UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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
W&T OFFSHORE, INC.
(Exact name of registrant as specified in its charter)
| |
(State of incorporation) | (IRS Employer Identification Number) |
| |
(Address of principal executive offices) | (Zip Code) |
(
(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.
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).
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 ☐ | | ☑ | |
Non-accelerated filer ☐ | Smaller reporting company | | |
Emerging growth company | |
Indicate by check mark whether the registrant is a shell company. Yes
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 | ||
| | |
As of November 2, 2020, there were
W&T OFFSHORE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page |
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PART I –FINANCIAL INFORMATION |
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Item 1. |
1 | |
Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019 |
1 | |
2 | ||
3 | ||
4 | ||
5 | ||
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
24 |
Item 3. |
39 | |
Item 4. |
39 | |
PART II – OTHER INFORMATION |
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Item 1. |
40 | |
Item 1A. |
40 | |
Item 6. |
41 | |
42 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
W&T OFFSHORE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
September 30, | December 31, | |||||||
2020 | 2019 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Receivables: | ||||||||
Oil and natural gas sales | ||||||||
Joint interest and other, net | ||||||||
Income taxes | ||||||||
Total receivables | ||||||||
Prepaid expenses and other assets (Note 1) | ||||||||
Total current assets | ||||||||
Oil and natural gas properties and other, net - at cost (Note 1) | ||||||||
Restricted deposits for asset retirement obligations | ||||||||
Deferred income taxes | ||||||||
Other assets (Note 1) | ||||||||
Total assets | $ | $ | ||||||
Liabilities and Shareholders’ Deficit | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | $ | ||||||
Undistributed oil and natural gas proceeds | ||||||||
Advance from joint interest partner | ||||||||
Asset retirement obligations | ||||||||
Accrued liabilities (Note 1) | ||||||||
Total current liabilities | ||||||||
Long-term debt: (Note 2) | ||||||||
Principal | ||||||||
Carrying value adjustments | ( | ) | ( | ) | ||||
Long term debt - carrying value | ||||||||
Asset retirement obligations, less current portion | ||||||||
Other liabilities (Note 1) | ||||||||
Commitments and contingencies | ||||||||
Shareholders’ deficit: | ||||||||
Preferred stock, par value; shares authorized; issued for dates presented | ||||||||
Common stock, par value; shares authorized; issued and outstanding at September 30, 2020; issued and outstanding at December 31, 2019 | ||||||||
Additional paid-in capital | ||||||||
Retained deficit | ( | ) | ( | ) | ||||
Treasury stock, at cost; shares for both dates presented | ( | ) | ( | ) | ||||
Total shareholders’ deficit | ( | ) | ( | ) | ||||
Total liabilities and shareholders’ deficit | $ | $ |
See Notes to Condensed Consolidated Financial Statements
W&T OFFSHORE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Revenues: | ||||||||||||||||
Oil | $ | $ | $ | $ | ||||||||||||
NGLs | ||||||||||||||||
Natural gas | ||||||||||||||||
Other | ||||||||||||||||
Total revenues | ||||||||||||||||
Operating costs and expenses: | ||||||||||||||||
Lease operating expenses | ||||||||||||||||
Production taxes | ||||||||||||||||
Gathering and transportation | ||||||||||||||||
Depreciation, depletion, amortization and accretion | ||||||||||||||||
General and administrative expenses | ||||||||||||||||
Derivative loss (gain) | ( | ) | ( | ) | ||||||||||||
Total costs and expenses | ||||||||||||||||
Operating (loss) income | ( | ) | ||||||||||||||
Interest expense, net | ||||||||||||||||
Gain on purchase of debt | ( | ) | ||||||||||||||
Other expense, net | ||||||||||||||||
(Loss) income before income tax benefit | ( | ) | ( | ) | ||||||||||||
Income tax benefit | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Net (loss) income | $ | ( | ) | $ | $ | $ | ||||||||||
Basic and diluted (loss) earnings per common share | $ | ( | ) | $ | $ | $ |
See Notes to Condensed Consolidated Financial Statements.
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, June 30, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||
Share-based compensation | — | — | ||||||||||||||||||||||||||
Stock Issued | ||||||||||||||||||||||||||||
Net loss | — | ( | ) | — | ( | ) | ||||||||||||||||||||||
Balances, September 30, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) |
Common Stock | Additional | Retained | Treasury Stock | Total | ||||||||||||||||||||||||
Shares | Value | Capital | Deficit | Shares | Value | Deficit | ||||||||||||||||||||||
Balances, June 30, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||
Share-based compensation | — | — | ||||||||||||||||||||||||||
Net income | — | — | ||||||||||||||||||||||||||
Balances, September 30, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) |
Common Stock Outstanding |
Additional Paid-In |
Retained |
Treasury Stock |
Total Shareholders’ |
||||||||||||||||||||||||
Shares |
Value |
Capital |
Deficit |
Shares |
Value |
Deficit |
||||||||||||||||||||||
Balances, December 31, 2019 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||||||||||||
Share-based compensation |
— | — | ||||||||||||||||||||||||||
Stock Issued |
||||||||||||||||||||||||||||
Net income |
— | — | ||||||||||||||||||||||||||
Balances, September 30, 2020 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) |
Common Stock |
Additional |
Retained |
Treasury Stock |
Total |
||||||||||||||||||||||||
Shares |
Value |
Capital |
Deficit |
Shares |
Value |
Deficit |
||||||||||||||||||||||
Balances, December 31, 2018 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||||||||||||
Share-based compensation |
— | — | ||||||||||||||||||||||||||
Stock Issued |
||||||||||||||||||||||||||||
Net loss |
— | — | ||||||||||||||||||||||||||
Balances, September 30, 2019 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) |
See Notes to Condensed Consolidated Financial Statements
W&T OFFSHORE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30, | ||||||||
2020 | 2019 | |||||||
Operating activities: | ||||||||
Net income | $ | $ | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation, depletion, amortization and accretion | ||||||||
Amortization of debt items and other items | ||||||||
Share-based compensation | ||||||||
Derivative (gain) loss | ( | ) | ||||||
Cash receipts on derivative settlements, net | ||||||||
Gain on purchase of debt | ( | ) | ||||||
Deferred income taxes | ( | ) | ( | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Oil and natural gas receivables | ( | ) | ||||||
Joint interest receivables | ( | ) | ||||||
Prepaid expenses and other assets | ( | ) | ||||||
Income tax | ||||||||
Asset retirement obligation settlements | ( | ) | ( | ) | ||||
Cash advance from JV partner | ||||||||
Accounts payable, accrued liabilities and other | ( | ) | ||||||
Net cash provided by operating activities | ||||||||
Investing activities: | ||||||||
Investment in oil and natural gas properties and equipment | ( | ) | ( | ) | ||||
Acquisition of property interest in oil and natural gas properties | ( | ) | ( | ) | ||||
Purchases of furniture, fixtures and other | ( | ) | ( | ) | ||||
Net cash used in investing activities | ( | ) | ( | ) | ||||
Financing activities: | ||||||||
Borrowings on credit facility | ||||||||
Repayments on credit facility | ( | ) | ( | ) | ||||
Purchase of Senior Second Lien Notes | ( | ) | ||||||
Debt issuance costs and other | ( | ) | ||||||
Net cash (used in) provided by financing activities | ( | ) | ||||||
Increase in cash and cash equivalents | ||||||||
Cash and cash equivalents, beginning of period | ||||||||
Cash and cash equivalents, end of period | $ | $ |
See Notes to Condensed Consolidated Financial Statements.
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. | Basis of Presentation |
Operations. W&T Offshore, Inc. (with subsidiaries referred to herein as “W&T,” “we,” “us,” “our,” or the “Company”) is an independent oil and natural gas producer 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 the Company 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, 2019.
Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Recent Events. The pandemic spread of the disease caused by a new strain of coronavirus (“COVID-19”) and other world events have significantly impacted the price of crude oil and the demand for crude oil beginning in March of 2020. Additionally, average prices for natural gas liquids (“NGLs”) and natural gas decreased for the nine months ended September 30, 2020 compared to the prior year levels, all of which have impacted revenues for the three and nine months ended September 30, 2020. While average crude oil prices have partially recovered during June to September 2020 from recent historical lows in April 2020, the perceived risks and volatility have increased in 2020 to date compared to recent years. Average natural gas prices for the three months ended September 30, 2020 have remained at levels similar to second quarter of 2020 levels. The Company has taken measures to reduce operating costs and capital expenditures in response. Management's assessment is the Company has adequate liquidity to meet the criteria of a going concern as defined under GAAP. See Note 2, Long-Term Debt and Note 12, Subsequent Events, for additional information.
Accounting Standard Updates effective January 1, 2020
Credit Losses - In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326) (“ASU 2016-13”) and subsequently issued additional guidance on this topic. 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. The amendment did not have a material impact on our financial statements and did not affect the opening balance of Retained Deficit.
Derivatives and Hedging - 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”) and subsequently issued additional guidance on this topic. 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 earnings 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 instruments as qualifying hedging instruments, this amendment did not impact the presentation of the changes in fair values of our commodity derivative instruments on our financial statements.
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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.
Paycheck Protection Program (“PPP”). On April 15, 2020, the Company received $
The Company submitted an application to the SBA on August 20, 2020, requesting that the PPP funds received be applied to specific covered payroll and non-payroll costs. As of the date of this filing, we have not received any response from the SBA, including any communication regarding the SBA’s acceptance of our application. Management believes the Company has met all the requirements under the PPP and will not be required to repay any portion of the grant.
We have elected to follow the income approach under IAS 20 and recognize earnings as funds are applied to covered expenses and classify the application of funds as a reduction of the related expense in the Condensed Consolidated Statement of Operations. As a result, we have reduced expenses during the nine months ended September 30, 2020 and classified expense reductions consistent with our PPP fund application request. Within the Condensed Consolidated Statement of Operations, credits to Lease operating expenses of $
Credit Risk and Allowance for Credit Losses. Our revenue has been concentrated in certain major oil and gas companies. For the nine months ended September 30, 2020, and the year ended December 31, 2019, approximately
Allowance for credit losses, December 31, 2019 | $ | |||
Additional provisions | ||||
Uncollectible accounts written off | ||||
Allowance for credit losses, September 30, 2020 | $ |
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Prepaid Expenses and Other Assets. The amounts recorded are expected to be realized within one year and the major categories are presented in the following table (in thousands):
September 30, 2020 | December 31, 2019 | |||||||
Derivatives - current (1) | $ | $ | ||||||
Unamortized insurance/bond premiums | ||||||||
Prepaid deposits related to royalties | ||||||||
Prepayment to vendors | ||||||||
Other | ||||||||
Prepaid expenses and other assets | $ | $ |
(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):
September 30, 2020 | December 31, 2019 | |||||||
Oil and natural gas properties and equipment, at cost | $ | $ | ||||||
Furniture, fixtures and other | ||||||||
Total property and equipment | ||||||||
Less: Accumulated depreciation, depletion and amortization | ||||||||
Oil and natural gas properties and other, net | $ | $ |
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Other Assets (long-term). The major categories are presented in the following table (in thousands):
September 30, 2020 | December 31, 2019 | |||||||
Right-of-Use assets (Note 7) | $ | $ | ||||||
Unamortized debt issuance costs | ||||||||
Investment in White Cap, LLC | ||||||||
Unamortized brokerage fee for Monza | ||||||||
Proportional consolidation of Monza's other assets (Note 4) | ||||||||
Derivative assets | ||||||||
Appeal bond deposits | ||||||||
Other | ||||||||
Total other assets (long-term) | $ | $ |
Accrued Liabilities. The major categories are presented in the following table (in thousands):
September 30, 2020 | December 31, 2019 | |||||||
Accrued interest | $ | $ | ||||||
Accrued salaries/payroll taxes/benefits | ||||||||
Incentive compensation plans | ||||||||
Litigation accruals | ||||||||
Lease liability (Note 7) | ||||||||
Derivatives - current | ||||||||
Other | ||||||||
Total accrued liabilities | $ | $ |
Other Liabilities (long-term). The major categories are presented in the following table (in thousands):
September 30, 2020 | December 31, 2019 | |||||||
Dispute related to royalty deductions | $ | $ | ||||||
Dispute related to royalty-in-kind | ||||||||
Derivatives | ||||||||
Lease liability (Note 7) | ||||||||
Black Elk escrow and other | ||||||||
Total other liabilities (long-term) | $ | $ |
Black Elk Escrow
$
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. | Long-Term Debt |
The components of our long-term debt are presented in the following table (in thousands):
September 30, 2020 | December 31, 2019 | |||||||
Credit Agreement borrowings | $ | $ | ||||||
Senior Second Lien Notes: | ||||||||
Principal | ||||||||
Unamortized debt issuance costs | ( | ) | ( | ) | ||||
Total Senior Second Lien Notes | ||||||||
Total long-term debt | $ | $ |
Credit Agreement
On October 18, 2018, we entered into the Sixth Amended and Restated Credit Agreement (as amended, the “Credit Agreement”), which matures on October 18, 2022.
On June 17, 2020, the lenders under the Credit Agreement completed their semi-annual borrowing base redetermination at $
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| • | Increased the interest rate margin by |
| • | Amended the financial covenants as follows: |
|
| • | From the period ended June 30, 2020 through the period ended December 31, 2021 (the "Waiver Period"), the Company will not be required to comply with the Leverage Ratio covenant. |
|
| • | During the Waiver Period, the Company will be required to maintain a |
|
| • | Increase the requirement to provide first priority liens on properties constituting at least |
Availability under the Credit Agreement is subject to semi-annual redeterminations of our borrowing base and the next scheduled redetermination is in the fall of 2020. Additional redeterminations 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 is collateralized by a first priority lien on properties constituting at least 90% of the total proved reserves of the Company as set forth on reserve reports required to be delivered under the Credit Agreement and certain personal property. The annualized interest rate on borrowings outstanding for the nine months ended September 30, 2020 was
Letters of credit may be issued in amounts up to $
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9.75% Senior Second Lien Notes Due 2023
On October 18, 2018, we issued $
During the nine months ended September 30, 2020, we acquired $
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. 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.
Covenants
As of September 30, 2020 and for all prior measurement periods, we were in compliance with all applicable covenants of the Credit Agreement and the Indenture.
Fair Value Measurements
For information about fair value measurements of our long-term debt, refer to Note 3.
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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):
September 30, 2020 | December 31, 2019 | |||||||
Assets: | ||||||||
Derivatives instruments - open contracts, current | $ | $ | ||||||
Derivatives instruments - open contracts, long-term | ||||||||
Liabilities: | ||||||||
Derivatives instruments - open contracts, current | ||||||||
Derivatives instruments - open contracts, long-term |
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 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):
September 30, 2020 | December 31, 2019 | |||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
Liabilities: | ||||||||||||||||
Credit Agreement | $ | $ | $ | $ | ||||||||||||
Senior Second Lien Notes |
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. | Joint Venture Drilling Program |
In March 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 certain drilling projects (the “Joint Venture Drilling Program”) in the Gulf of Mexico. Subsequent to the initial closing, additional investors joined as members of Monza during 2018 and total commitments by all members, including W&T's commitment to fund its retained interest in Monza projects held outside of Monza, are $
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
Monza is an entity separate from any other entity with its own separate creditors who will be entitled, upon its liquidation, to be satisfied out of Monza’s assets prior to any value in Monza becoming available to holders of its equity. The assets of Monza are not available to pay creditors of the Company and its affiliates.
Through September 30, 2020, nine wells have been completed. As of September 30, 2020, one additional well was drilled to target depth, but not completed as of this date. W&T is the operator for seven of the nine wells completed through September 30, 2020.
Through September 30, 2020, members of Monza made partner capital contributions, including our contributions of working interest in the drilling projects, to Monza totaling $
Consolidation and Carrying Amounts
Our interest in Monza is considered to be a variable interest that we account for using proportional consolidation. Through September 30, 2020, there have been no events or changes that would cause a redetermination of the variable interest status. We do not fully consolidate Monza because we are not considered the primary beneficiary of Monza. As of September 30, 2020, in the Condensed Consolidated Balance Sheet, we recorded $
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. | Asset Retirement Obligations |
Our 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):
Balances, December 31, 2019 | $ | |||
Liabilities settled | ( | ) | ||
Accretion of discount | ||||
Liabilities incurred, including acquisitions | ||||
Revisions of estimated liabilities | ||||
Balances, September 30, 2020 | ||||
Less current portion | ||||
Long-term | $ |
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 current period changes in the fair value of derivative contracts are recognized 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.
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 are based on West Texas Intermediate (“WTI”) crude oil prices and the natural gas contracts are based off the Henry Hub prices, both of which are quoted off the New York Mercantile Exchange (“NYMEX”). The open contracts as of September 30, 2020 are presented in the following tables:
Crude Oil: Open Swap Contracts, Priced off WTI (NYMEX) | ||||||||||||
Period | Notional Quantity (Bbls/day) (1) | Notional Quantity (Bbls) (1) | Weighted Strike Price | |||||||||
Jan 2021 - Dec 2021 | $ | |||||||||||
Jan 2022 - Feb 2022 | $ |
Crude Oil: Open Call Contracts - Bought, Priced off WTI (NYMEX) | ||||||||||||
Period | Notional Quantity (Bbls/day) (1) | Notional Quantity | Strike Price | |||||||||
Oct 2020 - Dec 2020 | $ |
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Crude Oil: Open Collar Contracts - Priced off WTI (NYMEX) | ||||||||||||||||
Period | Notional Quantity (Bbls/day) (1) | Notional Quantity | Put Option | Call Option | ||||||||||||
Oct 2020 - Dec 2020 | $ | $ | ||||||||||||||
Jan.2021 - Feb 2022 | $ | $ |
(1) | Bbls = Barrels |
Natural Gas: Open Swap Contracts, Bought, Priced off Henry Hub (NYMEX) | ||||||||||||
Period | Notional Quantity (MMBtu/day) (2) | Notional Quantity (MMBtu) (2) | Strike Price | |||||||||
Nov 2020 - Dec 2020 | $ | |||||||||||
Nov 2020 - Dec 2020 | $ | |||||||||||
Jan 2021 - Dec 2021 | $ | |||||||||||
Jan 2022 - Jan 2022 | $ | |||||||||||
Feb 2022 - Feb 2022 | $ |
Natural Gas: Open Call Contracts, Bought, Priced off Henry Hub (NYMEX) | ||||||||||||
Period | Notional Quantity (MMBtu/day) (2) | Notional Quantity (MMBtu) (2) | Strike Price | |||||||||
Nov 2020 - Dec. 2022 | $ |
Natural Gas: Open Collar Contracts, Priced off Henry Hub (NYMEX) | ||||||||||||||||
Period | Notional Quantity (MMBtu/day) (2) | Notional Quantity (MMBtu) (2) | Put Option | Call Option | ||||||||||||
Nov 2020 - Dec 2020 | $ | $ | ||||||||||||||
Nov 2020 - Dec 2022 | $ | $ | ||||||||||||||
Jan 2021 - Dec 2021 | $ | $ | ||||||||||||||
Jan 2022 - Feb 2022 | $ | $ |
(2) | MMBtu = Million British Thermal Units |
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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):
September 30, | December 31, | |||||||
2020 | 2019 | |||||||
Prepaid expenses and other assets | $ | $ | ||||||
Other assets (long-term) | ||||||||
Accrued liabilities | ||||||||
Other liabilities (long-term) |
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 material differences in reported amounts.
Changes in the fair value and settlements of our commodity derivative contracts were as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Derivative loss (gain) | $ | $ | ( | ) | $ | ( | ) | $ |
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):
Nine Months Ended September 30, | ||||||||
2020 | 2019 | |||||||
Cash receipts on derivative settlements, net | $ | $ |
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. | Leases |
Our contract arrangements accounted for under the applicable GAAP for lease contracts consist of office leases, a land lease and various pipeline right-of-way contracts. For these contracts, a right-of-use ("ROU") asset and lease liability was established based on our assumptions of the term, inflation rates and incremental borrowing rates. All of these lease contracts are operating leases.
During the nine months ended September 30, 2020, we terminated the existing office lease and executed a new lease on separate office space. The remaining term of the current office lease extends to December 2020. The term of the new office lease extends to February 2032. When calculating the ROU asset and lease liability at the commencement of the new office lease, we have reduced future cash outflows by the lease incentive to be received.
The term of each pipeline right-of-way contract is
We recorded ROU assets and lease liabilities using a discount rate of
Amounts related to leases recorded within our Condensed Consolidated Balance Sheet are as follows (in thousands):
September 30, 2020 | December 31, 2019 | |||||||
ROU assets | $ | $ | ||||||
Lease liability: | ||||||||
Accrued liabilities | $ | $ | ||||||
Other liabilities | ||||||||
Total lease liability | $ | $ |
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. | 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 2019, 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 may be used as short-term and long-term compensation components of the awards, and are subject to satisfaction of certain predetermined performance criteria.
As of September 30, 2020, there were
RSUs currently outstanding relate to the 2019 and 2018 grants. The 2019 and 2018 grants were subject to predetermined performance criteria applied against the applicable performance period. All the RSUs currently outstanding are 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 2019, 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 nine months ended September 30, 2020 is as follows:
Restricted Stock Units | ||||||||
Weighted Average | ||||||||
Grant Date Fair | ||||||||
Units | Value Per Unit | |||||||
Nonvested, December 31, 2019 | $ | |||||||
Forfeited | ( | ) | ||||||
Nonvested, September 30, 2020 |
For the outstanding RSUs issued to the eligible employees as of September 30, 2020, vesting is expected to occur as follows (subject to forfeitures):
Restricted Stock Units | |||
2020 | | ||
2021 | | ||
Total | |
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 2020, 2019, 2018 and 2017. During the second quarter of 2020, our shareholders approved increasing the shares available by
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 otherwise 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.
A summary of activity related to Restricted Shares during the nine months ended September 30, 2020 is as follows:
Restricted Shares | ||||||||
Weighted Average | ||||||||
Grant Date Fair | ||||||||
Shares | Value Per Share | |||||||
Nonvested, December 31, 2019 | $ | |||||||
Granted | ||||||||
Vested | ) | |||||||
Nonvested, September 30, 2020 | $ |
For the outstanding Restricted Shares issued to the non-employee directors as of September 30, 2020, vesting is expected to occur as follows (subject to any forfeitures):
Restricted Shares | |||
2021 | | ||
2022 | | ||
Total | |
Share-Based Compensation. Share-based compensation expense is recorded in the line General and administrative expenses in the Condensed Consolidated Statements of Operations.
share-based awards have been granted to date in 2020 under the Plan, and therefore, share-based compensation expense for 2020 has been recorded. The Compensation Committee has deferred its decision regarding the potential awarding of incentive compensation, including by the exercise of discretion. The tax benefit related to compensation expense recognized under share-based payment arrangements was not meaningful and was minimal due to our income tax situation. A summary of incentive compensation expense under share-based payment arrangements is as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Share-based compensation expense from: | ||||||||||||||||
Restricted stock units (1) | $ | $ | $ | $ | ||||||||||||
Restricted Shares | ||||||||||||||||
Total | $ | $ | $ | $ |
(1) | For the nine months ended September 30, 2019, share-based compensation expense includes adjustments for a former executive's forfeitures. |
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Unrecognized Share-Based Compensation. As of September 30, 2020, unrecognized share-based compensation expense related to our awards of RSUs and Restricted Shares was $
Cash-Based Incentive Compensation. In addition to share-based compensation, short-term, cash-based incentive awards were granted under the Plan to substantially all eligible employees in 2019 and 2018. The short-term, cash-based incentive awards, which are generally a short-term component of the Plan, are performance-based awards consisting of one or more business criteria or individual performance criteria and a targeted level or levels of performance with respect to each of such criteria. In addition, these cash-based incentive awards included an additional financial condition requiring Adjusted EBITDA less reported Interest Expense Incurred (terms as defined in the awards) for any fiscal quarter plus the three preceding quarters to exceed defined levels measured over defined time periods for each cash-based incentive award.
cash-based incentive awards have been granted to date in 2020 under the Plan, and therefore, cash-based incentive award compensation expense for 2020 has been recorded. The Compensation Committee has deferred its decision regarding the potential awarding of incentive compensation, including by the exercise of discretion. During 2018, long-term, cash-based incentive awards were granted to certain employees subject to pre-defined performance criteria. Expense is recognized over the service period once the business criteria, individual performance criteria and financial condition are met.
| • | For the 2019 cash-based awards, a portion of the business criteria and individual performance criteria were achieved. The financial condition requirement of Adjusted EBITDA less reported Interest Expense Incurred exceeding $ |
| • | In 2018, the Company, as part of its long-term incentive program, granted cash awards to certain employees that will vest over a three-year service 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 service period of the award). 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. |
A summary of compensation expense related to share-based awards and cash-based awards is as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Share-based compensation included in: | ||||||||||||||||
General and administrative expenses | $ | $ | $ | $ | ||||||||||||
Cash-based incentive compensation included in: | ||||||||||||||||
Lease operating expense (1) | ||||||||||||||||
General and administrative expenses (1) | ||||||||||||||||
Total charged to operating income | $ | $ | $ | $ |
(1) | Includes adjustments of accruals to actual payments. |
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. | Income Taxes |
Tax Benefit and Tax Rate. Income tax benefit for the three months and nine months ended September 30, 2020, was $
Valuation Allowance. Deferred tax assets are 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 September 30, 2020 and December 31, 2019, our valuation allowance was $
Calculation of Interim Provision for Income Tax. Historically, we have calculated the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full year to income (loss) for the interim period. In the third quarter of 2020, we concluded that we could not calculate a reliable estimate of our annual effective tax rate due to the range of potential impacts the global COVID-19 pandemic may have on our business and results of operations. Accordingly, we computed the effective tax rate for the nine-month period ending September 30, 2020 using actual results.
Income Taxes Receivable, Refunds and Payments. As of December 31, 2019, we had current income taxes receivable of $
The tax years 2017 through
remain open to examination by the tax jurisdictions to which we are subject.
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. | 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 September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net (loss) income | $ | ( | ) | $ | $ | $ | ||||||||||
Less portion allocated to nonvested shares | ||||||||||||||||
Net (loss) income allocated to common shares | $ | ( | ) | $ | $ | $ | ||||||||||
Weighted average common shares outstanding | ||||||||||||||||
Basic and diluted (loss) earnings per common share | $ | ( | ) | $ | $ | $ | ||||||||||
Shares excluded due to being anti-dilutive (weighted-average) |
11. | Contingencies |
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 $
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. While the amounts paid for the nine months ended September 30, 2020 and 2019 were immaterial, we are not able to determine the range of any additional royalties or, if and when assessed, whether such amounts would be material.
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Notices of Proposed Civil Penalty Assessment. During the nine months ended September 30, 2020 and 2019, we did
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
otherwise provided for or covered by insurance, will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.
12. | Subsequent Events |
COVID-19 Impacts on Economic Environment. Subsequent to September 30, 2020, COVID-19 outbreaks levels have continued and, in some cases, increased in some areas of the United States. The impacts of the COVID-19 pandemic on the economy combined with actions of certain foreign governments of oil producing countries have caused s significant decrease in global crude oil demand contributing to a substantial decrease in crude oil prices compared to the prior year and an increase in the volatility of the crude oil market. Additionally, prices for NGLs and natural gas have been impacted, but to a lesser degree. This economic environment has caused oil and gas operators to reduce their capital expenditure budgets, reduce activity and shut-in significant production. The full impact of the COVID-19 pandemic and the volatility in crude oil prices continue to evolve as of the date of this Quarterly Report. However, the scope and length of this economic downturn and the effect on future prices and demand of crude oil, NGLs and natural gas cannot be determined and we could be adversely affected in future periods.
In response to the market changes, we reduced our capital expenditure budget in 2020, experienced production shut-ins from non-operated oil and gas properties and shut-in a limited number of our operated oil and gas properties. We are actively monitoring the impact on our results of operations, financial position, and liquidity and may need to make further changes in response to the market for oil, NGLs and natural gas.
Hurricanes Impact on our Production. In the second and third quarters of 2020, the Gulf of Mexico experienced multiple hurricanes that required us to shut-in wells due to their impact. In October 2020, we experienced additional hurricane activity which required shutting in most of our fields for several days. We have since returned substantially all wells to production that were shut-in due to the hurricanes, as have operators of properties in which we have a non-operator interest. One of our fields had planned downtime which was extended due to hurricane activity and had not returned to production as of the end of October 2020. While no major structural damage was incurred, which has been assessed through October, increased costs for repairs are expected in the fourth quarter of 2020.
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, 2019 and this Quarterly Report on Form 10-Q, Part II, Item 1A, Risk Factors, 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. As of September 2020, we hold working interests in 50 offshore fields in federal and state waters (41 producing and nine fields capable of producing). We currently have under lease approximately 772,000 gross acres (523,000 net acres) spanning across the OCS off the coasts of Louisiana, Texas, Mississippi and Alabama, with approximately 557,000 gross acres on the conventional shelf and approximately 215,000 gross acres in the deepwater. 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 interest in Monza, as described in more detail in Financial Statements and Supplementary Data – Note 4 – Joint Venture Drilling Program under Part I, Item 1 in this Form 10-Q.
Recent Events
Due to circumstances related to the outbreak of COVID-19, various measures have been taken by federal, state and local governments to reduce the rate of spread of COVID-19. These measures and other factors have resulted in a decrease of general economic activity and a corresponding decrease in global and domestic energy demand impacting commodity pricing. In addition, actions by the Organization of Petroleum Exporting Countries and other high oil exporting countries like Russia (“OPEC+”) have negatively impacted crude oil prices. These rapid and unprecedented events have pushed crude oil storage near capacity and drove prices down significantly in the second quarter of 2020. These events have been the primary cause of the significant supply-and-demand imbalance for oil, significantly lowering oil pricing in 2020 compared to the prior year. Through October 2020, COVID-19 outbreak levels have continued and, in some cases, increased in some areas of the United States. Should these conditions continue in future periods, they could constrain our ability to store and move production to downstream markets, delay or curtail development activity or temporarily shut-in production, any or all of which could further reduce our cash flow.
In the second and third quarters of 2020, the Gulf of Mexico experienced multiple hurricanes that required us to shut-in wells due to their impact. In October 2020, we experienced additional hurricane activity which required shutting in most of our fields for several days. We have since returned substantially all wells to production that were shut-in due to the hurricanes, as have operators of properties in which we have a non-operator interest. One of our fields had planned downtime which was extended due to hurricane activity and had not returned to production as of the end of October 2020. While no major structural damage was incurred, which has been assessed through October, increased costs for repairs estimated at $5 million are expected in the fourth quarter of 2020.
During the fourth quarter of 2020, we will begin the consolidation of our two gas processing plants in Alabama. We estimate future cost savings of approximately $5 million per year related to the plant consolidation efforts.
The Company has responded to COVID-19 events and current economic conditions as follows:
|
• | Our capital expenditure forecast for 2020 has been reduced significantly from our initial budget in response to the unprecedented decrease in crude oil prices experienced beginning in the first quarter of 2020. Excluding acquisitions and plugging and abandonment expenditures, we are currently estimating capital expenditures to range from $15 million to $25 million for 2020 (excluding $28 million in working capital changes associated with capital expenditures incurred in 2019 but paid during the nine months ended September 30, 2020) and ARO spending to be in the range of $2 million to $4 million. We continue to closely monitor current and forecasted commodity prices to assess what changes, if any, should be made to our 2020 plans and are unable to predict the duration or impact of COVID-19 and OPEC+ actions have on our business. |
|
• | During the second quarter of 2020, we shut-in production in selected oil-weighted properties operated by the Company and experienced production shut-ins at certain non-operated properties due to the decline in oil prices. The majority of such non-operated production that was previously shut-in was restored during the third quarter of 2020. The Company restored some of its operated production that was shut-in due to low oil prices and continues to monitor commodity prices to determine the appropriate time to return the remaining fields online. |
|
• | We have taken proactive steps in our field operations and corporate offices to protect the health and safety of our employees and contractors. At W&T’s corporate offices located in Houston, Texas, the Company mandated a work-from-home policy on March 23, 2020 and ensured that all employees had the ability to continue performing their work duties remotely. In October 2020, we fully reopened our corporate office and implemented policies to protect our employees and contractors working in our offices. At all our onshore offices and offshore facilities located in Louisiana, Alabama and Texas, the Company conducts daily temperature screenings and implemented procedures for distancing and hygiene at its onshore offices and field locations. In our field operations, the Company instituted screening of all personnel prior to entry to heliports, shore-based facilities and Alabama gas treatment plants, which includes a questionnaire and temperature check. We monitor national, state and local government directives and continually assess the adequacy of our health and safety protocols. |
See the Liquidity and Capital Resources section in this Part II for a discussion of our liquidity and other aspects as a result of the decrease in commodity prices. See Item 1A, Risk Factors, under Item II of this Form 10-Q.
Oil and Natural Gas Production and Commodity Pricing
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 nine months ended September 30, 2020 were comprised of 36.7% crude oil and condensate, 11.1% NGLs and 52.2% 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 nine months ended September 30, 2020, revenues from the sale of crude oil and NGLs made up 69.4% of our total revenues compared to 82.0% for the nine months ended September 30, 2019. For the nine months ended September 30, 2020, our combined total production expressed in equivalent volumes on a daily basis was 18.5% higher than for the nine months ended September 30, 2019, primarily due to the acquisition of the Mobile Bay properties described below. For the nine months ended September 30, 2020, our total revenues were 34.2% lower than the nine months ended September 30, 2019 due to lower realized prices for crude oil, NGLs and natural gas and partially offset by higher volumes. See Results of Operations – Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019 in this Item 2 for additional information.
In August 2019, we completed the purchase of Exxon Mobil Corporation's (“Exxon”) interests in and operatorship of oil and gas producing properties in the eastern region of the Gulf of Mexico offshore Alabama and related onshore and offshore facilities and pipelines (the “Mobile Bay Properties”). For the nine months ended September 30, 2020, the average net production of the Mobile Bay Properties was approximately 15,800 net Boe per day.
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 nine months ended September 30, 2020, our average realized crude oil price was $37.17 per barrel. This is a decrease from our average realized crude oil price of $61.00 per barrel, or 39.1%, for the nine months ended September 30, 2019. Per the Energy Information Administration ("EIA"), crude oil prices using average WTI daily spot pricing decreased to $38.04 per barrel during the nine months ended September 30, 2020 compared to $57.04 during the nine months ended September 30, 2019 representing a decrease of 33.3%. Crude oil prices have partially recovered from their April lows, with an average WTI spot price of $39.63 per barrel for the month of September 2020, and $39.51 per barrel for the first two weeks of October 2020, but still remain depressed compared to the same periods in 2019.
Our average realized price of natural gas of $1.88 per Mcf for the nine months ended September 30, 2020 was 26.8 % lower than the average realized price of $2.57 per Mcf for the nine months ended September 30, 2019. The average Henry Hub ("HH") daily natural gas spot price of $1.94 per Mcf for the nine months ended September 30, 2020 was 28.7% lower than the average HH natural gas price of $2.72 per Mcf for the nine months ended September 30, 2019. Per the EIA, this decrease was due to lower demand from the U.S. power sector and lower exports of liquefied natural gas. Furthermore, working inventories of natural gas as of September 30, 2020 were 12% higher than the five-year average.
According to Baker Hughes, the number of working rigs drilling for oil and natural gas on land in the U.S. as reported in their October 16, 2020 report was significantly lower than a year ago, decreasing to 282 rigs compared to 851 rigs a year ago. The oil rig count decreased to 205 rigs compared to 713 rigs a year ago and the gas and miscellaneous rigs decreased to 77 rigs from 138 a year ago. In the Gulf of Mexico, the number of working rigs was 14 rigs (all oil) compared to 21 (20 oil and one natural gas) a year ago.
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 September 30, |
Nine Months Ended September 30, |
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2020 |
2019 |
Change |
% | 2020 |
2019 |
Change |
% | |||||||||||||||||||||||||
(In thousands, except percentages and per share data) |
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Financial: |
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Revenues: |
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Oil |
$ | 46,589 | $ | 102,786 | $ | (56,197 | ) | (54.7 | )% | $ | 161,884 | $ | 298,684 | $ | (136,800 | ) | (45.8 | )% | ||||||||||||||
NGLs |
4,464 | 4,373 | 91 | 2.1 | % | 12,833 | 15,461 | (2,628 | ) | (17.0 | )% | |||||||||||||||||||||
Natural gas |
19,213 | 23,686 | (4,473 | ) | (18.9 | )% | 69,877 | 65,091 | 4,786 | 7.4 | % | |||||||||||||||||||||
Other |
2,251 | 1,376 | 875 | 63.6 | % | 7,292 | 3,766 | 3,526 | 93.6 | % | ||||||||||||||||||||||
Total revenues |
72,517 | 132,221 | (59,704 | ) | (45.2 | )% | 251,886 | 383,002 | (131,116 | ) | (34.2 | )% | ||||||||||||||||||||
Operating costs and expenses: |
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Lease operating expenses |
36,437 | 47,185 | (10,748 | ) | (22.8 | )% | 119,525 | 130,982 | (11,457 | ) | (8.7 | )% | ||||||||||||||||||||
Production taxes |
1,266 |