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 September 30, 2021

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

For the transition period from _______________ to ________________

Commission File Number 1-32414

W&T OFFSHORE, INC.

(Exact name of registrant as specified in its charter)


Texas		72-1121985
(State of incorporation)		(IRS Employer Identification Number)

5718 Westheimer Road, Suite 700, Houston, Texas		77057-5745
(Address of principal executive offices)		(Zip Code)

(713) 626-8525

(Registrant’s telephone number, including area code)

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

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

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


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

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

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

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.00001	WTI	New York Stock Exchange

As of October 31, 2021 there were 142,367,272 shares outstanding of the registrant’s common stock, par value $0.00001.

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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 September 30, 2021 and December 31, 2020	1
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2021 and 2020	2
	Condensed Consolidated Statements of Changes in Shareholders’ Deficit for the Three and Nine Months Ended September 30, 2021 and 2020	3
	Condensed Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 2021 and 2020	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	38

PART II – OTHER INFORMATION		39
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 5.	Other Information	39
Item 6.	Exhibits	40

SIGNATURE		41

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)


	September 30,		December 31,
	2021		2020
Assets
Current assets:
Cash and cash equivalents	$	257,584	$	43,726
Receivables:
Oil and natural gas sales		38,326		38,830
Joint interest, net		13,012		10,840
Income taxes		20		—
Total receivables		51,358		49,670
Prepaid expenses and other assets (Note 1)		73,642		13,832
Total current assets		382,584		107,228

Oil and natural gas properties and other, net (Note 1)		653,936		686,878

Restricted deposits for asset retirement obligations		29,873		29,675
Deferred income taxes		113,177		94,331
Other assets (Note 1)		63,776		22,470
Total assets	$	1,243,346	$	940,582
Liabilities and Shareholders’ Deficit
Current liabilities:
Accounts payable	$	78,782	$	48,612
Undistributed oil and natural gas proceeds		30,759		19,167
Asset retirement obligations		27,545		17,188
Accrued liabilities (Note 1)		196,486		29,880
Current portion of long-term debt		46,201		—
Income tax payable		—		153
Total current liabilities		379,773		115,000
Long-term debt (Note 2)
Principal		709,481		632,460
Unamortized debt issuance costs		(13,310)		(7,174)
Long-term debt, net		696,171		625,286

Asset retirement obligations, less current portion		380,329		375,516
Other liabilities (Note 1)		83,814		32,938
Deferred income taxes		148		128
Commitments and contingencies (Note 11)		—		—
Shareholders’ deficit:
Preferred stock, $0.00001 par value; 20,000 shares authorized; none issued at September 30, 2021 and December 31, 2020		—		—
Common stock, $0.00001 par value; 200,000 shares authorized; 145,236 issued and 142,367 outstanding at September 30, 2021; 145,174 issued and 142,305 outstanding at December 31, 2020		1		1
Additional paid-in capital		552,118		550,339
Retained deficit		(824,841)		(734,459)
Treasury stock, at cost; 2,869 shares at September 30, 2021 and December 31, 2020		(24,167)		(24,167)
Total shareholders’ deficit		(296,889)		(208,286)
Total liabilities and shareholders’ deficit	$	1,243,346	$	940,582

See Notes to Condensed Consolidated Financial Statements

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W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands except per share data)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenues:
Oil	$	74,265	$	46,589	$	240,418	$	161,884
NGLs		12,205		4,464		30,397		12,833
Natural gas		45,137		19,213		113,816		69,877
Other		2,339		2,251		7,790		7,292
Total revenues		133,946		72,517		392,421		251,886
Operating costs and expenses:
Lease operating expenses		39,490		36,437		129,399		119,525
Production taxes		2,600		1,266		6,552		3,325
Gathering and transportation		3,993		3,560		13,135		12,310
Depreciation, depletion, amortization and accretion		26,291		25,127		83,879		93,736
General and administrative expenses		13,391		14,476		38,090		34,067
Derivative loss (gain)		73,137		11,161		179,156		(35,337)
Total costs and expenses		158,902		92,027		450,211		227,626
Operating (loss) income		(24,956)		(19,510)		(57,790)		24,260

Interest expense, net		18,910		14,135		50,474		46,061
Gain on debt transactions		—		—		—		(47,469)
Other expense, net		—		751		964		2,225
(Loss) income before income taxes		(43,866)		(34,396)		(109,228)		23,443
Income tax benefit		(5,902)		(21,057)		(18,846)		(23,294)
Net (loss) income	$	(37,964)	$	(13,339)	$	(90,382)	$	46,737
Basic and diluted (loss) earnings per common share	$	(0.27)	$	(0.09)	$	(0.64)	$	0.33

See Notes to Condensed Consolidated Financial Statements.

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W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT

(In thousands)

(Unaudited)


Three Month Comparison
	Common Stock			Additional							Total
	Outstanding			Paid-In		Retained		Treasury Stock			Shareholders’
	Shares	Value		Capital		Deficit		Shares	Value		Deficit
Balances at June 30, 2021	142,367	$	1	$	551,260	$	(786,877)	2,869	$	(24,167)	$	(259,783)
Share-based compensation	—				858		—	—		—		858
Stock Issued	—		—		—		—	—		—		—
Net loss	—		—		—		(37,964)	—		—		(37,964)
Balances at September 30, 2021	142,367	$	1	$	552,118	$	(824,841)	2,869	$	(24,167)	$	(296,889)


	Common Stock			Additional							Total
	Outstanding			Paid-In		Retained		Treasury Stock			Shareholders’
	Shares	Value		Capital		Deficit		Shares	Value		Deficit
Balances at June 30, 2020	141,669	$	1	$	549,117	$	(712,173)	2,869	$	(24,167)	$	(187,222)
Share-based compensation	—		—		1,075		—	—		—		1,075
Stock Issued	109		—		—		—	—		—		—
Net loss	—		—		—		(13,339)	—		—		(13,339)
Balances at September 30, 2020	141,778	$	1	$	550,192	$	(725,512)	2,869	$	(24,167)	$	(199,486)


Nine Month Comparison
	Common Stock			Additional							Total
	Outstanding			Paid-In		Retained		Treasury Stock			Shareholders’
	Shares	Value		Capital		Deficit		Shares	Value		Deficit
Balances at December 31, 2020	142,305	$	1	$	550,339	$	(734,459)	2,869	$	(24,167)	$	(208,286)
Share-based compensation	—		—		1,779		—	—		—		1,779
Stock Issued	62		—		—		—	—		—		—
Net loss	—		—		—		(90,382)	—		—		(90,382)
Balances at September 30, 2021	142,367	$	1	$	552,118	$	(824,841)	2,869	$	(24,167)	$	(296,889)


	Common Stock			Additional							Total
	Outstanding			Paid-In		Retained		Treasury Stock			Shareholders’
	Shares	Value		Capital		Deficit		Shares	Value		Deficit
Balances at December 31, 2019	141,669	$	1	$	547,050	$	(772,249)	2,869	$	(24,167)	$	(249,365)
Share-based compensation	—		—		3,142		—	—		—		3,142
Stock Issued	109		—		—		—	—		—		—
Net income	—		—		—		46,737	—		—		46,737
Balances at September 30, 2020	141,778	$	1	$	550,192	$	(725,512)	2,869	$	(24,167)	$	(199,486)

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)


	Nine Months Ended September 30,
	2021		2020
Operating activities:
Net (loss) income	$	(90,382)	$	46,737
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation, depletion, amortization and accretion		83,879		93,736
Amortization of debt items and other items		4,095		5,251
Share-based compensation		1,779		3,142
Derivative loss (gain)		179,156		(35,337)
Derivative cash (payments) receipts, net		(39,554)		42,028
Derivative cash premium (payments)		(32,368)		—
Gain on debt transactions		—		(47,469)
Deferred income taxes		(18,826)		(23,407)
Changes in operating assets and liabilities:
Oil and natural gas receivables		504		35,959
Joint interest receivables		(2,172)		9,039
Prepaid expenses and other assets		(30,473)		7,951
Income tax		(153)		1,993
Asset retirement obligation settlements		(19,744)		(2,788)
Cash advances from JV partners		9,999		2,442
Accounts payable, accrued liabilities and other		65,551		(24,539)
Net cash provided by operating activities		111,291		114,738
Investing activities:
Investment in oil and natural gas properties and equipment		(16,025)		(12,954)
Changes in operating assets and liabilities associated with investing activities		3,617		(28,229)
Acquisition of property interests		—		(456)
Purchases of furniture, fixtures and other		2		(70)
Net cash used in investing activities		(12,406)		(41,709)
Financing activities:
Borrowings on credit facility		—		25,000
Repayments on credit facility		(80,000)		(50,000)
Purchase of Senior Second Lien Notes		—		(23,930)
Proceeds from Term Loan		215,000		—
Repayments on Term Loan		(11,778)		—
Debt issuance costs and other		(8,249)		—
Net cash provided by (used in) financing activities		114,973		(48,930)
Increase in cash and cash equivalents		213,858		24,099
Cash and cash equivalents, beginning of period		43,726		32,433
Cash and cash equivalents, end of period	$	257,584	$	56,532

See Notes to Condensed Consolidated Financial Statements.

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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 subsidiaries, W & T Energy VI, LLC, Aquasition LLC, and Aquasition II, LLC, and through our proportionately consolidated interest in Monza Energy LLC (“Monza”), as described in more detail in Note 5.

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, 2020.

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.

Accounting Standards Updates effective January 1, 2021

Simplifying the Accounting for Income Taxes. In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and by clarifying and amending existing guidance. ASU 2019-12 is effective for annual and interim financial statement periods beginning after December 15, 2020. Adoption of the amendment did not have a material impact on our financial statements or disclosures.

Revenue Recognition. We recognize revenue from the sale of crude oil, NGLs and natural gas when our performance obligations are satisfied. Our contracts with customers are primarily short-term (less than 12 months). Our responsibilities to deliver a unit of crude oil, NGL, and natural gas under these contracts represent separate, distinct performance obligations. These performance obligations are satisfied at the point in time control of each unit is transferred to the customer. Pricing is primarily determined utilizing a particular pricing or market index, plus or minus adjustments reflecting quality or location differentials.

Employee Retention Credit. Under the Consolidated Appropriations Act, 2021 passed by the United States Congress and signed by the President on December 27, 2020, provisions of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) were extended and modified making the Company eligible for a refundable employee retention credit subject to meeting certain criteria. The Company recognized a $2.1 million employee retention credit during the nine months ended September 30, 2021 which is included as a credit to General and administrative expenses in the Condensed Consolidated Statement of Operations.

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Credit Risk and Allowance for Credit Losses. Our revenue is concentrated in certain major oil and gas companies. For the nine months ended September 30, 2021, and the year ended December 31, 2020, approximately 61% and 62%, 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 related to joint interest billings are reported on the Condensed Consolidated Balance Sheets net of the allowance for credit losses. The allowance for credit losses was $9.2 million as of September 30, 2021 and $9.1 million December 31, 2020.

Prepaid Expenses and Other Assets. The amounts recorded are expected to be realized within one year and the major categories are presented in the following table (in thousands):


	September 30, 2021		December 31, 2020
Derivatives – current ⁽¹⁾	$	52,327	$	2,752
Unamortized insurance/bond premiums		6,969		4,717
Prepaid deposits related to royalties		6,254		4,473
Prepayment to vendors		4,265		1,429
Prepayments to joint interest partners		3,604		402
Other		223		59
Prepaid expenses and other assets	$	73,642	$	13,832

⁽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):


	September 30, 2021		December 31, 2020
Oil and natural gas properties and equipment, at cost	$	8,601,081	$	8,567,509
Furniture, fixtures and other		20,844		20,847
Total property and equipment		8,621,925		8,588,356
Less: Accumulated depreciation, depletion, amortization and impairment		7,967,989		7,901,478
Oil and natural gas properties and other, net	$	653,936	$	686,878

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


	September 30, 2021		December 31, 2020
Right-of-Use assets	$	10,689	$	11,509
Unamortized debt issuance costs		1,075		2,094
Investment in White Cap, LLC		3,034		2,699
Unamortized brokerage fee for Monza		—		626
Proportional consolidation of Monza's other assets (Note 5)		2,992		1,782
Derivatives		44,920		2,762
Other		1,066		998
Total other assets (long-term)	$	63,776	$	22,470

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


	September 30, 2021		December 31, 2020
Accrued interest	$	25,693	$	10,389
Accrued salaries/payroll taxes/benefits		7,604		4,009
Litigation accruals		530		436
Lease liability		845		394
Derivatives ⁽¹⁾		159,538		13,620
Other		2,276		1,032
Total accrued liabilities	$	196,486	$	29,880

⁽¹⁾	^{Includes closed contracts which have not yet settled.}

Paycheck Protection Program ("PPP"). On April 15, 2020, the Company received $8.4 million under the PPP offered by the U.S. Small Business Administration ("SBA"). We applied the guidance under IAS 20 and accounted for the PPP as a government grant with an offset to the applicable expenses for which the funds were utilized. The Company submitted an application to the SBA on August 20, 2020, requesting that the PPP funds received be applied to specific covered and non-covered payroll costs as allowed under the program. On June 11, 2021, we received notification that the SBA accepted our application and approved forgiveness of our PPP; therefore, we will not be required to repay the grant.

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


	September 30, 2021		December 31, 2020
Dispute related to royalty deductions	$	5,247	$	5,467
Derivatives		55,467		4,384
Lease liability		11,190		11,360
Black Elk escrow		11,102		11,103
Other		808		624
Total other liabilities (long-term)	$	83,814	$	32,938

2. Debt

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


	September 30, 2021		December 31, 2020
Term Loan:
Principal	$	203,223	$	—
Unamortized debt issuance costs		(7,838)		—
Total Term Loan		195,385		—

Company Credit Agreement borrowings:		—		80,000

Senior Second Lien Notes:
Principal		552,460		552,460
Unamortized debt issuance costs		(5,473)		(7,174)
Total Senior Second Lien Notes		546,987		545,286

Less current portion		(46,201)		—
Total long-term debt, net	$	696,171	$	625,286

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Current Portion of Long-Term Debt

As of September 30, 2021, the current portion of long-term debt of $46.2 million represented principal payments due within one year on the Term Loan (defined below).

Term Loan (Subsidiary Credit Agreement)

On May 19, 2021, Aquasition LLC (“A-I LLC”) and Aquasition II LLC (“A-II LLC”) (collectively, the “Borrowers”), both Delaware limited liability companies and indirect, wholly-owned subsidiaries of W&T Offshore, Inc., entered into a credit agreement (the “Subsidiary Credit Agreement”) providing for a term loan in an aggregate principal amount equal to $215.0 million (the “Term Loan”). The Term Loan requires quarterly amortization payments commencing September 30, 2021. The Term Loan bears interest at a fixed rate of 7% per annum and will mature on May 19, 2028. The Term Loan is non-recourse to the Company and any subsidiaries other than the Borrowers and the subsidiary that owns the equity in the Borrowers, and is secured by the first lien security interests in the equity of the Borrowers and a first lien mortgage security interest and mortgages on certain assets of the Borrowers (the Mobile Bay Properties, defined below).

In exchange for the net cash proceeds received by the 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”). A portion of the proceeds to the Company was used to repay the $48.0 million outstanding balance on its reserve-based lending facility under the Company Credit Agreement (defined below), with the majority of the proceeds to W&T expected to be used for general corporate purposes, including oil and gas acquisitions, development activities, and other opportunities to grow the Company’s broader asset base. We refer to the transactions contemplated by the Subsidiary Credit Agreement, including the assignment of the Mobile Bay Properties to A-I LLC and the assignment of the Midstream Assets to A-II LLC as the “Mobile Bay Transaction”.

For information about Mobile Bay Transaction refer to Note 4, Mobile Bay Transaction.

Company Credit Agreement

On October 18, 2018, we entered into the Sixth Amended and Restated Credit Agreement (as amended, the “Company Credit Agreement”), which matures on October 18, 2022. On May 19, 2021, we entered into a Waiver, Consent to Second Amendment to Intercreditor Agreement and Sixth Amendment to Sixth Amended and Restated Credit Agreement (the “Sixth Amendment”) which amended the Company Credit Agreement. The Sixth Amendment, among other things, (i) amended the Company Credit Agreement to effectuate the Mobile Bay Transaction (as discussed under Term Loan above and Note 4, Mobile Bay Transaction below) by specifically permitting the Mobile Bay Transaction and related transactions under certain covenants and (ii) consented to and waived certain technical defaults arising from the formation of certain company subsidiaries that were formed in advance of, and in order to effectuate, the consummation of the Mobile Bay Transaction and related transactions. On July 15, 2021, the Company entered into a Waiver and Seventh Amendment to Sixth Amended and Restated Credit Agreement (the “Seventh Amendment”) dated effective June 30, 2021, which further amended the Company Credit Agreement.

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The primary terms and covenants associated with the Company Credit Agreement as of September 30, 2021, as amended by the Sixth and Seventh Amendments, are as follows, with capitalized terms defined under the Company Credit Agreement:

The borrowing base was $190.0 million, subject to the next redetermination in the fourth quarter of 2021.

Letters of credit may be issued in amounts up to $30.0 million, provided availability under the Company Credit Agreement exists.

From the period ended June 30, 2020 through the period ended December 31, 2021 (the "Waiver Period"), the Company is not required to comply with the Leverage Ratio covenant. The Leverage Ratio, as defined in the Company Credit Agreement, is limited to 3.00 to 1.00 for quarters ending March 31, 2022 and thereafter.

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 Company Credit Agreement on the last day of the most recent quarter to EBITDAX for the trailing four quarters.

·The Current Ratio, as defined in the Company Credit Agreement, must be maintained at greater than 1.00 to 1.00.

The Company used a portion of the proceeds from Mobile Bay Transaction to repay $48.0 million outstanding balance on its reserve-based lending facility under the Company Credit Agreement. All liens on the Mobile Bay Properties granted to secure obligations under the Company Credit Agreement were released in connection with the transfer of such assets to Borrowers. The Company Credit Agreement is collateralized by a first priority lien on properties constituting at least 90% of the total proved reserves of the Company as set forth on reserve reports required to be delivered under the Company Credit Agreement and certain personal property, excluding those liens released in the Mobile Bay Transaction as described above.

As of September 30, 2021 and December 31, 2020, we had $4.4 million of letters of credit issued and outstanding under the Company Credit Agreement. Borrowings under the Company Credit Agreement were $0 and $80.0 million as of September 30, 2021 and December 31, 2020, respectively. The annualized interest rate on borrowings outstanding for the nine months ended September 30, 2021 was 3.2%, which excludes debt issuance costs, commitment fees and other fees.

Subsequent to September 30, 2021, the Company entered into two amendments of its Company Credit Agreement which significantly revised its first lien secured revolving credit facility. See Note 12 – Subsequent Events for additional information.

9.75% Senior Second Lien Notes Due 2023

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

During the year ended December 31, 2020, we acquired $72.5 million in principal of our outstanding Senior Second Lien Notes for $23.9 million and recorded a non-cash gain on purchase of debt of $47.5 million, which included a reduction of $1.1 million related to the write-off of unamortized debt issuance costs. No such transactions were completed during the three and nine months ended September 30, 2021. As a result of these purchases, $552.5 million in principal amount of Senior Second Lien Notes remains issued and outstanding as of September 30, 2021 and December 31, 2020.

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

Covenants

As of September 30, 2021 and for all prior measurement periods, we were in compliance with all applicable covenants of the Company Credit Agreement and the Indenture. The Seventh Amendment revised certain covenants under the Company Credit Agreement related to hedging our future production and waived compliance with such requirements, including the requirement that certain existing hedge transactions be unwound or terminated, until our next semi-annual borrowing base redetermination occurs.

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 7 Derivative Financial Instruments, for additional information on our derivative financial instruments.

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


	September 30, 2021		December 31, 2020
Assets:
Derivatives instruments - open contracts, current	$	45,901	$	2,705
Derivatives instruments - open contracts, long-term		44,920		2,762

Liabilities:
Derivatives instruments - open contracts, current		140,601		13,291
Derivatives instruments - open contracts, long-term		55,467		4,384

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Debt

The fair value of the Term Loan was measured using a discounted cash flows model and current market rates. The net value of our debt under the Company 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 highly liquid market. The fair value of our debt was classified as Level 2 within the valuation hierarchy. See Note 2 – Debt for additional information on our debt.

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


	September 30, 2021				December 31, 2020
	Net Value		Fair Value		Net Value		Fair Value
Liabilities:
Term Loan	$	195,385	$	199,615	$	—	$	—
Company Credit Agreement		—		—		80,000		80,000
Senior Second Lien Notes		546,987		524,997		545,286		393,352
Total		742,372		724,612		625,286		473,352

4. Mobile Bay Transaction

On May 19, 2021, the Company’s wholly-owned special purpose vehicles (the “SPVs”), A-I LLC and A-II LLC or the Borrowers, entered into the Subsidiary Credit Agreement providing for the Term Loan in an aggregate principal amount equal to $215.0 million. Proceeds of the Term Loan were used by the Borrowers to (i) fund the acquisition of the Mobile Bay Properties and the Midstream Assets from the Company and (ii) pay fees, commissions and expenses in connection with the transactions contemplated by the Subsidiary Credit Agreement and the other related loan documents, including to enter into certain swap and put derivative contracts described in more detail under Note 7 – Derivative Financial Instruments, of this Quarterly Report.

As part of the Mobile Bay Transaction, the SPVs entered into a management services agreement (the “Services Agreement”) with the Company, pursuant to which the Company will provide (a) certain operational and management services for i) the Mobile Bay Properties and ii) the Midstream Assets and (b) certain corporate, general and administrative services for A-I LLC and A-II LLC (collectively in this capacity, the “Services Recipient”). Under the Services Agreement, the Company will indemnify the Services Recipient with respect to claims, losses or liabilities incurred by the Services Agreement Parties that relate to personal injury or death or property damage of the Company, in each case, arising out of performance of the Services Agreement, except to the extent of the gross negligence or willful misconduct of the Services Recipient. The Services Recipient will indemnify the Company with respect to claims, losses or liabilities incurred by the Company that relate to personal injury or death of the Services Recipient or property damage of the Services Recipient, in each case, arising out of performance of the Services Agreement, except to the extent of the gross negligence or willful misconduct of the Company. The Services Agreement will terminate upon the earlier of (a) termination of the Subsidiary Credit Agreement and payment and satisfaction of all obligations thereunder or (b) the exercise of certain remedies by the secured parties under the Subsidiary Credit Agreement and the realization by such secured parties upon any of the collateral under the Subsidiary Credit Agreement.

The SPVs are wholly-owned subsidiaries of the Company; however, the assets of the SPVs will not be available to satisfy the debt or contractual obligations of any non-SPV entities, including debt securities or other contractual obligations of W&T Offshore, Inc., and the SPVs do not bear any liability for the indebtedness or other contractual obligations of any non-SPVs, and vice versa. As of September 30, 2021, the book value of the assets of the SPVs were $319.6 million.

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5. 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. 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.

The members of Monza are 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 September 30, 2021, nine wells have been completed since the inception of the Joint Venture Drilling Program. In 2020, one well was drilled to target depth, which we expect to be completed in the fourth quarter of 2021 and we expect production to commence late in the fourth quarter of 2021. W&T is the operator for seven of the nine wells completed through September 30, 2021.

Through September 30, 2021, members of Monza made partner capital contributions, including our contributions of working interest in the drilling projects, to Monza totaling $302.4 million and received cash distributions totaling $85.5 million. Our net contribution to Monza, reduced by distributions received, as of September 30, 2021 was $60.7 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 September 30, 2021, there have been no events or changes that would cause a redetermination of the variable interest status. We do not fully consolidate Monza because we are not considered the primary beneficiary of Monza. As of September 30, 2021, in the Condensed Consolidated Balance Sheet, we recorded $5.1 million, net, in Oil and natural gas properties and other, net, $3.0 million in Other assets, $0.3 million in Asset Retirement Obligations ("ARO") and $3.2 million, net, increase in working capital in connection with our proportional interest in Monza’s assets and liabilities. As of December 31, 2020, in the Condensed Consolidated Balance Sheet, we recorded $9.9 million, net, in Oil and natural gas properties and other, net, $1.8 million in Other assets, $0.2 million in ARO and $1.3 million, net, increase in working capital in connection with our proportional interest in Monza’s assets and liabilities. Additionally, during the nine months ended September 30, 2021 and during the year ended December 31, 2020, 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 September 30, 2021 and December 31, 2020 were $17.3 million and $7.3 million, respectively, which are included in the Condensed Consolidated Balance Sheet in Advances from joint interest partners. For the nine months ended September 30, 2021, in the Condensed Consolidated Statement of Operations, we recorded $8.7 million in Total revenues and $9.5 million in Operating costs and expenses in connection with our proportional interest in Monza’s operations. For the year ended December 31, 2020, in the Condensed Consolidated Statement of Operations, we recorded $8.4 million in Total revenues and, $12.1 million in Operating costs and expenses in connection with our proportional interest in Monza’s operations.

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6. Asset Retirement Obligations

Our ARO represent the estimated present value of the amount incurred to plug, abandon and remediate our properties at the end of their productive lives.

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


Balances, December 31, 2020	$	392,704
Liabilities settled		(19,744)
Accretion of discount		17,368
Liabilities incurred and assumed through acquisition		417
Revisions of estimated liabilities		17,129
Balances, September 30, 2021		407,874
Less current portion		(27,545)
Long-term	$	380,329

7. 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 current derivative counterparties are also lenders or affiliates of lenders participating in our Company Credit Agreement or Term Loan. We are exposed to credit loss in the event of nonperformance by the derivative counterparties; however, we currently anticipate that each of our derivative counterparties will be able to fulfill their contractual obligations. We are not required to provide additional collateral to the derivative counterparties and we do not require collateral from our derivative counterparties.

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

We entered into commodity contracts for crude oil and natural gas which related to a portion of our expected future production. The crude oil contracts are based on West Texas Intermediate (“WTI”) crude oil prices and the natural gas contracts are based off the Henry Hub prices, both of which are quoted off the New York Mercantile Exchange (“NYMEX”).

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The following table reflects the contracted volumes and weighted average prices under the terms of the Company’s open derivative contracts as of September 30, 2021:



		Average
	Instrument	Daily	Total	Weighted		Weighted		Weighted
Period	Type	Volumes	Volumes	Strike Price		Put Price		Call Price

Crude Oil - WTI (NYMEX)		(Bbls)⁽¹⁾	(Bbls)⁽¹⁾		($/Bbls)⁽¹⁾		($/Bbls)⁽¹⁾		($/Bbls)⁽¹⁾
Oct 2021 - Dec 2021	swaps	4,000	368,000	$	42.06	$	—	$	—
Jan 2022 - Nov 2022	swaps	2,525	843,256	$	49.99	$	—	$	—
Oct 2021 - Dec 2021	collars	1,762	162,084	$	—	$	39.55	$	58.12
Jan 2022 - Nov 2022	collars	2,428	811,096	$	—	$	41.71	$	58.91

Natural Gas - Henry Hub (NYMEX)		(MMbtu)⁽²⁾	(MMbtu)⁽²⁾		($/MMbtu)⁽²⁾		($/MMbtu)⁽²⁾		($/MMbtu)⁽²⁾
Oct 2021 - Dec 2021	calls	80,000	7,360,000	$	—	$	—	$	3.25
Jan 2022 - Dec 2022	calls	77,000	28,105,000