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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

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

For the quarterly period ended September 30, 2023

or

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

For the transition period from _______________ to ________________

Commission File Number 1-32414

Graphic

W&T OFFSHORE, INC.

(Exact name of registrant as specified in its charter)

Texas

    

72-1121985

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification Number)

 

 

5718 Westheimer Road, Suite 700, Houston, Texas

77057-5745

(Address of principal executive offices)

(Zip Code)

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

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

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Common Stock, par value $0.00001

 

WTI

 

New York Stock Exchange

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

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

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

Large accelerated filer

    

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

Emerging growth company

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

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

As of October 31, 2023, there were 146,574,193 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, 2023 and December 31, 2022

1

 

Condensed Consolidated Statements of Operations for the Nine Months Ended September 30, 2023 and 2022

2

 

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

3

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022

5

 

Notes to Condensed Consolidated Financial Statements

6

Item 2.

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

25

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

41

Item 4.

Controls and Procedures

41

 

 

PART II – OTHER INFORMATION

42

Item 1.

Legal Proceedings

42

Item 1A.

Risk Factors

42

Item 2.

Unregistered Sales of Equity Securities, Use of Proceed and Issuer Purchases of Equity Securities

42

Item 3.

Defaults Upon Senior Securities

42

Item 4.

Mine Safety Disclosures

42

Item 5.

Other Information

42

Item 6.

Exhibits

42

 

 

SIGNATURE

44

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, 

    

2023

    

2022

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

148,993

$

461,357

Restricted cash

4,417

4,417

Accounts receivable:

 

 

Oil and natural gas sales

 

48,522

 

66,146

Joint interest, net

 

16,049

 

14,000

Income taxes

 

275

 

Total receivables

64,846

80,146

Prepaid expenses and other current assets (Note 1)

 

30,476

 

24,343

Total current assets

 

248,732

 

570,263

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

 

771,454

 

735,215

Restricted deposits for asset retirement obligations

 

22,168

 

21,483

Deferred income taxes

 

42,633

 

57,280

Other assets (Note 1)

 

40,386

 

47,549

Total assets

$

1,125,373

$

1,431,790

Liabilities and Shareholders’ Equity

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

80,412

$

65,158

Undistributed oil and natural gas proceeds

 

34,649

 

41,934

Advances from joint interest partners

 

3,106

 

3,181

Current portion of asset retirement obligation (Note 8)

 

33,169

 

25,359

Accrued liabilities (Note 1)

 

34,264

 

74,041

Current portion of long-term debt, net (Note 2)

30,015

582,249

Income taxes

 

53

 

412

Total current liabilities

 

215,668

 

792,334

Long-term debt, net (Note 2)

 

367,144

 

111,188

Asset retirement obligations (Note 8)

 

465,245

 

441,071

Other liabilities (Note 1)

 

29,448

 

59,134

Deferred income taxes

 

72

 

72

Commitments and contingencies (Note 12)

 

17,809

 

20,357

Shareholders’ equity:

 

  

 

  

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

 

 

Common stock, $0.00001 par value; 200,000 shares authorized; 149,443 issued and 146,574 outstanding at September 30, 2023; 149,002 issued and 146,133 outstanding at December 31, 2022

 

1

 

1

Additional paid-in capital

 

582,900

 

576,588

Retained deficit

 

(528,747)

 

(544,788)

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

 

(24,167)

 

(24,167)

Total shareholders’ equity

 

29,987

 

7,634

Total liabilities and shareholders’ equity

$

1,125,373

$

1,431,790

See Notes to Condensed Consolidated Financial Statements.

1

Table of Contents

W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2023

    

2022

    

2023

    

2022

    

Revenues:

 

  

 

  

 

  

 

  

 

Oil

$

100,331

$

130,560

$

287,313

$

412,526

NGLs

 

7,415

 

16,875

 

25,595

 

47,430

Natural gas

 

32,515

 

113,673

 

80,757

 

257,452

Other

 

2,150

 

5,377

 

6,651

 

13,889

Total revenues

 

142,411

 

266,485

 

400,316

 

731,297

Operating expenses:

 

  

 

  

 

  

 

  

Lease operating expenses

 

61,826

 

59,010

 

193,033

 

155,397

Gathering, transportation and production taxes

6,692

12,199

19,630

26,647

Depreciation, depletion, and amortization

 

30,218

 

27,493

 

81,019

 

79,848

Asset retirement obligations accretion

6,414

6,620

21,641

19,536

General and administrative expenses

 

19,978

 

23,047

 

57,290

 

51,790

Total operating expenses

 

125,128

 

128,369

 

372,613

 

333,218

Operating income

 

17,283

 

138,116

 

27,703

 

398,079

Interest expense, net

 

9,925

 

16,849

 

34,960

 

54,915

Derivative (gain) loss, net

 

(1,491)

 

38,749

 

(41,560)

 

109,892

Other expense (income), net

 

1,927

 

(600)

 

1,849

 

(1,229)

Income before income taxes

 

6,922

 

83,118

 

32,454

 

234,501

Income tax expense

 

4,777

 

16,397

 

16,413

 

46,801

Net income

$

2,145

$

66,721

$

16,041

$

187,700

Net income per common share:

Basic

$

0.01

$

0.46

$

0.11

$

1.30

Diluted

$

0.01

$

0.46

$

0.11

$

1.30

Weighted average common shares outstanding:

Basic

146,483

143,116

146,451

143,026

Diluted

151,459

145,882

149,856

144,696

See Notes to Condensed Consolidated Financial Statements.

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W&T OFFSHORE, INC. AND SUBSIDIARIES

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

(In thousands)

(Unaudited)

    

Common Stock

    

Additional

    

    

    

    

    

Total

Outstanding

Paid-In

Retained

Treasury Stock

Shareholders’

    

Shares

    

Value

    

Capital

    

Deficit

    

Shares

    

Value

    

Equity

Balances at June 30, 2023

 

146,481

 

$

1

 

$

579,849

 

$

(530,892)

 

2,869

 

$

(24,167)

 

$

24,791

Share-based compensation

 

 

 

 

 

3,250

 

 

 

 

 

 

 

3,250

Stock issued

 

94

 

 

 

 

 

 

 

 

 

 

 

Shares withheld related to net settlement of equity awards

 

 

 

 

 

(199)

 

 

 

 

 

 

 

(199)

Net income

 

 

 

 

 

 

 

2,145

 

 

 

 

 

2,145

Balances at September 30, 2023

 

146,575

 

$

1

 

$

582,900

 

$

(528,747)

 

2,869

 

$

(24,167)

 

$

29,987

    

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

 

 

 

 

 

 

 

 

 

 

 

Shares withheld related to net settlement of equity awards

 

 

 

 

 

(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)

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W&T OFFSHORE, INC. AND SUBSIDIARIES

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

(In thousands)

(Unaudited)

    

Common Stock

    

Additional

    

    

    

    

    

Total

Outstanding

Paid-In

Retained

Treasury Stock

Shareholders’

    

Shares

    

Value

    

Capital

    

Deficit

    

Shares

    

Value

    

Equity

Balances at December 31, 2022

 

146,133

 

$

1

 

$

576,588

 

$

(544,788)

 

2,869

 

$

(24,167)

 

$

7,634

Share-based compensation

 

 

 

 

 

7,259

 

 

 

 

 

 

 

7,259

Stock issued

442

 

 

 

 

 

 

 

 

 

 

 

Shares withheld related to net settlement of equity awards

 

 

 

 

 

(947)

 

 

 

 

 

 

 

(947)

Net income

 

 

 

 

16,041

 

 

 

16,041

Balances at September 30, 2023

 

146,575

$

1

$

582,900

$

(528,747)

 

2,869

$

(24,167)

$

29,987

    

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

 

 

 

 

 

 

 

 

 

 

 

Shares withheld related to net settlement of equity awards

 

 

 

 

 

(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)

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, 

    

2023

    

2022

    

Operating activities:

 

  

 

  

 

Net income

$

16,041

$

187,700

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

 

  

 

  

Depreciation, depletion, amortization and accretion

 

102,660

 

99,384

Share-based compensation

 

7,259

 

5,179

Amortization and write off of debt issuance costs

 

5,714

 

6,114

Derivative (gain) loss

 

(41,560)

 

109,892

Derivative cash payments, net

 

(6,123)

 

(1,022)

Derivative cash premium payments

(46,111)

Deferred income taxes

 

14,647

 

40,171

Changes in operating assets and liabilities:

 

  

 

  

Oil and natural gas receivables

 

17,624

 

(34,276)

Joint interest receivables

(2,049)

(7,070)

Prepaid expenses and other current assets

 

25,550

 

(26,816)

Accounts payable, accrued liabilities and other

(34,475)

65,566

Asset retirement obligation settlements

 

(24,918)

 

(61,285)

Cash advances from JV partners

 

(74)

 

(12,055)

Income taxes payable

 

(634)

 

1,480

Net cash provided by operating activities

 

79,662

 

326,851

Investing activities:

 

  

 

  

Investment in oil and natural gas properties and equipment

 

(30,959)

 

(29,966)

Changes in operating assets and liabilities associated with investing activities

1,285

(8,237)

Acquisition of property interests

 

(28,863)

 

(51,474)

Deposit related to acqusition of property interests

(8,850)

Purchase of corporate aircraft (Note 13)

(8,983)

Purchases of furniture, fixtures and other

(3,081)

Net cash used in investing activities

 

(79,451)

 

(89,677)

Financing activities:

 

  

 

  

Repayment of 9.75% Senior Second Lien Notes due 2023

(552,460)

Repayment of Term Loan

(26,329)

(33,837)

Repayment of TVPX Loan

(458)

Proceeds from issuance of 11.75% Senior Second Lien Notes due 2026

275,000

Debt issuance costs

 

(7,380)

 

(1,290)

Other

 

(948)

 

(716)

Net cash used in financing activities

 

(312,575)

 

(35,843)

Change in cash, cash equivalents and restricted cash

 

(312,364)

 

201,331

Cash and cash equivalents and restricted cash, beginning of period

 

465,774

 

250,216

Cash and cash equivalents and restricted cash, end of period

$

153,410

$

451,547

See Notes to Condensed Consolidated Financial Statements.

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W&T OFFSHORE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

W&T Offshore, Inc. (with subsidiaries referred to herein as “W&T” or the “Company”) is an independent oil and natural gas producer with substantially all of its operations offshore in the Gulf of Mexico. The Company is active in the exploration, development and acquisition of oil and natural gas properties. The Company operates in one reportable segment.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and an interest in Monza Energy LLC (“Monza”), which is accounted for under the proportional consolidation method. All intercompany accounts and transactions have been eliminated in consolidation. These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. 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 Item 8 “Financial Statements and Supplementary Data” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Annual Report”).

Use of Estimates

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

Allowance for Credit Losses

The Company has receivables related to joint interest arrangements primarily with mid-size oil and natural 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 $11.2 million and $12.1 million as of September 30, 2023 and December 31, 2022, respectively.

Employee Retention Credit

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

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W&T OFFSHORE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following (in thousands):

September 30, 

    

December 31, 

2023

2022

Derivatives (1)

$

1,294

$

4,954

Insurance/bond premiums

 

8,955

 

6,046

Deposit related to acquisition (Note 14)

8,850

Prepaid deposits related to royalties

 

7,322

 

9,139

Prepayments to vendors

 

1,520

 

1,767

Prepayments to joint interest partners

2,242

1,717

Current portion of debt issuance costs

213

687

Other

 

80

 

33

Prepaid expenses and other current assets

$

30,476

$

24,343

(1)

Includes closed contracts which have not yet settled.

Oil and Natural Gas Properties and Other, Net

Oil and natural gas properties and other, net consist of the following (in thousands):

September 30, 

    

December 31, 

2023

2022

Oil and natural gas properties and equipment

$

8,908,490

$

8,813,404

Furniture, fixtures and other

 

43,087

 

20,915

Total property and equipment

 

8,951,577

 

8,834,319

Less: Accumulated depreciation, depletion, amortization and impairment

 

(8,180,123)

 

(8,099,104)

Oil and natural gas properties and other, net

$

771,454

$

735,215

Other Assets

Other assets consist of the following (in thousands):

September 30, 

    

December 31, 

2023

2022

Operating lease right-of-use assets

$

10,623

$

10,364

Investment in White Cap, LLC

 

2,924

 

2,453

Proportional consolidation of Monza

 

10,805

 

9,321

Derivatives (1)

 

14,372

 

23,236

Other

 

1,662

 

2,175

Total other assets

$

40,386

$

47,549

(1)

Includes open contracts.

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W&T OFFSHORE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

September 30, 

    

December 31, 

2023

2022

Accrued interest

$

5,430

$

8,967

Accrued salaries/payroll taxes/benefits

 

9,065

 

15,097

Litigation accruals

 

56

 

396

Operating lease liabilities

 

871

 

1,628

Derivatives (1)

 

17,659

 

46,595

Other

 

1,183

 

1,358

Total accrued liabilities

$

34,264

$

74,041

(1)

Includes closed contracts which have not yet settled.

Other Liabilities

Other liabilities consist of the following (in thousands):

September 30, 

    

December 31, 

2023

2022

Dispute related to royalty deductions

$

5,250

$

4,937

Derivatives

 

11,790

 

43,061

Operating lease liabilities

 

11,700

 

10,527

Other

 

708

 

609

Total other liabilities

$

29,448

$

59,134

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W&T OFFSHORE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 DEBT

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

September 30, 

    

December 31, 

2023

2022

TVPX Loan:

Principal

$

11,300

$

Unamortized discount

(1,434)

Unamortized debt issuance costs

 

(246)

Total

 

9,620

Term Loan:

Principal

121,571

147,899

Unamortized debt issuance costs

(3,337)

(4,592)

Total

 

118,234

 

143,307

Credit Agreement

11.75% Senior Second Lien Notes due 2026:

 

 

  

Principal

 

275,000

 

Unamortized debt issuance costs

 

(5,695)

 

Total

 

269,305

 

9.75% Senior Second Lien Notes due 2023:

 

 

  

Principal

 

 

552,460

Unamortized debt issuance costs

 

 

(2,330)

Total

 

 

550,130

Total debt, net

397,159

693,437

Less current portion, net

(30,015)

(582,249)

Long-term debt, net

$

367,144

$

111,188

Current Portion of Long-Term Debt, Net

As of September 30, 2023, the current portion of long-term debt of $30.0 million represented principal payments due within one year on the TVPX Loan and Term Loan (defined below), net of current unamortized debt issuance costs.

TVPX Loan

On May 15, 2023, the Company acquired a corporate aircraft from a company affiliated with and controlled by W&T’s Chairman, Chief Executive Officer (“CEO”) and President, Tracy W. Krohn. The terms of the transactions were reviewed and approved by the Audit Committee of the Company’s Board of Directors. See Note 13Related Party Transactions.

The purchase price of the aircraft was $19.1 million, which was paid using $9.0 million of the Company’s cash on hand and through the assumption of an approximately $11.8 million amortizing loan by TVPX Aircraft Solutions Inc. (the “TVPX Loan”), not in its individual capacity but as owner trustee of the trust which holds title to the aircraft, a wholly owned indirect subsidiary of the Company, as the borrower.

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W&T OFFSHORE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The TVPX Loan bears a fixed interest rate of 2.49% per annum for a term of 41 months and requires monthly amortization payments of $91.7 thousand plus accrued interest, and a balloon payment of $8.0 million at the end of the loan term. The TVPX Loan is guaranteed by the Company on an unsecured basis. At the date of assumption, the Company determined that the fair market value of the TVPX Loan was $10.1 million using current market rates.

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

Term Loan

On May 19, 2021, Aquasition LLC and Aquasition-II LLC (collectively, the “Subsidiary Borrowers”), both indirect wholly owned subsidiaries of the Company, entered into a credit agreement (the “Subsidiary Credit Agreement”) providing for a $215.0 million term loan (the “Term Loan”). The Term Loan matures on May 19, 2028.

The Term Loan requires quarterly amortization payments and bears interest at a fixed rate of 7.0% per annum. The Subsidiary Credit Agreement required the Company to enter into certain natural gas swaps and put derivative contracts (see Note 4 – Derivative Financial Instruments).

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 (the “Subsidiary Parent”) 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 (see Note 6 Subsidiary Borrowers for additional information).

Credit Agreement

The Company entered into a Credit Agreement with Calculus Lending, LLC (“Calculus”), a company affiliated with and controlled by the Company’s CEO, as sole lender under the Credit Agreement (as amended from time to time, the “Credit Agreement”). The Credit Agreement currently has a maturity date of January 3, 2024. As of September 30, 2023, the primary terms and covenants associated with the Credit Agreement are as follows:

$100 million first priority lien secured revolving credit facility, with borrowings limited to a borrowing base of $50.0 million;
Outstanding borrowings accrue interest at SOFR plus 6.0% per annum;
The Company’s ratio of First Lien Debt (as such term is defined in the Credit Agreement) outstanding under the Credit Agreement on the last day of the most recent quarter to EBITDAX (as such term is defined in the Credit Agreement) for the trailing four quarters must not be greater than 2.50 to 1.00;
The Company’s ratio of Total Proved PV-10 to First Lien Debt (as such terms are defined in the Credit Agreement) as of the last day of any fiscal quarter must be equal to or greater than 2.00 to 1.00;
The ratio of the Company and its restricted subsidiaries’ consolidated current assets to consolidated current liabilities (subject in each case to certain exceptions and adjustments as set forth in the Credit Agreement) at the last day of any fiscal quarter must be greater than or equal to 1.00 to 1.00;

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W&T OFFSHORE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of the last day of any fiscal quarter, the Company and its restricted subsidiaries on a consolidated basis must pass a “Stress Test” to determine whether certain future net revenues from the Company’s and its restricted subsidiaries’ and certain joint ventures’ oil and gas properties included in the collateral are sufficient to satisfy the aggregate first lien indebtedness under the Credit Agreement assuming the Borrowing Base is 100% funded or fully utilized; and
Certain related party transactions are required to meet certain arm’s length criteria; except in each case as specifically permitted or excluded from the covenant under the Credit Agreement.

Availability under the Credit Agreement is subject to redetermination of the borrowing base that may be requested at the discretion of either the lender or the Company in accordance with the Credit Agreement. Any redetermination by the lender to change the borrowing base will result in a similar change in the availability under the Credit Agreement. The borrowing base was reconfirmed at $50.0 million on October 2023. 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 (as described in Note 6 – Subsidiary Borrowers).

As of September 30, 2023, 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, 2023. As of September 30, 2023 and December 31, 2022, the Company had $4.4 million outstanding in letters of credit which have been cash collateralized.

11.75% Senior Second Lien Notes due 2026

On January 27, 2023, the Company issued at par $275 million in aggregate principal amount of its 11.75% Senior Second Lien Notes (the “11.75% Notes”) under an indenture dated January 27, 2023 (the “Indenture”). The 11.75% Notes mature on February 1, 2026, and interest is payable in arrears on February 1 and August 1.

The 11.75% Notes are secured by second-priority liens on the same collateral that is secured under the Credit Agreement, which does not include the assets of the Subsidiary Borrowers (as described in Note 6 – Subsidiary Borrowers). The estimated annual effective interest rate on the 11.75% Notes is 12.7%, which includes amortization of deferred interest costs.

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

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

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W&T OFFSHORE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The 11.75% Notes contain covenants that limit or prohibit the Company’s ability and the ability of certain of its subsidiaries to: (i) make investments; (ii) incur additional indebtedness or issue certain types of preferred stock; (iii) create certain liens; (iv) sell assets; (v) enter into agreements that restrict dividends or other payments from the Company’s subsidiaries to the Company; (vi) consolidate, merge or transfer all or substantially all of the assets of the Company; (vii) engage in transactions with affiliates; (viii) pay dividends or make other distributions on capital stock or subordinated indebtedness; and (ix) create subsidiaries that would not be restricted by the covenants of the Indenture. These covenants are subject to important exceptions and qualifications set forth in the Indenture. In addition, most of the above-described covenants will terminate if both S&P Global Ratings, a division of S&P Global Inc., and Moody’s Investors Service, Inc. assign the 11.75% Notes an investment grade rating and no default exists with respect to the 11.75% Notes.

Redemption of 9.75% Senior Second Lien Notes due 2023

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

Covenants

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

NOTE 3 FAIR VALUE MEASUREMENTS

Derivative Financial Instruments

Derivative financial instruments are reported in the Condensed Consolidated Balance Sheets using fair value. See Note 4 – Derivative Financial Instruments for additional information on derivative financial instruments. The following table presents the fair value of the Company’s derivative financial instruments (in thousands):

September 30, 

    

December 31, 

2023

2022

Assets:

 

  

 

  

Derivative instruments - current

$

1,294

$

4,954

Derivative instruments - long-term

 

14,372

 

23,236

Liabilities:

 

  

 

  

Derivative instruments - current

 

17,659

 

46,595

Derivative instruments - long-term

 

11,790

 

43,061

The Company measures the fair value of derivative financial instruments by applying the income approach, using models with inputs that are classified within Level 2 of the valuation hierarchy. The income approach converts expected future cash flows to a present value amount based on market expectations. The inputs used for the fair value measurement of derivative financial instruments are the exercise price, the expiration date, the settlement date, notional quantities, the implied volatility, the discount curve with spreads and published commodity future prices.

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W&T OFFSHORE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Debt Instruments

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

    

September 30, 2023

    

December 31, 2022

Net Value

    

Fair Value

    

Net Value

    

Fair Value

TVPX Loan

$

9,620

$

9,783

$

$

Term Loan

118,234

113,478

143,307

139,056

11.75% Notes

269,305

 

283,580

 

 

9.75% Notes

 

 

 

550,130

 

544,902

Total

$

397,159

$

406,841

$

693,437

$

683,958

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

NOTE 4 — DERIVATIVE FINANCIAL INSTRUMENTS

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

W&T has elected not to designate commodity derivative contracts for hedge accounting. Accordingly, commodity derivatives are recorded on the Condensed Consolidated Balance Sheets at fair value with settlements of such contracts, and changes in the unrealized fair value, recorded as Derivative (gain) loss, net on the Condensed Consolidated Statements of Operations in each period presented.

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

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

Average

Instrument

Daily

Total

Weighted

Weighted

Weighted

Period

    

Type

    

Volumes

    

Volumes

    

Strike Price

    

Put Price

    

Call Price

Natural Gas - Henry Hub (NYMEX)

(MMbtu)(1)

(MMbtu)(1)

($/MMbtu)(1)

($/MMbtu)(1)

($/MMbtu)(1)

Oct 2023 - Dec 2023

calls

70,000

6,440,000