Significant Accounting Policies
|12 Months Ended|
Dec. 31, 2017
|Accounting Policies [Abstract]|
|Significant Accounting Policies||
1. Significant Accounting Policies
W&T Offshore, Inc. and 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 in the Gulf of Mexico. On October 15, 2015, a substantial amount of our interest in onshore acreage was sold, which is described in Note 7. We are active in the exploration, development and acquisition of oil and natural gas properties. Our interest in fields, leases, structures and equipment are primarily owned by the parent company, W&T Offshore, Inc. (on a stand-alone basis, the “Parent Company”) and our wholly-owned subsidiary, W & T Energy VI, LLC (“Energy VI”).
Basis of Presentation
Our consolidated financial statements include the accounts of W&T Offshore, Inc. and its majority-owned subsidiaries. All significant intercompany transactions and amounts have been eliminated for all years presented. Our consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) and the appropriate rules and regulations of the Securities and Exchange Commission (“SEC”).
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, the reported amounts of revenues and expenses during the reporting periods and the reported amounts of proved oil and natural gas reserves. Actual results could differ from those estimates.
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 these commodities improved in 2017 compared to the average realized prices in 2016. Operating costs were lower for 2017 on an absolute and on a per barrel oil equivalent (“Boe”) basis compared to the operating costs for 2016.
In September 2016, we consummated the Exchange Transaction, as defined and described below in Note 2, which reduced our interest payments for 2017 as compared to 2016. In addition, the Exchange Transaction extended the maturities on a portion of our debt, although for a portion of the New Debt, as defined and described in Note 2, the maturities of two of the new loans will accelerate if certain events do not transpire.
We have continued working to further reduce our operating costs, capital expenditures and costs related to asset retirement obligations (“ARO”). Our capital expenditures incurred in 2017 were higher than the capital expenditures incurred during 2016, but were significantly lower than spending levels incurred during 2015 and prior years. Our current capital expenditure budget for 2018 is approximately the same level as incurred in 2017.
As of the filing date of this Form 10-K, the Company is in compliance with its financial assurance obligations to the Bureau of Ocean Energy Management (“BOEM”) and has no outstanding BOEM orders related to financial assurance obligations.
During the second quarter of 2017, a trial court judgment was rendered in Apache Corporation’s (“Apache”) lawsuit against us. As a result, we deposited $49.5 million with the registry of the court from cash on hand as a first step to allow us to appeal the decision. See Note 17 for additional information.
We have assessed our financial condition, the current capital markets and options given different scenarios of commodity prices. We believe we will have adequate liquidity to fund our operations through March 2019, the period of assessment to qualify as a going concern. We are evaluating various alternatives and believe our plans can be executed in the current market and are within our capabilities. Our plans address the possible maturity acceleration of certain debt instruments, which could accelerate to February 28, 2019 if certain events were not to occur, and address events needed to extend our Credit Agreement, which matures on November 8, 2018. However, we cannot predict the potential changes in commodity prices or future bonding requirements, either of which could affect our operations, liquidity levels and compliance with debt obligations.
We consider all highly liquid investments purchased with original or remaining maturities of three months or less at the date of purchase to be cash equivalents.
We recognize oil and natural gas revenues based on the quantities of our production sold to purchasers under short-term contracts (less than 12 months) at market prices when delivery has occurred, title has transferred and collectability is reasonably assured. We use the sales method of accounting for oil and natural gas revenues from properties with joint ownership. Under this method, we record oil and natural gas revenues based upon physical deliveries to our customers, which can be different from our net revenue ownership interest in field production. These differences create imbalances that we recognize as a liability only when the estimated remaining recoverable reserves of a property will not be sufficient to enable the under-produced party to recoup its entitled share through production. We do not record receivables for those properties in which we have taken less than our ownership share of production. At December 31, 2017 and 2016, $4.7 million and $5.3 million, respectively, were included in current liabilities related to natural gas imbalances.
Concentration of Credit Risk
Our customers are primarily large integrated oil and natural gas companies, large financial institutions and large trading houses. The majority of our production is sold utilizing month-to-month contracts that are based on bid prices. We attempt to minimize our credit risk exposure to purchasers of our oil and natural gas, joint interest owners, derivative counterparties and other third-party entities through formal credit policies, monitoring procedures, and letters of credit or guarantees when considered necessary.
The following table identifies customers from whom we derived 10% or more of our receipts from sales of crude oil, NGLs and natural gas:
** Less than 10%
We believe that the loss of any of the customers above would not result in a material adverse effect on our ability to market future oil and natural gas production as replacement customers could be obtained in a relatively short period of time on terms, conditions and pricing substantially similar to those currently existing.
Accounts Receivables and Allowance for Bad Debts
Our accounts receivables are recorded at their historical cost, less an allowance for doubtful accounts. The carrying value approximates fair value because of the short-term nature of such accounts. In addition to receivables from sales of our production to our customers, we also have receivables from joint interest owners on properties we operate. In certain arrangements, we have the ability to withhold future revenue disbursements to recover amounts due us from the joint interest partners. We have not had any significant problems collecting our receivables from our customers, but with the decline in commodity prices starting in 2015, several oil and gas companies have filed for bankruptcy where we have joint interest arrangements. We use the specific identification method of determining if an allowance for doubtful accounts is needed. The following table describes the balance and changes to the allowance for doubtful accounts:
We recognize insurance receivables with respect to capital, repair and plugging and abandonment costs primarily as a result of hurricane damage when we deem those to be probable of collection, which normally arises when our insurance company’s adjuster reviews and approves such costs for payment or when the insurance company has agreed to reimbursement amounts. Claims that have been processed in this manner have customarily been paid on a timely basis. During 2017, we received payments by certain insurance companies related to settlement of previously unpaid claims. See Note 5 for additional information.
Prepaid expenses and other
Amounts recorded in Prepaid expenses and other on the Consolidated Balance Sheets are expected to be realized within one year. The following table describes the major items for the periods presented:
Properties and Equipment
We use the full-cost method of accounting for oil and natural gas properties and equipment. Under this method, all costs associated with the acquisition, exploration, development and abandonment of oil and natural gas properties are capitalized. Acquisition costs include costs incurred to purchase, lease or otherwise acquire properties. Exploration costs include costs of drilling exploratory wells and external geological and geophysical costs, which mainly consist of seismic costs. Development costs include the cost of drilling development wells and costs of completions, platforms, facilities and pipelines. Costs associated with production, certain geological and geophysical costs and general and administrative costs are expensed in the period incurred.
Oil and natural gas properties and equipment include costs of unproved properties. The cost of unproved properties related to significant acquisitions are excluded from the amortization base until it is determined that proved reserves can be assigned to such properties or until such time as we have made an evaluation that impairment has occurred. The costs of drilling exploratory dry holes are included in the amortization base immediately upon determination that such wells are non-commercial.
We capitalize interest on the amount of unproved properties that are excluded from the amortization base. Interest is capitalized only for the period that exploration and development activities are in progress. Capitalization of interest ceases when the property is moved into the amortization base. All capitalized interest is recorded within Oil and natural gas property and equipment on the Consolidated Balance Sheets.
Oil and natural gas properties included in the amortization base are amortized using the units-of-production method based on production and estimates of proved reserve quantities. In addition to costs associated with evaluated properties and capitalized asset ARO, the amortization base includes estimated future development costs to be incurred in developing proved reserves as well as estimated plugging and abandonment costs, net of salvage value, related to developing proved reserves. Future development costs related to proved reserves are not recorded as liabilities on the balance sheet, but are part of the calculation of depletion expense.
Sales of proved and unproved oil and natural gas properties, whether or not being amortized currently, are accounted for as adjustments of capitalized costs with no gain or loss recognized unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and natural gas.
Furniture, fixtures and non-oil and natural gas property and equipment are depreciated using the straight-line method based on the estimated useful lives of the respective assets, generally ranging from five to seven years. Leasehold improvements are amortized over the shorter of their economic lives or the lease term. Repairs and maintenance costs are expensed in the period incurred. Oil and natural gas properties and equipment are recorded at cost using the full cost method.
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):
Ceiling Test Write-Down
Under the full-cost method of accounting, we are required to perform a “ceiling test” calculation quarterly, which determines a limit on the book value of our oil and natural gas properties. If the net capitalized cost of oil and natural gas properties (including capitalized ARO) net of related deferred income taxes exceeds the ceiling test limit, the excess is charged to expense on a pre-tax basis and separately disclosed. Any such write downs are not recoverable or reversible in future periods. The ceiling test limit is calculated as: (i) the present value of estimated future net revenues from proved reserves, less estimated future development costs, discounted at 10%; (ii) plus the cost of unproved oil and natural gas properties not being amortized; (iii) plus the lower of cost or estimated fair value of unproved oil and natural gas properties included in the amortization base; and (iv) less related income tax effects. Estimated future net revenues used in the ceiling test for each period are based on current prices for each product, defined by the SEC as the unweighted average of first-day-of-the-month commodity prices over the prior twelve months for that period. All prices are adjusted by field for quality, transportation fees, energy content and regional price differentials.
We did not record a ceiling test write-down during 2017. We recorded ceiling test write-downs in 2016 and 2015, which are reported as a separate line in the Statements of Operations, due primarily to declines in the unweighted rolling 12-month average of first-day-of-the-month commodity prices for oil and natural gas. The ceiling test write-downs of the carrying value of our oil and natural gas properties were $279.1 million and $987.2 million for 2016 and 2015, respectively. If average crude oil and natural gas prices decrease from 2016 levels, it is possible that ceiling test write-downs could be recorded during 2018 or future periods.
Asset Retirement Obligations
We are required to record a separate liability for the present value of our ARO, with an offsetting increase to the related oil and natural gas properties on our balance sheet. We have significant obligations to plug and abandon well bores, remove our platforms, pipelines, facilities and equipment and restore the land or seabed at the end of oil and natural gas production operations. These obligations are primarily associated with plugging and abandoning wells, removing pipelines, removing and disposing of offshore platforms and site cleanup. Estimating the future restoration and removal cost is difficult and requires us to make estimates and judgments because the removal obligations may be many years in the future and contracts and regulations often have vague descriptions of what constitutes removal. Asset removal technologies and costs are constantly changing, as are regulatory, political, environmental, safety and public relations considerations, which can substantially affect our estimates of these future costs from period to period. For additional information, refer to Note 4.
Oil and Natural Gas Reserve Information
We use the unweighted average of first-day-of-the-month commodity prices over the preceding 12-month period when estimating quantities of proved reserves. Similarly, the prices used to calculate the standardized measure of discounted future cash flows and prices used in the ceiling test for impairment are the 12-month average commodity prices. Proved undeveloped reserves may only be classified as such if a development plan has been adopted indicating that they are scheduled to be drilled within five years, with some limited exceptions allowed. Refer to Note 21 for additional information about our proved reserves.
Derivative Financial Instruments
Our market risk exposure relates primarily to commodity prices. From time to time, we use various derivative instruments to manage our exposure to commodity price risk from sales of oil and natural gas. When we have outstanding borrowings on our revolving bank credit facility, we may use various derivative financial instruments to manage our exposure to interest rate risk from floating interest rates. During 2017, no borrowings were outstanding on our revolving bank credit facility. We do not enter into derivative instruments for speculative trading purposes. We entered into commodity derivatives contracts during 2017, which were settled or expired during 2017. As of December 31, 2017 and 2016, we did not have any open derivative financial instruments.
Derivative instruments are recorded on the balance sheet as an asset or a liability at fair value. Changes in a derivative’s fair value are required to be recognized currently in earnings unless specific hedge accounting and documentation criteria are met at the time the derivative contract is entered into. Whenever we have entered into derivative contracts, we did not designate our commodity derivatives as hedging instruments, therefore, all changes in fair value are recognized in earnings.
Fair Value of Financial Instruments
We include fair value information in the notes to our consolidated financial statements when the fair value of our financial instruments is different from the book value or it is required by applicable guidance. We believe that the book value of our cash and cash equivalents, receivables, accounts payable and accrued liabilities materially approximates fair value due to the short-term nature and the terms of these instruments. We believe that the book value of our restricted deposits approximates fair value as deposits are in cash or short-term investments. We believe the carrying amount of debt under our 11.00% 1.5 Lien Term Loan, due November 2019, (the “1.5 Lien Term Loan”) approximates fair value because of the debt’s superior collateral ranking amongst our various debt instruments even though such debt was not traded.
Fair Value of Acquisitions
Acquisitions are recorded on the closing date of the transaction at their fair value, which is determined by applying the market and income approaches using Level 3 inputs. The Level 3 inputs are: (i) analysis of comparable transactions obtained from various third-parties, (ii) estimates of ultimate recoveries of reserves, and (iii) estimates of discounted cash flows based on estimated reserve quantities, reserve categories, timing of production, costs to produce and develop reserves, future prices, ARO and discount rates. The estimates and assumptions are determined by management and third-parties. The fair value is based on subjective estimates and assumptions, which are inherently imprecise, and the actual realized values can vary significantly from estimates that are made.
We use the liability method of accounting for income taxes in accordance with the Income Taxes topic of the Accounting Standard Codification. Under this method, deferred tax assets and liabilities are determined by applying tax rates in effect at the end of a reporting period to the cumulative temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. The effects of changes in tax rates and laws on deferred tax balances are recognized in the period in which the new legislation is enacted. 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. We recognize uncertain tax positions in our financial statements when it is more likely than not that we will sustain the benefit taken or expected to be taken. When applicable, we recognize interest and penalties related to uncertain tax positions in income tax expense. See Note 12 for additional information.
Other Assets (long-term)
The major categories recorded in Other assets are presented in the following table (in thousands):
The major categories recorded in Accrued liabilities are presented in the following table (in thousands):
Troubled Debt Restructuring
We accounted for a debt exchange transaction in 2016, which is described in Note 2, 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 New Debt (as defined in Note 2) is measured using all future undiscounted payments (principal and interest); therefore, no interest expense has been recorded for the newly issued debt in the Consolidated Statements of Operations since September 7, 2016. Additionally, no interest expense related to the New Debt will be recorded in future periods as payments of interest on this debt will be recorded as a reduction in the carrying amount; thus, our reported interest expense will be significantly less than the contractual interest payments beginning on September 7, 2016 and through the maturities of the New Debt. See Note 2 for additional information.
Debt Issuance Costs
Debt issuance costs associated with our revolving bank credit facility are amortized using the straight-line method over the scheduled maturity of the debt. Debt issuance costs associated with all other debt are deferred and amortized over the scheduled maturity of the debt utilizing the effective interest method. Unamortized debt issuance costs associated with our revolving bank credit facility is reported within Other Assets (noncurrent) and unamortized debt issuance costs associated with our other debt is reported as a reduction in Long-term debt, less current maturities in the Consolidated Balance Sheets. See Note 2 for additional information.
Premiums Received and Discounts Provided on Debt Issuance
Premiums and discounts are recorded in Long-term debt, less current maturities in the Consolidated Balance Sheets and are amortized over the term of the related debt using the effective interest method.
Other Liabilities (long-term)
The major categories recorded in Other liabilities are presented in the following table (in thousands):
Compensation cost for share-based payments to employees and non-employee directors is based on the fair value of the equity instrument on the date of grant and is recognized over the period during which the recipient is required to provide service in exchange for the award. The fair value for equity instruments subject to only time or to Company performance measures was determined using the closing price of the Company’s common stock at the date of grant. We recognize share-based compensation expense on a straight line basis over the period during which the recipient is required to provide service in exchange for the award. Estimates are made for forfeitures during the vesting period, resulting in the recognition of compensation cost only for those awards that are estimated to vest and estimated forfeitures are adjusted to actual forfeitures when the equity instrument vests. See Note 10 for additional information.
Earnings (Loss) Per Share
Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings (loss) per share under the two-class method when the effect is dilutive. For additional information, refer to Note 13.
Other (Income) Expense, Net
For 2017, the amount consists primarily of expense items related to the Apache lawsuit of $6.3 million, partially offset by loss-of-use reimbursements from a third-party for damages incurred at one of our platforms of $1.1 million. For 2016, the amount includes $7.7 million of income related to the settlement of certain insurance claims. In 2016 and 2015, the amount includes write-offs of debt issuance costs of $1.4 million and $3.2 million, respectively, related to a reduction in the borrowing base of the revolving bank credit facility under the Fifth Amended and Restated Credit Agreement (as amended, the “Credit Agreement”). The write-offs of debt issuance costs in both 2016 and 2015 are included as an adjustment to net income in determining Net cash provided by operating activities in the Consolidated Statements of Cash Flows as the write-offs were non-cash transactions.
Recent Accounting Developments
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09 (“ASU 2014-09”), Revenue from Contracts and Customers (Topic 606). ASU 2014-09 amends and replaces current revenue recognition requirements, including most industry-specific guidance. The revised guidance establishes a five step approach to be utilized in determining when, and if, revenue should be recognized. ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2017. Upon adoption, an entity may elect one of two methods, either restatement of prior periods presented or recording a cumulative adjustment in the initial period of application (modified retrospective approach). Our analysis of contracts with customers against the requirements of ASU 2014-09 is complete and we have not identified any changes to the timing of revenue recognition, or any changes to the classification of transactions previously recorded as revenue or credits to expense based on requirements of the standard. Therefore, the implementation of ASU 2014-09 will not have a material impact on our consolidated financial statements. We will adopt ASU 2014-09 using the modified retrospective method that requires application of the new standard prospectively from the date of adoption with a cumulative effect adjustment, if any, recorded to retained earnings as of January 1, 2018 and revise our disclosures under ASU 2014-09 as applicable.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (“ASU 2016-02”), Leases (Subtopic 842). 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 finance or operating lease. However, unlike current GAAP, which requires only capital 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. Our current operating leases that will be impacted by ASU 2016-02 are leases for office space in Houston, Texas and New Orleans, Louisiana, 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. 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. 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, (“ASU 2016-13”), Financial Instruments – Credit Losses (Subtopic 326). 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 2016, the FASB issued Accounting Standards Update No. 2016-15, (“ASU 2016-15”), Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 addresses the classification of several items that previously had diversity in practice. Items identified in the new standard which were incurred by us in the past are: (a) debt prepayment or extinguishment costs; (b) contingent consideration made after a business acquisition; and (c) proceeds from settlement of insurance claims. The item described in clause (b) would be the only such item changed under our historical classification in the statement of cash flows (financing vs. investing) and the amount of such change would not have been material; therefore, we do not anticipate the new standard will have a material effect on our financial statements. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017 and early adoption is permitted.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18, (“ASU 2016-18”), Statement of Cash Flows (Topic 230) – Restricted Cash. ASU 2016-18 addresses diversity in practice and requires that a statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is expected to change some of the presentation in our statement of cash flows, but not materially impact total cash flows from operating, investing or financing activities. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period.
In August 2017, the FASB issued Accounting Standards Update No. 2017-12, (“ASU 2017-12”), Derivatives and Hedging (Topic 815) – Targeted Improvements to Accounting for Hedging Activities. 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. As we do not designate our commodity derivative positions 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. 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.
The entire disclosure for all significant accounting policies of the reporting entity.
Reference 1: http://www.xbrl.org/2003/role/presentationRef