Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

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Form 10-Q

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

For the quarterly period ended March 31, 2020

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

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W&T OFFSHORE, INC.

(Exact name of registrant as specified in its charter)

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Texas	72-1121985
(State of incorporation)	(IRS Employer Identification Number)
Nine Greenway Plaza, Suite 300, Houston, Texas	77046-0908
(Address of principal executive offices)	(Zip Code)

(713) 626-8525

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer ☐		Accelerated filer	☑
Non-accelerated filer ☐		Smaller reporting company	☐
		Emerging growth company	☐

 

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

 

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

 

Securities registered pursuant to section 12(b) of the Act:
Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.00001		WTI		New York Stock Exchange

 

As of June 19, 2020, there were 141,778,318 shares outstanding of the registrant’s common stock, par value $0.00001.

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Explanatory Note:

 

As previously disclosed in the Current Report on Form 8-K filed by W&T Offshore, Inc. (the “Company”) on May 5, 2020, the Company expected that the filing of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (the “Quarterly Report”), originally due on May 11, 2020, would be delayed due to circumstances related to the outbreak of the coronavirus disease 2019 (“COVID-19”).

 

In particular, COVID-19 and related precautionary responses had caused the institution of work-from-home policies for our corporate offices which had limited our employees’ access to our facilities and disrupted our normal interactions and workflows among our accounting, financial and legal personnel and other staff and service providers involved in the completion of our quarterly review and preparation of the Quarterly Report. These restrictions had slowed the completion of our internal quarterly review, including evaluating the various impacts of COVID-19 on our financial statements, and our ability to prepare and complete the Quarterly Report in a timely manner.

 

The Company relied on Release No. 34-88465 issued by the Securities and Exchange Commission on March 25, 2020, pursuant to Section 36 of the Securities Exchange Act of 1934, as amended, to delay the filing of the Quarterly Report.

 

 

 

		March 31,				December 31,
		2020				2019
Assets
Current assets:
Cash and cash equivalents		$	47,574			$	32,433
Receivables:
Oil and natural gas sales			35,413				57,367
Joint interest and other, net			12,277				19,400
Income taxes			1,861				1,861
Total receivables			49,551				78,628
Prepaid expenses and other assets (Note 1)			78,658				30,691
Total current assets			175,783				141,752
Oil and natural gas properties and other, net - at cost (Note 1)			730,044				748,798
Restricted deposits for asset retirement obligations			15,574				15,806
Deferred income taxes			57,418				63,916
Other assets (Note 1)			30,084				33,447
Total assets		$	1,008,903			$	1,003,719
Liabilities and Shareholders’ Deficit
Current liabilities:
Accounts payable		$	61,729			$	102,344
Undistributed oil and natural gas proceeds			28,176				29,450
Advances from joint interest partners			18,285				5,279
Asset retirement obligations			2,803				21,991
Accrued liabilities (Note 1)			34,428				30,896
Total current liabilities			145,421				189,960
Long-term debt: (Note 2)
Principal			677,525				730,000
Carrying value adjustments			(9,467	)			(10,467	)
Long term debt - carrying value			668,058				719,533
Asset retirement obligations, less current portion			361,297				333,603
Other liabilities (Note 1)			16,464				9,988
Commitments and contingencies			—				—
Shareholders’ deficit:
Preferred stock, $0.00001 par value; 20,000 shares authorized; 0 issued for both dates presented			—				—
Common stock, $0.00001 par value; 200,000 shares authorized; 144,538 issued and 141,669 outstanding for both dates presented			1				1
Additional paid-in capital			548,098				547,050
Retained deficit			(706,269	)			(772,249	)
Treasury stock, at cost; 2,869 shares for both dates presented			(24,167	)			(24,167	)
Total shareholders’ deficit			(182,337	)			(249,365	)
Total liabilities and shareholders’ deficit		$	1,008,903			$	1,003,719

 

 

		Three Months Ended March 31,
		2020				2019
Revenues:
Oil		$	84,650			$	86,703
NGLs			6,452				6,448
Natural gas			29,300				21,838
Other			3,726				1,091
Total revenues			124,128				116,080
Operating costs and expenses:
Lease operating expenses			54,775				43,456
Production taxes			916				416
Gathering and transportation			5,449				6,423
Depreciation, depletion, amortization and accretion			39,126				33,766
General and administrative expenses			13,963				14,109
Derivative (gain) loss			(61,912	)			48,886
Total costs and expenses			52,317				147,056
Operating income (loss)			71,811				(30,976	)
Interest expense, net			17,110				16,282
Gain on purchase of debt			(18,501	)			—
Other expense, net			723				331
Income (loss) before income tax expense			72,479				(47,589	)
Income tax expense			6,499				172
Net income (loss)		$	65,980			$	(47,761	)
Basic and diluted earnings (loss) per common share		$	0.46			$	(0.34	)

 

		Common Stock Outstanding								Additional Paid-In				Retained				Treasury Stock								Total Shareholders’
		Shares				Value				Capital				Deficit				Shares				Value				Deficit
Balances, December 31, 2018			140,644			$	1			$	545,705			$	(846,335	)			2,869			$	(24,167	)		$	(324,796	)
Share-based compensation			—				—				(78	)			—				—				—				(78	)
Net loss			—				—				—				(47,761	)			—				—				(47,761	)
Balances, March 31, 2019			140,644			$	1			$	545,627			$	(894,096	)			2,869			$	(24,167	)		$	(372,635	)

		Common Stock Outstanding								Additional Paid-In				Retained				Treasury Stock								Total Shareholders’
		Shares				Value				Capital				Deficit				Shares				Value				Deficit
Balances, December 31, 2019			141,669			$	1			$	547,050			$	(772,249	)			2,869			$	(24,167	)		$	(249,365	)
Share-based compensation			—				—				1,048				—				—				—				1,048
Net income			—				—				—				65,980				—				—				65,980
Balances, March 31, 2020			141,669			$	1			$	548,098			$	(706,269	)			2,869			$	(24,167	)		$	(182,337	)

 

		Three Months Ended March 31,
		2020				2019
Operating activities:
Net income (loss)		$	65,980			$	(47,761	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion, amortization and accretion			39,126				33,766
Amortization of debt items and other items			1,625				1,152
Share-based compensation			1,048				(78	)
Derivative (gain) loss			(61,912	)			48,886
Cash receipts on derivative settlements, net			4,404				11,948
Gain on purchase of debt			(18,501	)			—
Deferred Income taxes			6,499				172
Changes in operating assets and liabilities:
Oil and natural gas receivables			21,954				6,496
Joint interest receivables			7,123				(2,986	)
Prepaid expenses and other assets			11,011				(4,269	)
Asset retirement obligation settlements			(249	)			(254	)
Cash advances from JV partners			13,006				44,644
Accounts payable, accrued liabilities and other			(6,790	)			(6,871	)
Net cash provided by operating activities			84,324				84,845
Investing activities:
Investment in oil and natural gas properties and equipment			(33,575	)			(31,581	)
Acquisition of property interest			(2,002	)			—
Purchases of furniture, fixtures and other			(70	)			—
Net cash used in investing activities			(35,647	)			(31,581	)
Financing activities:
Repayments on credit facility			(25,000	)			—
Purchase of Senior Second Lien Notes			(8,536	)			—
Debt issuance costs and other			—				(441	)
Net cash used in financing activities			(33,536	)			(441	)
Increase in cash and cash equivalents			15,141				52,823
Cash and cash equivalents, beginning of period			32,433				33,293
Cash and cash equivalents, end of period		$	47,574			$	86,116

 

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 worldly events have significantly impacted the price of crude oil and the demand for crude oil beginning in March of 2020.  While crude oil prices have partially recovered in June 2020 from recent historical lows in April 2020, the perceived risks and volatility have increased in 2020 to date compared to recent years.  See 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, natural gas liquids (“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.

 

Credit Risk and Allowance for Credit Losses.   Our revenue has been concentrated in certain major oil and gas companies.  For the year ended December 31, 2019 and for the three months ended March 31, 2020, approximately 63% and 57%, respectively, of our revenue was from three major oil and gas companies and a substantial majority of our receivables were from sales with major oil and gas companies.  We also have 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.  Our maximum exposure at any time would be the receivable balance.  The receivables, Joint interest and other, net, reported on the Condensed Consolidated Balance Sheets are reduced for the allowance for credit losses.  The roll forward of the allowance for credit losses is as follows: 

 

 

 

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):

 

 

 

(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):

 

 

 

 

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):

 

 

 

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

 

 

 

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

 

 

 

 

 

 

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):

 

 

 

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.  The primary terms and covenants associated with the Credit Agreement are as follows, with capitalized terms defined under the Credit Agreement:

 

•

As of March 31, 2020, the borrowing base was $250.0 million.

 

•

Letters of credit may be issued in amounts up to $30.0 million, provided sufficient availability under the Credit Agreement exists.  As of March 31, 2020 and December 31, 2019, we had $5.8 million of letters of credit issued and outstanding under the Credit Agreement.

 

•

For the period ended March 31, 2020, the Leverage Ratio must not exceed 3.00 to 1.00.

 

•

For the period ended March 31, 2020, the Current Ratio must be maintained at greater than 1.00 to 1.00.

 

Availability under the Credit Agreement is subject to semi-annual redeterminations of our borrowing base in or around May and November of each calendar year, and 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.  See Note 12, Subsequent Events, for revisions to certain terms of the Credit Agreement, including the borrowing base, Leverage Ratio and collateral, resulting from the Spring 2020 semi-annual redetermination.

 

The Credit Agreement is collateralized by a first priority lien on properties constituting at least 85% 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 three months ended March 31, 2020 was 4.5%, which excludes debt issuance costs, commitment fees and other fees.

 

 

 

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 $625.0 million of 9.75% Senior Second Lien Notes due 2023 (the “Senior Second Lien Notes”), which were issued at par with an interest rate of 9.75% per annum and mature on November 1, 2023, and are governed under the terms of the Indenture of the Senior Second Lien Notes (the “Indenture”).  The estimated annual effective interest rate on the Senior Second Lien Notes is 10.4%, which includes amortization of debt issuance costs.  Interest on the Senior Second Lien Notes is payable in arrears on May 1 and November 1 of each year.

 

During the three months ended March 31, 2020, we acquired $27.5 million in principal of our outstanding Senior Second Lien Notes for $8.5 million and recorded a non-cash gain on purchase of debt of $18.5 million, which included a reduction of $0.4 million related to the write-off of unamortized debt issuance costs. The Company purchased additional Senior Second Lien Notes subsequent to March 31, 2020 (refer to Note 12, Subsequent Events).

 

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 March 31, 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.

 

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):

 

 

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):

 

 

 

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 $361.4 million.  Through March 31, 2020, nine wells have been completed.  As of March 31, 2020, one additional well was drilled to target depth, but not completed as of this date.  W&T contributed 88.94% of its working interest in certain identified undeveloped drilling projects to Monza and retained 11.06% of its working interest.  The Joint Venture Drilling Program is structured so that we initially receive an aggregate of 30.0% of the revenues less expenses, through both our direct ownership of our retained working interest in the Monza projects and our indirect interest through our interest in Monza, for contributing 20.0% of the estimated total well costs plus associated leases and providing access to available infrastructure at agreed-upon rates.  Any exceptions to this structure are approved by the Monza board.  W&T is the operator for seven of the nine wells completed through March 31, 2020.  

 

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

 

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 March 31, 2020, members of Monza made partner capital contributions, including our contributions of working interest in the drilling projects, to Monza totaling $289.3 million and received cash distributions totaling $45.9 million.  Our net contribution to Monza, reduced by distributions received, as of March 31, 2020 was $57.1 million.  W&T is obligated to fund certain cost overruns to the extent they occur, subject to certain exceptions, for the Joint Venture Drilling Program wells above budgeted and contingency amounts, of which the total exposure cannot be estimated at this time.

 

Consolidation and Carrying Amounts

 

Our interest in Monza is considered to be a variable interest that we account for using proportional consolidation.  Through March 31, 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 March 31, 2020, in the Consolidated Balance Sheet, we recorded $15.1 million, net, in Oil and natural gas properties and other, net, $4.2 million in Other assets, $0.1 million in ARO and $2.4 million, net, increase in working capital in connection with our proportional interest in Monza’s assets and liabilities.  As of December 31, 2019, in the Consolidated Balance Sheet, we recorded $16.1 million, net, in Oil and natural gas properties and other, net, $5.3 million in Other assets, $0.1 million in ARO and $2.7 million, net, increase in working capital in connection with our proportional interest in Monza’s assets and liabilities.  Additionally, during the three months ended March 31, 2020 and during the year ended December 31, 2019, we called on Monza to provide cash to fund its portion of certain Joint Venture Drilling Program projects in advance of capital expenditure spending, and the unused balances as of March 31, 2020 and December 31, 2019 were $18.3 million and $5.3 million, respectively, which are included in the Consolidated Balance Sheet in Advances from joint interest partners.  For the three months ended March 31, 2020, in the Consolidated Statement of Operations, we recorded $3.3 million in Total revenues and $3.1 million in Operating costs and expenses in connection with our proportional interest in Monza’s operations.  For the three months ended March 31, 2019, in the Consolidated Statement of Operations, we recorded $1.6 million in Total revenues and, $0.9 million in Operating costs and expenses in connection with our proportional interest in Monza’s operations.

 

 

 

 

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

 

5.	Asset Retirement Obligations

 

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

 

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

 

 

 

6.	Derivative Financial Instruments

 

Our market risk exposure relates primarily to commodity prices and, from time to time, we use various derivative instruments to manage our exposure to this commodity price risk from sales of our crude oil and natural gas.  All of the present derivative counterparties are also lenders or affiliates of lenders participating in our Credit Agreement.  We are exposed to credit loss in the event of nonperformance by the derivative counterparties; however, we currently anticipate that each of our derivative counterparties will be able to fulfill their contractual obligations.  We are not required to provide additional collateral to the derivative counterparties and we do not require collateral from our derivative counterparties.

 

We have elected not to designate our commodity derivative contracts as hedging instruments; therefore, all changes in the fair value of derivative contracts were recognized currently in earnings during the periods presented.  The cash flows of all of our commodity derivative contracts are included in Net cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows.

 

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 March 31, 2020 are presented in the following tables:

 

 

 

 

 

(1)

Bbls = Barrels

 

 

 

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

 

 

 

 

 

 

 

 

(2)

MMBtu = Million British Thermal Units

 

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

 

 

 

 

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):

 

 

 

 

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

 

 

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):

 

 

 

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. 

 

During the three months ended March 31, 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 10 years with various effective dates, and each has an option to renew for up to another ten years.  It is expected renewals beyond 10 years can be obtained as renewals were granted to the previous lessees.  The land lease has an option to renew every five years extending to 2085.  The expected term of the rights-of way and land leases was estimated to approximate the life of the related reserves.   

 

We recorded ROU assets and lease liabilities using a discount rate of 9.75% for the office leases and 10.75% for the other leases due to their longer expected term. 

 

Amounts related to leases recorded within our Condensed Consolidated Balance Sheet are as follows (in thousands):

 

 

 

 

 

 

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 March 31, 2020, there were 10,874,043 shares of common stock available for issuance in satisfaction of awards under the Plan.  The shares available for issuance are reduced on a one-for-one basis when RSUs are settled in shares of common stock, which shares of common stock are issued net of withholding tax through the withholding of shares.  The Company has the option following vesting to settle RSUs in stock or cash, or a combination of stock and cash. The Company expects to settle RSUs that vest in the future using shares of common stock.

 

RSUs currently outstanding relate to the 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 three months ended March 31, 2020 is as follows:

 

 

For the outstanding RSUs issued to the eligible employees as of March 31, 2020, vesting is expected to occur as follows (subject to forfeitures): 

 

 

 

 

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 2019, 2018 and 2017.  As of March 31, 2020, there were 82,620 shares of common stock available for issuance in satisfaction of awards under the Director Compensation Plan.  During the second quarter of 2020, our shareholders approved increasing the shares available by 500,000 shares.  During the second quarter of 2020, 109,376 Restricted Shares were granted to non-employee directors.  The shares available are reduced on a one-to-one basis when Restricted Shares are granted.

 

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

 

The Restricted Shares are subject to service conditions and vesting occurs at the end of specified service periods unless 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.

 

There was no activity related to Restricted Shares during the three months ended March 31, 2020.

 

For the outstanding Restricted Shares issued to the non-employee directors as of March 31, 2020, vesting is expected to occur as follows (subject to any forfeitures):

 

 

 

 

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

 

 

 

 

(1)

For the three months ended March 31, 2019, share-based compensation expense includes adjustments for a former executive's' forfeitures.

 

Unrecognized Share-Based Compensation.  As of March 31, 2020, unrecognized share-based compensation expense related to our awards of RSUs and Restricted Shares was $4.0 million and $0.4 million, respectively.  Unrecognized share-based compensation expense will be recognized through November 2021 for RSUs and April 2022 for Restricted Shares.

 

 

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

 

Cash-Based Incentive Compensation.  In addition to share-based compensation, short-term, cash-based awards were granted under the Plan to substantially all eligible employees in 2019 and 2018.  The short-term, cash-based 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 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 award.  During 2018, long-term, cash 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 $200 million over four consecutive quarters was achieved; therefore, incentive compensation expense was recognized over the January 2019 to February 2020 period (the service period of the award).  Payments were made in March 2020 and are subject to all the terms of the 2019 Annual Incentive Award Agreement.

 

•

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):

 

 

 

(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 Expense and Tax Rate.  Income tax expense for the three months ended March 31, 2020 and 2019 was $6.5 million and $0.2 million, respectively.  For the three months ended March 31, 2020, our effective tax rate primarily differed from the statutory Federal tax rate for adjustments recorded related to the enactment of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) on March 27, 2020.  The CARES Act modified certain income tax statutes, including changes related to the business interest expense limitation under Code Section 163(j).  For the three months ended March 31, 2019, immaterial deferred income tax expense was recorded due to dollar-for-dollar offsets by our valuation allowance.  Our effective tax rate was 9.0% for the three months ended March 31, 2020 and was not meaningful for the three months ended March 31, 2019.  

 

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 March 31, 2020 and December 31, 2019, our valuation allowance was $47.8 million and $54.4 million, respectively, and relates primarily to state net operating losses and the disallowed interest limitation carryover. 

 

Income Taxes Receivable.  As of March 31, 2020 and December 31, 2019, we had current income taxes receivable of $1.9 million, which relates primarily to a net operating loss  (“NOL”) carryback claim for 2017 that was carried back to prior years. 

 

During the three months ended March 31, 2020 and 2019, we did not receive any income tax claims or make any income tax payments of significance.

 

The tax years 2016 through 2019 remain open to examination by the tax jurisdictions to which we are subject.

 

 

 

10.	Earnings Per Share

 

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

 

 

 

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

 

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 $4.7 million of the reductions taken.  We recorded a reduction to other revenue in 2010 to reflect this disallowance with the offset to a liability reserve; however, we disagree with the position taken by the ONRR.  We filed an appeal with the ONRR, which was denied in May 2014.  On June 17, 2014, we filed an appeal with the IBLA under the Department of the Interior.  On January 27, 2017, the IBLA affirmed the decision of the ONRR requiring W&T to pay approximately $4.7 million in additional royalties. We filed a motion for reconsideration of the IBLA decision on March 27, 2017.  Based on a statutory deadline, we filed an appeal of the IBLA decision on July 25, 2017 in the U.S. District Court for the Eastern District of Louisiana.  We were required to post a bond in the amount of $7.2 million and cash collateral of $6.9 million with the surety in order to appeal the IBLA decision, of which the cash collateral held by the surety was subsequently returned during the first quarter of 2020.  On December 4, 2018, the IBLA denied our motion for reconsideration.  On February 4, 2019, we filed our first amended complaint, and the government has filed its Answer in the Administrative Record.  On July 9, 2019, we filed an Objection to the Administrative Record and Motion to Supplement the Administrative Record, asking the court to order the government to file a complete privilege log with the record.  Following a hearing on July 31, 2019, the Court ordered the government to file a complete privilege log.  In an Order dated December 18, 2019, the court ordered the government to produce certain contracts subject to a protective order and to produce the remaining documents in dispute to the court for in camera review.  Following in camera review, the Court upheld the government’s assertion of privilege, and the parties are proceeding with drafting Cross-Motions for Summary Judgment, which will be the basis for the court’s ruling.  We anticipate that briefing will be complete in the Fall of 2020.

 

 

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 three months ended March 31, 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.

 

Notices of Proposed Civil Penalty Assessment.  During the three months ended March 31, 2020 and 2019, we did not pay any civil penalties to the Bureau of Safety and Environmental Enforcement ("BSEE") related to Incidents of Noncompliance (“INCs”) at various offshore locations.  We currently have nine open civil penalties issued by the BSEE from INCs, which have not been settled as of the filing date of this Form 10-Q.  The INCs underlying these open civil penalties cite alleged non-compliance with various safety-related requirements and procedures occurring at separate offshore locations on various dates ranging from July 2012 to January 2018.  The proposed civil penalties for these INCs total $7.7 million.  As of March 31, 2020 and December 31, 2019, we have accrued approximately $3.5 million, which is our best estimate of the final settlements once all appeals have been exhausted.  Our position is that the proposed civil penalties are excessive given the specific facts and circumstances related to these INCs.  We are exploring the possibility of settling these civil penalties with the BSEE.

 

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

 

 

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

 

12.	Subsequent Events

 

COVID-19 Impacts on Economic Environment.  On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of COVID-19 and the risks to the international community as the virus spread globally beyond its point of origin.  In March 2020, the WHO classified the COVID-19 as a pandemic based on the rapid increase in exposure globally.

 

The COVID-19 pandemic has significantly impacted the global crude oil supply-demand balance causing a substantial decrease in crude oil prices and increasing the volatility of the market.  Domestic natural gas prices have remained relatively stable and have experienced less volatility.  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 ultimate effect on the prices of crude oil and natural gas cannot be determined and we could be adversely affected in future periods.

 

We are actively monitoring the impact on our results of operations, financial position, and liquidity for the remainder of 2020.  In response to the market changes, we have reduced our capital expenditure budget for the remainder of 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

 

Purchase of Senior Second Lien Notes.  During the second quarter of 2020, approximately $45.1 million of  Senior Second Lien Notes were purchased in the open market for approximately $15.4 million.

 

Paycheck Protection Program (“PPP”).  On April 15, 2020, the Company received $8.4 million under the U.S. Small Business Administration (“SBA”) PPP.  The Company expects that it will not be required to repay any of the funds received; however, we can give no assurances on the outcome of the SBA’s decision on the matter.  Should the Company be required to repay all or a portion of the funds received under the PPP (the PPP “Loan”), the Loan would mature on April 10, 2025 and accrue interest at 1%.

 

Spring 2020 Borrowing Base Redetermination.  On June 17, 2020, the lenders under the Credit Agreement completed their semi-annual borrowing base redetermination and entered into the Third Amendment and Waiver (the “Third Amendment”) to the Credit Agreement. Although the Company had not violated any covenants, the Third Amendment provides less stringent covenant requirements given the recent changes in the oil and gas markets.  The Third Amendment includes the following changes, among other things, to the Credit Agreement:

 

•

The borrowing base under the Credit Agreement was reduced from $250.0 million to $215.0 million.

 

•

Increase the interest rate margin by 25 basis points.

 

•

Amend 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 2.00 to 1.00 ratio limit of first lien debt outstanding under the Credit Agreement on the last day of the most recent quarter to EBITDAX for the trailing four quarters.

 

•

Increase the requirement to provide first priority liens on properties constituting at least 85% of total proved reserves of the Company as set forth on reserve reports required to be delivered under the Credit Agreement to 90%.

 

 

 

 

 

Our operating results are strongly influenced by the price of the commodities that we produce and sell.  The price of those commodities is affected by both domestic and international factors, including domestic production.  During the three months ended March 31, 2020, our average realized crude oil price was $46.33 per barrel.  This is a decrease from our average realized crude oil price of $58.66 per barrel, or 21.0%, for the three months ended March 31, 2019.  Crude oil prices using West Texas Intermediate ("WTI") pricing decreased significantly in April with spot prices being negative at some times and averaging $16.55 per barrel for April 2020.  Crude oil prices have partially recovered and averaged $28.56 per barrel for May 2020 and ending the month at levels above $35.00 per barrel. 

 

Our average realized prices of NGLs and natural gas for the three months ended March 31, 2020 were lower than the average realized prices for the three months ended March 31, 2019 by 37.6% and 36.3%, respectively. Our average realized crude oil sales price of $46.33 per barrel differs from the WTI benchmark average crude price of $45.34 per barrel primarily due to premiums or discounts, crude oil quality adjustments, volume weighting (collectively referred to as differentials) and other factors.  Crude oil quality adjustments can vary significantly by field.  All of our crude oil is produced offshore in the Gulf of Mexico and is characterized as Poseidon, Light Louisiana Sweet (“LLS”), Heavy Louisiana Sweet (“HLS”) and others.  WTI is frequently used to value domestically produced crude oil, and the majority of our crude oil production is priced using the spot price for WTI as a base price, then adjusted for the type and quality of crude oil and other factors.  Similar to crude oil prices, the differentials for our offshore crude oil have also experienced volatility in the past.  The monthly average differentials of WTI versus Poseidon, LLS and HLS for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 decreased approximately $3.00 to $4.00 per barrel and averaged $0.07, $3.73, and $3.30 per barrel, respectively, for these three types of crude oil for the three months ended March 31, 2020.

 

Our primary liquidity needs are to fund capital and operating expenditures and strategic acquisitions to allow us to replace our oil and natural gas reserves, repay and service outstanding borrowings, operate our properties and satisfy our AROs.  We have funded such activities in the past with cash on hand, net cash provided by operating activities, sales of property, securities offerings and bank borrowings and expect to continue to do so in the future.