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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

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

For the quarterly period ended June 30, 2023

or

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

For the transition period from _______________ to ________________

Commission File Number 1-32414

Graphic

W&T OFFSHORE, INC.

(Exact name of registrant as specified in its charter)

Texas

    

72-1121985

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification Number)

 

 

5718 Westheimer Road, Suite 700, Houston, Texas

77057-5745

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (713) 626-8525

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

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Common Stock, par value $0.00001

 

WTI

 

New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every interactive data file required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes      No  

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

Large accelerated filer

    

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

Emerging growth company

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.

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

As of July 31, 2023 there were 146,480,637 shares outstanding of the registrant’s common stock, par value $0.00001.

Table of Contents

W&T OFFSHORE, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

 

Page

PART I – FINANCIAL INFORMATION

1

 

 

 

Item 1.

Financial Statements

1

 

Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022

1

 

Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 2023 and 2022

2

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Deficit) for the Six Months Ended June 30, 2023 and 2022

3

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022

4

 

Notes to Condensed Consolidated Financial Statements

5

Item 2.

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

22

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

40

Item 4.

Controls and Procedures

40

 

 

PART II – OTHER INFORMATION

41

Item 1.

Legal Proceedings

41

Item 1A.

Risk Factors

41

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

41

Item 3.

Defaults Upon Senior Securities

41

Item 4.

Mine Safety Disclosures

41

Item 5.

Other Information

41

Item 6.

Exhibits

41

 

 

SIGNATURE

43

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

June 30, 

December 31, 

    

2023

    

2022

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

171,627

$

461,357

Restricted cash

4,417

4,417

Receivables:

 

 

Oil and natural gas sales

 

41,342

 

66,146

Joint interest, net

 

13,875

 

14,000

Income taxes

 

1,941

 

Total receivables

 

57,158

 

80,146

Prepaid expenses and other assets (Note 1)

 

21,365

 

24,343

Total current assets

 

254,567

 

570,263

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

 

737,740

 

735,215

Restricted deposits for asset retirement obligations

 

22,092

 

21,483

Deferred income taxes

 

45,700

 

57,280

Other assets (Note 1)

 

42,118

 

47,549

Total assets

$

1,102,217

$

1,431,790

Liabilities and Shareholders’ Equity

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

67,293

$

65,158

Undistributed oil and natural gas proceeds

 

31,178

 

41,934

Advances from joint interest partners

 

3,110

 

3,181

Asset retirement obligations (Note 7)

 

37,763

 

25,359

Accrued liabilities (Note 1)

 

39,323

 

74,041

Current portion of long-term debt, net

30,550

582,249

Income tax payable

 

10

 

412

Total current liabilities

 

209,227

 

792,334

Long-term debt (Note 2)

 

  

 

  

Principal

 

382,697

 

114,158

Unamortized debt issuance costs

 

(9,676)

 

(2,970)

Long-term debt, net (Note 2)

 

373,021

 

111,188

Asset retirement obligations, less current portion (Note 7)

 

443,069

 

441,071

Other liabilities (Note 1)

 

35,041

 

59,134

Deferred income taxes

 

72

 

72

Commitments and contingencies (Note 11)

 

16,996

 

20,357

Shareholders’ equity:

 

  

 

  

Preferred stock, $0.00001 par value; 20,000 shares authorized; none issued at June 30, 2023 and December 31, 2022

 

 

Common stock, $0.00001 par value; 200,000 shares authorized; 149,350 issued and 146,481 outstanding at June 30, 2023; 149,002 issued and 146,133 outstanding at December 31, 2022

 

1

 

1

Additional paid-in capital

 

579,849

 

576,588

Retained deficit

 

(530,892)

 

(544,788)

Treasury stock, at cost; 2,869 shares at June 30, 2023 and December 31, 2022

 

(24,167)

 

(24,167)

Total shareholders’ equity

 

24,791

 

7,634

Total liabilities and shareholders’ equity

$

1,102,217

$

1,431,790

See Notes to Condensed Consolidated Financial Statements.

1

Table of Contents

W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2023

    

2022

    

2023

    

2022

Revenues:

 

  

 

  

 

  

 

  

Oil

$

89,982

$

159,264

$

186,982

$

281,966

NGLs

 

10,385

 

16,735

 

18,180

 

30,555

Natural gas

 

23,438

 

92,413

 

48,242

 

143,779

Other

 

2,376

 

5,396

 

4,502

 

8,512

Total revenues

 

126,181

 

273,808

 

257,906

 

464,812

Operating expenses:

 

  

 

  

 

  

 

  

Lease operating expenses

 

66,021

 

52,976

 

131,207

 

96,387

Gathering, transportation and production taxes

6,802

9,181

12,938

14,448

Depreciation, depletion, and amortization

 

28,177

 

27,679

 

50,801

 

52,354

Asset retirement obligations accretion

7,717

6,681

15,227

12,917

General and administrative expenses

 

17,393

 

14,967

 

37,312

 

28,743

Total operating expenses

 

126,110

 

111,484

 

247,485

 

204,849

Operating income

 

71

 

162,324

 

10,421

 

259,963

Interest expense, net

 

10,323

 

18,183

 

25,036

 

38,066

Derivative (gain) loss, net

 

(829)

 

(8,854)

 

(40,069)

 

71,143

Other (income) expense, net

 

(311)

 

(1,534)

 

(78)

 

(629)

Income (loss) before income taxes

 

(9,112)

 

154,529

 

25,532

 

151,383

Income tax expense

 

2,997

 

31,093

 

11,636

 

30,404

Net (loss) income

$

(12,109)

$

123,436

$

13,896

$

120,979

Net income per common share:

Basic

$

(0.08)

$

0.86

$

0.09

$

0.85

Diluted

$

(0.08)

$

0.85

$

0.09

$

0.84

Weighted average common shares outstanding:

Basic

146,452

143,020

146,435

142,981

Diluted

146,452

144,525

149,045

144,094

See Notes to Condensed Consolidated Financial Statements.

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W&T OFFSHORE, INC. AND SUBSIDIARIES

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

(In thousands)

(Unaudited)

    

Common Stock

    

Additional

    

    

    

    

    

Total

Outstanding

Paid-In

Retained

Treasury Stock

Shareholders’

    

Shares

    

Value

    

Capital

    

Deficit

    

Shares

    

Value

    

Equity

Balances at March 31, 2023

 

146,461

 

$

1

 

$

577,787

 

$

(518,783)

 

2,869

 

$

(24,167)

 

$

34,838

Share-based compensation

 

 

 

 

 

2,087

 

 

 

 

 

 

 

2,087

Stock issued

 

20

 

 

 

 

 

 

 

 

 

 

 

RSUs surrendered for payroll taxes

 

 

 

 

 

(25)

 

 

 

 

 

 

 

(25)

Net loss

 

 

 

 

 

 

 

(12,109)

 

 

 

 

 

(12,109)

Balances at June 30, 2023

 

146,481

 

$

1

 

$

579,849

 

$

(530,892)

 

2,869

 

$

(24,167)

 

$

24,791

    

Common Stock

    

Additional

    

    

    

    

    

Total

Outstanding

Paid-In

Retained

Treasury Stock

Shareholders’

    

Shares

    

Value

    

Capital

    

Deficit

    

Shares

    

Value

    

Deficit

Balances at March 31, 2022

 

143,012

 

$

1

 

$

553,175

 

$

(778,394)

 

2,869

 

$

(24,167)

 

$

(249,385)

Share-based compensation

 

 

 

 

 

2,014

 

 

 

 

 

 

 

2,014

Stock issued

 

143

 

 

 

 

 

 

 

 

 

 

 

RSUs surrendered for payroll taxes

 

 

 

 

 

(434)

 

 

 

 

 

 

 

(434)

Net income

 

 

 

 

 

 

 

123,436

 

 

 

 

 

123,436

Balances at June 30, 2022

 

143,155

 

$

1

 

$

554,755

 

$

(654,958)

 

2,869

 

$

(24,167)

 

$

(124,369)

    

Common Stock

    

Additional

    

    

    

    

    

Total

Outstanding

Paid-In

Retained

Treasury Stock

Shareholders’

    

Shares

    

Value

    

Capital

    

Deficit

    

Shares

    

Value

    

Equity

Balances at December 31, 2022

 

146,133

$

1

$

576,588

$

(544,788)

 

2,869

$

(24,167)

$

7,634

Share-based compensation

 

 

 

4,009

 

 

 

 

4,009

Stock issued

348

RSUs surrendered for payroll taxes

 

 

 

 

 

(748)

 

 

 

 

 

 

 

(748)

Net income

 

 

 

 

13,896

 

 

 

13,896

Balances at June 30, 2023

 

146,481

$

1

$

579,849

$

(530,892)

 

2,869

$

(24,167)

$

24,791

    

Common Stock

    

Additional

    

    

    

    

    

Total

Outstanding

Paid-In

Retained

Treasury Stock

Shareholders’

    

Shares

    

Value

    

Capital

    

Deficit

    

Shares

    

Value

    

Deficit

Balances at December 31, 2021

 

142,863

$

1

$

552,923

$

(775,937)

 

2,869

$

(24,167)

$

(247,180)

Share-based compensation

 

 

 

2,534

 

 

 

 

2,534

Stock issued

292

RSUs surrendered for payroll taxes

 

 

 

 

 

(702)

 

 

 

 

 

 

 

(702)

Net income

 

 

 

 

120,979

 

 

 

120,979

Balances at June 30, 2022

 

143,155

$

1

$

554,755

$

(654,958)

 

2,869

$

(24,167)

$

(124,369)

See Notes to Condensed Consolidated Financial Statements.

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W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

Six Months Ended June 30, 

    

2023

    

2022

Operating activities:

 

  

 

  

Net income

$

13,896

$

120,979

Adjustments to reconcile net income to net cash provided by operating activities:

 

  

 

  

Depreciation, depletion, amortization and accretion

 

66,028

 

65,271

Amortization and write off of debt issuance costs

 

4,363

 

4,365

Share-based compensation

 

4,009

 

2,534

Derivative (gain) loss

 

(40,069)

 

71,143

Derivative cash (payments) receipts, net

 

(4,427)

 

70,227

Derivative cash premium payments

(46,111)

Deferred income taxes

 

11,580

 

27,031

Changes in operating assets and liabilities:

 

  

 

  

Oil and natural gas receivables

 

24,804

 

(44,236)

Joint interest receivables

 

125

 

(3,625)

Prepaid expenses and other assets

 

26,992

 

(30,092)

Income tax

 

(2,345)

 

3,223

Asset retirement obligation settlements

 

(11,841)

 

(39,775)

Cash advances from JV partners

 

(71)

 

(9,813)

Accounts payable, accrued liabilities and other

 

(43,412)

 

46,638

Net cash provided by operating activities

 

49,632

 

237,759

Investing activities:

 

  

 

  

Investment in oil and natural gas properties and equipment

 

(22,999)

 

(25,489)

Changes in operating assets and liabilities associated with investing activities

 

(2,338)

 

(5,786)

Acquisition of property interests

 

 

(47,625)

Purchase of corporate aircraft (Note 12)

(8,983)

Purchases of furniture, fixtures and other

 

(218)

 

Net cash used in investing activities

 

(34,538)

 

(78,900)

Financing activities:

 

  

 

  

Repayment of Note Payable

(183)

Issuance of 11.75% Senior Second Lien Notes

275,000

Repayments on 9.75% Second Senior Lien Notes

(552,460)

Repayments on Term Loan

 

(19,181)

 

(24,941)

Debt issuance costs

 

(7,252)

 

(1,290)

Other

 

(748)

 

(703)

Net cash used in financing activities

 

(304,824)

 

(26,934)

(Decrease) increase in cash and cash equivalents

 

(289,730)

 

131,925

Cash and cash equivalents and restricted cash, beginning of period

 

465,774

 

250,216

Cash and cash equivalents and restricted cash, end of period

$

176,044

$

382,141

See Notes to Condensed Consolidated Financial Statements.

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NOTE 1BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

W&T Offshore, Inc. (with subsidiaries referred to herein as “W&T” 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. Interests in fields, leases, structures and equipment are primarily owned by the Company and its 100% owned subsidiaries, W & T Energy VI, LLC, Aquasition LLC (“A-I, LLC”), and Aquasition II, LLC (“A-II LLC”), and through a proportionately consolidated interest in Monza Energy LLC (“Monza”).

Basis of Presentation

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 2022 Annual Report on Form 10-K (the “2022 Annual Report”).

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.

Summary of Significant Accounting Policies

Revenue and Accounts ReceivableThe Company records revenues from the sale of oil, natural gas liquids (“NGLs”) and natural gas based on quantities of production sold to purchasers under short-term contracts (less than twelve months) at market prices when delivery to the customer has occurred, title has transferred, prices are fixed and determinable and collection is reasonably assured. Revenue from the sale of crude oil, NGLs and natural gas is recognized when performance obligations under the terms of the respective contracts are satisfied; this generally occurs with the delivery of oil, NGLs and natural gas to the customer. Each unit of product represents a separate performance obligation, therefore, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.

The Company also has receivables related to joint interest arrangements primarily with mid-size oil and gas companies with a substantial majority of the net receivable balance concentrated in less than ten companies. A loss methodology is used to develop the allowance for credit losses on material receivables to estimate the net amount to be collected. The loss methodology uses historical data, current market conditions and forecasts of future economic conditions. The Company’s maximum exposure at any time would be the receivable balance. Joint interest receivables on the Condensed Consolidated Balance Sheets are presented net of allowance for credit losses of $11.3 million and $12.1 million as of June 30, 2023 and December 31, 2022, respectively.

Employee Retention Credit – Under the Consolidated Appropriations Act of 2021, the Company recognized a $2.2 million employee retention credit during the six months ended June 30, 2023, which is included as a credit to General and administrative expenses in the Condensed Consolidated Statement of Operations.

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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):

June 30, 2023

    

December 31, 2022

Derivatives(1) (Note 4)

$

1,778

$

4,954

Unamortized insurance/bond premiums

 

8,303

 

6,046

Prepaid deposits related to royalties

 

6,822

 

9,139

Prepayments to vendors

 

1,628

 

1,767

Prepayments to joint interest partners

2,319

1,717

Debt issue costs

427

687

Other

 

88

 

33

Prepaid expenses and other assets

$

21,365

$

24,343

(1)

Includes closed contracts which have not yet settled.

Oil and Natural Gas Properties and Other, Net – 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):

June 30, 2023

    

December 31, 2022

Oil and natural gas properties and equipment

$

8,847,421

$

8,813,404

Furniture, fixtures and other

 

40,224

 

20,915

Total property and equipment

 

8,887,645

 

8,834,319

Less: Accumulated depreciation, depletion, amortization and impairment

 

(8,149,905)

 

(8,099,104)

Oil and natural gas properties and other, net

$

737,740

$

735,215

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

June 30, 2023

    

December 31, 2022

Right-of-Use assets

$

10,728

$

10,364

Investment in White Cap, LLC

 

2,721

 

2,453

Proportional consolidation of Monza (Note 6)

 

9,909

 

9,321

Derivatives(1) (Note 4)

 

17,184

 

23,236

Other

 

1,576

 

2,175

Total other assets (long-term)

$

42,118

$

47,549

(1)

Includes open contracts.

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

June 30, 2023

    

December 31, 2022

Accrued interest

$

13,848

$

8,967

Accrued salaries/payroll taxes/benefits

 

4,808

 

15,097

Litigation accruals

 

56

 

396

Lease liability

 

1,045

 

1,628

Derivatives(1) (Note 4)

 

18,518

 

46,595

Other

 

1,048

 

1,358

Total accrued liabilities

$

39,323

$

74,041

(1)

Includes closed contracts which have not yet settled.

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

June 30, 2023

    

December 31, 2022

Dispute related to royalty deductions

$

5,250

$

4,937

Derivatives (Note 4)

 

17,417

 

43,061

Lease liability

 

11,709

 

10,527

Other

 

665

 

609

Total other liabilities (long-term)

$

35,041

$

59,134

At-the-Market Equity Offering – On March 18, 2022, the Company filed a prospectus supplement related to the issuance and sale of up to $100,000,000 of shares of common stock under the Company’s “at-the-market” equity offering program (the “ATM Program”). The designated sales agents will be entitled to a placement fee of up to 3.0% of the gross sales price per share sold. During the six months ended June 30, 2023, the Company did not sell any shares in connection with the ATM Program. During the year ended December 31, 2022, the Company sold an aggregate of 2,971,413 shares for an average price of $5.72 per share in connection with the ATM Program and received proceeds, net of commissions and expenses, of $16.5 million.

NOTE 2 DEBT

The components comprising the Company’s debt are presented in the following table (in thousands):

June 30, 2023

December 31, 2022

TVPX Loan:

Principal

$

11,575

$

Discount

(1,651)

Unamortized debt issuance costs

 

(267)

Total TVPX Loan

 

9,657

Term Loan:

Principal

128,719

147,899

Unamortized debt issuance costs

(3,727)

(4,592)

Total Term Loan

 

124,992

 

143,307

Credit Agreement borrowings:

11.75% Senior Second Lien Notes due 2026:

 

 

  

Principal

 

275,000

 

Unamortized debt issuance costs

 

(6,078)

 

Total 11.75% Senior Second Lien Notes due 2026

 

268,922

 

9.75% Senior Second Lien Notes due 2023:

 

 

  

Principal

 

 

552,460

Unamortized debt issuance costs

 

 

(2,330)

Total 9.75% Senior Second Lien Notes due 2023

 

 

550,130

Less current portion, net

(30,550)

(582,249)

Total long-term debt, net

$

373,021

$

111,188

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Current Portion of Long-Term Debt, Net

As of June 30, 2023, the current portion of long-term debt of $30.6 million represented principal payments due within one year on the TVPX Loan and Term Loan (defined below), net of current unamortized debt issuance costs.

TVPX Loan

On May 15, 2023, the Company acquired a corporate aircraft from a company affiliated with and controlled by W&T’s Chairman, Chief Executive Officer (“CEO”) and President, Tracy W. Krohn. The terms of the transactions were reviewed and approved by the Audit Committee of the Company’s Board of Directors. See Note 12 – Related Party Transactions.

The purchase price of the aircraft was $19.1 million, which was paid using $9.0 million of the Company’s cash on hand and through the assumption of an amortizing loan by TVPX Aircraft Solutions Inc. (the “TVPX Loan”), not in its individual capacity but as owner trustee of the trust which holds title to the aircraft, a wholly owned indirect subsidiary of the Company, as the borrower. At the time of the assumption, the TVPX Loan had an aggregate principal amount of approximately $11.8 million outstanding. The TVPX Loan bears a fixed interest rate of 2.49% per annum for a term of 41 months and requires monthly amortization payments of $91.7 thousand plus accrued interest, which began on May 17, 2023, and a balloon payment of $8.0 million at the end of the loan term. The TVPX Loan is guaranteed by the Company on an unsecured basis. Using current market rates, we determined that the fair market value of the TVPX Loan was $10.1 million at the date of assumption.

The aircraft was purchased as part of a series of transactions pursuant to which the Company restructured the compensation for its Named Executive Officers. Prior to the Company’s purchase of the aircraft, the Company used the aircraft for business purposes, and the CEO also used the aircraft for personal purposes. Both the Company’s use for business purposes and the CEO’s unlimited use for personal purposes were paid for by the Company pursuant to the CEO’s prior employment agreement. In connection with the Company’s efforts to significantly reduce overall executive compensation, including perquisite compensation Mr. Krohn was receiving for personal use of the aircraft, on April 20, 2023, the Company entered into an amendment to the employment agreement with the CEO which requires that the Company be reimbursed for personal use of the aircraft in accordance with the Company’s aircraft use policy.

During the six months ended June 30, 2023, the Company repaid $183.3 thousand of principal outstanding. As of June 30, 2023, the Company had $11.6 million of principal amount outstanding related to the TVPX Loan.

Term Loan (Subsidiary Credit Agreement)

On May 19, 2021, A-I LLC and A-II LLC (collectively, the “Subsidiary Borrowers”), both Delaware limited liability companies and indirect, wholly-owned subsidiaries of the Company, entered into a credit agreement (the “Subsidiary Credit Agreement”) providing for a term loan (the “Term Loan”) in an aggregate principal amount equal to $215.0 million. The Term Loan requires quarterly amortization payments which commenced on September 30, 2021. The Term Loan bears interest at a fixed rate of 7.0% per annum and will mature on May 19, 2028. The Subsidiary Credit Agreement required the Company to enter into certain natural gas swap and put derivative contracts. See Note 4 – Derivative Financial Instruments.

In exchange for the net cash proceeds received by the Subsidiary Borrowers from the Term Loan, the Company assigned to (a) A-I LLC all of its interests in certain oil and gas leasehold interests and associated wells and units located in State of Alabama waters and U.S. federal waters in the offshore Gulf of Mexico, Mobile Bay region (such assets, the “Mobile Bay Properties”) and (b) A-II LLC its interest in certain gathering and processing assets located (i) in State of Alabama waters and U.S. federal waters in the offshore Gulf of Mexico, Mobile Bay region and (ii) onshore near Mobile, Alabama, including offshore gathering pipelines, an onshore crude oil treating and sweetening facility, an onshore gathering pipeline, and associated assets (such assets, the “Midstream Assets”).

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The Term Loan is non-recourse to the Company and any subsidiaries other than the Subsidiary Borrowers and the subsidiary that owns the equity in the Subsidiary Borrowers, and is secured by the first lien security interests in the equity of the Subsidiary Borrowers and a first lien mortgage security interest and mortgages on certain assets of the Subsidiary Borrowers (the Mobile Bay Properties, defined below). See Note 5 – Subsidiary Borrowers for additional information.

During the six months ended June 30, 2023, the Company repaid $19.2 million of principal outstanding. As of June 30, 2023, the Company had $128.7 million in principal amount of the Term Loan outstanding.

Credit Agreement

The Company has entered into a Credit Agreement with Calculus Lending, LLC (“Calculus”), a company affiliated with and controlled by W&T’s Chairman, Chief Executive Officer and President, Tracy W. Krohn, as sole lender under the Credit Agreement (as amended from time to time, the “Credit Agreement”). The Credit Agreement currently has a maturity date of January 3, 2024. Alter Domus (US) LLC serves as the administrative agent under the Credit Agreement. The primary terms and covenants associated with the Credit Agreement as of June 30, 2023, are as follows:

$100 million first priority lien secured revolving credit facility, with borrowings limited to a borrowing base of $50.0 million;
Outstanding borrowings accrue interest at SOFR plus 6.0% per annum;
The Company’s ratio of First Lien Debt (as such term is defined in the Credit Agreement) outstanding under the Credit Agreement on the last day of the most recent quarter to EBITDAX (as such term is defined in the Credit Agreement) for the trailing four quarters must not be greater than 2.50 to 1.00 on the last day of any fiscal quarter commencing with the fiscal quarter ended March 31, 2022;
The Company’s ratio of Total Proved PV-10 to First Lien Debt (as such terms are defined in the Credit Agreement) as of the last day of any fiscal quarter commencing with the fiscal quarter ended March 31, 2022, must be equal to or greater than 2.00 to 1.00;
The ratio of the Company and its restricted subsidiaries’ consolidated current assets to consolidated current liabilities (subject in each case to certain exceptions and adjustments as set forth in the Credit Agreement) at the last day of any fiscal quarter must be greater than or equal to 1.00 to 1.00;
As of the last day of any fiscal quarter commencing with the fiscal quarter ended March 31, 2022, the Company and its restricted subsidiaries on a consolidated basis must pass a “Stress Test” to determine whether certain future net revenues from the Company’s and its restricted subsidiaries’ and certain joint ventures’ oil and gas properties included in the collateral are sufficient to satisfy the aggregate first lien indebtedness under the Credit Agreement assuming the Borrowing Base is 100% funded or fully utilized; and
Certain related party transactions are required to meet certain arm’s length criteria; except in each case as specifically permitted or excluded from the covenant under the Credit Agreement.

Availability under the Credit Agreement is subject to redetermination of the borrowing base that may be requested at the discretion of either the lender or the Company in accordance with the Credit Agreement. Any redetermination by the lender to change the borrowing base will result in a similar change in the availability under the Credit Agreement. The Credit Agreement is secured by a first priority lien on substantially all of the Company’s and its guarantor subsidiaries’ assets, excluding those assets of the Subsidiary Borrowers, which liens were released in the Mobile Bay Transaction (as described in Note 5 – Subsidiary Borrowers).

As of June 30, 2023, there were no borrowings outstanding under the Credit Agreement and no borrowings had been incurred under the Credit Agreement during the six months ended June 30, 2023. As of June 30, 2023 and December 31, 2022, the Company had $4.4 million outstanding in letters of credit which have been cash collateralized.

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11.75% Senior Second Lien Notes due 2026

On January 27, 2023, the Company issued and sold $275 million in aggregate principal amount of its 11.75% Senior Second Lien Notes at par with an interest rate of 11.75% per annum that matures on February 1, 2026 (the “11.75% Senior Second Lien Notes”), which are governed under the terms of an indenture (the “Indenture”). Interest on the 11.75% Senior Second Lien Notes is payable in arrears on February 1 and August 1, commencing August 1, 2023. The 11.75% Senior Second Lien Notes will be recorded at their carrying value consisting of principal and unamortized debt issuance costs. The 11.75% Senior Second Lien Notes are secured by second-priority liens on the same collateral that is secured under the Credit Agreement, which does not include the Mobile Bay Properties and the related Midstream Assets. The estimated annual effective interest rate on the 11.75% Senior Second Lien Notes is 12.6%, which includes amortization of deferred interest costs.

Prior to August 1, 2024, the Company may redeem all or any portion of the 11.75% Senior Second Lien Notes at a redemption price equal to 100% of the principal amount of the notes outstanding plus accrued and unpaid interest, if any, to the redemption date, plus the “Applicable Premium” (as defined in the Indenture). In addition, prior to August 1, 2024, the Company may, at its option, on one or more occasions redeem up to 35% of the aggregate original principal amount of the 11.75% Senior Second Lien Notes in an amount not greater than the net cash proceeds from certain equity offerings at a redemption price of 111.750% of the principal amount of the outstanding plus accrued and unpaid interest, if any, to the redemption date.

On and after August 1, 2024, the Company may redeem the 11.75% Senior Second Lien Notes, in whole or in part, at redemption prices (expressed as percentages of the principal amount thereof) equal to 105.875% for the 12-month period beginning August 1, 2024, and 100.000% on August 1, 2025 and thereafter, plus accrued and unpaid interest, if any, to the redemption date. The 11.75% Senior Second Lien Notes are guaranteed by the Guarantors.

The 11.75% Senior Second Lien Notes contain covenants that limit or prohibit the Company’s ability and the ability of certain of its 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 important 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 11.75% Senior Second Lien Notes an investment grade rating and no default exists with respect to the 11.75% Senior Second Lien Notes.

Redemption of 9.75% Senior Second Lien Notes due 2023

On October 18, 2018, the Company issued $625.0 million of 9.75% Senior Second Lien Notes due 2023 (the “9.75% Senior Second Lien Notes”), which were issued at par with an interest rate of 9.75% per annum and would have matured on November 1, 2023.

On February 8, 2023, the Company redeemed all of the $552.5 million of aggregate principle outstanding of the 9.75% Senior Second Lien Notes at a redemption price of 100.0%, plus accrued and unpaid interest to the redemption date. The Company used the net proceeds of $270.8 million from the issuance of the 11.75% Senior Second Lien Notes and cash on hand of $296.1 million to fund the redemption.

Covenants

As of June 30, 2023 and for all prior measurement periods presented, the Company was in compliance with all applicable covenants of the Credit Agreement and the Indenture.

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NOTE 3 – FAIR VALUE MEASUREMENTS

Derivative Financial Instruments

Derivative financial instruments are reported in the Condensed Consolidated Balance Sheets using fair value. See Note 4 – Derivative Financial Instruments for additional information on derivative financial instruments. The Company measures the fair value of derivative financial instruments by applying the income approach, using models with inputs that are classified within Level 2 of the valuation hierarchy. The income approach converts expected future cash flows to a present value amount based on market expectations. The inputs used for the fair value measurement of 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.

The following table presents the fair value of the Company’s derivative financial instruments (in thousands):

June 30, 2023

    

December 31, 2022

Assets:

 

  

 

  

Derivative instruments - current

$

1,778

$

4,954

Derivative instruments - long-term

 

17,184

 

23,236

Liabilities:

 

  

 

  

Derivative instruments - current

 

18,518

 

46,595

Derivative instruments - long-term

 

17,417

 

43,061

Debt Instruments

The following table presents the net value and fair value of the Company’s debt (in thousands):

    

June 30, 2023

    

December 31, 2022

Net Value

    

Fair Value

    

Net Value

    

Fair Value

Liabilities:

 

  

 

  

 

  

 

  

TVPX Loan

$

9,657

$

9,977

$

$

Term Loan

124,992

120,965

143,307

139,056

11.75% Senior Second Lien Notes due 2026

268,922

 

275,303

 

 

9.75% Senior Second Lien Notes due 2023

 

 

 

550,130

 

544,902

Total

$

403,571

$

406,245

$

693,437

$

683,958

The fair value of the TVPX Loan and the Term Loan were measured using a discounted cash flows model and current market rates. The fair value of the 11.75% Senior Second Lien Notes and 9.75% Senior Second Lien Notes were measured using quoted prices, although the market is not a highly liquid market. The fair value of debt was classified as Level 2 within the valuation hierarchy.

NOTE 4 — DERIVATIVE FINANCIAL INSTRUMENTS

W&T’s market risk exposure relates primarily to commodity prices. The Company attempts to mitigate a portion of its commodity price risk and stabilize cash flows associated with sales of oil and natural gas production through the use of oil and natural gas swaps, costless collars, sold calls and purchased puts. The Company is exposed to credit loss in the event of nonperformance by the derivative counterparties; however, the Company currently anticipates that the derivative counterparties will be able to fulfill their contractual obligations. The Company is not required to provide additional collateral to the derivative counterparties and does not require collateral from the derivative counterparties.

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W&T has elected not to designate commodity derivative contracts for hedge accounting. Accordingly, commodity derivatives are recorded on the Condensed Consolidated Balance Sheets at fair value with settlements of such contracts, and changes in the unrealized fair value, recorded as Derivative (gain) loss on the Condensed Consolidated Statements of Operations in each period presented. The cash flows of all commodity derivative contracts are included in Net cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows.

The natural gas contracts are based off the Henry Hub prices, which is quoted off the New York Mercantile Exchange (“NYMEX”).

The following table reflects the contracted volumes and weighted average prices under the terms of the Company’s open derivative contracts as of June 30, 2023:

Average

Instrument

Daily

Total

Weighted

Weighted

Weighted

Period

    

Type

    

Volumes

    

Volumes

    

Strike Price

    

Put Price

    

Call Price

Natural Gas - Henry Hub (NYMEX)

(MMbtu)(1)

(MMbtu)(1)

($/MMbtu)(1)

($/MMbtu)(1)

($/MMbtu)(1)

July 2023 - Dec 2023

calls

35,288

12,880,000

$

$

$

7.50

Jan 2024 - Dec 2024

calls

65,000

23,790,000

$

$

$

6.13

Jan 2025 - Mar 2025

calls

62,000

5,580,000

$

$

$

5.50

July 2023 - Dec 2023(2)

swaps

36,164

13,200,000

$

2.43

$