10-Q 1 wti-10q_20180630.htm 10Q-2018-0630 wti-10q_20180630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 10-Q

 

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

For the quarterly period ended June 30, 2018

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

 

W&T OFFSHORE, INC.

(Exact name of registrant as specified in its charter)

 

Texas

72-1121985

(State of incorporation)

(IRS Employer

Identification Number)

 

 

Nine Greenway Plaza, Suite 300

Houston, Texas

77046-0908

(Address of principal executive offices)

(Zip Code)

(713) 626-8525

(Registrant’s telephone number, including area code)

 

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 and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post 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

(Do not check if a 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.  

As of July 31, 2018, there were 139,153,798 shares outstanding of the registrant’s common stock, par value $0.00001.

 

 

 


W&T OFFSHORE, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

 

 

Page

PART I –FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017

1

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2018 and 2017

2

 

Condensed Consolidated Statement of Changes in Shareholders’ Deficit for the Six Months Ended June 30, 2018

3

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017

4

 

Notes to Condensed Consolidated Financial Statements

5

Item 2.

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

32

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

45

Item 4.

Controls and Procedures

46

 

 

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

46

Item 1A.

Risk Factors

46

Item 6.

Exhibits

47

 

 

SIGNATURE

48

 

 

 

 

 

 


 

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

June 30,

 

 

December 31,

 

 

2018

 

 

2017

 

 

(Unaudited)

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

129,440

 

 

$

99,058

 

Receivables:

 

 

 

 

 

 

 

Oil and natural gas sales

 

52,073

 

 

 

45,443

 

Joint interest

 

19,366

 

 

 

19,754

 

Income taxes

 

65,240

 

 

 

13,006

 

Total receivables

 

136,679

 

 

 

78,203

 

Prepaid expenses and other assets (Note 1)

 

20,470

 

 

 

13,419

 

Total current assets

 

286,589

 

 

 

190,680

 

 

 

 

 

 

 

 

 

Oil and natural gas properties and other, net - at cost: (Note 1)

 

576,073

 

 

 

579,016

 

Restricted deposits for asset retirement obligations

 

26,072

 

 

 

25,394

 

Income taxes receivable

 

 

 

 

52,097

 

Other assets (Note 1)

 

69,418

 

 

 

60,393

 

Total assets

$

958,152

 

 

$

907,580

 

Liabilities and Shareholders’ Deficit

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

46,464

 

 

$

83,665

 

Undistributed oil and natural gas proceeds

 

22,649

 

 

 

20,129

 

Asset retirement obligations

 

27,923

 

 

 

23,613

 

Current maturities of long-term debt: (Note 2)

 

 

 

 

 

 

 

Principal

 

189,829

 

 

 

 

Carrying value adjustments

 

34,917

 

 

 

22,925

 

Current maturities of long-term debt  - carrying value

 

224,746

 

 

 

22,925

 

Accrued liabilities (Note 1)

 

20,505

 

 

 

17,930

 

Total current liabilities

 

342,287

 

 

 

168,262

 

Long-term debt: (Note 2)

 

 

 

 

 

 

 

Principal

 

713,365

 

 

 

889,790

 

Carrying value adjustments

 

47,605

 

 

 

79,337

 

Long term debt, less current portion - carrying value

 

760,970

 

 

 

969,127

 

 

 

 

 

 

 

 

 

Asset retirement obligations, less current portion

 

289,297

 

 

 

276,833

 

Other liabilities (Note 1)

 

73,007

 

 

 

66,866

 

Commitments and contingencies (Note 11)

 

 

 

 

 

Shareholders’ deficit:

 

 

 

 

 

 

 

Preferred stock, $0.00001 par value; 20,000,000 shares authorized; 0 issued at

   June 30, 2018 and December 31, 2017

 

 

 

 

 

Common stock, $0.00001 par value; 200,000,000 shares authorized;

   142,022,971 issued and 139,153,798 outstanding at June 30, 2018 and

   141,960,462 issued and 139,091,289 outstanding December 31, 2017

 

1

 

 

 

1

 

Additional paid-in capital

 

548,196

 

 

 

545,820

 

Retained earnings (deficit)

 

(1,031,439

)

 

 

(1,095,162

)

Treasury stock, at cost; 2,869,173 shares at June 30, 2018 and December 31, 2017

 

(24,167

)

 

 

(24,167

)

Total shareholders’ deficit

 

(507,409

)

 

 

(573,508

)

Total liabilities and shareholders’ deficit

$

958,152

 

 

$

907,580

 

 

See Notes to Condensed Consolidated Financial Statements.

1


 

W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

(In thousands except per share data)

 

 

(Unaudited)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil

$

116,618

 

 

$

85,622

 

 

$

213,924

 

 

$

170,593

 

NGLs

 

8,734

 

 

 

7,054

 

 

 

18,394

 

 

 

15,796

 

Natural gas

 

22,977

 

 

 

29,258

 

 

 

48,844

 

 

 

59,016

 

Other

 

1,283

 

 

 

1,389

 

 

 

2,663

 

 

 

2,311

 

Total revenues

 

149,612

 

 

 

123,323

 

 

 

283,825

 

 

 

247,716

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease operating expenses

 

35,582

 

 

 

31,519

 

 

 

72,425

 

 

 

71,683

 

Production taxes

 

439

 

 

 

449

 

 

 

894

 

 

 

964

 

Gathering and transportation

 

4,928

 

 

 

5,318

 

 

 

9,985

 

 

 

11,527

 

Depreciation, depletion, amortization and accretion

 

39,757

 

 

 

40,364

 

 

 

77,838

 

 

 

80,354

 

General and administrative expenses

 

14,220

 

 

 

16,474

 

 

 

29,258

 

 

 

29,748

 

Derivative (gain) loss

 

6,219

 

 

 

(3,689

)

 

 

6,219

 

 

 

(7,644

)

Total costs and expenses

 

101,145

 

 

 

90,435

 

 

 

196,619

 

 

 

186,632

 

Operating income

 

48,467

 

 

 

32,888

 

 

 

87,206

 

 

 

61,084

 

Interest expense

 

12,147

 

 

 

11,436

 

 

 

23,470

 

 

 

22,730

 

Gain on exchange of debt

 

 

 

 

8,056

 

 

 

 

 

 

7,811

 

Other (income) expense, net

 

125

 

 

 

5,168

 

 

 

(208

)

 

 

5,114

 

Income before income tax expense (benefit)

 

36,195

 

 

 

24,340

 

 

 

63,944

 

 

 

41,051

 

Income tax expense (benefit)

 

112

 

 

 

(8,975

)

 

 

221

 

 

 

(16,563

)

Net income

$

36,083

 

 

$

33,315

 

 

$

63,723

 

 

$

57,614

 

 

Basic and diluted earnings per common share

$

0.25

 

 

$

0.23

 

 

$

0.44

 

 

$

0.40

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

2


 

W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

Outstanding

 

 

Additional

Paid-In

 

 

Retained

Earnings

 

 

Treasury Stock

 

 

Total

Shareholders’

 

 

Shares

 

 

Value

 

 

Capital

 

 

(Deficit)

 

 

Shares

 

 

Value

 

 

Deficit

 

 

(In thousands)

 

 

(Unaudited)

 

Balances at December 31, 2017

 

139,091

 

 

$

1

 

 

$

545,820

 

 

$

(1,095,162

)

 

 

2,869

 

 

$

(24,167

)

 

$

(573,508

)

Share-based compensation

 

 

 

 

 

 

 

2,434

 

 

 

 

 

 

 

 

 

 

 

 

2,434

 

Stock Issued

 

63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RSUs surrendered

  for payroll taxes

 

 

 

 

 

 

 

(58

)

 

 

 

 

 

 

 

 

 

 

 

(58

)

Net income

 

 

 

 

 

 

 

 

 

 

63,723

 

 

 

 

 

 

 

 

 

63,723

 

Balances at June 30, 2018

 

139,154

 

 

$

1

 

 

$

548,196

 

 

$

(1,031,439

)

 

 

2,869

 

 

$

(24,167

)

 

$

(507,409

)

 

See Notes to Condensed Consolidated Financial Statements.

 

 

3


 

W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

Six Months Ended

 

 

June 30,

 

 

2018

 

 

2017

 

 

(In thousands)

 

 

(Unaudited)

 

Operating activities:

 

 

 

 

 

 

 

Net income

$

63,723

 

 

$

57,614

 

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

Depreciation, depletion, amortization and accretion

 

77,838

 

 

 

80,354

 

Gain on exchange of debt

 

 

 

 

(7,811

)

Amortization of debt items and other items

 

1,126

 

 

 

836

 

Share-based compensation

 

2,434

 

 

 

3,466

 

Derivative (gain) loss

 

6,219

 

 

 

(7,644

)

Cash receipts (payments) on derivative settlements, net

 

(1,149

)

 

 

2,208

 

Deferred income taxes

 

221

 

 

 

212

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Oil and natural gas receivables

 

(6,630

)

 

 

3,675

 

Joint interest receivables

 

251

 

 

 

1,965

 

Insurance reimbursements

 

 

 

 

30,100

 

Income taxes

 

(138

)

 

 

(16,960

)

Prepaid expenses and other assets

 

(14,323

)

 

 

(3,575

)

Escrow deposit - Apache lawsuit

 

 

 

 

(49,500

)

Asset retirement obligation settlements

 

(12,124

)

 

 

(36,021

)

Accounts payable, accrued liabilities and other

 

(2,256

)

 

 

6,666

 

Net cash provided by operating activities

 

115,192

 

 

 

65,585

 

Investing activities:

 

 

 

 

 

 

 

Investment in oil and natural gas properties and equipment

 

(31,803

)

 

 

(43,800

)

Changes in operating assets and liabilities associated with investing activities

 

(29,330

)

 

 

(827

)

Acquisition of property interest

 

(16,617

)

 

 

 

Purchases of furniture, fixtures and other

 

 

 

 

(853

)

Net cash used in investing activities

 

(77,750

)

 

 

(45,480

)

Financing activities:

 

 

 

 

 

 

 

Payment of interest on 1.5 Lien Term Loan

 

(4,114

)

 

 

(4,113

)

Payment of interest on 2nd Lien PIK Toggle Notes

 

(2,920

)

 

 

(7,335

)

Payment of interest on 3rd Lien PIK Toggle Notes

 

 

 

 

(6,201

)

Other

 

(26

)

 

 

(372

)

Net cash used in financing activities

 

(7,060

)

 

 

(18,021

)

Increase  in cash  and cash equivalents

 

30,382

 

 

 

2,084

 

Cash and cash equivalents, beginning of period

 

99,058

 

 

 

70,236

 

Cash and cash equivalents, end of period

$

129,440

 

 

$

72,320

 

See Notes to Condensed Consolidated Financial Statements.

 

 

4


 

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

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 W&T Offshore, Inc. (on a stand-alone basis, the “Parent Company”) and its 100%-owned subsidiary, W & T Energy VI, LLC (“Energy VI”) and through our proportionately consolidated interest in Monza Energy LLC, as described in more detail below under the subheading “-Recent Events” in this Note and in Note 4.  

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

Operating results for interim periods are not necessarily indicative of the results that may be expected for the entire year.  These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

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

Recent Events.  The price we receive for our crude oil, natural gas liquids (“NGLs”) and natural gas production directly affects our revenues, profitability, cash flows, liquidity, access to capital, proved reserves and future rate of growth.  The average realized prices of crude oil and NGLs improved during the six months ended June 30, 2018 compared to the average realized prices in the six months ended June 30, 2017.  

Our Fifth Amended and Restated Credit Agreement (as amended, the “Credit Agreement”) provides our revolver bank credit facility and matures on November 8, 2018.  As of June 30, 2018, we had $9.7 million of letters of credit outstanding and no amounts borrowed on our revolving bank credit facility.  Our 8.500% Senior Notes (the “Unsecured Senior Notes”) mature on June 15, 2019.  If the Unsecured Senior Notes have not been extended, refunded, defeased, discharged, replaced or refinanced by February 28, 2019, then the 11.00% 1.5 Lien Term Loan, due November 15, 2019 (the “1.5 Lien Term Loan”) and the 8.50%/10.00% Third Lien Payment-In-Kind (“PIK”) Toggle Notes, due June 15, 2021, (the “Third Lien PIK Toggle Notes”) will both accelerate their maturity to February 28, 2019.  During the remainder of 2018, we plan to address the issues of the potential maturity acceleration of these two debt instruments and to extend or replace the revolving bank credit facility.  We expect to build sufficient cash balances in 2018 to be able to redeem, repurchase or refinance the Unsecured Senior Notes.  Certain amendments under the Credit Agreement and the 1.5 Lien Term Loan will likely be required in the event we redeem or repurchase the Unsecured Senior Notes, which we anticipate would be granted if requested.  If we are in a position to repay or refinance the 1.5 Lien Term Loan, then we would expect to extend the maturity of our revolving bank credit facility.  There can be no assurance that lenders will extend our revolving bank credit facility maturity, but under current market conditions and based on the outlook of our cash position in 2018 and further, we believe our lenders or replacement lenders will be amenable to participating in a refinancing or other corporate financing transaction.

5


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

In addition to the assessment of potential maturity acceleration of certain debt instruments discussed above, we have assessed our obligations, our financial condition, the current capital markets and options given different scenarios of commodity prices.  We believe we will have adequate available liquidity to fund our operations through August 2019, the period of assessment to qualify as a going concern.  However, we cannot predict the potential changes in commodity prices or future Bureau of Ocean Energy Management (“BOEM”) bonding requirements, either of which could affect our operations, liquidity levels and compliance with debt covenants.

See our Annual Report on Form 10-K for the year ended December 31, 2017 concerning risks related to our business and events occurring during 2017 and other information and the Notes herein for additional information.  

Accounting Standard Updates Effective January 1, 2018.  Accounting Standards Update No. 2016-18, (“ASU 2016-18”), Statement of Cash Flows (Topic 230) – Restricted Cash became effective for us as of January 1, 2018.  As we did not have any amounts of restricted cash in the six months ended June 30, 2018 and 2017, ASU 2016-18 did not affect the Condensed Consolidated Statement of Cash Flows.

   Accounting Standards Update No. 2017-01, (“ASU 2017-01”), Business Combinations (Topic 805) – Clarifying the Definition of a Business became effective for us as of January 1, 2018.  The new guidance is intended to assist with the evaluation of whether a set of transferred assets and activities is a business.  In application of the revised guidance under ASU 2017-01 for our acquisition of a non-operated interest in the Heidelberg field described in Note 5, we determined the transaction should be treated as an asset purchase rather than the purchase of a business.          

Accounting Standard Update No. 2014-09, (“ASU 2014-09”) Revenue from Customers (Topic 606), became effective for us in the period ending March 31, 2018.  We reviewed our contracts using the five-step revenue recognition model, which did not identify any changes required as to the amount or timing of revenue recognition.  We adopted the new standard using the modified retrospective approach which did not result in any cumulative-effect adjustment on the date of adoption.  The implementation of ASU 2014-09 resulted in a change in our reporting in the Condensed Consolidated Statement of Operations so that we now report revenue streams separately for crude oil, NGLs, natural gas and other revenues in compliance with the new standard.    

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.

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

 

 

June 30,

 

 

December 31,

 

 

2018

 

 

2017

 

Prepaid/accrued insurance

$

4,526

 

 

$

2,401

 

Surety bond unamortized premiums

 

3,305

 

 

 

2,676

 

Prepaid deposits related to royalties

 

8,391

 

 

 

6,456

 

Advances for capital expenditures

 

1,098

 

 

 

 

Derivative contract premiums

 

1,582

 

 

 

 

Other

 

1,568

 

 

 

1,886

 

Prepaid expenses and other assets

$

20,470

 

 

$

13,419

 

 

6


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

Oil and Natural Gas Properties and Other, Net – at cost.  Oil and natural gas properties and equipment are recorded at cost using the full cost method.  There were no amounts excluded from amortization as of the dates presented in the following table (in thousands):

 

 

June 30,

 

 

December 31,

 

 

2018

 

 

2017

 

Oil and natural gas properties and equipment

$

8,167,664

 

 

$

8,102,044

 

Furniture, fixtures and other

 

21,831

 

 

 

21,831

 

Total property and equipment

 

8,189,495

 

 

 

8,123,875

 

Less accumulated depreciation, depletion

   and amortization

 

7,613,422

 

 

 

7,544,859

 

Oil and natural gas properties and other, net

$

576,073

 

 

$

579,016

 

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

 

 

June 30,

 

 

December 31,

 

 

2018

 

 

2017

 

Escrow deposit - Apache lawsuit

$

49,500

 

 

$

49,500

 

Appeal bond deposits

 

6,925

 

 

 

6,925

 

Investment in White Cap, LLC

 

2,648

 

 

 

2,511

 

Deposit related to the Credit Agreement

 

4,702

 

 

 

 

Unamortized brokerage fee for Monza

 

2,182

 

 

 

 

Proportional consolidation of Monza's

   other assets  (Note 4)

 

2,301

 

 

 

 

Other

 

1,160

 

 

 

1,457

 

Total other assets

$

69,418

 

 

$

60,393

 

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

 

 

June 30,

 

 

December 31,

 

 

2018

 

 

2017

 

Accrued interest

$

4,199

 

 

$

4,200

 

Accrued salaries/payroll taxes/benefits

 

2,996

 

 

 

2,454

 

Incentive compensation plans

 

3,987

 

 

 

7,366

 

Litigation accruals

 

3,604

 

 

 

3,480

 

Derivative contracts

 

5,281

 

 

 

 

Other

 

438

 

 

 

430

 

Total accrued liabilities

$

20,505

 

 

$

17,930

 

 

7


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

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

 

 

June 30,

 

 

December 31,

 

 

2018

 

 

2017

 

Apache lawsuit

$

49,500

 

 

$

49,500

 

Uncertain tax positions including interest/penalties

 

11,236

 

 

 

11,015

 

Dispute related to royalty deductions

 

4,687

 

 

 

 

Dispute related to royalty-in-kind

 

2,083

 

 

 

914

 

Other

 

5,501

 

 

 

5,437

 

Total other liabilities (long-term)

$

73,007

 

 

$

66,866

 

 

Recent Accounting Developments.  In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (“ASU 2016-02”), Leases (Subtopic 842).  Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months.  Consistent with current GAAP, the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a financing or operating lease.  However, unlike current GAAP, which requires only capital or financing leases to be recognized on the balance sheet, ASU 2016-02 will require both types of leases to be recognized on the balance sheet.  ASU 2016-02 also will require disclosures to help investors and other financial statement users to better understand the amount, timing and uncertainty of cash flows arising from leases.  These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements.  ASU 2016-02 does not apply for leases for oil and gas properties, but does apply to equipment used to explore and develop oil and gas resources.  ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018 and is to be applied using the modified retrospective approach.  Our current operating leases that will be impacted by ASU 2016-02 are leases for office space, which is primarily in Houston, Texas, although ASU 2016-02 may impact the accounting for leases related to equipment depending on the term of the lease.  We currently do not have any leases classified as financing leases nor do we have any leases recorded on the Condensed Consolidated Balance Sheets.  We have not yet fully determined or quantified the effect ASU 2016-02 will have on our financial statements.

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, (“ASU 2016-13”), Financial Instruments – Credit Losses (Subtopic 326).  The new guidance eliminates the probable recognition threshold and broadens the information to consider past events, current conditions and forecasted information in estimating credit losses.  ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted for fiscal years beginning after December 15, 2018.  We have not yet fully determined or quantified the effect ASU 2016-13 will have on our financial statements.

In August 2017, the FASB issued Accounting Standards Update No. 2017-12, (“ASU 2017-12”), Derivatives and Hedging (Topic 815) – Targeted Improvements to Accounting for Hedging Activities.  The amendments in ASU 2017-12 require an entity to present the earnings effect of the hedging instrument in the same income statement line in which the earning effect of the hedged item is reported.  This presentation enables users of financial statements to better understand the results and costs of an entity’s hedging program.  Also, relative to current GAAP, this approach simplifies the financial statement reporting for qualifying hedging relationships.  ASU 2017-12 is effective for fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020.  Early adoption is permitted, including adoption in an interim period.  As we do not designate our commodity derivative instruments as qualifying hedging instruments, our assessment is this amendment will not impact the presentation of the changes in fair values of our commodity derivative instruments on our financial statements.      

 

 

8


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

2.  Long-Term Debt

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

 

June 30, 2018

 

 

December 31, 2017

 

 

 

 

 

 

Adjustments to

 

 

 

 

 

 

 

 

 

 

Adjustments to

 

 

 

 

 

 

 

 

 

 

Carrying

 

 

Carrying

 

 

 

 

 

 

Carrying

 

 

Carrying

 

 

Principal

 

 

Value (1)

 

 

Value

 

 

Principal

 

 

Value (1)

 

 

Value

 

11.00% 1.5 Lien Term Loan,

     due November 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal

$

75,000

 

 

$

 

 

$

75,000

 

 

$

75,000

 

 

$

 

 

$

75,000

 

Future interest payments

 

 

 

 

11,482

 

 

 

11,482

 

 

 

 

 

 

15,596

 

 

 

15,596

 

Subtotal

 

75,000

 

 

 

11,482

 

 

 

86,482

 

 

 

75,000

 

 

 

15,596

 

 

 

90,596

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9.00 % Second Lien Term Loan,

    due May 2020:

 

300,000

 

 

 

 

 

 

300,000

 

 

 

300,000

 

 

 

 

 

 

300,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9.00%/10.75% Second Lien

    PIK Toggle Notes, due May 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal

 

177,513

 

 

 

 

 

 

177,513

 

 

 

171,769

 

 

 

 

 

 

171,769

 

Future payments-in-kind

 

 

 

 

 

 

 

 

 

 

 

 

 

5,745

 

 

 

5,745

 

Future interest payments

 

 

 

 

31,952

 

 

 

31,952

 

 

 

 

 

 

34,872

 

 

 

34,872

 

Subtotal

 

177,513

 

 

 

31,952

 

 

 

209,465

 

 

 

171,769

 

 

 

40,617

 

 

 

212,386

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8.50%/10.00% Third Lien

  PIK Toggle Notes, due June 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal

 

160,852

 

 

 

 

 

 

160,852

 

 

 

153,192

 

 

 

 

 

 

153,192

 

Future payments-in-kind

 

 

 

 

3,664

 

 

 

3,664

 

 

 

 

 

 

11,323

 

 

 

11,323

 

Future interest payments

 

 

 

 

38,682

 

 

 

38,682

 

 

 

 

 

 

38,682

 

 

 

38,682

 

Subtotal

 

160,852

 

 

 

42,346

 

 

 

203,198

 

 

 

153,192

 

 

 

50,005

 

 

 

203,197

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8.50% Unsecured Senior Notes,

    due June 2019

 

189,829

 

 

 

 

 

 

189,829

 

 

 

189,829

 

 

 

 

 

 

189,829

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt premium, discount,

     issuance costs, net of amortization

 

 

 

 

(3,258

)

 

 

(3,258

)

 

 

 

 

 

(3,956

)

 

 

(3,956

)

Total long-term debt

 

903,194

 

 

 

82,522

 

 

 

985,716

 

 

 

889,790

 

 

 

102,262

 

 

 

992,052

 

Current maturities of long-term debt (2)

 

189,829

 

 

 

34,917

 

 

 

224,746

 

 

 

 

 

 

22,925

 

 

 

22,925

 

Long term debt, less current

   maturities

$

713,365

 

 

$

47,605

 

 

$

760,970

 

 

$

889,790

 

 

$

79,337

 

 

$

969,127

 

 

 

(1)

Future interest payments and future payments-in-kind are recorded on an undiscounted basis.

 

(2)

Represents principal of the 8.50% Unsecured Senior Notes due June 15, 2019 and future interest payments on the 1.5 Lien Term Loan, Second Lien PIK Toggle Notes and Third Lien PIK Toggle Notes due within twelve months.

 

 

9


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

Accounting for Certain Debt Instruments

We accounted for a transaction executed on September 7, 2016 as a Troubled Debt Restructuring pursuant to the guidance under Accounting Standard Codification 470-60, Troubled Debt Restructuring (“ASC 470-60”).  Under ASC 470-60, the carrying value of the 9.00/ 10.75% Second Lien PIK Toggle Notes, due May 15, 2020, (the “Second Lien PIK Toggle Notes”); the Third Lien PIK Toggle Notes and 1.5 Lien Term Loan (the “New Debt”) are measured using all future undiscounted payments (principal and interest); therefore, no interest expense has been recorded for the New Debt in the Condensed Consolidated Statements of Operations for the periods presented.  Additionally, no interest expense related to the New Debt will be recorded in future periods as payments of interest on the New Debt will be recorded as a reduction in the carrying amount; thus, our reported interest expense will be significantly less than the contractual interest payments through the terms of the New Debt.  Under ASC 470-60, payments related to the New Debt are reported in the financing section of the Condensed Consolidated Statements of Cash Flows.

The primary terms of our long-term debt are described below:    

Credit Agreement.  The Credit Agreement provides a revolving bank credit facility and expires by its term on November 8, 2018.  The primary items of the Credit Agreement are as follows, with certain terms defined under the Credit Agreement:

 

The borrowing base is $150.0 million.

 

Letters of credit may be issued in amounts up to $150.0 million, provided availability under the revolving bank credit facility exists.      

 

The First Lien Leverage Ratio limit is 2.00 to 1.00.

 

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

 

We are required to have deposit accounts only with banks under the Credit Agreement with certain exceptions.

 

We may not have unrestricted cash balances above $35.0 million if outstanding balances on the revolving bank credit agreement (including letters of credit) are greater than $5.0 million.

 

To the extent there are borrowings, they are primarily executed as Eurodollar Loans, and the applicable margins range from 3.00% to 4.00%.

 

The commitment fee is 50 basis points for all levels of utilization.

Availability under our revolving bank credit facility is subject to a semi-annual redetermination of our borrowing base that occurs in the spring and fall of each year and is calculated by our lenders based on their evaluation of our proved reserves and their own internal criteria.  The 2018 spring redetermination reaffirmed the borrowing base amount of $150.0 million.  Any redetermination by our lenders to change our borrowing base will result in a similar change in the availability under our revolving bank credit facility.  The revolving bank credit facility is secured and is collateralized by a first priority lien on substantially all of our oil and natural gas properties.  

The Credit Agreement contains various customary covenants for certain financial tests, as defined in the Credit Agreement and are measured as of the end of each quarter, and for customary events of default.  The customary events of default include: (i) nonpayment of principal when due or nonpayment of interest or other amounts within three business days of when due; (ii) bankruptcy or insolvency with respect to the Company or any of its subsidiaries guaranteeing borrowings under the revolving bank credit facility; or (iii) a change of control.  The Credit Agreement contains cross-default clauses with the other long-term debt agreements, and such agreements contain similar cross-default clauses with the Credit Agreement.  

  As of June 30, 2018 and December 31, 2017, we did not have any borrowings outstanding on the revolving bank credit facility and had $9.7 million and $0.3 million of letters of credit outstanding, respectively.  Available credit as of June 30, 2018 was $140.3 million.  As of June 30, 2018, we have deposited $4.7 million with the lead bank in compliance with the terms of the Credit Agreement as letters of credit are considered borrowings and our unrestricted cash balance exceeded $35.0 million.

10


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

1.5 Lien Term Loan.  In September 2016, we entered into the 1.5 Lien Term Loan with a maturity date of November 15, 2019.  The maturity date will accelerate to February 28, 2019 if the remaining Unsecured Senior Notes have not been extended, renewed, refunded, defeased, discharged, replaced or refinanced by February 28, 2019.  Interest accrues at 11.00% per annum and is payable quarterly in cash.  The 1.5 Lien Term Loan is secured by a 1.5 priority lien on all of our assets pledged under the Credit Agreement.  The lien securing the 1.5 Lien Term Loan is subordinate to the liens securing the Credit Agreement and has priority above the liens securing the Second Lien Term Loan (defined below), the Second Lien PIK Toggle Notes and the Third Lien PIK Toggle Notes.  All future undiscounted cash flows have been included in the carrying value under ASC 470-60.  The 1.5 Lien Term Loan contains various covenants that limit, among other things, our ability to: (i) pay cash dividends; (ii) repurchase the Unsecured Senior Notes at a price greater than 65% of par and limited to a basket of $35 million; (iii) repurchase our common stock; (iv) sell our assets; (v) make certain loans or investments; (vi) merge or consolidate; (vii) enter into certain liens; (viii) create liens that secure debt; and (ix) enter into transactions with affiliates.  

Second Lien Term Loan.  In May 2015, we entered into the 9.00% Term Loan (the “Second Lien Term Loan”), which bears an annual interest rate of 9.00%.  The Second Lien Term Loan was issued at a 1.0% discount to par, matures on May 15, 2020 and is recorded at its carrying value consisting of principal, unamortized discount and unamortized debt issuance costs.  Interest on the Second Lien Term Loan is payable in arrears semi-annually on May 15 and November 15.  The estimated annual effective interest rate on the Second Lien Term Loan is 9.6%, which includes amortization of debt issuance costs and discounts.  The Second Lien Term Loan is secured by a second-priority lien on all of our assets that are secured under the Credit Agreement.  The Second Lien Term Loan is effectively subordinate to the Credit Agreement and the 1.5 Lien Term Loan (discussed above) and is effectively pari passu with the Second Lien PIK Toggle Notes (discussed below).  The Second Lien Term Loan contains covenants that limit or prohibit our ability and the ability of certain of our subsidiaries to: (i) incur additional debt; (ii) make payments or distributions on account of our or our restricted subsidiaries’ capital stock; (iii) sell assets; (iv) restrict dividends or other payments of our restricted subsidiaries to us; (v) create liens that secure debt; (vi) enter into transactions with affiliates; and (vii) merge or consolidate with another company.  

Second Lien PIK Toggle Notes.  In September 2016, we issued Second Lien PIK Toggle Notes with a maturity date of May 15, 2020.  Interest is payable on May 15 and November 15 of each year.  For the interest period from November 15, 2017 up to and including March 6, 2018, we had the option to pay all or a portion of interest in-kind at the rate of 10.75% per annum, which if so exercised, is added to the principal amount.  After March 6, 2018, interest is payable in cash at the rate of 9.00% per annum.  The Second Lien PIK Toggle Notes are secured by a second-priority lien on all of our assets that are pledged under the Credit Agreement.  The Second Lien PIK Toggle Notes are effectively subordinate to the Credit Agreement and the 1.5 Lien Term Loan and are effectively pari passu with the Second Lien Term Loan.  The Second Lien PIK Toggle Notes and related Support Agreement contain covenants that limit or prohibit our ability and the ability of certain of our subsidiaries to: (i) incur additional debt; (ii) make payments or distributions on account of our or our restricted subsidiaries’ capital stock; (iii) sell assets; (iv) restrict dividends or other payments of our restricted subsidiaries to us; (v) create liens that secure debt; (vi) enter into transactions with affiliates; and (vii) merge or consolidate with another company.  

Third Lien PIK Toggle Notes.  In September 2016, we issued Third Lien PIK Toggle Notes with a maturity date of June 15, 2021.  The maturity date will accelerate to February 28, 2019 if the remaining Unsecured Senior Notes have not been extended, renewed, refunded, defeased, discharged, replaced or refinanced by February 28, 2019.  Interest is payable on June 15 and December 15 of each year.  For the interest periods up to and including September 6, 2018, if we so elect, we have the option to pay all or a portion of interest in-kind at a rate of 10.00% per annum.  If so elected, such in-kind will be added to the principal amount.  After September 6, 2018, interest is payable in cash at the rate of 8.50% per annum.  The Third Lien PIK Toggle Notes are secured by a third-priority lien on all of our assets that are secured under the Credit Agreement.  The Third Lien PIK Toggle Notes are effectively subordinate to the Second Lien Term Loan and the Second Lien PIK Toggle Notes.  The Third Lien PIK Toggle Notes and related Support Agreement contain covenants that limit or prohibit our ability and the ability of certain of our subsidiaries to: (i) incur additional debt; (ii) make payments or distributions on account of our or our restricted subsidiaries’ capital stock; (iii) sell assets; (iv) restrict dividends or other payments of our restricted subsidiaries to us; (v) create liens that secure debt; (vi) enter into transactions with affiliates; and (vii) merge or consolidate with another company.

11


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

Unsecured Senior Notes.  Our outstanding Unsecured Senior Notes, which bear an annual interest rate of 8.50% and mature on June 15, 2019, were recorded at their carrying value, which includes unamortized debt premium and unamortized debt issuance costs.  Interest on the Unsecured Senior Notes is payable semi-annually in arrears on June 15 and December 15.  The estimated annual effective interest rate on the Unsecured Senior Notes is 8.4%, which includes amortization of premiums and debt issuance costs.  The Unsecured Senior Notes contain covenants that limit or prohibit our ability and the ability of certain of our subsidiaries to: (i) incur additional debt; (ii) make payments or distributions on account of our or our restricted subsidiaries’ capital stock; (iii) sell assets; (iv) restrict dividends or other payments of our restricted subsidiaries to us; (v) create liens that secure debt; (vi) enter into transactions with affiliates; and (vii) merge or consolidate with another company.  

Covenants.  We were in compliance with all applicable covenants for all of our debt instruments as of June 30, 2018.

For information about fair value measurements for our long-term debt, refer to Note 3.

3.  Fair Value Measurements  

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 fair value of the 1.5 Lien Term Loan was estimated using the carrying value of the principal as only one entity has been the holder of the 1.5 Lien Term Loan.  The fair values of our Second Lien Term Loan, Second Lien PIK Toggle Notes, Third Lien PIK Toggle Notes and Unsecured Senior Notes were based on quoted prices, although the market is not a very active market; therefore, the fair value is classified within Level 2.  

The following table presents the fair value of our long-term debt, all of which are classified as Level 2 within the valuation hierarchy (in thousands):

 

Hierarchy

 

June 30, 2018

 

 

December 31, 2017

 

11.00% 1.5 Lien Term Loan, due November 2019

Level 2

 

$

75,000

 

 

$

75,000

 

9.00 % Second Lien Term Loan, due May 2020

Level 2

 

 

300,000

 

 

 

288,000

 

9.00%/10.75% Second Lien PIK Toggle Notes, due May 2020

Level 2

 

 

177,513

 

 

 

162,322

 

8.50%/10.00% Third Lien PIK Toggle Notes, due June 2021

Level 2

 

 

153,614

 

 

 

119,490

 

8.50% Unsecured Senior Notes, due June 2019

Level 2

 

 

187,931

 

 

 

178,439

 

The long-term debt items are reported on the Condensed Consolidated Balance Sheets at their carrying value as described in Note 2.  

4.  JV Drilling Program

On March 12, 2018, W&T and two other initial members formed and initially funded a limited liability company, Monza Energy LLC, a Delaware limited liability company (“Monza”), that will jointly participate with us in the exploration, drilling and development of up to 14 identified drilling projects (the “JV Drilling Program”) in the Gulf of Mexico over the next three years.  W&T initially contributed 88.94% of its working interest in 14 identified undeveloped drilling projects to Monza and retained 11.06% of its working interest.  The Monza board has approved the substitution of one of these identified undeveloped drilling projects, the Viosca Knoll 823 (“VK 823”) A-14 well, with the VK 823 A-13 well, which is in the process of being contributed to Monza through the conveyance by W&T of 58.71% of its working interest in such well to Monza and retaining 41.29% of its working interest in such well.  The interest in the VK823 A-14 well will be reconveyed to W&T.  Since the initial closing, additional investors have joined as members of Monza and as of June 30, 2018, total commitments by all members, including W&T, are $361.4 million.  Monza has closed off funding from additional investors.  The JV 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 working interest in the 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. W&T will be the operator of each well in the JV Drilling Program unless there is already a designated third-party operator.

12


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

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

At the inception of Monza, W&T received a net reimbursement of approximately $20 million for the capital expenditures incurred prior to the close date for projects in the JV Drilling Program.  W&T may be obligated to fund certain cost overruns, subject to certain exceptions, on JV Drilling Program wells above budgeted and contingency amounts.  As of June 30, 2018, members of Monza made partner capital contribution payments to Monza totaling $89.4 million.

Information on the structure and relationship follows:

Board Structure and Authority.  Under the Monza limited liability agreement, the business and affairs of Monza are managed by a board of five directors, which will consist of three directors selected by the third-party investors, Mr. Krohn, and an additional independent director will be selected by a majority of the third-party investors in Monza which will be subject to consent by W&T.  The day-to-day operations of Monza are being managed by W&T, under the direction of the Monza board, pursuant to a services agreement.  W&T has no control over the decisions of the Monza board.  W&T has veto rights for certain decisions, but does not have the ability to unilaterally make decisions for Monza, except for day-to-day decisions as permitted under the services agreement.  The Monza board is responsible for the management of Monza and for making decisions with respect to its interest in the 14 drilling projects, including approval of the budgets.    

Accounting Methodology and Carrying Amounts.  Our interest in Monza is considered to be a variable interest entity that we account for using proportional consolidation.  We do not fully consolidate Monza because we are not considered the primary beneficiary and we utilize proportional consolidation to account for our interest in the Monza properties.  As of June 30, 2018, in the Condensed Consolidated Balance Sheet, we recorded $6.0 million in oil and natural gas properties, $2.3 million in other assets and $1.7 million, net reduction in working capital in connection with our proportional interest in Monza’s assets and liabilities.  For the six months ended June 30, 2018, we recorded $0.5 million in revenue, $0.4 million in operating expense and $0.2 million in other expense in connection with our proportional interest in Monza’s operations.

Maximum Exposure. Our contribution to Monza as of June 30, 2018 was $48.8 million, which consisted of cash and the conveyance of the Company’s working interest in the 14 projects.  We may also take responsibility for certain drilling and completion cost overruns, subject to certain limitations and certain exceptions, of which the total exposure cannot be estimated at this time.

5.  Heidelberg Field

  On April 5, 2018, we closed on the purchase from Cobalt International Energy, Inc. of a 9.375% non-operated working interest in the Heidelberg field located in Green Canyon blocks 859, 903 and 904.  The gross purchase price was $31.1 million which was adjusted for certain closing items and an effective date of January 1, 2018.  Cash flows generated by the acquired interest between the effective date and the closing date reduced the net purchase price to $16.6 million on the closing date.  We determined that the assets acquired did not meet the definition of a business; therefore, the transaction was accounted for as an asset acquisition.  In connection with this transaction, we were required to furnish a letter of credit of $9.4 million to a pipeline company as consignee.  We recognized ARO of $3.6 million as a component of the transaction.  In conjunction with the purchase of an interest in the Heidelberg field, we assumed contracts with certain pipeline companies that contain minimum quantities obligations through 2028 resulting in an estimated commitment of $19.6 million.    

13


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

6.  Asset Retirement Obligations

Our ARO primarily represents the estimated present value of the amount we will incur to plug, abandon and remediate our producing properties at the end of their productive lives.  

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

 

Balance, December 31, 2017

$

300,446

 

Liabilities settled

 

(12,124

)

Accretion of discount

 

9,273

 

Liabilities assumed through purchase

 

3,597