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, 2022

☐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)

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


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

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

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

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


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

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

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

As of October 31, 2022 there were 143,161,608 shares outstanding of the registrant’s common stock, par value $0.00001.

Table of Contents

W&T OFFSHORE, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

		Page
PART I – FINANCIAL INFORMATION		1

Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021	1
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021	2
	Condensed Consolidated Statements of Changes in Shareholders’ Deficit for the Three and Nine Months Ended September 30, 2022 and 2021	3
	Condensed Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 2022 and 2021	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44
Item 4.	Controls and Procedures	44

PART II – OTHER INFORMATION		45
Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults Upon Senior Securities	46
Item 4.	Mine Safety Disclosures	46
Item 5.	Other Information	46
Item 6.	Exhibits	47

SIGNATURE		48

Table of Contents

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,
	2022		2021
Assets
Current assets:
Cash and cash equivalents	$	447,130	$	245,799
Restricted cash		4,417		4,417
Receivables:
Oil and natural gas sales		89,195		54,919
Joint interest, net		16,815		9,745
Total receivables		106,010		64,664
Prepaid expenses and other assets (Note 1)		53,014		43,379
Total current assets		610,571		358,259

Oil and natural gas properties and other, net (Note 1)		729,958		665,252

Restricted deposits for asset retirement obligations		21,760		16,019
Deferred income taxes		62,334		102,505
Other assets (Note 1)		65,681		51,172
Total assets	$	1,490,304	$	1,193,207
Liabilities and Shareholders’ Deficit
Current liabilities:
Accounts payable	$	72,051	$	67,409
Undistributed oil and natural gas proceeds		59,518		36,243
Advances from joint interest partners		3,017		15,072
Asset retirement obligations		54,886		56,419
Accrued liabilities (Note 1)		154,236		106,140
Current portion of long-term debt		35,450		42,960
Income tax payable		1,613		133
Total current liabilities		380,771		324,376

Long-term debt, net (Note 2)		665,973		687,938
Asset retirement obligations, less current portion		398,724		368,076
Other liabilities (Note 1)		94,841		55,389
Deferred income taxes		113		113
Commitments and contingencies (Note 12)		4,899		4,495
Shareholders’ deficit:
Preferred stock, $0.00001 par value; 20,000 shares authorized; none issued at September 30, 2022 and December 31, 2021		—		—
Common stock, $0.00001 par value; 200,000 shares authorized; 146,031 issued and 143,162 outstanding at September 30, 2022; 145,732 issued and 142,863 outstanding at December 31, 2021		1		1
Additional paid-in capital		557,386		552,923
Retained deficit		(588,237)		(775,937)
Treasury stock, at cost; 2,869 shares at September 30, 2022 and December 31, 2021		(24,167)		(24,167)
Total shareholders’ deficit		(55,017)		(247,180)
Total liabilities and shareholders’ deficit	$	1,490,304	$	1,193,207

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,
	2022		2021		2022		2021
Revenues:
Oil	$	130,560	$	74,265	$	412,526	$	240,418
NGLs		16,875		12,205		47,430		30,397
Natural gas		113,673		45,137		257,452		113,816
Other		5,377		2,339		13,889		7,790
Total revenues		266,485		133,946		731,297		392,421
Operating expenses:
Lease operating expenses		59,010		39,490		155,397		129,399
Gathering, transportation and production taxes		12,199		6,593		26,647		19,687
Depreciation, depletion, and amortization		27,493		20,818		79,848		66,511
Asset retirement obligations accretion		6,620		5,473		19,536		17,368
General and administrative expenses		23,047		13,391		51,790		38,090
Total operating expenses		128,369		85,765		333,218		271,055
Operating income		138,116		48,181		398,079		121,366

Interest expense, net		16,849		18,910		54,915		50,474
Derivative loss		38,749		73,137		109,892		179,156
Other (income) expense, net		(600)		—		(1,229)		964
Income (loss) before income taxes		83,118		(43,866)		234,501		(109,228)
Income tax expense (benefit)		16,397		(5,902)		46,801		(18,846)
Net income (loss)	$	66,721	$	(37,964)	$	187,700	$	(90,382)

Net income (loss) per common share:
Basic	$	0.46	$	(0.27)	$	1.30	$	(0.64)
Diluted	$	0.46	$	(0.27)	$	1.30	$	(0.64)

Weighted average common shares outstanding
Basic		143,116		142,297		143,026		142,231
Diluted		145,882		142,297		144,696		142,231

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)


	Common Stock			Additional							Total
	Outstanding			Paid-In		Retained		Treasury Stock			Shareholders’
	Shares	Value		Capital		Deficit		Shares	Value		Deficit
Balances at June 30, 2022	143,155	$	1	$	554,755	$	(654,958)	2,869	$	(24,167)	$	(124,369)
Share-based compensation	—		—		2,645		—	—		—		2,645
Stock Issued	7		—		—		—	—		—		—
RSUs surrendered for payroll taxes	—		—		(14)		—	—		—		(14)
Net income	—		—		—		66,721	—		—		66,721
Balances at September 30, 2022	143,162	$	1	$	557,386	$	(588,237)	2,869	$	(24,167)	$	(55,017)


	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 December 31, 2021	142,863	$	1	$	552,923	$	(775,937)	2,869	$	(24,167)	$	(247,180)
Share-based compensation	—		—		5,179		—	—		—		5,179
Stock Issued	299		—		—		—	—		—		—
RSUs surrendered for payroll taxes	—		—		(716)		—	—		—		(716)
Net income	—		—		—		187,700	—		—		187,700
Balances at September 30, 2022	143,162	$	1	$	557,386	$	(588,237)	2,869	$	(24,167)	$	(55,017)


	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)

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,
	2022		2021
Operating activities:
Net income (loss)	$	187,700	$	(90,382)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion, amortization and accretion		99,384		83,879
Amortization of debt items and other items		6,114		4,095
Share-based compensation		5,179		1,779
Derivative loss		109,892		179,156
Derivative cash (payments) receipts, net		(1,022)		(39,554)
Derivative cash premium payments		(46,111)		(32,368)
Deferred income taxes		40,171		(18,826)
Changes in operating assets and liabilities:
Oil and natural gas receivables		(34,276)		504
Joint interest receivables		(7,070)		(2,172)
Prepaid expenses and other assets		(26,816)		(30,473)
Income tax		1,480		(153)
Asset retirement obligation settlements		(61,285)		(19,744)
Cash advances from JV partners		(12,055)		9,999
Accounts payable, accrued liabilities and other		65,566		65,551
Net cash provided by operating activities		326,851		111,291
Investing activities:
Investment in oil and natural gas properties and equipment		(29,966)		(16,025)
Changes in operating assets and liabilities associated with investing activities		(8,237)		3,619
Acquisition of property interests		(51,474)		—
Net cash used in investing activities		(89,677)		(12,406)
Financing activities:
Repayments on credit facility		—		(80,000)
Proceeds from Term Loan		—		215,000
Repayments on Term Loan		(33,837)		(11,778)
Debt issuance costs		(1,290)		(8,249)
Other		(716)		—
Net cash (used in) provided by financing activities		(35,843)		114,973
Increase in cash and cash equivalents		201,331		213,858
Cash and cash equivalents and restricted cash, beginning of period		250,216		43,726
Cash and cash equivalents and restricted cash, end of period	$	451,547	$	257,584

See Notes to Condensed Consolidated Financial Statements.

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NOTE 1 — BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

W&T Offshore, Inc. (with subsidiaries referred to herein as “W&T” or the “Company”) is an independent oil and natural gas producer with substantially all of its operations offshore in the Gulf of Mexico. The Company is active in the exploration, development and acquisition of oil and natural gas properties. Interests in fields, leases, structures and equipment are primarily owned by the Company and its 100% owned subsidiaries, W & T Energy VI, LLC, Aquasition LLC (“A-I, LLC”), and Aquasition II, LLC (“A-II LLC”), and through a proportionately consolidated interest in Monza Energy LLC (“Monza”), as described in more detail in Note 6 – Joint Venture Drilling Program.

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim periods and the appropriate rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, the condensed consolidated financial statements do not include all of the information and footnote disclosures required by GAAP for complete financial statements for annual periods. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

Operating results for interim periods are not necessarily indicative of the results that may be expected for the entire year. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s 2021 Annual Report on Form 10-K (the “2021 Annual Report”).

Reclassification – For presentation purposes, as of September 30, 2021, Derivative (gain) loss has been reclassified from “Operating income” on the Condensed Consolidated Statement of Operations in order to conform to the current period presentation. Such reclassification had no effect on the Company’s results of operations, financial position or cash flows.

For presentation purposes, as of September 30, 2021, Gathering and transportation and Production taxes have been combined into one line item within “Operating income” on the Condensed Consolidated Statement of Operations in order to conform to the current period presentation. Such reclassification had no effect on the Company’s results of operations, financial position or cash flows.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods and the reported amounts of proved oil and natural gas reserves. Actual results could differ from those estimates.

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Summary of Significant Accounting Policies

Revenue and Accounts Receivable – Revenue from the sale of crude oil, natural gas liquids (“NGLs”) and natural gas is recognized when performance obligations under the terms of the respective contracts are satisfied; this generally occurs with the delivery of crude oil, NGLs and natural gas to the customer. Revenue is concentrated with certain major oil and gas companies. There have been no significant changes to the Company’s contracts with customers during the nine months ended September 30, 2022.

The Company also has receivables related to joint interest arrangements primarily with mid-size oil and gas companies with a substantial majority of the net receivable balance concentrated in less than ten companies. A loss methodology is used to develop the allowance for credit losses on material receivables to estimate the net amount to be collected. The loss methodology uses historical data, current market conditions and forecasts of future economic conditions. The Company’s maximum exposure at any time would be the receivable balance. Joint interest receivables on the Condensed Consolidated Balance Sheets are presented net of allowance for credit losses of $11.6 million and $10.0 million as of September 30, 2022 and December 31, 2021, respectively.

Employee Retention Credit – Under the Consolidated Appropriations Act of 2021, 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. No such credit has been recognized during the nine months ended September 30, 2022.

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, 2022		December 31, 2021
Derivatives⁽¹⁾(Note 8)	$	28,747	$	21,086
Unamortized insurance/bond premiums		7,475		5,400
Prepaid deposits related to royalties		12,978		8,441
Prepayment to vendors		1,213		4,522
Prepayments to joint interest partners		1,953		2,808
Debt issue costs		604		1,065
Other		44		57
Prepaid expenses and other assets	$	53,014	$	43,379

⁽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, 2022		December 31, 2021
Oil and natural gas properties and equipment	$	8,780,961	$	8,636,408
Furniture, fixtures and other		20,827		20,844
Total property and equipment		8,801,788		8,657,252
Less: Accumulated depreciation, depletion, amortization and impairment		(8,071,830)		(7,992,000)
Oil and natural gas properties and other, net	$	729,958	$	665,252

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


	September 30, 2022		December 31, 2021
Right-of-Use assets	$	10,443	$	10,602
Investment in White Cap, LLC		3,193		2,533
Proportional consolidation of Monza (Note 6)		15,409		2,511
Derivatives⁽¹⁾ (Note 8)		35,656		34,435
Other		980		1,091
Total other assets (long-term)	$	65,681	$	51,172

⁽¹⁾

^{Includes open contracts.}

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


	September 30, 2022		December 31, 2021
Accrued interest	$	25,423	$	10,154
Accrued salaries/payroll taxes/benefits		9,711		9,617
Litigation accruals		524		646
Lease liability		1,620		1,115
Derivatives⁽¹⁾(Note 8)		116,008		81,456
Other		950		3,152
Total accrued liabilities	$	154,236	$	106,140

⁽¹⁾

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

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


	September 30, 2022		December 31, 2021
Dispute related to royalty deductions	$	7,564	$	5,177
Derivatives (Note 8)		75,079		37,989
Lease liability		10,812		11,227
Other		1,386		996
Total other liabilities (long-term)	$	94,841	$	55,389

At-the-Market Equity Offering – On March 18, 2022, the Company filed a prospectus supplement related to the issuance and sale of up to $100,000,000 of shares of common stock under the Company’s "at-the-market" equity offering program (the “ATM Program”). The designated sales agents will be entitled to a placement fee of up to 3.0% of the gross sales price per share sold. During the nine months ended September 30, 2022, the Company did not sell any shares in connection with the ATM Program.

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NOTE 2 — DEBT

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


	September 30, 2022		December 31, 2021
Term Loan:
Principal	$	157,021	$	190,859
Unamortized debt issuance costs		(5,067)		(7,545)
Total Term Loan		151,954		183,314

Credit Agreement borrowings:		—		—

Senior Second Lien Notes:		—
Principal		552,460		552,460
Unamortized debt issuance costs		(2,991)		(4,876)
Total Senior Second Lien Notes		549,469		547,584

Less current portion		(35,450)		(42,960)
Total long-term debt, net	$	665,973	$	687,938

Current Portion of Long-Term Debt

As of September 30, 2022, the current portion of long-term debt of $35.5 million represented principal payments due within one year on the Term Loan (defined below).

As of September 30, 2022, the Company had outstanding $552.5 million principal of Senior Second Lien Notes with an interest rate of 9.75% per annum that mature on November 1, 2023. The Company has commenced discussions with potential lenders and institutional investors regarding a potential refinancing of all or a portion of the Senior Second Lien Notes prior to maturity, although there is no assurance as to the terms of any such refinancing or whether or when such refinancing will occur.

The Company believes that cash on hand and cash flows from operations will enable the Company to satisfy its debt obligations as well as meet its other funding requirements for at least one year from the date this Form 10-Q is issued. The Company’s view regarding sufficiency of cash and liquidity is primarily based on the financial forecast, which is impacted by various assumptions including projections for pricing, production volumes and operating costs. Given the assumptions involved, the forecast is subject to uncertainty, therefore cash flows from operations may be lower than projected.

If necessary, there are further actions the Company could undertake to increase cash flows which include limiting capital expenditures and reducing operating expenditures. Additionally, the Company may seek to raise cash through the sale of up to $100 million of equity available under the ATM program.

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Term Loan (Subsidiary Credit Agreement)

On May 19, 2021, A-I LLC and A-II LLC (collectively, the “Subsidiary Borrowers”), both Delaware limited liability companies and indirect, wholly-owned subsidiaries of the Company, entered into a credit agreement (the “Subsidiary Credit Agreement”) providing for a term loan in an aggregate principal amount equal to $215.0 million (the “Term Loan”). The Term Loan requires quarterly amortization payments, which commenced on 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 Subsidiary Borrowers and the subsidiary that owns the equity in the Subsidiary Borrowers, and is secured by the first lien security interests in the equity of the Subsidiary Borrowers and a first lien mortgage security interest and mortgages on certain assets of the Subsidiary Borrowers (the Mobile Bay Properties, defined below).

In exchange for the net cash proceeds received by the Subsidiary Borrowers from the Term Loan, the Company assigned to (a) A-I LLC all of its interests in certain oil and gas leasehold interests and associated wells and units located in State of Alabama waters and U.S. federal waters in the offshore Gulf of Mexico, in the 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, in the 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 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. 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 are referred to herein as the “Mobile Bay Transaction”. For information about the Mobile Bay Transaction refer to Note 5 – Subsidiary Borrowers.

As of September 30, 2022 and December 31, 2021, the Company had $157.0 million and $190.9 million in principal amount of Term Loan outstanding, respectively.

Credit Agreement

On November 2, 2021, the Company entered into the Ninth Amendment to the Sixth Amended and Restated Credit Agreement (the “Ninth Amendment”), which establishes a short-term $100.0 million first priority lien secured revolving credit facility with borrowings limited to a borrowing base of $50.0 million (the “Credit Agreement”) provided by Calculus Lending, LLC (“Calculus”), a company affiliated with, and controlled by W&T’s Chairman and Chief Executive Officer, Tracy W. Krohn, as sole lender under the Credit Agreement. A committee of the independent members of the Board of Directors reviewed and approved the amendments given the Chief Executive Officer’s affiliation with Calculus. As of November 2, 2021, the Company cash collateralized each of the outstanding letters of credit in the aggregate amount of approximately $4.4 million. Alter Domus (US) LLC was appointed to replace Toronto Dominion (Texas) LLC as administrative agent under the Credit Agreement.

On March 8, 2022, the Company entered into the Tenth Amendment to Credit Agreement (the “Tenth Amendment”), which extended the maturity date and Calculus’ commitment to January 3, 2023. The terms of this extension with Calculus were reviewed and approved by the Audit Committee of the Company. In connection with the Tenth Amendment, Calculus was paid arrangement and upfront fees of approximately $1.0 million in the aggregate during the nine months ended September 30, 2022.

On November 7, 2022, the Company entered into the Eleventh Amendment to the Credit Agreement (the “Eleventh Amendment”), which extended the maturity date and Calculus’ commitment to January 3, 2024, or in certain circumstances as described in more detail below, to August 1, 2023, and shifted the rate at which outstanding borrowings will accrue interest to a SOFR-based rate. The terms of this extension with Calculus were reviewed and approved by the Audit Committee of the Company.

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Pursuant to the Eleventh Amendment, the commitment will expire and final maturity of any and all outstanding loans is January 3, 2024, or in the event the Senior Second Lien Notes are not refinanced or replaced in full, on or prior to August 1, 2023, with other indebtedness that matures on or after April 3, 2024 or are not otherwise discharged, defeased or repaid in full, August 1, 2023. Outstanding borrowings will accrue interest at SOFR plus 6.0% per annum. The commitment fee for the unused portion of available borrowing amounts will be 3.0% per annum. In connection with the Eleventh Amendment, the Company paid to Calculus an extension fee of $100,000.

As a result of the Ninth Amendment, Tenth Amendment and Eleventh Amendment and related assignments and agreements, the primary terms and covenants associated with the Credit Agreement as of September 30, 2022, are as follows:

The revised borrowing base is $50.0 million;

The commitment will expire and final maturity of any and all outstanding loans is January 3, 2024, or in the event that the Second Lien Notes are not refinanced or replaced in full, on or prior to August 1, 2023, with other indebtedness that matures on or after April 3, 2024 or are not otherwise discharged, defeased or repaid in full, August 1, 2023.

·The Company’s ratio of First Lien Debt (as such term is defined in the Credit Agreement) outstanding under the Credit Agreement on the last day of the most recent quarter to EBITDAX (as such term is defined in the Credit Agreement) for the trailing four quarters must not be greater than 2.50 to 1.00 on the last day of the fiscal quarter ending March 31, 2022 and on the last day of each fiscal quarter thereafter;

·The Company’s ratio of Total Proved PV-10 (as such term is defined in the Credit Agreement) to First Lien Debt as of the last day of any fiscal quarter commencing with the fiscal quarter ending March 31, 2022 must be equal to or greater than 2.00 to 1.00;

·The ratio of the Company and its restricted subsidiaries’ consolidated current assets to Company and its restricted subsidiaries’ consolidated current liabilities (subject in each case to certain exceptions and adjustments as set forth in the Credit Agreement) at the last day of any fiscal quarter must be greater than or equal to 1.00 to 1.00;

●

As of the last day of any fiscal quarter commencing with the fiscal quarter ending March 31, 2022, the Company and its restricted subsidiaries on a consolidated basis must pass a “Stress Test” consisting of an analysis conducted by the lender in good faith and in consultation with the Company based upon the latest engineering report furnished to lender, which analysis is designed to determine whether the future net revenues expected to accrue to the Company’s and its guarantor subsidiaries’ interest (and the interest of certain joint ventures) in the oil and gas properties included in the properties used to determine the latest borrowing base during half of the remaining expected economic lives of such properties are sufficient to satisfy the aggregate first lien indebtedness of the Company and its restricted subsidiaries in accordance with the terms of such indebtedness assuming the revolving credit facility is 100% funded or fully utilized; and

●Certain related party transactions are required to meet certain arm’s length criteria; except in each case as specifically permitted or excluded from the covenant under the Credit Agreement.

In addition, Calculus earned commitment fees of $1,137,500, equal to 3.0% of unborrowed portion of the borrowing base lending commitment, during the nine months ended September 30, 2022.

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

As of September 30, 2022, there were no borrowings outstanding under the Credit Agreement and no borrowings had been incurred under the Credit Agreement during the nine months ended September 30, 2022. Separately, as of September 30, 2022 and December 31, 2021, the Company had $4.4 million outstanding in letters of credit which have been cash collateralized.

9.75% Senior Second Lien Notes Due 2023

On October 18, 2018, W&T 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. As of September 30, 2022 and December 31, 2021, $552.5 million in principal amount of Senior Second Lien Notes remained issued and outstanding.

The Senior Second Lien Notes are secured by a second-priority lien on all of the Company’s assets that are secured under the 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 the Company’s ability and the ability of certain 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, 2022 and for all prior measurement periods presented, the Company was in compliance with all applicable covenants of the Credit Agreement and the Indenture.

NOTE 3 – FAIR VALUE MEASUREMENTS

Derivative Financial Instruments

The Company measures the fair value of derivative financial instruments by applying the income approach, using models with inputs that are classified within Level 2 of the valuation hierarchy. The inputs used for the fair value measurement of derivative financial instruments are the exercise price, the expiration date, the settlement date, notional quantities, the implied volatility, the discount curve with spreads and published commodity future prices. Derivative financial instruments are reported in the Condensed Consolidated Balance Sheets using fair value. See Note 8 – Derivative Financial Instruments, for additional information on derivative financial instruments.

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


	September 30, 2022		December 31, 2021
Assets:
Derivative instruments - current	$	28,747	$	21,086
Derivative instruments - long-term		35,656		34,435

Liabilities:
Derivative instruments - current		116,008		81,456
Derivative instruments - long-term		75,079		37,989

Debt Instruments

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


	September 30, 2022				December 31, 2021
	Net Value		Fair Value		Net Value		Fair Value
Liabilities:
Term Loan	$	151,954	$	147,137	$	183,314	$	190,579
Senior Second Lien Notes		549,469		543,206		547,584		527,715
Total	$	701,423	$	690,343	$	730,898	$	718,294

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

NOTE 4 — ACQUISITIONS

On January 5, 2022, the Company entered into a purchase and sale agreement with ANKOR E&P Holdings Corporation and KOA Energy LP (“ANKOR”) to acquire their interests in and operatorship of certain oil and natural gas producing properties in federal shallow waters in the Gulf of Mexico at Ship Shoal 230, South Marsh Island 27/Vermilion 191, and South Marsh Island 73 fields for $47.0 million. The transaction closed on February 1, 2022, and after normal and customary post-effective date adjustments (including net operating cash flow attributable to the properties from the effective date of July 1, 2021 to the close date), cash consideration of $34.0 million was paid to the sellers. The transaction was funded using cash on hand. The Company also assumed the related asset retirement obligations (“ARO”) associated with these assets.

Additionally, on April 1, 2022, the Company entered into a purchase and sale agreement with a private seller to acquire the remaining working interests in certain oil and natural gas producing properties in federal shallow waters of the Gulf of Mexico at the Ship Shoal 230, South Marsh Island 27/Vermilion 191, and South Marsh Island 73 fields purchased from ANKOR. The transaction had an effective date and closing date of April 1, 2022. After normal and customary post-effective date adjustments, cash consideration of $17.5 million was paid to the seller.

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The Company determined that the assets acquired did not meet the definition of a business; therefore, the transactions were accounted for as asset acquisitions in accordance with ASC 805. An acquisition qualifying as an asset acquisition requires, among other items, that the cost of the assets acquired and liabilities assumed to be recognized on the Condensed Consolidated Balance Sheet by allocating the asset cost on a relative fair value basis. The fair value measurements of the oil and natural gas properties acquired and asset retirement obligations assumed were derived utilizing an income approach and based, in part, on significant inputs not observable in the market. These inputs represent Level 3 measurements in the fair value hierarchy and include, but are not limited to, estimates of reserves, future operating and development costs, future commodity prices, estimated future cash flows and appropriate discount rates. These inputs required significant judgments and estimates by the Company’s management at the time of the valuation. Transaction costs incurred on an asset acquisition are capitalized as a component of the assets acquired. The amounts recorded on the Condensed Consolidated Balance Sheet for the purchase price allocation and liabilities assumed related to the acquisitions described above on February 1, 2022, and April 1, 2022, are presented in the following tables, respectively (in thousands):


	February 1, 2022
Oil and natural gas properties and other, net	$	54,299
Restricted deposits for asset retirement obligations		6,196
Asset retirement obligations		(26,493)
Allocated purchase price	$	34,002


	April 1,
	2022
Oil and natural gas properties and other, net	$	22,632
Restricted deposits for asset retirement obligations		1,549
Asset retirement obligations		(6,709)
Allocated purchase price	$	17,472

NOTE 5 — SUBSIDIARY BORROWERS

On May 19, 2021, the Company’s wholly-owned special purpose vehicles (the “SPVs”), the Subsidiary 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 Subsidiary 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 8 – Derivative Financial Instruments, of this Quarterly Report on Form 10-Q (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.

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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 the Company, and the SPVs do not bear any liability for the indebtedness or other contractual obligations of any non-SPVs, and vice versa.

Consolidation and Carrying Amounts

The following table presents the amounts recorded by W&T on the Condensed Consolidated Balance Sheets related to the consolidation of the Subsidiary Borrowers and the subsidiary that owns the equity of the Subsidiary Borrowers (in thousands):


	September 30, 2022		December 31, 2021
Assets:
Cash and cash equivalents	$	54,219	$	38,937
Receivables:
Oil and natural gas sales		80,431		34,420
Joint interest, net		(5,749)		(10,856)
Prepaid expenses and other assets		614		356
Oil and natural gas properties and other, net		280,444		272,747
Other assets		(19,438)		(19,903)
Liabilities:
Accounts payable		49,859		29,678
Undistributed oil and natural gas proceeds		22,077		3,144
Accrued liabilities		89,431		29,937
Current portion of long-term debt		35,450		42,960
Long-term debt, net		116,504		140,353
Asset retirement obligations		59,107		54,515
Other liabilities		79,602		42,615

The following table presents the amounts recorded by W&T in the Condensed Consolidated Statement of Operations related to the consolidation of the operations of the Subsidiary Borrowers and the subsidiary that owns the equity of the Subsidiary Borrowers (in thousands):


			The period from
	Nine Months Ended		May 19, 2021 to
	September 30, 2022		September 30, 2021
Total revenues	$	218,625	$	63,053
Total operating expenses		52,961		26,644
Interest expense, net		11,841		5,930
Derivative loss		187,896		124,364
Other income		64		—

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NOTE 6 — JOINT VENTURE DRILLING PROGRAM

In March 2018, W&T and two other initial members formed and initially funded Monza, which jointly participates 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, was $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 W&T initially receives an aggregate of 30.0% of the revenues less expenses, through the direct ownership from the retained working interest in the Monza projects and the indirect interest through the 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 of directors.

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 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, 2022, ten wells have been completed since the inception of the Joint Venture Drilling Program. W&T is the operator for eight of the ten wells completed through September 30, 2022.

Through September 30, 2022, members of Monza made partner capital contributions, including W&T’s contributions of working interest in the drilling projects, to Monza totaling $302.4 million and received cash distributions totaling $138.4 million. Through September 30, 2022, W&T made total capital contributions, including the contributions of working interest in the drilling projects, to Monza totaling $68.2 million and received cash distributions totaling $31.8 million.

Consolidation and Carrying Amounts

W&T’s interest in Monza is considered to be a variable interest that is proportionally consolidated. Through September 30, 2022, there have been no events or changes that would cause a redetermination of the variable interest status. W&T does not fully consolidate Monza because the Company is not considered the primary beneficiary of Monza.

The following table presents the amounts recorded by W&T on the Condensed Consolidated Balance Sheets related to the consolidation of the proportional interest in Monza’s operations (in thousands):


		September 30, 2022		December 31, 2021
Working capital		$	3,583	$	4,648
Oil and natural gas properties and other, net	̴