are contained, are not within the scope of this standard’s update.

ASU 2016-02 was effective for us in the first quarter of 2019 and we adopted the new standard using a modified retrospective approach, with the date of initial application on January 1, 2019.  Consequently, upon transition, we recognized an ROU asset and a lease liability with no retained earnings impact.

 

 

5


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

 

As provided for in subsequent accounting standards updates related to ASU 2016-02, we are applying the following practical expedients which provide elections to:

 

not apply the recognition requirements to short-term leases (a lease that at commencement date has a lease term of 12 months or less and does not contain a purchase option);

 

not reassess whether a contract contains a lease, lease classifications between operating and financing and accounting for initial direct costs related to leases;

 

not reassess certain land easements in existence prior to January 1, 2019;

 

use hindsight in determining the lease term and assessing impairment; and

 

not separate nonlease and lease components.

Based on the results of our implementation process, we identified one operating lease in existence at January 1, 2019 subject to ASU 2016-02, which is our real estate lease for office space in Houston, Texas that terminates in December 2022.  We identified no finance leases.  

Houston Office Lease. Minimum future lease payments due under the lease as of March 31, 2019 are as follows: 2019 - $1.1 million; 2020 - $1.6 million; 2021 - $1.6 million and 2022 - $1.6 million.  Expense related to the Houston office lease for the three months ended March 31, 2019 and 2018 was $0.7 million each period.  

As of March 31, 2019, we recorded an ROU asset and a lease liability of $5.0 million using a discount rate of 9.75%.  The discount rate (or incremental borrowing rate) was determined using the interest rate of recently issued debt instruments that were issued at par and for a similar term as the term of our lease for the office space in Houston.    

After the adoption of the new standard update, the amounts recorded within our Condensed Consolidated Balance Sheet are as follows (in thousands):

 

 

March 31, 2019

 

ROU:

 

 

 

 

Prepaid expenses and other current assets:

 

$

1,095

 

Other assets

 

 

3,856

 

Total ROU

 

$

4,951

 

 

 

 

 

 

Lease liability:

 

 

 

 

Accrued liabilities

 

$

1,095

 

Other liabilities

 

 

3,856

 

Total lease liability

 

$

4,951

 

 

 

 

 

 

Lease incentives:

 

 

 

 

Prepaid expenses and other current assets (contra-asset)

 

$

(213

)

Other assets (contra-asset)

 

 

(795

)

Total lease incentives

 

$

(1,008

)

The adoption of the new standard did not impact our Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Cash Flows or Condensed Consolidated Statements of Changes in Shareholders’ Deficit.

6


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

 

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.  

Reclassifications.  Certain reclassifications have been made to the prior period financial statements to conform to the current presentation as follows:  In the Condensed Consolidated Statements of Operations, interest income was reclassified from Other expense, net to Interest expense, net, which did not change Net (loss) income before income tax expense.  In the Condensed Consolidated Statements of Cash Flows, adjustments were made to certain line items within the Net Cash Used in Investing Activities of which did not change the total amount previous reported.  The adjustments did not affect the Condensed Consolidated Balance Sheets.

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):

 

 

March 31,

 

 

December 31,

 

 

2019

 

 

2018

 

Derivative assets (1)

$

16,959

 

 

$

60,687

 

Unamortized bond/insurance premiums

 

4,944

 

 

 

5,197

 

Prepaid deposits related to royalties

 

8,871

 

 

 

8,872

 

Other

 

3,353

 

 

 

1,650

 

Prepaid expenses and other assets

$

34,127

 

 

$

76,406

 

 

 

(1)

Includes closed contracts which have not yet settled.

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):

 

 

March 31,

 

 

December 31,

 

 

2019

 

 

2018

 

Oil and natural gas properties and equipment

$

8,198,394

 

 

$

8,169,871

 

Furniture, fixtures and other

 

20,228

 

 

 

20,228

 

Total property and equipment

 

8,218,622

 

 

 

8,190,099

 

Less accumulated depreciation, depletion and amortization

 

7,703,857

 

 

 

7,674,678

 

Oil and natural gas properties and other, net

$

514,765

 

 

$

515,421

 

7


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

 

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

 

 

March 31,

 

 

December 31,

 

 

2019

 

 

2018

 

Escrow deposit - Apache lawsuit

$

49,500

 

 

$

49,500

 

Derivative assets

 

4,169

 

 

 

21,275

 

Appeal bond deposits

 

6,925

 

 

 

6,925

 

Unamortized debt issuance costs

 

4,511

 

 

 

4,773

 

Investment in White Cap, LLC

 

2,546

 

 

 

2,586

 

Unamortized brokerage fee for Monza

 

3,746

 

 

 

2,277

 

Proportional consolidation of Monza's other assets  (Note 4)

 

3,299

 

 

 

3,275

 

Other

 

4,309

 

 

 

936

 

Total other assets (long-term)

$

79,005

 

 

$

91,547

 

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

 

 

March 31,

 

 

December 31,

 

 

2019

 

 

2018

 

Accrued interest

$

27,624

 

 

$

12,385

 

Accrued salaries/payroll taxes/benefits

 

2,425

 

 

 

2,320

 

Incentive compensation plans

 

 

 

 

10,817

 

Litigation accruals

 

3,673

 

 

 

3,673

 

Other

 

1,475

 

 

 

416

 

Total accrued liabilities

$

35,197

 

 

$

29,611

 

 

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

 

 

March 31,

 

 

December 31,

 

 

2019

 

 

2018

 

Apache lawsuit

$

49,500

 

 

$

49,500

 

Uncertain tax positions including interest/penalties

 

11,694

 

 

 

11,523

 

Dispute related to royalty deductions

 

4,687

 

 

 

4,687

 

Dispute related to royalty-in-kind

 

2,164

 

 

 

2,135

 

Other

 

5,097

 

 

 

845

 

Total other liabilities (long-term)

$

73,142

 

 

$

68,690

 

 

Recent Accounting Developments.  

In June 2016, the Financial Accounting Standards Board (“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.

8


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

 

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.

The SEC issued Final Rule Release No. 33-10532, Disclosure Update and Simplification, which revised Regulation S-X, Rule 3-04, Changes in Stockholders’ Equity and Noncontrolling Interests.  The new requirement for registrants is to include a reconciliation of changes in stockholders’ equity (deficit) in interim periods for each period that for which a statement of operations is required to be filed.  The new requirement became effective for us for the quarter ended March 31, 2019.

2.  Long-Term Debt

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

 

March 31,

 

 

December 31,

 

 

2019

 

 

2018

 

Credit Agreement (1) borrowings

$

21,000

 

 

$

21,000

 

 

 

 

 

 

 

 

 

Senior Second Lien Notes: (1)

 

 

 

 

 

 

 

Principal

 

625,000

 

 

 

625,000

 

Unamortized debt issuance costs

 

(11,995

)

 

 

(12,465

)

Total Senior Second Lien Notes (1)

 

613,005

 

 

 

612,535

 

 

 

 

 

 

 

 

 

Total long-term debt

$

634,005

 

 

$

633,535

 

 

 

(1)

Defined below

9


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

 

Credit Agreement

On October 18, 2018, we entered into the Sixth Amended and Restated Credit Agreement (the “Credit Agreement”), which matures on October 18, 2022.  The primary terms and covenants associated with the Credit Agreement are as follows, with capitalized terms defined under the Credit Agreement:

 

The borrowing base and lending commitment was $250.0 million as of the filing date of this Form 10-Q.

 

Letters of credit may be issued in amounts up to $30.0 million, provided availability under the Credit Agreement exists.  As of March 31, 2019, and December 31, 2018, we had $8.1 million and $9.6 million, respectively, of letters of credit issued and outstanding under the Credit Agreement.

 

The Leverage Ratio is limited to 3.50 to 1.00 for March 31, 2019; 3.25 to 1.00 for quarters ending June 30, 2019 and September 30, 2019; and 3.00 to 1.00 for quarters ending December 31, 2019 and thereafter.  In the event of a Material Acquisition, the Leverage Ratio limit is 3.50 to 1.00 for the two quarters following a Material Acquisition.  

 

The Current Ratio must be maintained at greater than 1.00 to 1.00.

Availability under the Credit Agreement is subject to semi-annual redeterminations of our borrowing base to occur on or before May 15 and November 14 each calendar year, and certain additional redeterminations that may be requested at the discretion of either the lenders or the Company.  The borrowing base is calculated by our lenders based on their evaluation of our proved reserves and their own internal criteria.  Any redetermination by our lenders to change our borrowing base will result in a similar change in the availability under the Credit Agreement.  The Credit Agreement’s security is collateralized by a first priority lien on substantially all of our oil and natural gas properties and certain personal property.  The interest rate on borrowings outstanding for the three months ended March 31, 2019 was 5.1%, which excludes debt issuance costs, commitment fees and other fees.  

9.75% Senior Second Lien Notes Due 2023

On October 18, 2018, we issued $625.0 million of 9.75% Senior Second Lien Notes due 2023 (the “Senior Second Lien Notes”), which were issued at par with an interest rate of 9.75% per annum and mature on November 1, 2023, and are governed under the terms of the Indenture of the Senior Second Lien Notes (the “Indenture”).  The estimated annual effective interest rate on the Senior Second Lien Notes is 10.3%, which includes amortization of debt issuance costs.   Interest on the Senior Second Lien Notes is payable in arrears on May 1 and November 1 of each year, beginning on May 1, 2019.  

The Senior Second Lien Notes are secured by a second-priority lien on all of our assets that are secured under the Credit Agreement.  The Senior Second Lien Notes contain covenants that limit or prohibit our ability and the ability of certain of our subsidiaries to: (i) make investments; (ii) incur additional indebtedness or issue certain types of preferred stock; (iii) create certain liens; (iv) sell assets; (v) enter into agreements that restrict dividends or other payments from the Company’s subsidiaries to the Company; (vi) consolidate, merge or transfer all or substantially all of the assets of the Company; (vii) engage in transactions with affiliates; (viii) pay dividends or make other distributions on capital stock or subordinated indebtedness; and (ix) create subsidiaries that would not be restricted by the covenants of the Indenture entered into by and among the Company, the Guarantors, and Wilmington Trust, National Association, as trustee (the “Trustee”).  These covenants are subject to exceptions and qualifications set forth in the Indenture.  In addition, most of the above described covenants will terminate if both S&P Global Ratings, a division of S&P Global Inc., and Moody’s Investors Service, Inc. assign the Senior Second Lien Notes an investment grade rating and no default exists with respect to the Senior Second Lien Notes.

10


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

 

Covenants  

As of March 31, 2019, we were in compliance with all applicable covenants of the Credit Agreement and Senior Second Lien Notes indenture.

Fair Value Measurements

For information about fair value measurements of our long-term debt, refer to Note 3.

3.  Fair Value Measurements  

Derivative Financial Instruments

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 inputs used for the fair value measurement of our open derivative financial instruments are the exercise price, the expiration date, the settlement date, notional quantities, the implied volatility, the discount curve with spreads and published commodity future prices.  Our open derivative financial instruments are reported in the Condensed Consolidated Balance Sheets using fair value.  See Note 6, Derivative Financial Instruments, for additional information on our derivative financial instruments.    

The following table presents the fair value of our open derivative financial instruments (in thousands):

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Assets:

 

 

 

 

 

 

 

 

Derivatives instruments - open contracts

 

$

20,275

 

 

$

74,580

 

Long-Term Debt

We believe the carrying value of our debt under the Credit Agreement approximates fair value because the interest rates are variable and reflective of current market rates.  The fair value of our Senior Second Lien Notes was measured based using quoted prices, although the market is not a very active market.  The fair value of our long-term debt was classified as Level 2 within the valuation hierarchy.  See Note 2, Long-Term Debt for additional information on our long-term debt.

The following table presents the carrying value and fair value of our long-term debt (in thousands):

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

Carrying Value

 

 

Fair Value

 

 

Carrying Value

 

 

Fair Value

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Agreement

 

$

21,000

 

 

$

21,000

 

 

$

21,000

 

 

$

21,000

 

Senior Second Lien Notes

 

 

613,005

 

 

 

623,256

 

 

 

612,535

 

 

 

546,875

 

 

11


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

 

4.  Joint Venture Drilling Program

On March 12, 2018, W&T and two other initial members formed and initially funded Monza, which jointly participates with us in the exploration, drilling and development of up to 14 identified drilling projects (the “JV Drilling Program”) in the Gulf of Mexico.  The projects are expected to be completed during the years 2018 through 2020, but some projects may possibly extend into years beyond 2020.  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.  Subsequent to the initial closing, additional investors joined as members of Monza during 2018 and total commitments by all members, including W&T, are $361.4 million.  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.  Any exceptions are approved by the Monza board.  W&T is or will be the operator of each well in the JV Drilling Program unless there is 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.  

  As of March 31, 2019, members of Monza made partner capital contribution payments to Monza totaling $184.9 million, of which $70.2 million was contributed during the three months ended March 31, 2019.  Our net contribution to Monza, reduced by distributions received, as of March 31, 2019 was $58.9 million.  W&T may be obligated to fund certain cost overruns, subject to certain exceptions, for the JV Drilling Program wells above budgeted and contingency amounts, of which the total exposure cannot be estimated at this time.

Consolidation and Carrying Amounts.  Our interest in Monza is considered to be a variable interest 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 interests in the Monza properties.  As of March 31, 2019, in the Condensed Consolidated Balance Sheet, we recorded $11.0 million, net, in Oil and natural gas properties and other, net, $3.3 million in Other assets and $5.0 million, net, increase in working capital in connection with our proportional interest in Monza’s assets and liabilities.  As of December 31, 2018, in the Condensed Consolidated Balance Sheet, we recorded $8.8 million, net, in Oil and natural gas properties and other, net, $3.3 million in Other assets and $0.7 million, net, increase in working capital in connection with our proportional interest in Monza’s assets and liabilities.  For the three months ended March 31, 2019, we recorded $1.6 million in Total revenues and $0.9 million in Operating costs and expenses in connection with our proportional interest in Monza’s operations.  No revenues or expenses were recorded in the three months ended March 31, 2018 in connection with our proportional interest in Monza’s operations.

Additionally, during the three-months ended March 31, 2019, we received cash calls from Monza of $66.3 million, of which $65.2 million is included in the Condensed Consolidated Balance Sheet in Advances from joint interest partners as of March 31, 2019.

12


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

 

5.  Asset Retirement Obligations

Our asset retirement obligations (“ARO”) represent the estimated present value of the amount incurred to plug, abandon and remediate our properties at the end of their productive lives.  

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

 

Balance, December 31, 2018

$

310,137

 

Liabilities settled

 

(254

)

Accretion of discount

 

4,588

 

Liabilities incurred

 

44

 

Revisions of estimated liabilities

 

(353

)

Balance, March 31, 2019

 

314,162

 

Less current portion

 

24,799

 

Long-term

$

289,363

 

 

6.  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 crude oil and natural gas.  All of the present derivative counterparties are also lenders or affiliates of lenders participating in our Credit Agreement.  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.  We are not required to provide additional collateral to the derivative counterparties 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.

During 2018, we entered into commodity contracts for crude oil and natural gas which related to a portion of our expected future production.  The crude oil contracts were based on West Texas Intermediate (“WTI”) crude oil prices as quoted off the New York Mercantile Exchange (“NYMEX”).  The natural gas contracts are based on Henry Hub natural gas prices as quoted off the NYMEX.  The open contracts as of March 31, 2019 are presented in the following tables:

 

Crude Oil:  Swap, Priced off WTI (NYMEX)

 

Termination Period

 

Notional Quantity (Bbls/day) (1)

 

 

Notional Quantity

(Bbls) (1)

 

 

Strike Price

 

May 2020

 

 

1,500

 

 

 

640,500

 

 

$

60.80

 

May 2020

 

 

5,000

 

 

 

2,135,000

 

 

 

61.00

 

May 2020

 

 

3,500

 

 

 

1,494,500

 

 

 

60.85

 

 

(1)

Bbls = Barrels

13


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

 

 

Crude Oil:  Calls - Bought, Priced off WTI (NYMEX)

 

Termination Period

 

Notional Quantity (Bbls/day) (1)

 

 

Notional Quantity

(Bbls) (1)

 

 

Strike Price

 

May 2020

 

 

10,000

 

 

 

4,270,000

 

 

$

61.00

 

 

(1)

Bbls = Barrels

 

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

 

Termination Period

 

Notional Quantity (MMBtu/day) (1)

 

 

Notional Quantity (MMBtu) (1)

 

 

Put Option

Strike Price

(Bought)

 

 

Call Option

Strike Price

(Sold)

 

June 2019

 

 

50,000

 

 

 

3,050,000

 

 

$

2.49

 

 

$

3.975

 

 

(1)

MMBtu – Million British Thermal Units

 

The following amounts were recorded in the Condensed Consolidated Balance Sheets in the categories presented and include the fair value of open contracts, and closed contracts which had not yet settled (in thousands):  

 

March 31,

 

 

December 31,

 

 

2019

 

 

2018

 

Prepaid expenses and other assets

$

16,959

 

 

$

60,687

 

Other assets (non-current)

 

4,169

 

 

 

21,275

 

The amounts recorded on the Condensed Consolidated Balance Sheets are on a gross basis.  If these were recorded on a net settlement basis, it would not have resulted in any differences in reported amounts.  

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

 

Three Months Ended

 

 

March 31,

 

 

2019

 

 

2018

 

Derivative loss

$

48,886

 

 

$

 

 

Cash receipts on commodity derivative contract settlements, net, are included within Net cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows and were as follows (in thousands):

 

Three Months Ended

 

 

March 31,

 

 

2019

 

 

2018

 

Cash receipts on derivative settlements, net

$

11,948

 

 

$

 

 

14


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

 

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

Awards to Employees.  In 2010, the W&T Offshore, Inc. Amended and Restated Incentive Compensation Plan (as amended from time to time, the “Plan”) was approved by our shareholders.  During 2018 and 2017, the Company granted restricted stock units (“RSUs”) under the Plan to certain of its employees.  RSUs are a long-term compensation component, and are subject to satisfaction of certain predetermined performance criteria and adjustments at the end of the applicable performance period based on the results achieved.  In addition to share-based awards, the Company may grant to its employees cash-based incentive awards under the Plan, which were used as a short-term and long-term compensation component of the 2018 awards, and were subject to satisfaction of certain predetermined performance criteria.

As of March 31, 2019, there were 11,852,592 shares of common stock available for issuance in satisfaction of awards under the Plan.  The shares available for issuance are reduced on a one-for-one basis when RSUs are settled in shares of common stock, which shares of common stock were issued net of withholding tax through the withholding of shares.  The Company has the option following vesting to settle RSUs in stock or cash, or a combination of stock and cash.  The Company expects to settle RSUs that vest in the future using shares of common stock.  

RSUs currently outstanding relate to the 2018 and 2017 grants, which were subject to predetermined performance criteria applied against the applicable performance period.  These RSUs continue to be subject to employment-based criteria and vesting generally occurs in December of the second year after the grant.  See the table below for anticipated vesting by year.

We recognize compensation cost for share-based payments to employees over the period during which the recipient is required to provide service in exchange for the award.  Compensation cost is based on the fair value of the equity instrument on the date of grant.  The fair values for the RSUs granted during 2018 and 2017 were determined using the Company’s closing price on the grant date.  We also estimate forfeitures, resulting in the recognition of compensation cost only for those awards that are expected to actually vest.

All RSUs awarded are subject to forfeiture until vested and cannot be sold, transferred or otherwise disposed of during the restricted period.  

A summary of activity related to RSUs during the three months ended March 31, 2019 is as follows:

 

 

Restricted Stock Units

 

 

 

 

 

 

Weighted Average

 

 

 

 

 

 

Grant Date Fair

 

 

Units

 

 

Value Per Unit

 

Nonvested, December 31, 2018

 

3,355,917

 

 

$

3.90

 

Forfeited (1)

 

(856,718

)

 

 

2.77

 

Nonvested, March 31, 2019

 

2,499,199

 

 

 

4.28

 

 

(1)

Primarily related to a former executive’s forfeitures.

 

15


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

 

For the outstanding RSUs issued to the eligible employees as of March 31, 2019, vesting is expected to occur as follows (subject to forfeitures):  

 

 

Restricted Stock Units

 

2019

 

1,579,140

 

2020

 

920,059

 

Total

 

2,499,199

 

Awards to Non-Employee Directors.  Under the W&T Offshore, Inc. 2004 Directors Compensation Plan (as amended from time to time, the “Director Compensation Plan”), shares of restricted stock (“Restricted Shares”) have been granted to the Company’s non-employee directors.  Grants to non-employee directors were made during 2018, 2017 and 2016.  As of March 31, 2019, there were 128,980 shares of common stock available for issuance in satisfaction of awards under the Director Compensation Plan.  The shares available are reduced on a one-to-one basis when Restricted Shares are granted.  

We recognize compensation cost for share-based payments to non-employee directors over the period during which the recipient is required to provide service in exchange for the award.  Compensation cost is based on the fair value of the equity instrument on the date of grant.  The fair values for the Restricted Shares granted were determined using the Company’s closing price on the grant date.   No forfeitures were estimated for the non-employee directors’ awards.

The Restricted Shares are subject to service conditions and vesting occurs at the end of specified service periods unless approved by the Board of Directors.  Restricted Shares cannot be sold, transferred or disposed of during the restricted period.  The holders of Restricted Shares generally have the same rights as a shareholder of the Company with respect to such Restricted Shares, including the right to vote and receive dividends or other distributions paid with respect to the Restricted Shares.

For the outstanding Restricted Shares issued to the non-employee directors as of March 31, 2019, vesting is expected to occur as follows (subject to any forfeitures):

 

Restricted Shares

 

2019

 

105,012

 

2020

 

62,972

 

2021

 

13,848

 

Total

 

181,832

 

Share-Based Compensation.  Share-based compensation expense is recorded in the line General and administrative expenses in the Condensed Consolidated Statements of Operations.  The tax benefit related to compensation expense recognized under share-based payment arrangements was not meaningful and was minimal due to adjustments in the valuation allowance.  A summary of incentive compensation expense under share-based payment arrangements is as follows (in thousands):

 

 

Three Months Ended

 

 

March 31,

 

 

2019

 

 

2018

 

Share-based compensation expense from:

 

 

 

 

 

 

 

Restricted stock units (1)

$

(148

)

 

$

1,149

 

Restricted Shares

 

70

 

 

 

70

 

Total

$

(78

)

 

$

1,219

 

 

(1)

For the 2019 period, the net credit is due to a former executive’s forfeitures.

16


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

 

Unrecognized Share-Based Compensation.  As of March 31, 2019, unrecognized share-based compensation expense related to our awards of RSUs and Restricted Shares was $5.5 million and $0.3 million, respectively.  Unrecognized share-based compensation expense will be recognized through November 2020 for RSUs and April 2021 for Restricted Shares.  

Cash-Based Incentive Compensation. In addition to share-based awards, cash-based awards were granted under the Plan to eligible employees in 2018 and 2017.  For 2018, there were two cash-based awards consisting of a long-term award and a short-term award.  All cash-based awards are performance-based awards consisting of predetermined performance criteria applied against the applicable performance period.  Expense for each award is recognized over the service period once the applicable financial condition is expected to be met, and the business criteria and individual performance criteria can be reasonably estimated for the applicable period.

 

For the 2018 long-term, cash-based awards, incentive compensation expense was determined based on the Company achieving certain performance metrics for 2018 and is being recognized over the September 2018 to November 2020 period.  The 2018 long-term, cash-based awards will be eligible for payment on December 14, 2020 subject to participants meeting certain employment-based criteria.  

 

For the 2018 short-term, cash-based awards, incentive compensation expense was determined based on the Company achieving certain performance metrics for 2018 combined with individual performance criteria for 2018 and was recognized over the January 2018 to February 2019 period.  The 2018 short-term, cash-based awards were paid during March 2019.  

 

For the 2017 cash-based awards, incentive compensation expense was determined based on the Company achieving certain performance metrics for 2017 combined with individual performance criteria for 2017 and was recognized over the January 2017 to February 2018 period.  The 2017 cash-based awards were paid during March 2018.

A summary of compensation expense related to share-based awards and cash-based awards is as follows (in thousands):

 

Three Months Ended

 

 

March 31,

 

 

2019

 

 

2018

 

Share-based compensation included in:

 

 

 

 

 

 

 

General and administrative expenses

$

(78

)

 

$

1,219

 

Cash-based incentive compensation included in:

 

 

 

 

 

 

 

Lease operating expense (1)

 

(123

)

 

 

860

 

General and administrative expenses (1)

 

2,095

 

 

 

2,672

 

Total charged to operating income

$

1,894

 

 

$

4,751

 

 

(1) Includes adjustments of accruals to actual payments.

17


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

 

8.  Income Taxes  

Our income tax expense for the three months ended March 31, 2019 and 2018 was $0.2 million and $0.1 million, respectively.  Our effective tax rate was not meaningful for the periods presented as we continue to record a full valuation allowance on net deferred tax assets.  

During the three months ended March 31, 2019 and 2018, we did not receive any income tax refunds or make any income tax payments of significance.

As of March 31, 2019 and December 31, 2018, our valuation allowance was $127.8 million and $117.8 million, respectively, related to net federal and state deferred tax assets.  Net deferred tax assets were recorded related to net operating losses and temporary differences between the book and tax basis of assets and liabilities expected to produce tax deductions in future periods.  The realization of these assets depends on recognition of sufficient future taxable income in specific tax jurisdictions in which those temporary differences or net operating losses are deductible.  In assessing the need for a valuation allowance on our deferred tax assets, we consider whether it is more likely than not that some portion or all of them will not be realized.     

As of March 31, 2019 and December 31, 2018, we had current income taxes receivable of $54.1 million, which primarily relates to our net operating loss carryback claims for the years 2012, 2013 and 2014 that were carried back to prior years.  These carryback claims were made pursuant to IRC Section 172(f) (related to rules regarding “specified liability losses”), which permits certain platform dismantlement, well abandonment and site clearance costs to be carried back 10 years.  The refund claims require a review by the Congressional Joint Committee on Taxation which we expect to receive in 2019.

The tax years 2013 through 2018 remain open to examination by the tax jurisdictions to which we are subject.   

9.  Earnings Per Share

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

 

Three Months Ended

 

 

March 31,

 

 

2019

 

 

2018

 

Net (loss) income

$

(47,761

)

 

$

27,640

 

Less portion allocated to nonvested shares

 

 

 

 

1,145

 

Net (loss) income allocated to common shares

$

(47,761

)

 

$

26,495

 

 

Weighted average common shares outstanding

 

140,462

 

 

 

138,845

 

 

 

 

 

 

 

 

 

Basic and diluted (loss) earnings  per common share

$

(0.34

)

 

$

0.19

 

 

 

 

 

 

 

 

 

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

 

3,342

 

 

 

 

 

18


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

 

10.  Contingencies  

Apache Lawsuit.   On December 15, 2014, Apache filed a lawsuit against the Company alleging that W&T breached the joint operating agreement related to, among other things, the abandonment of three deepwater wells in the Mississippi Canyon area of the Gulf of Mexico.  A trial court judgment was rendered from the U.S. District Court for the Southern District of Texas on May 31, 2017 directing the Company to pay Apache $43.2 million, plus $6.3 million in prejudgment interest, attorney’s fees and costs assessed in the judgment.  We filed an appeal of the trial court judgment in the U.S. Court of Appeals for the Fifth Circuit and provided oral arguments in December 2018.    Prior to filing the appeal, in order to stay execution of the judgment, we deposited $49.5 million with the registry of the court in June 2017.  Oral arguments occurred on December 4, 2018, but as the filing date of this Form 10-Q, a decision had not been rendered by the U.S. Court of Appeals for the Fifth Circuit.  

The deposit of $49.5 million with the registry of the court is recorded in Other assets (long-term) on the Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018.  Although we are appealing the decision, based solely on the decision rendered, we have recorded $49.5 million in Other liabilities (long-term) on the Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018.

Appeal with the Office of Natural Resources Revenue (“ONRR”). In 2009, we recognized allowable reductions of cash payments for royalties owed to the ONRR for transportation of their deepwater production through our subsea pipeline systems.  In 2010, the ONRR audited our calculations and support related to this usage fee, and in 2010, we were notified that the ONRR had disallowed approximately $4.7 million of the reductions taken.  We recorded a reduction to other revenue in 2010 to reflect this disallowance; however, we disagree with the position taken by the ONRR.  We filed an appeal with the ONRR, which was denied in May 2014.  On June 17, 2014, we filed an appeal with the Interior Board of Land Appeals (“IBLA”) under the Department of the Interior.  On January 27, 2017, the IBLA affirmed the decision of the ONRR requiring W&T to pay approximately $4.7 million in additional royalties.  We filed a motion for reconsideration of the IBLA decision on March 27, 2017.  Based on a statutory deadline, we filed an appeal of the IBLA decision on July 25, 2017 in the U.S. District Court for the Eastern District of Louisiana.  We were required to post a bond in the amount of $7.2 million and cash collateral of $6.9 million in order to appeal the IBLA decision.  On December 4, 2018, the IBLA denied our motion for reconsideration.  On February 4, 2019, we filed our first amended complaint.  

Royalties-In-Kind (“RIK”).  Under a program of the Minerals Management Service (“MMS”) (a Department of Interior agency and predecessor to the ONRR), royalties must be paid “in-kind” rather than in value from federal leases in the program.  The MMS added to the RIK program our lease at the East Cameron 373 field beginning in November 2001, where in some months we over delivered volumes of natural gas and under delivered volumes of natural gas in other months for royalties owed.  The MMS elected to terminate receiving royalties in-kind in October 2008, causing the imbalance to become fixed for accounting purposes.  The MMS ordered us to pay an amount based on its interpretation of the program and its calculations of amounts owed.  We disagreed with MMS’s interpretations and calculations and filed an appeal with the IBLA, of which the IBLA ruled in MMS’ favor.  We filed an appeal with the District Court of the Western District of Louisiana, who assigned the case to a magistrate to review and issue a ruling, and the District Court upheld the magistrate’s ruling on May 29, 2018.  We filed an appeal on July 24, 2018.  Part of the ruling was in favor of our position and part was in favor of MMS’ position.  Based solely on the District Court’s ruling, we recorded a liability reserve of $2.2 million and $2.1 million as of March 31, 2019 and December 31, 2018, respectively.  We have appealed the ruling to the U.S. Fifth Circuit Court of Appeals and the government filed a cross-appeal.  Briefing and oral arguments, if held, are expected to be completed in 2019.        

19


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

 

Royalties – “Unbundling” Initiative.  The ONRR has publicly announced an “unbundling” initiative to revise the methodology employed by producers in determining the appropriate allowances for transportation and processing costs that are permitted to be deducted in determining royalties under Federal oil and gas leases.  The ONRR’s initiative requires re-computing allowable transportation and processing costs using revised guidance from the ONRR going back 84 months for every gas processing plant that processed our gas.  In the second quarter of 2015, pursuant to the initiative, we received requests from the ONRR for additional data regarding our transportation and processing allowances on natural gas production related to a specific processing plant.  We also received a preliminary determination notice from the ONRR asserting that our allocation of certain processing costs and plant fuel use at another processing plant was not allowed as deductions in the determination of royalties owed under Federal oil and gas leases.  We have submitted revised calculations covering certain plants and time periods to the ONRR.  As of the filing date of this Form 10-Q, we have not received a response from the ONRR related to our submissions.  These open ONRR unbundling reviews, and any further similar reviews, could ultimately result in an order for payment of additional royalties under our Federal oil and gas leases for current and prior periods.  For the three months ended March 31, 2019 and 2018, we paid $0.1 million and $0.1 million, respectively, of additional royalties and expect to pay more in the future.  We are not able to determine the range of any additional royalties or, if and when assessed, whether such amounts would be material.

Notices of Proposed Civil Penalty Assessment.  During the three months ended March 31, 2019 and 2018, we did not pay any civil penalties to the Bureau of Safety and Environmental Enforcement (“BSEE”) related to Incidents of Noncompliance (“INCs”) at various offshore locations.  We currently have nine open civil penalties issued by the BSEE from INCs, which have not been settled as of the filing date of this Form 10-Q.  The INCs underlying these open civil penalties cite alleged non-compliance with various safety-related requirements and procedures occurring at separate offshore locations on various dates ranging from July 2012 to January 2018.  The proposed civil penalties for these INCs total $7.7 million.  As of March 31, 2019 and December 31, 2018, we have accrued approximately $3.4 million, which is our best estimate of the final settlements once all appeals have been exhausted.  Our position is that the proposed civil penalties are excessive given the specific facts and circumstances related to these INCs.    

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

 

 

 

20


 

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

Forward-Looking Statements

The following discussion and analysis should be read in conjunction with our accompanying unaudited condensed consolidated financial statements and the notes to those financial statements included in Item 1 of this Quarterly Report on Form 10-Q.  The following discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). These forward-looking statements involve risks, uncertainties and assumptions.  If the risks or uncertainties materialize or the assumptions prove incorrect, our results may differ materially from those expressed or implied by such forward-looking statements and assumptions.  All statements other than statements of historical fact are statements that could be deemed forward-looking statements, such as those statements that address activities, events or developments that we expect, believe or anticipate will or may occur in the future.  These statements are based on certain assumptions and analyses made by us in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate in the circumstances.  Known material risks that may affect our financial condition and results of operations are discussed in Item 1A, Risk Factors, and market risks are discussed in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of our Annual Report on Form 10-K for the year ended December 31, 2018 and may be discussed or updated from time to time in subsequent reports filed with the Securities and Exchange Commission.  Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof.  We assume no obligation, nor do we intend to update these forward-looking statements.  Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “W&T,” “we,” “us,” “our” and the “Company” refer to W&T Offshore, Inc. and its consolidated subsidiaries.

Overview

We are an independent oil and natural gas producer, active in the exploration, development and acquisition of oil and natural gas properties in the Gulf of Mexico.  We have grown through acquisitions, exploration and development and hold working interests in 48 offshore fields in federal and state waters (47 producing and one field capable of producing).  We currently have under lease approximately 720,000 gross acres (390,000 net acres) spanning across the Outer Continental Shelf (“OCS”) off the coasts of Louisiana, Texas, Mississippi and Alabama, with approximately 515,000 gross acres on the conventional shelf and approximately 205,000 gross acres in the deepwater (water depths in excess of 500 feet).  A majority of our daily production is derived from wells we operate.  Our interest in fields, leases, structures and equipment are primarily owned by W&T Offshore, Inc. and our wholly-owned subsidiary, W & T Energy VI, LLC, a Delaware limited liability company and through our proportionately consolidated interests in Monza, as described in more detail in Financial Statements– Note 4 – Joint Venture Drilling Program under Part I, Item 1 in this Form 10-Q.    

Our financial condition, cash flow and results of operations are significantly affected by the volume of our crude oil, NGLs and natural gas production and the prices that we receive for such production.  Our production volumes for the three months ended March 31, 2019 were comprised of 49.2% crude oil and condensate, 10.3% NGLs and 40.5% natural gas, determined on a barrel of oil equivalent (“Boe”) using the energy equivalency ratio of six thousand cubic feet (“Mcf”) of natural gas to one barrel of crude oil, condensate or NGLs.  The conversion ratio does not assume price equivalency, and the price per one Boe for crude oil, NGLs and natural gas has differed significantly in the past.  For the three months ended March 31, 2019, revenues from the sale of crude oil and NGLs made up 80.2% of our total revenues compared to 79.7% for the three months ended March 31, 2018.  For the three months ended March 31, 2019, our combined total production expressed in equivalent volumes was 9.8% lower than for the three months ended March 31, 2018, with natural gas having the largest decline.  For the three months ended March 31, 2019, our total revenues were 13.5% lower than the three months ended March 31, 2018 primarily due to lower production and lower realized prices for crude oil and NGLs.  See Results of Operations – Three Months Ended March 31, 2019 Compared to the Three Months Ended March 31, 2018 in this Item 2 for additional information.

21


 

Our operating results are strongly influenced by the price of the commodities that we produce and sell.  The price of those commodities is affected by both domestic and international factors, including domestic production.  During the three months ended March 31, 2019, our average realized crude oil price was $58.66 per barrel.  This is a decrease from our average realized crude oil price of $62.52 per barrel for the three months ended March 31, 2018 and a decrease from our average realized crude oil price of $65.62 per barrel for the year 2018.  For the month of March 2019, the average realized price for crude oil increased from the amounts realized in January 2019 and February 2019 to $64.23 per barrel, which was above the average realized crude oil price for the three months ended March 31, 2018.  Our average realized prices of NGLs and natural gas for the three months ended March 31, 2019 were lower than the average realized prices for the three months ended March 31, 2018 by 24.2% and 1.0%, respectively.  

Our average realized crude oil sales price differs from the WTI benchmark average crude price primarily due to premiums or discounts, crude oil quality adjustments, volume weighting (collectively referred to as differentials) and other factors.  Crude oil quality adjustments can vary significantly by field.  All of our crude oil is produced offshore in the Gulf of Mexico and is characterized as Poseidon, Light Louisiana Sweet (“LLS”), Heavy Louisiana Sweet (“HLS”) and others.  WTI is frequently used to value domestically produced crude oil, and the majority of our crude oil production is priced using the spot price for WTI as a base price, then adjusted for the type and quality of crude oil and other factors.  Similar to crude oil prices, the differentials for our offshore crude oil have also experienced volatility in the past.  The monthly average differentials of WTI versus Poseidon, LLS and HLS for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 improved by approximately $3.00 per barrel for these types of crude oils.

Two major components of our NGLs, ethane and propane, typically make up over 70% of an average NGL barrel.  During in the three months ended March 31, 2019 compared to the three months ended March 31, 2018, average prices for domestic ethane increased by 6% and average domestic propane prices decreased by 21% as measured using a price index for Mount Belvieu.  The average price for other domestic NGLs components ranged from decreases of 15% to 18% for the three months ended March 31, 2019 year-over-year.  We believe the change in prices for NGLs is mostly a function of the change in crude oil prices combined with changes in propane supply and demand.  

According to Baker Hughes, the number of working rigs drilling for oil and natural gas on land in the U.S. as of the end of March 2019 was approximately the same level as year ago levels for land based rigs (an increase of four rigs, or less than 1%), and higher in the Gulf of Mexico (an increase of 11 rigs or 92%).  The oil rig count as of March 2019 and March 2018 was 816 and 797, respectively.  The U.S. natural gas rig count as of March 2019 and March 2018 was 190 and 194, respectively.  In the Gulf of Mexico, the number of working rigs was 23 rigs (18 oil rigs and five natural gas rigs) as of March 2019 and 12 rigs (all oil rigs) as of March 2018.  During the three months ended March 31, 2019, we had four rigs running, which represents approximately 20% of the active rigs in the Gulf of Mexico.  


22


 

Our current capital expenditure forecast for 2019 is approximately $120.0 million composed of select shelf and deepwater projects that, assuming success, would be placed on production within a few months after completion.  The forecast also incorporates our capital spending relating to the JV Drilling Program (net to our interest).  Our 2019 plans also include spending $24.0 million for ARO.  Based upon current price and production expectations for 2019, we believe that our cash flows from operating activities and cash on hand will be sufficient to fund our operations through year-end 2019 and build available cash balances; however, future cash flows are subject to a number of variables and additional capital expenditures may be required to more fully develop our properties.  We are also currently evaluating various acquisition opportunities, which, if successful, may increase our capital requirements in 2019 and beyond.  We continue to closely monitor current and forecasted commodity prices to assess what changes, if any, should be made to our 2019 plans.  See our Annual Report on Form 10-K for the year ended December 31, 2018, for additional information.  

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Results of Operations

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

 

Three Months Ended

 

 

March 31,

 

 

2019

 

 

2018

 

 

Change

 

 

%

 

 

(In thousands, except percentages and per share data)

 

Financial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil

$

86,703

 

 

$

97,306

 

 

$

(10,603

)

 

 

(10.9

)%

NGLs

 

6,448

 

 

 

9,660

 

 

 

(3,212

)

 

 

(33.3

)%

Natural gas

 

21,838

 

 

 

25,867

 

 

 

(4,029

)

 

 

(15.6

)%

Other

 

1,091

 

 

 

1,380

 

 

 

(289

)

 

 

(20.9

)%

Total revenues

 

116,080

 

 

 

134,213

 

 

 

(18,133

)