PART I – FINANCIAL INFORMATION Item 1. Financial Statements W&T OFFSHORE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited) | | | | | | | | | March 31, | | December 31, | | | 2022 | | 2021 | Assets | | | | | | | Current assets: | | | | | | | Cash and cash equivalents | | $ | 215,475 | | $ | 245,799 | Restricted cash | | | 4,417 | | | 4,417 | Receivables: | | | | | | | Oil and natural gas sales | | | 92,693 | | | 54,919 | Joint interest, net | | | 14,221 | | | 9,745 | Total receivables | | | 106,914 | | | 64,664 | Prepaid expenses and other assets (Note 1) | | | 103,061 | | | 43,379 | Total current assets | | | 429,867 | | | 358,259 | | | | | | | | Oil and natural gas properties and other, net (Note 1) | | | 731,692 | | | 665,252 | | | | | | | | Restricted deposits for asset retirement obligations | | | 21,958 | | | 16,019 | Deferred income taxes | | | 103,238 | | | 102,505 | Other assets (Note 1) | | | 63,392 | | | 51,172 | Total assets | | $ | 1,350,147 | | $ | 1,193,207 | Liabilities and Shareholders’ Deficit | | | | | | | Current liabilities: | | | | | | | Accounts payable | | $ | 69,195 | | $ | 67,409 | Undistributed oil and natural gas proceeds | | | 33,575 | | | 36,243 | Advances from joint interest partners | | | 6,521 | | | 15,072 | Asset retirement obligations | | | 67,274 | | | 56,419 | Accrued liabilities (Note 1) | | | 209,845 | | | 106,140 | Current portion of long-term debt | | | 39,881 | | | 42,960 | Income tax payable | | | 177 | | | 133 | Total current liabilities | | | 426,468 | | | 324,376 | | | | | | | | Long-term debt, net (Note 2) | | | 680,436 | | | 687,938 | Asset retirement obligations, less current portion | | | 407,682 | | | 368,076 | Other liabilities (Note 1) | | | 80,338 | | | 55,389 | Deferred income taxes | | | 113 | | | 113 | Commitments and contingencies (Note 12) | | | 4,495 | | | 4,495 | Shareholders’ deficit: | | | | | | | Preferred stock, $0.00001 par value; 20,000 shares authorized; NaN issued at March 31, 2022 and December 31, 2021 | | | — | | | — | Common stock, $0.00001 par value; 200,000 shares authorized; 145,881 issued and 143,012 outstanding at March 31, 2022; 145,732 issued and 142,863 outstanding at December 31, 2021 | | | 1 | | | 1 | Additional paid-in capital | | | 553,175 | | | 552,923 | Retained deficit | | | (778,394) | | | (775,937) | Treasury stock, at cost; 2,869 shares at March 31, 2022 and December 31, 2021 | | | (24,167) | | | (24,167) | Total shareholders’ deficit | | | (249,385) | | | (247,180) | Total liabilities and shareholders’ deficit | | $ | 1,350,147 | | $ | 1,193,207 |
| | March 31, | | | December 31, | | | | 2021 | | | 2020 | | Assets | | | | | | | | | Current assets: | | | | | | | | | Cash and cash equivalents | | $ | 53,359 | | | $ | 43,726 | | Receivables: | | | | | | | | | Oil and natural gas sales | | | 49,931 | | | | 38,830 | | Joint interest, net | | | 15,234 | | | | 10,840 | | Total receivables | | | 65,165 | | | | 49,670 | | Prepaid expenses and other assets (Note 1) | | | 15,350 | | | | 13,832 | | Total current assets | | | 133,874 | | | | 107,228 | | | | | | | | | | | Oil and natural gas properties and other, net – at cost: (Note 1) | | | 668,969 | | | | 686,878 | | | | | | | | | | | Restricted deposits for asset retirement obligations | | | 29,699 | | | | 29,675 | | Deferred income taxes | | | 94,535 | | | | 94,331 | | Other assets (Note 1) | | | 22,613 | | | | 22,470 | | Total assets | | $ | 949,690 | | | $ | 940,582 | | Liabilities and Shareholders’ Deficit | | | | | | | | | Current liabilities: | | | | | | | | | Accounts payable | | $ | 43,714 | | | $ | 48,612 | | Undistributed oil and natural gas proceeds | | | 25,338 | | | | 19,167 | | Asset retirement obligations | | | 26,402 | | | | 17,188 | | Accrued liabilities (Note 1) | | | 64,420 | | | | 29,880 | | Income tax payable | | | 153 | | | | 153 | | Total current liabilities | | | 160,027 | | | | 115,000 | | Long-term debt: (Note 2) | | | | | | | | | Principal | | | 600,460 | | | | 632,460 | | Unamortized debt issuance costs | | | (6,622 | ) | | | (7,174 | ) | Long-term debt, net | | | 593,838 | | | | 625,286 | | | | | | | | | | | Asset retirement obligations, less current portion | | | 372,495 | | | | 375,516 | | Other liabilities (Note 1) | | | 31,780 | | | | 32,938 | | Deferred income taxes | | | 128 | | | | 128 | | Commitments and contingencies (Note 10) | | | — | | | | — | | Shareholders’ deficit: | | | | | | | | | Preferred stock, $0.00001 par value; 20,000 shares authorized; 0 issued at March 31, 2021 and December 31, 2020 | | | 0 | | | | 0 | | Common stock, $0.00001 par value; 200,000 shares authorized; 145,174 issued and 142,305 outstanding at March 31, 2021 and at December 31, 2020 | | | 1 | | | | 1 | | Additional paid-in capital | | | 550,793 | | | | 550,339 | | Retained deficit | | | (735,205 | ) | | | (734,459 | ) | Treasury stock, at cost; 2,869 shares at March 31, 2021 and December 31, 2020 | | | (24,167 | ) | | | (24,167 | ) | Total shareholders’ deficit | | | (208,578 | ) | | | (208,286 | ) | Total liabilities and shareholders’ deficit | | $ | 949,690 | | | $ | 940,582 | |
See Notes to Condensed Consolidated Financial StatementsStatements.
W&T OFFSHORE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) | | | | | | | | | Three Months Ended March 31, | | | 2022 | | 2021 | Revenues: | | | | | | | Oil | | $ | 122,702 | | $ | 78,140 | NGLs | | | 13,820 | | | 9,359 | Natural gas | | | 51,366 | | | 36,209 | Other | | | 3,116 | | | 1,939 | Total revenues | | | 191,004 | | | 125,647 | Operating expenses: | | | | | | | Lease operating expenses | | | 43,411 | | | 42,357 | Gathering, transportation and production taxes | | | 5,267 | | | 6,315 | Depreciation, depletion, and amortization | | | 24,675 | | | 20,769 | Asset retirement obligations accretion | | | 6,236 | | | 5,868 | General and administrative expenses | | | 13,776 | | | 10,712 | Total operating expenses | | | 93,365 | | | 86,021 | Operating income | | | 97,639 | | | 39,626 | | | | | | | | Interest expense, net | | | 19,883 | | | 15,034 | Derivative loss | | | 79,997 | | | 24,578 | Other expense, net | | | 905 | | | 963 | Loss before income taxes | | | (3,146) | | | (949) | Income tax benefit | | | (689) | | | (203) | Net loss | | $ | (2,457) | | $ | (746) | | | | | | | | Net loss per common share: | | | | | | | Basic | | $ | (0.02) | | $ | (0.01) | Diluted | | | (0.02) | | | (0.01) | | | | | | | | Weighted average common shares outstanding | | | | | | | Basic | | | 142,942 | | | 142,151 | Diluted | | | 142,942 | | | 142,151 |
| | Three Months Ended March 31, | | | | 2021 | | | 2020 | | Revenues: | | | | | | | | | Oil | | $ | 78,140 | | | $ | 84,650 | | NGLs | | | 9,359 | | | | 6,452 | | Natural gas | | | 36,209 | | | | 29,300 | | Other | | | 1,939 | | | | 3,726 | | Total revenues | | | 125,647 | | | | 124,128 | | Operating costs and expenses: | | | | | | | | | Lease operating expenses | | | 42,357 | | | | 54,775 | | Production taxes | | | 1,996 | | | | 916 | | Gathering and transportation | | | 4,319 | | | | 5,449 | | Depreciation, depletion, amortization and accretion | | | 26,637 | | | | 39,126 | | General and administrative expenses | | | 10,712 | | | | 13,963 | | Derivative loss (gain) | | | 24,578 | | | | (61,912 | ) | Total costs and expenses | | | 110,599 | | | | 52,317 | | Operating income | | | 15,048 | | | | 71,811 | | Interest expense, net | | | 15,034 | | | | 17,110 | | Gain on debt transactions | | | 0 | | | | (18,501 | ) | Other expense, net | | | 963 | | | | 723 | | (Loss) income before income tax (benefit) expense | | | (949 | ) | | | 72,479 | | Income tax (benefit) expense | | | (203 | ) | | | 6,499 | | Net (loss) income | | $ | (746 | ) | | $ | 65,980 | | Basic and diluted (loss) earnings per common share | | $ | (0.01 | ) | | $ | 0.46 | |
See Notes to Condensed Consolidated Financial Statements.
W&T OFFSHORE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT (In thousands) (Unaudited)
| | Common Stock Outstanding | | | Additional Paid-In | | | Retained | | | Treasury Stock | | | Total Shareholders’ | | | | Shares | | | Value | | | Capital | | | Deficit | | | Shares | | | Value | | | Deficit | | Balances at December 31, 2019 | | | 141,669 | | | $ | 1 | | | $ | 547,050 | | | $ | (772,249 | ) | | | 2,869 | | | $ | (24,167 | ) | | $ | (249,365 | ) | Share-based compensation | | | — | | | | 0 | | | | 1,048 | | | | 0 | | | | — | | | | 0 | | | | 1,048 | | Net income | | | — | | | | 0 | | | | 0 | | | | 65,980 | | | | — | | | | 0 | | | | 65,980 | | Balances at March 31, 2020 | | | 141,669 | | | $ | 1 | | | $ | 548,098 | | | $ | (706,269 | ) | | | 2,869 | | | $ | (24,167 | ) | | $ | (182,337 | ) |
| | Common Stock Outstanding | | | Additional Paid-In | | | Retained | | | Treasury Stock | | | Total 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 | | | — | | | | 0 | | | | 454 | | | | 0 | | | | — | | | | 0 | | | | 454 | | Stock Issued | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | Net loss | | | — | | | | 0 | | | | 0 | | | | (746 | ) | | | — | | | | 0 | | | | (746 | ) | Balances at March 31, 2021 | | | 142,305 | | | $ | 1 | | | $ | 550,793 | | | $ | (735,205 | ) | | | 2,869 | | | $ | (24,167 | ) | | $ | (208,578 | ) |
See Notes to Condensed Consolidated Financial Statements
W&T OFFSHORE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | 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 | | 0 | | | 0 | | | 520 | | | 0 | | 0 | | | 0 | | | 520 | Stock Issued | | 149 | | | 0 | | | 0 | | | 0 | | 0 | | | 0 | | | 0 | RSUs surrendered for payroll taxes | | — | | | — | | | (268) | | | — | | — | | | — | | | (268) | Net loss | | — | | | — | | | — | | | (2,457) | | — | | | — | | | (2,457) | Balances at March 31, 2022 | | 143,012 | | $ | 1 | | $ | 553,175 | | $ | (778,394) | | 2,869 | | $ | (24,167) | | $ | (249,385) |
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | 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 | | 0 | | | | | | 454 | | | 0 | | 0 | | | 0 | | | 454 | Net loss | | 0 | | | 0 | | | 0 | | | (746) | | 0 | | | 0 | | | (746) | Balances at March 31, 2021 | | 142,305 | | $ | 1 | | $ | 550,793 | | $ | (735,205) | | 2,869 | | $ | (24,167) | | $ | (208,578) |
(Unaudited)
| | Three Months Ended March 31, | | | | 2021 | | | 2020 | | Operating activities: | | | | | | | | | Net (loss) income | | $ | (746 | ) | | $ | 65,980 | | Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | | | | | Depreciation, depletion, amortization and accretion | | | 26,637 | | | | 39,126 | | Amortization of debt items and other items | | | 2,019 | | | | 1,625 | | Share-based compensation | | | 454 | | | | 1,048 | | Derivative loss (gain) | | | 24,578 | | | | (61,912 | ) | Derivative cash (payments) receipts, net | | | (4,604 | ) | | | 4,404 | | Gain on debt transactions | | | 0 | | | | (18,501 | ) | Deferred income taxes | | | (203 | ) | | | 6,499 | | Changes in operating assets and liabilities: | | | | | | | | | Oil and natural gas receivables | | | (11,101 | ) | | | 21,954 | | Joint interest receivables | | | (4,394 | ) | | | 7,123 | | Prepaid expenses and other assets | | | (7,575 | ) | | | 11,011 | | Asset retirement obligation settlements | | | (962 | ) | | | (249 | ) | Cash advances from JV partners | | | (1,023 | ) | | | 13,006 | | Accounts payable, accrued liabilities and other | | | 21,884 | | | | (6,790 | ) | Net cash provided by operating activities | | | 44,964 | | | | 84,324 | | Investing activities: | | | | | | | | | Investment in oil and natural gas properties and equipment | | | (1,575 | ) | | | (9,542 | ) | Changes in operating assets and liabilities associated with investing activities | | | (1,758 | ) | | | (24,033 | ) | Acquisition of property interests | | | 0 | | | | (2,002 | ) | Purchases of furniture, fixtures and other | | | 2 | | | | (70 | ) | Net cash used in investing activities | | | (3,331 | ) | | | (35,647 | ) | Financing activities: | | | | | | | | | Repayments on credit facility | | | (32,000 | ) | | | (25,000 | ) | Purchase of Senior Second Lien Notes | | | 0 | | | | (8,536 | ) | Net cash used in financing activities | | | (32,000 | ) | | | (33,536 | ) | Increase in cash and cash equivalents | | | 9,633 | | | | 15,141 | | Cash and cash equivalents, beginning of period | | | 43,726 | | | | 32,433 | | Cash and cash equivalents, end of period | | $ | 53,359 | | | $ | 47,574 | |
See Notes to Condensed Consolidated Financial Statements. W&T OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OF CASH FLOWS (In thousands) (Unaudited) | | | | | | | | | Three Months Ended March 31, | | | 2022 | | 2021 | Operating activities: | | | | | | | Net loss | | $ | (2,457) | | $ | (746) | Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | | Depreciation, depletion, amortization and accretion | | | 30,911 | | | 26,637 | Amortization of debt items and other items | | | 2,594 | | | 2,019 | Share-based compensation | | | 520 | | | 454 | Derivative loss | | | 79,997 | | | 24,578 | Derivative cash payments, net | | | (30,515) | | | (4,604) | Deferred income taxes | | | (733) | | | (203) | Changes in operating assets and liabilities: | | | | | | | Oil and natural gas receivables | | | (37,774) | | | (11,101) | Joint interest receivables | | | (4,476) | | | (4,394) | Prepaid expenses and other assets | | | (12,183) | | | (7,575) | Income tax | | | 44 | | | — | Asset retirement obligation settlements | | | (5,492) | | | (962) | Cash advances from JV partners | | | (8,550) | | | (1,023) | Accounts payable, accrued liabilities and other | | | 15,651 | | | 21,884 | Net cash provided by operating activities | | | 27,537 | | | 44,964 | Investing activities: | | | | | | | Investment in oil and natural gas properties and equipment | | | (17,439) | | | (1,575) | Changes in operating assets and liabilities associated with investing activities | | | 2,630 | | | (1,758) | Acquisition of property interests | | | (30,153) | | | 0 | Purchases of furniture, fixtures and other | | | — | | | 2 | Net cash used in investing activities | | | (44,962) | | | (3,331) | Financing activities: | | | | | | | Repayments on credit facility | | | — | | | (32,000) | Repayments on Term Loan | | | (12,630) | | | — | Debt issuance costs | | | (269) | | | — | Net cash used in financing activities | | | (12,899) | | | (32,000) | (Decrease) increase in cash and cash equivalents | | | (30,324) | | | 9,633 | Cash and cash equivalents and restricted cash, beginning of period | | | 250,216 | | | 43,726 | Cash and cash equivalents and restricted cash, end of period | | $ | 219,892 | | $ | 53,359 |
See Notes to Condensed Consolidated Financial Statements.
Operations.NOTE 1 — BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations W&T Offshore, Inc. (with subsidiaries referred to herein as “W&T,” “we,” “us,” “our,”&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. Our interestsInterests in fields, leases, structures and equipment are primarily owned by the Company and its 100% owned subsidiary,subsidiaries, W & T Energy VI, LLC, Aquasition LLC (“A-I, LLC”), and Aquasition II, LLC (“A-II LLC), and through oura proportionately consolidated interest in Monza Energy LLC (“Monza”), as described in more detail in Note 4.6 – Joint Venture Drilling Program. Basis of Presentation Interim Financial Statements.The accompanying unaudited condensed consolidated financial statementsCondensed 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 for10-K (the “2021 Annual Report”). Reclassification – For presentation purposes, as of March 31, 2021, Derivative loss has been reclassified from “Operating income” on the year ended DecemberCondensed Consolidated Statement of Operations in order to conform to the current period presentation. Such reclassification had no effect on our results of operations, financial position or cash flows. For presentation purposes, as of March 31, 2020.2021, 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 our results of operations, financial position or cash flows. Use of Estimates.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.periods and the reported amounts of proved oil and natural gas reserves. Actual results could differ from those estimates. Summary of Significant Accounting Policies Revenue and Accounts ReceivableAccounting Standards Updates effective January 1, 2021 – SimplifyingRevenue from the Accounting for Income Taxes. In December 2019, sale of crude oil, natural gas liquids (“NGLs”) and natural gas is recognized when performance obligations under the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.2019-12,Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and by clarifying and amending existing guidance. ASU 2019-12 is effective for annual and interim financial statement periods beginning after December 15, 2020. Adoptionterms of the amendment did not have a material impact on our financial statements or disclosures.
Revenue Recognition. We recognize revenue fromrespective contracts are satisfied; this generally occurs with the saledelivery 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. PricingRevenue is primarily determined utilizing a particular pricing or market index, plus or minus adjustments reflecting quality or location differentials.
W&T OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Employee Retention Credit. Under the Consolidated Appropriations Act, 2021 passed by the United States Congress and signed by the President on December 27, 2020, provisions of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") were extended and modified making the Company eligible for a refundable employee retention credit subject to meeting certain criteria. The Company recognized a $2.1 million employee retention credit during the three months ended March 31, 2021 which is included as a credit to General and administrative expenses in the Condensed Consolidated Statement of Operations.
Credit Risk and Allowance for Credit Losses. Our revenue has been concentrated inwith certain major oil and gas companies. ForThere have been no significant changes to the Company’s contracts with customers during the three months ended March 31, 2021, and the year ended December 31, 2020, approximately 67% and 2022.62%, respectively, of our revenue was from 3 major oil and gas companies and a substantial majority of our receivables were from sales with major oil and gas companies. We
The Company also havehas receivables related to joint interest arrangements primarily with mid-size oil and gas companies with a substantial majority of the net receivable balance concentrated in less than ten companies. A loss methodology is used to develop the allowance for credit losses on material receivables to estimate the net amount to be collected. The loss methodology uses historical data, current market conditions and forecasts of future economic conditions. Our maximum exposure at any time would be the receivable balance. The receivables, Joint interest and other, net, reportedreceivables on the Condensed Consolidated Balance SheetsSheet are reduced for the allowance for credit losses. Thepresented net of allowance for credit losses was $9.1of $10.9 million and $10.0 million as of March 31, 2022 and December 31, 2021, respectively. Employee Retention Credit – Under the Consolidated Appropriations Act of 2021 passed by the United States Congress and signed by the President on December 27, 2020, the Company recognized a $2.1 million employee retention credit during the three months ended March 31, 2021 which is included as a credit to General and Decemberadministrative expenses in the Condensed Consolidated Statement of Operations. NaN such credit has been recognized during the three months ended March 31, 2020. 2022. Prepaid Expenses and Other Assets. Assets – The amounts recorded are expected to be realized within one year and the major categories are presented in the following table (in thousands): | | | | | | | | | March 31, 2022 | | December 31, 2021 | Derivatives(1) (Note 8) | | $ | 77,658 | | $ | 21,086 | Unamortized insurance/bond premiums | | | 7,291 | | | 5,400 | Prepaid deposits related to royalties | | | 9,189 | | | 8,441 | Prepayment to vendors | | | 4,461 | | | 4,522 | Prepayments to joint interest partners | | | 2,653 | | | 2,808 | Debt issue costs | | | 1,763 | | | 1,065 | Other | | | 46 | | | 57 | Prepaid expenses and other assets | | $ | 103,061 | | $ | 43,379 |
| | March 31, 2021 | | | December 31, 2020 | | Derivatives - current (1) | | $ | 2,701 | | | $ | 2,752 | | Unamortized insurance/bond premiums | | | 5,163 | | | | 4,717 | | Prepaid deposits related to royalties | | | 4,536 | | | | 4,473 | | Prepayment to vendors | | | 1,966 | | | | 1,429 | | Other | | | 984 | | | | 461 | | Prepaid expenses and other assets | | $ | 15,350 | | | $ | 13,832 | |
(1)(1)
| Includes closed contracts which have not yet settled. |
Oil and Natural Gas Properties and Other, Net – At Cost. Oil and natural gas properties and equipment are recorded at cost using the full cost method. There were no amounts excluded from amortization as of the dates presented in the following table (in thousands): | | | | | | | | | March 31, 2022 | | December 31, 2021 | Oil and natural gas properties and equipment | | $ | 8,727,521 | | $ | 8,636,408 | Furniture, fixtures and other | | | 20,845 | | | 20,844 | Total property and equipment | | | 8,748,366 | | | 8,657,252 | Less: Accumulated depreciation, depletion, amortization and impairment | | | 8,016,674 | | | 7,992,000 | Oil and natural gas properties and other, net | | $ | 731,692 | | $ | 665,252 |
| | March 31, 2021 | | | December 31, 2020 | | Oil and natural gas properties and equipment, at cost | | $ | 8,570,371 | | | $ | 8,567,509 | | Furniture, fixtures and other | | | 20,845 | | | | 20,847 | | Total property and equipment | | | 8,591,216 | | | | 8,588,356 | | Less: Accumulated depreciation, depletion, amortization and impairment | | | 7,922,247 | | | | 7,901,478 | | Oil and natural gas properties and other, net | | $ | 668,969 | | | $ | 686,878 | |
W&T OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Other Assets (long-term). – The major categories are presented in the following table (in thousands): | | | | | | | | | March 31, 2022 | | December 31, 2021 | Right-of-Use assets | | $ | 10,604 | | $ | 10,602 | Investment in White Cap, LLC | | | 2,740 | | | 2,533 | Proportional consolidation of Monza (Note 6) | | | (531) | | | 2,511 | Derivatives (1) (Note 8) | | | 49,550 | | | 34,435 | Other | | | 1,029 | | | 1,091 | Total other assets (long-term) | | $ | 63,392 | | $ | 51,172 |
(1) | Includes open contracts and prepaid premiums paid for purchased put and call options. |
| | March 31, 2021 | | | December 31, 2020 | | Right-of-Use assets | | $ | 11,218 | | | $ | 11,509 | | Unamortized debt issuance costs | | | 1,591 | | | | 2,094 | | Investment in White Cap, LLC | | | 2,872 | | | | 2,699 | | Unamortized brokerage fee for Monza | | | 0 | | | | 626 | | Proportional consolidation of Monza's other assets (Note 4) | | | 4,073 | | | | 1,782 | | Derivatives | | | 1,731 | | | | 2,762 | | Other | | | 1,128 | | | | 998 | | Total other assets (long-term) | | $ | 22,613 | | | $ | 22,470 | |
Accrued Liabilities. Liabilities – The major categories are presented in the following table (in thousands): | | March 31, 2021 | | December 31, 2020 | | | | | | | | | | | | | | March 31, 2022 | | December 31, 2021 | Accrued interest | | $ | 25,420 | | | $ | 10,389 | | | $ | 25,405 | | $ | 10,154 | Accrued salaries/payroll taxes/benefits | | 3,902 | | | 4,009 | | | | 3,997 | | | 9,617 | Litigation accruals | | 530 | | | 436 | | | | 500 | | | 646 | Lease liability | | 484 | | | 394 | | | | 1,409 | | | 1,115 | Derivatives | | 32,703 | | | 13,620 | | | Derivatives (1) (Note 8) | | | | 177,298 | | | 81,456 | Other | | | 1,381 | | | | 1,032 | | | | 1,236 | | | 3,152 | Total accrued liabilities | | $ | 64,420 | | | $ | 29,880 | | | $ | 209,845 | | $ | 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): | | | | | | | | | March 31, 2022 | | December 31, 2021 | Dispute related to royalty deductions | | $ | 4,937 | | $ | 5,177 | Derivatives (Note 8) | | | 63,318 | | | 37,989 | Lease liability | | | 10,936 | | | 11,227 | Other | | | 1,147 | | | 996 | Total other liabilities (long-term) | | $ | 80,338 | | $ | 55,389 |
| | March 31, 2021 | | | December 31, 2020 | | Dispute related to royalty deductions | | $ | 5,247 | | | $ | 5,467 | | Derivatives | | | 3,514 | | | | 4,384 | | Lease liability | | | 11,257 | | | | 11,360 | | Black Elk escrow | | | 11,103 | | | | 11,103 | | Other | | | 659 | | | | 624 | | Total other liabilities (long-term) | | $ | 31,780 | | | $ | 32,938 | |
At-the-Market Equity Offering – On March 17, 2022, the Company filed a prospectus supplement related to the issuance and sale of up to $100,000,000 of shares of our common stock under our "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 three months ended March 31, 2022, we did not sell any shares in connection with the ATM Program. W&T OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)NOTE 2
The components of our long-termcomprising the Company’s debt are presented in the following table (in thousands): | | March 31, 2021 | | | December 31, 2020 | | | Credit Agreement borrowings | | $ | 48,000 | | | $ | 80,000 | | | | | | | | | | | | | | | | | March 31, | | December 31, | | | | 2022 | | 2021 | Term Loan: | | | | | | | | Principal | | | $ | 178,229 | | $ | 190,859 | Unamortized debt issuance costs | | | | (6,108) | | | (7,545) | Total Term Loan | | | | 172,121 | | | 183,314 | | | | | | | | | Credit Agreement borrowings: | | | | — | | | — | | | | | | | | | Senior Second Lien Notes: | | | | | | | | | | | | Principal | | 552,460 | | | 552,460 | | | | 552,460 | | | 552,460 | Unamortized debt issuance costs | | | (6,622 | ) | | | (7,174 | ) | | | (4,264) | | | (4,876) | Total Senior Second Lien Notes | | | 545,838 | | | | 545,286 | | | | 548,196 | | | 547,584 | | | | | | | | | | | | Less current portion | | | | (39,881) | | | (42,960) | Total long-term debt, net | | $ | 593,838 | | | $ | 625,286 | | | $ | 680,436 | | $ | 687,938 |
Current Portion of Long-Term Debt As of March 31, 2022, the current portion of long-term debt of $39.9 million represented principal payments due within one year on the Term Loan (defined below). Term Loan (Subsidiary Credit Agreement Agreement) On October 18, 2018, weMay 19, 2021, A-I LLC and A-II LLC (collectively, the “Subsidiary Borrowers”), both Delaware limited liability companies and indirect, wholly-owned subsidiaries of W&T Offshore, Inc., entered into a credit agreement (the “Subsidiary Credit Agreement”) providing for a term loan in an aggregate principal amount equal to $215.0 million (the “Term Loan”). The Term Loan requires quarterly amortization payments commencing September 30, 2021. The Term Loan bears interest at a fixed rate of 7% per annum and will mature on May 19, 2028. The Term Loan is non-recourse to the Company and any subsidiaries other than the 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 – Mobile Bay Transaction. Credit Agreement On November 2, 2021, the Company entered into the Ninth Amendment to the Sixth Amended and Restated Credit Agreement (as amended, the(the “Ninth Amendment”), which establishes a short-term $100.0 million first priority lien secured revolving facility with borrowings limited to a borrowing base of $50.0 million (the “Credit Agreement”) provided by Calculus Lending, LLC (“Calculus”), which matures on October 18, 2022. 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 January 6, 2021, weMarch 8, 2022, the Company entered into a Waiver, Consent to Secondthe Tenth Amendment to Intercreditor Agreement and Fifth Amendment to Sixth Amended and Restated Credit Agreement (the “Fifth“Tenth Amendment”), which amendedextended the Credit Agreement. 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. As a result of the Ninth Amendment and Tenth Amendment and related assignments and agreements, the primary terms and covenants associated with the Credit Agreement as of March 31, 2021, as amended2022, are as follows, with capitalized terms defined under the Credit Agreement: follows: | •·
| The revised borrowing base was $190.0is $50.0 million. |
| · | | | • | LettersThe commitment will expire and final maturity of credit may be issued inany and all outstanding loans is January 3, 2023. Outstanding borrowings will accrue interest at LIBOR plus 6.0% per annum. The commitment fee for the unused portion of available borrowing amounts up to $30.0 million, provided availability under the Credit Agreement exists. | | | | | • | From the period ended June 30, 2020 through the period ended December 31, 2021 (the "Waiver Period"), the Company is not required to comply with the Leverage Ratio covenant. The Leverage Ratio, as defined in the Credit Agreement, is limited to 3.00 to 1.00 for quarters ending March 31, 2022 and thereafter. | | | | | • | During the Waiver Period, the Company will be required to maintain a 2.00 to 1.00 ratio limit of first lien debt3.0% 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 4 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 most recentfiscal 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 EBITDAX forlender, which analysis is designed to determine whether the trailing four quarters. | | | | | • | The Current Ratio, as definedfuture net revenues expected to accrue to the Company’s and its guarantor subsidiaries’ interest (and the interest of certain joint ventures) in the Credit Agreement, must be maintained at greater than 1.00oil and gas properties included in the properties used to 1.00.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. |
●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 connection with the Tenth Amendment, Calculus was paid arrangement and upfront fees of approximately $1.0 million in the aggregate during the three months ended March 31, 2022. Availability under the Credit Agreement is subject to semi-annual redeterminationsredetermination of our borrowing base and the next scheduled redetermination is in the spring of 2021. Additional redeterminations that may be requested at the discretion of either the lenderslender or the Company.Company in accordance with the Credit Agreement. The borrowing base is calculated by our lendersthe lender based on their evaluation of our proved reserves and their own internal criteria. Any redetermination by our lendersthe lender to change ourthe borrowing base will result in a similar change in the availability under the Credit Agreement. The Credit Agreement is collateralizedsecured by a first priority lien on properties constituting at least 90%substantially all of the total proved reservesCompany’s and its guarantor subsidiaries’ assets, excluding those assets of the Company as set forth on reserve reports required to be delivered underSubsidiary Borrowers, which liens were released in the Credit Agreement and certain personal property. Mobile Bay Transaction (as described in Note 5 – Mobile Bay Transaction). As of March 31, 2021 and December 31, 2020,2022, we had $4.4 million of letters of credit issued and0 borrowings outstanding under the Credit Agreement. The annualized interest rate on borrowings outstanding for the three months ended Separately, as of March 31, 2021was 3.1%, which excludes debt issuance costs, commitment fees2022 and other fees.December 31, 2021, the Company had $4.4 million, outstanding in letters of credit which have been cash collateralized. W&T OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
9.75% Senior Second Lien Notes Due 2023 On October 18, 2018, weW&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 9.2% 10.3%, whichwhich includes amortization of debt issuance costs. Interest on the Senior Second Lien Notes is payable in arrears on May 1 and November 1 of each year. During the year ended December 31, 2020, we acquired $72.5 million in principal of our outstanding Senior Second Lien Notes for $23.9 million and recorded a non-cash gain on purchase of debt of $47.5 million, which included a reduction of $1.1 million related to the write-off of unamortized debt issuance costs. No such transactions were completed during the three months ended March 31, 2021.2022. As a result of these purchases, $552.5 million in principal amount of Senior Second Lien Notes remains issued and outstanding as of March 31, 2021 2022 and December 31, 2020. 2021. The Senior Second Lien Notes are secured by a second-prioritysecond-priority lien on all of our assets that are secured under the Credit Agreement.Agreement, which does not include the Mobile Bay Properties and the related Midstream Assets. The Senior Second Lien Notes contain covenants that limit or prohibit our ability and the ability of certain of our subsidiaries to: (i) make investments; (ii) incur additional indebtedness or issue certain types of preferred stock; (iii) create certain liens; (iv) sell assets; (v) enter into agreements that restrict dividends or other payments from the Company’s subsidiaries to the Company; (vi) consolidate, merge or transfer all or substantially all of the assets of the Company; (vii) engage in transactions with affiliates; (viii) pay dividends or make other distributions on capital stock or subordinated indebtedness; and (ix) create subsidiaries that would not be restricted by the covenants of the Indenture. These covenants are subject to exceptions and qualifications set forth in the Indenture. In addition, most of the above described covenants will terminate if both S&P Global Ratings, a division of S&P Global Inc., and Moody’s Investors Service, Inc. assign the Senior Second Lien Notes an investment grade rating and no default exists with respect to the Senior Second Lien Notes. Covenants Covenants
As of March 31, 20212022 and for all prior measurement periods we werepresented, the Company was in compliance with all applicable covenants of the Credit Agreement and the Indenture. Fair Value Measurements For information about fair value measurements of our long-term debt, refer to Note 3.3 – Fair Value Measurements. W&T OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)NOTE 3 — FAIR VALUE MEASUREMENTS
3.
| Fair Value Measurements
|
Derivative Financial Instruments We measureThe Company measures the fair value of our open derivative financial instruments by applying the income approach, using models with inputs that are classified within Level 2 of the valuation hierarchy. The inputs used for the fair value measurement of our open derivative financial instruments are the exercise price, the expiration date, the settlement date, notional quantities, the implied volatility, the discount curve with spreads and published commodity future prices. Our openOpen derivative financial instruments are reported in the Condensed Consolidated Balance Sheets using fair value. See Note 6,8 – Derivative Financial Instruments, for additional information on our derivative financial instruments.
The following table presents the fair value of our open derivative financial instruments (in thousands): | | March 31, 2021 | | | December 31, 2020 | | Assets: | | | | | | | | | Derivatives instruments - open contracts, current | | $ | 2,691 | | | $ | 2,705 | | Derivatives instruments - open contracts, long-term | | | 1,731 | | | | 2,762 | | | | | | | | | | | Liabilities: | | | | | | | | | Derivatives instruments - open contracts, current | | | 29,227 | | | | 13,291 | | Derivatives instruments - open contracts, long-term | | | 3,514 | | | | 4,384 | |
| | | | | | | | | March 31, 2022 | | December 31, 2021 | Assets: | | | | | | | Derivative instruments - open contracts, current | | $ | 73,090 | | $ | 19,215 | Derivative instruments - open contracts, long-term | | | 49,550 | | | 34,435 | | | | | | | | Liabilities: | | | | | | | Derivative instruments - open contracts, current | | | 157,348 | | | 73,190 | Derivative instruments - open contracts, long-term | | | 63,318 | | | 37,989 |
Long-Term Debt
We believe the netThe fair value of our debt under the Credit Agreement approximates fair value because the interest rates are variableTerm Loan was measured using a discounted cash flows model and reflective of current market rates. The fair value of our Senior Second Lien Notes was measured using quoted prices, although the market is not a very activehighly liquid market. The fair value of our long-term debt was classified as Level 2 within the valuation hierarchy. See Note 2Long-Term – Debt for additional information on our long-term debt.
The following table presents the net value and fair value of our long-term debt (in thousands): | | March 31, 2021 | | | December 31, 2020 | | | | | Net Value | | | Fair Value | | | Net Value | | | Fair Value | | | | | | | | | | | | | | | | | | | | March 31, 2022 | | December 31, 2021 | | | | Net Value | | Fair Value | | Net Value | | Fair Value | Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | Credit Agreement | | $ | 48,000 | | | $ | 48,000 | | | $ | 80,000 | | | $ | 80,000 | | | Term Loan | | | $ | 172,121 | | $ | 173,210 | | $ | 183,314 | | $ | 190,579 | Senior Second Lien Notes | | | 545,838 | | | | 490,087 | | | | 545,286 | | | | 393,352 | | | | 548,196 | | | 551,162 | | | 547,584 | | | 527,715 | Total | | | 593,838 | | | 538,087 | | | 625,286 | | | 473,352 | | | | 720,317 | | | 724,372 | | | 730,898 | | | 718,294 |
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 approximately $30.2 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. The Company determined that the assets acquired did not meet the definition of a business; therefore, the transaction was accounted for as an asset acquisition. Acquisitions 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 Sheets 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 are presented in the following table (in thousands): | | | | | | February 1, 2022 | Oil and natural gas properties and other, net | | $ | 50,450 | Restricted deposits for asset retirement obligations | | | 6,196 | Asset retirement obligations | | | (26,493) | Allocated purchase price | | $ | 30,153 |
NOTE 5 — MOBILE BAY TRANSACTION On May 19, 2021, the Company’s wholly-owned special purpose vehicles (the “SPVs”), A-I LLC and A-II LLC or the 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. The SPVs are wholly-owned subsidiaries of the Company; however, the assets of the SPVs will not be available to satisfy the debt or contractual obligations of any non-SPV entities, including debt securities or other contractual obligations of W&T OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)Offshore, Inc., 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 As of March 31, 2022, W&T recorded $33.4 million in Cash and cash equivalents, $275.5 million, in Oil and natural gas properties and other, net, $39.9 million in Current portion of long-term debt, $56.0 million in Asset retirement obligations, and $132.2 million in Long-term debt, net in the Condensed Consolidated Balance Sheetrelated to the consolidation of the Subsidiary Borrowers and the subsidiary that owns the equity of the Subsidiary Borrowers. As of December 31, 2021, W&T recorded $38.9 million in Cash and cash equivalents, $272.7 million, in Oil and natural gas properties and other, net, $43.0 million in Current portion of long-term debt, $54.5 million in Asset retirement obligations, and $140.4 million in Long-term debt, net in the Condensed Consolidated Balance Sheet related to the consolidation of the Subsidiary Borrowers and the subsidiary that owns the equity of the Subsidiary Borrowers. During the three months ended March 31, 2022, W&T recognized $47.5 million in Total revenues, $19.6 million in Operating costs and expenses, $96.2 million in Derivative loss, and $4.8 million in Interest expense, net in the Condensed Consolidated Statement of Operationsrelated to the consolidation of the operations of the Subsidiary Borrowers and the subsidiary that owns the equity of the Subsidiary Borrowers. NaN revenues or expenses were recorded in the three months ended March 31, 2021 related to the consolidation of the Subsidiary Borrowers and the subsidiary that owns the equity of the Subsidiary Borrowers as the transaction was effective subsequent to March 31, 2021. NOTE 6 — JOINT VENTURE DRILLING PROGRAM 4.
| Joint Venture Drilling Program
|
In March 2018, W&T and two2 other initial members formed and initially funded Monza, which jointly participates with us in the exploration, drilling and development of certain drilling projects (the “Joint Venture Drilling Program”) in the Gulf of Mexico. Subsequent to the initial closing, additional investors joined as members of Monza during 2018 and total commitments by all members, including W&T's&T’s commitment to fund its retained interest in Monza projects held outside of Monza, arewas $361.4 million. W&T contributed 88.94% of its working interest in certain identified undeveloped drilling projects to Monza and retained 11.06% of its working interest. The Joint Venture Drilling Program is structured so that we initially receive an aggregate of 30.0% of the revenues less expenses, through both our direct ownership of our retained working interest in the Monza projects and our indirect interest through our interest in Monza, for contributing 20.0% of the estimated total well costs plus associated leases and providing access to available infrastructure at agreed-upon rates. Any exceptions to this structure are approved by the Monza board. The members of Monza are made up of third-partythird-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-partythird-party investors, and its investment is limited to 4.5% of total invested capital within Monza. The entity affiliated with Mr. Krohn has made a capital commitment to Monza of $14.5 million. Monza is an entity separate from any other entity with its own separate creditors who will be entitled, upon its liquidation, to be satisfied out of Monza’s assets prior to any value in Monza becoming available to holders of its equity. The assets of Monza are not available to pay creditors of the Company and its affiliates. Through March 31, 2021, nine2022, 10 wells have been completed. In 2020,one well was drilled to target depth, which we expect to be completed insince the second quarterinception of 2021.the Joint Venture Drilling Program. W&T is the operator for seven8 of the nine10 wells completed through March 31, 2021. 2022. Through March 31, 2021,2022, members of Monza made partner capital contributions,contributions, including our contributions of working interest in the drilling projects, to Monza totaling $302.4 million and received cash distributions totaling $71.5$95.8 million. OurW&T’s net contribution to Monza, reduced by distributions received, as of March 31, 20212022 was $53.0$47.8 million. W&T is obligated to fund certain cost overruns to the extent they occur, subject to certain exceptions, for the Joint Venture Drilling Program wells above budgeted and contingency amounts, Consolidation and Carrying Amounts OurW&T’s interest in Monza is considered to be a variable interest that we account for using proportional consolidation. Through March 31, 2021,2022, there have been no events or changes that would cause a redetermination of the variable interest status. We do W&T does not fully consolidate Monza because we are the Company is not considered the primary beneficiarybeneficiary of Monza.
As of March 31, 2021, in the Condensed Consolidated Balance Sheet, we2022, W&T recorded $8.0$2.1 million, net, in Oil and natural gas properties and other, net, $4.1$(0.5) million in Other assets, $0.2$0.3 million in Asset Retirement Obligations ("ARO")retirement obligations and $1.6$11.0 million, net, increase in working capital in the Condensed Consolidated Balance Sheet in connection with ourthe proportional interest in Monza’s assets and liabilities. As of December 31, 2020, in the Condensed Consolidated Balance Sheet, we2021, W&T recorded $9.9$3.5 million net, in Oil and natural gas properties and other, net, $1.8$2.5 million in Other assets, $0.2$0.3 million in ARO and $1.3$4.6 million, net, increase in working capital in the Condensed Consolidated Balance Sheet in connection with ourthe proportional interest in Monza’s assets and liabilities. Additionally, during the three months ended March 31, 2021 and during the year ended December 31, 2020, we2021, W&T called on Monza to provide cash to fund its portion of certain Joint Venture Drilling Program projects in advance of capital expenditure spending, and the unused balances as of March 31, 20212022 and December 31, 20202021 were $6.3$6.5 million and $7.3$14.8 million, respectively, which are included in the Condensed Consolidated Balance Sheet in Advances from joint interest partners. For the three months ended March 31, 2021, 2022, W&T recorded $6.5 million in Total revenues and $3.3 million in Operating costs and expenses in the Condensed Consolidated Statement of Operations wein connection with the proportional interest in Monza’s operations. For three months ended March 31, 2021, W&T recorded $2.5 million in Total revenuesand, $3.4 million in Operating costs and expensesin theCondensed Consolidated Statement of Operations in connection with ourthe proportional interest in Monza’s operations. For the year ended December 31, 2020, in the Condensed Consolidated Statement of Operations, we recorded $8.4 million in Total revenues and, $12.1 million in Operating costs and expenses in connection with our proportional interest in Monza’s operations.
W&T OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)NOTE 7 — ASSET RETIREMENT OBLIGATIONS
5.
| Asset Retirement Obligations
|
Our AROAROs represent the estimated present value of the amount incurred to plug, abandon and remediate our properties at the end of their productive lives.
A summary of the changes to our ARO is as follows (in thousands): | | | | | | Three Months Ended March 31, | | | 2022 | Asset retirement obligations, beginning of period | | $ | 424,495 | Liabilities settled | | | (5,492) | Accretion of discount | | | 6,236 | Liabilities incurred and assumed through acquisition | | | 26,493 | Revisions of estimated liabilities (1) | | | 23,224 | Asset retirement obligations, end of period | | | 474,956 | Less current portion | | | (67,274) | Long-term | | $ | 407,682 |
Balances, December 31, 2020 | | $ | 392,704 | | Liabilities settled | | | (962 | ) | Accretion of discount | | | 5,868 | | Revisions of estimated liabilities | | | 1,287 | | Balances, March 31, 2021 | | | 398,897 | | Less current portion | | | 26,402 | | Long-term | | $ | 372,495 | |
6.
| Derivative Financial Instruments (1) | Revisions in 2022 were primarily due to moving additional projects to current term and increases in current pricing. |
Our
NOTE 8 — DERIVATIVE FINANCIAL INSTRUMENTS W&T’s market risk exposure relates primarily to commodity prices and, from timeprices. The Company attempts to time, we use various derivative instruments to manage our exposure to thismitigate a portion of its commodity price risk fromand stabilize cash flows associated with sales of our crude oil and natural gas. Allgas production through the use of the present derivative counterparties are also lenders or affiliates of lenders participating in our Credit Agreement. We areoil 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, wethe Company currently anticipateanticipates that each of ourthe derivative counterparties will be able to fulfill their contractual obligations. We are The Company is not required to provide additional collateral to the derivative counterparties and we do does not require collateral from ourthe derivative counterparties. We haveW&T has elected not to designate our commodity derivative contracts as hedging instruments; therefore, all current periodfor 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 losson the Condensed Consolidated Statements of derivative contracts are recognizedOperations in earnings during the periodseach period presented. The cash flows of all of our commodity derivative contracts are included in Net cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows.
We entered into commodity contracts for crude oil and natural gas which related to a portion of our expected future production. The crude oil contracts are based on West Texas Intermediate (“WTI”) crude oil prices and the natural gas contracts are based off the Henry Hub prices, both of which are quoted off the New York Mercantile Exchange (“NYMEX”).
The following table reflects the contracted volumes and weighted average prices under the terms of the Company’s open derivative contracts as of March 31, 2021 are presented in the following tables:2022: Crude Oil: Open Swap Contracts - Priced off WTI (NYMEX) | | Period | | Average Notional Quantity (Bbls/day) (1) | | | Notional Quantity (Bbls) (1) | | | Weighted Strike Price | | Apr 2021 - Dec 2021 | | | 4,000 | | | | 1,100,000 | | | $ | 42.06 | | Jan 2022 - Feb 2022 | | | 3,000 | | | | 177,000 | | | $ | 42.98 | | Mar 2022 - May 2022 | | | 2,044 | | | | 188,006 | | | $ | 42.33 | | Mar 2022 - Sept 2022 | | | 1,615 | | | | 345,638 | | | $ | 54.53 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Average | | | | | | | | | | | | | Instrument | | Daily | | Total | | Weighted | | Weighted | | Weighted | Period | | Type | | Volumes | | Volumes | | Strike Price | | Put Price | | Call Price | | | | | | | | | | | | | | | | | Crude Oil - WTI (NYMEX) | | (Bbls)(1) | | (Bbls)(1) | | | ($/Bbls)(1) | | | ($/Bbls)(1) | | | ($/Bbls)(1) | Apr 2022 - Nov 2022 | | swaps | | 2,410 | | 588,027 | | $ | 52.83 | | $ | — | | $ | — | Apr 2022 - Nov 2022 | | collars | | 2,403 | | 586,377 | | $ | — | | $ | 43.15 | | $ | 60.47 | | | | | | | | | | | | | | | | | Natural Gas - Henry Hub (NYMEX) | | (MMbtu)(2) | | (MMbtu)(2) | | | ($/MMbtu)(2) | | | ($/MMbtu)(2) | | | ($/MMbtu)(2) | Apr 2022 - Dec 2022 | | calls | | 111,519 | | 30,667,734 | | $ | — | | $ | — | | $ | 3.78 | Jan 2023 - Dec 2023 | | calls | | 70,000 | | 25,550,000 | | $ | — | | $ | — | | $ | 3.50 | Jan 2024 - Dec 2024 | | calls | | 65,000 | | 23,790,000 | | $ | — | | $ | — | | $ | 3.50 | Jan 2025 - Mar 2025 | | calls | | 62,000 | | 5,580,000 | | $ | — | | $ | — | | $ | 3.50 | Apr 2022 - Dec 2022 | | collars | | 42,218 | | 11,610,000 | | $ | — | | $ | 1.85 | | $ | 3.02 | Apr 2022 - Nov 2022 | | swaps | | 16,224 | | 3,958,540 | | $ | 2.52 | | $ | — | | $ | — | Apr 2022 - Dec 2022 (3) | | swaps | | 78,545 | | 21,600,000 | | $ | 2.55 | | $ | — | | $ | — | Jan 2023 - Dec 2023 (3) | | swaps | | 72,329 | | 26,400,000 | | $ | 2.48 | | $ | — | | $ | — | Jan 2024 - Dec 2024 (3) | | swaps | | 65,574 | | 24,000,000 | | $ | 2.46 | | $ | — | | $ | — | Jan 2025 - Mar 2025 (3) | | swaps | | 63,333 | | 5,700,000 | | $ | 2.72 | | $ | — | | $ | — | Apr 2025 - Dec 2025 (3) | | puts | | 62,182 | | 17,100,000 | | $ | — | | $ | 2.27 | | $ | — | Jan 2026 - Dec 2026 (3) | | puts | | 55,890 | | 20,400,000 | | $ | — | | $ | 2.35 | | $ | — | Jan 2027 - Dec 2027 (3) | | puts | | 52,603 | | 19,200,000 | | $ | — | | $ | 2.37 | | $ | — | Jan 2028 - Apr 2028 (3) | | puts | | 49,587 | | 6,000,000 | | $ | — | | $ | 2.50 | | $ | — |
W&T OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Crude Oil: Open Collar Contracts - Priced off WTI (NYMEX) | | Period | | Average Notional Quantity (Bbls/day) (1) | | | Notional Quantity (Bbls) (1) | | | Put Option Weighted Strike Price (Bought) | | | Call Option Weighted Strike Price (Sold) | | Apr 2021 - Dec 2021 | | | 200 | | | | 55,000 | | | $ | 40.00 | | | $ | 54.90 | | Apr 2021 - Feb 2022 | | | 2,273 | | | | 759,237 | | | $ | 38.50 | | | $ | 56.65 | | Mar 2022 - May 2022 | | | 2,000 | | | | 184,000 | | | $ | 35.00 | | | $ | 48.50 | | Mar 2022 - Sept 2022 | | | 1,615 | | | | 345,638 | | | $ | 45.00 | | | $ | 62.50 | |
Natural Gas: Open Swap Contracts, Bought, Priced off Henry Hub (NYMEX) | | Period | | Average Notional Quantity (MMBtu/day) (2) | | | Notional Quantity (MMBtu) (2) | | | Strike Price | | Apr 2021 - Dec 2021 | | | 10,000 | | | | 2,750,000 | | | $ | 2.62 | | Jan 2022 | | | 20,000 | | | | 620,000 | | | $ | 2.79 | | Feb 2022 | | | 30,000 | | | | 840,000 | | | $ | 2.79 | | Mar 2022 - May 2022 | | | 10,544 | | | | 970,075 | | | $ | 2.69 | | Mar 2022 - Sept 2022 | | | 10,628 | | | | 2,274,311 | | | $ | 2.44 | |
Natural Gas: Open Call Contracts, Bought, Priced off Henry Hub (NYMEX) | | Period | | Average Notional Quantity (MMBtu/day) (2) | | | Notional Quantity (MMBtu) (2) | | | Strike Price | | Nov 2020 - Dec. 2022 | | | 40,000 | | | | 25,600,000 | | | $ | 3.00 | |
Natural Gas: Open Collar Contracts, Priced off Henry Hub (NYMEX) | | Period | | Average Notional Quantity (MMBtu/day) (2) | | | Notional Quantity (MMBtu) (2) | | | Put Option Weighted Strike Price (Bought) | | | Call Option Weighted Strike Price (Sold) | | Apr 2021 - Dec 2021 | | | 30,000 | | | | 8,250,000 | | | $ | 2.18 | | | $ | 3.00 | | Apr 2021 - Dec. 2022 | | | 40,000 | | | | 25,600,000 | | | $ | 1.83 | | | $ | 3.00 | | Jan 2022 - Feb 2022 | | | 30,000 | | | | 1,770,000 | | | $ | 2.20 | | | $ | 4.50 | | Mar 2022 - May 2022 | | | 10,000 | | | | 920,000 | | | $ | 2.25 | | | $ | 3.40 | |
(2)(2)
| MMBtu =MMbtu – Million British Thermal Units
|
(3) | These contracts were entered into by the Company’s wholly owned subsidiary, A-I LLC, in conjunction with the Mobile Bay Transaction (see Note 5 – Mobile Bay Transaction). |
W&T OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The following amounts were recorded in the Condensed Consolidated Balance Sheets in the categories presented and include the fair value of open contracts, unamortized premiums, and closed contracts which had not yet settled (in thousands): | | March 31, | | December 31, | | | | | 2021 | | | 2020 | | | Prepaid expenses and other assets | | $ | 2,701 | | | $ | 2,752 | | | | | | | | | | | | | | March 31, 2022 | | December 31, 2021 | Prepaid expenses and other current assets | | | $ | 77,658 | | $ | 21,086 | Other assets (long-term) | | 1,731 | | | 2,762 | | | | 49,550 | | | 34,435 | Accrued liabilities | | 32,703 | | | 13,620 | | | | 177,298 | | | 81,456 | Other liabilities (long-term) | | 3,514 | | | 4,384 | | | | 63,318 | | | 37,989 |
The amounts recorded on the Condensed Consolidated Balance Sheets are on a gross basis. If these were recorded on a net settlement basis, it would not have resulted in any material differences in reported amounts. Changes in the fair value and settlements of contracts are recorded on the Condensed Consolidated Statements of Operations as Derivative loss (gain). The impact of our commodity derivative contracts has on the condensed consolidatedCondensed Consolidated Statements of Operations were as follows (in thousands): | | Three Months Ended March 31, | | | | 2021 | | | 2020 | | Realized loss (gain) | | $ | 8,244 | | | $ | (9,392 | ) | Unrealized loss (gain) | | | 16,334 | | | | (52,520 | ) | Derivative loss (gain) | | $ | 24,578 | | | $ | (61,912 | ) |
| | | | | | | | | Three Months Ended March 31, | | | 2022 | | 2021 | Realized loss | | $ | 43,694 | | $ | 8,244 | Unrealized loss | | | 36,303 | | | 16,334 | Derivative loss | | $ | 79,997 | | $ | 24,578 |
Cash receiptspayments on commodity derivative contract settlements, net, are included within Net cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows and were as follows (in thousands): | | Three Months Ended March 31, | | | | 2021 | | | 2020 | | Derivative cash (payments) receipts, net | | $ | (4,604 | ) | | $ | 4,404 | |
| | | | | | | | | Three Months Ended March 31, | | | 2022 | | 2021 | Derivative loss | | $ | 79,997 | | $ | 24,578 | Derivative cash payments, net | | | (30,515) | | | (4,604) |
W&T OFFSHORE, INC.NOTE 9 — SHARE-BASED AWARDS AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)CASH BASED AWARDS
7.
| Share-Based Awards and Cash-Based Awards
|
Awards to Employees. The W&T Offshore, Inc. Amended and Restated Incentive Compensation Plan (as amended from time to time, the “Plan”) was approved by ourthe Company’s shareholders in 2010. There were no RSUs granted during three months ended March 31, 2021 and none were granted in 2020. RSUs are a long-term compensation component, and are Under the Plan, the Company may issue, subject to satisfaction of certain predetermined performance criteria and adjustments at the endapproval of the applicableBoard of Directors, stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards, dividend equivalents, other stock-based awards, performance period based on the results achieved. In addition to share-basedunits or shares, cash awards, the Company may grant to its employees cash-based incentivesubstitute awards under the Plan, which may be used as short-term and long-term compensation componentsor any combination of the awards,foregoing to employees, directors and are subjectconsultants.
Share-Based Awards to satisfaction of certain predetermined performance criteria.Employees As of March 31, 2021, there were 10,347,591 shares of common stock available for issuance in satisfaction of awards under the Plan. The shares available for issuance are reduced on a one-for-one basis when RSUs are settled in shares of common stock, which shares of common stock are issued net of withholding tax through the withholding of shares. The Company has the option following vesting to settle RSUs in stock or cash, or a combination of stock and cash. The Company expects to settle RSUs that vest in the future using shares of common stock.
Restricted Stock Units (“RSUs”) – RSUs currently outstanding relate to the 20192021 grants. NaN RSUs were granted during the three months ended March 31, 2022. Performance Share Units (“PSUs”) – The 2019PSUs are RSU awards granted subject to performance criteria. PSUs currently outstanding relate to 2021 grants. NaN PSUs were granted during the three months ended March 31, 2022. The 2021 grants were subject to predetermined performance criteria applied against the applicable performance period. All the RSUs currently outstanding areperiod, which ended on December 31, 2021. The PSUs granted during 2021 continue to be subject to employment-basedservice-based criteria andwith vesting generally occurs in December of the second year after the grant. Subject to the satisfaction of the service conditions, the outstanding RSUs issued to the eligible employees as of March 31, 2021, are eligible to vest in 2021.occurring on October 1, 2023. We recognize compensation cost for share-based payments to employees over the period during which the recipient is required to provide service in exchange for the award. Compensation cost is based on the fair value of the equity instrument on the date of grant. The fair values for the RSUs granted were determined using the Company’s closing price on the grant date. We also estimate forfeitures, resulting in the recognition of compensation cost only for those awards that are expected to actually vest.
All RSUs awarded are subject to forfeiture until vested and cannot be sold, transferred or otherwise disposed of during the restricted period.
A summary of activity related to RSUs during the three months ended March 31, 2021 is as follows:
| | Restricted Stock Units | | | | | | | | Weighted Average | | | | | | | | Grant Date Fair | | | | Units | | | Value Per Unit | | Nonvested, December 31, 2020 | | | 763,688 | | | $ | 4.51 | | Forfeited | | | (19,880 | ) | | | 4.51 | | Nonvested, March 31, 2021 | | | 743,808 | | | | 4.51 | |
W&T OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Share-Based Awards to Non-Employee Directors. Under the W&T Offshore, Inc. 2004 Directors Compensation Plan (as amended from time to time, the “Director Compensation Plan”), shares of restricted stock (“Restricted Shares”) have been granted to the Company’s non-employee directors. Grants to non-employee directors were made during 2020, and 0 grants were made during the three months ended March 31, 2021. During the second quarter of 2020, our shareholders approved increasing the shares available under the Director Compensation Plan by 500,000 shares. As of March 31, 2021, there were 473,244 shares of common stock available for issuance in satisfaction of awards under the Director Compensation Plan. The shares available are reduced on a one-to-one basis when Restricted Shares are granted. We recognize compensation cost for share-based payments to non-employee directors over the period during which the recipient is required to provide service in exchange for the award. Compensation cost is based on the fair value of the equity instrument on the date of grant. The fair values for the Restricted Shares granted were determined using the Company’s closing price on the grant date. NaN forfeitures were estimated for the non-employee directors’ awards.
The Restricted Shares are subject to service conditions and vesting occurs at the end of specified service periods unless otherwise approved by the Board of Directors. Restricted Shares cannot be sold, transferred or disposed of during the restricted period. The holders of Restricted Shares generally have the same rights as a shareholder of the Company with respect to such Restricted Shares, including the right to vote and receive dividends or other distributions paid with respect to the Restricted Shares.
There was no0 activity related to Restricted Shares during the three months ended March 31, 2021. For the outstanding2022. Restricted Shares issuedcurrently outstanding relate to the non-employee directors as2021 grants.
| | Restricted Shares | | 2021 | | 138,676 | | 2022 | | 15,452 | | Total | | 154,128 | |
Share-Based Compensation Expense Share-Based Compensation. Share-based compensation expense is recorded in the line General and administrative expenses in the Condensed Consolidated Statements of Operations. NaN share-based awards have been granted to date in 2021 under the Plan, and therefore, share-based compensation expense recorded during the three months ended March 31, 2021 related to prior periods' grants. The tax benefit related to compensation expense recognized under share-based payment arrangements was not meaningful and was minimal due to ourthe Company’s income tax situation.position.
The Company did not grant any share-based awards during the three months ended March 31, 2022. As such, all share-bases incentive compensation expense recognized during the three months ended March 31, 2022 relates to awards granted in prior periods. A summary of incentive compensation expense under share-based payment arrangements is as follows (in thousands): | | Three Months Ended March 31, | | | | | 2021 | | | 2020 | | | Share-based compensation expense from: | | | | | | | | | | | | | | Three Months Ended March 31, | | | | 2022 | | 2021 | Restricted stock units | | $ | 338 | | | $ | 978 | | | $ | 251 | | $ | 338 | Performance share units | | | | 205 | | | — | Restricted Shares | | | 116 | | | | 70 | | | | 64 | | | 116 | Total | | $ | 454 | | | $ | 1,048 | | | $ | 520 | | $ | 454 |
W&T OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Unrecognized Share-Based Compensation.As of March 31, 2021, unrecognized share-based compensation expense related to our awards of RSUs and Restricted Shares was $0.9 million and $0.1 million, respectively. Unrecognized share-based compensation expense will be recognized through November 2021 for RSUs and April 2022 for Restricted Shares.
Cash-Based Incentive Compensation.Compensation In addition to share-based compensation, both short-term and long-term cash-based incentive awards were granted under the Plan to substantially all eligible employees in 2019.2021. The short-term cash-based incentive awards granted in 2021 were paid in March 2022. No cash-based incentive awards were granted in 2020,during the three months ended March 31, 2022. Share-Based Awards and therefore, 0Cash-Based Awards Compensation Expense The Company did not grant any share-based awards or cash-based awards during the three months ended March 31, 2022. As such, all incentive compensation expense for 2020 was recorded. The short-term, cash-based incentiverecognized during the three months ended March 31, 2022 relates to awards which are generally a short-term component of the Plan, are typically performance-based awards consisting of one or more business criteria or individual performance criteria and a targeted level or levels of performance with respect to each of such criteria. In addition, the 2019 cash-based incentive awards included an additional financial condition requiring Adjusted EBITDA less reported Interest Expense Incurred (terms as definedgranted in the awards) for any fiscal quarter plus the three preceding quarters to exceed defined levels measured over defined time periods for each cash-based incentive award. On February 15, 2021, the Company received approval from the Compensation Committee of the Board of Directors for the payment of a discretionary cash bonus up to the amount of $7.6 million, subject to employment-based criteria. The Compensation Committee has not yet made any other decisions regarding the potential awarding of incentive compensation under the Plan in 2021. Expense is recognized over the service period once the business criteria, individual performance criteria and financial condition are met. | • | The 2021 discretionary bonus award is payable in equal installments on March 15, 2021 and April 15, 2021, to substantially all employees subject to employment on those dates. Incentive compensation expense of $3.5 million was recognized during the three months ended March 31, 2021 related to the awards. | | | | | • | For the 2019 cash-based awards, a portion of the business criteria and individual performance criteria were achieved. The financial condition requirement of Adjusted EBITDA less reported Interest Expense Incurred exceeding $200 million over four consecutive quarters was achieved; therefore, incentive compensation expense was recognized over the January 2019 to February 2020 period (the service period of the award). Payments were made in March 2020 and are subject to all the terms of the 2019 Annual Incentive Award Agreement.
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prior periods. A summary of compensation expense related to share-based awards and cash-based awards is as follows (in thousands): | | Three Months Ended March 31, | | | | 2021 | | | 2020 | | Share-based compensation included in: | | | | | | | | | General and administrative expenses | | $ | 454 | | | $ | 1,048 | | Cash-based incentive compensation included in: | | | | | | | | | Lease operating expense (1) | | | 839 | | | | 849 | | General and administrative expenses (1) | | | 2,682 | | | | 3,631 | | Total charged to operating income | | $ | 3,975 | | | $ | 5,528 | |
| | | | | | | | | Three Months Ended March 31, | | | 2022 | | 2021 | Share-based compensation included in: | | | | | | | General and administrative expenses | | $ | 520 | | $ | 454 | Cash-based incentive compensation included in: | | | | | | | Lease operating expense (1) | | | 255 | | | 839 | General and administrative expenses (1) | | | 1,957 | | | 2,682 | Total charged to operating (loss) income | | $ | 2,732 | | $ | 3,975 |
(1)
| (1) | Includes adjustments of accruals to actual payments. |
W&T OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)NOTE 10 — INCOME TAXES
Tax (Benefit) ExpenseBenefit and Tax Rate.Rate – Income tax (benefit) expensebenefit for the three months ended March 31, 2022 and 2021 was $0.7 and 2020 was $(0.2) million and $6.5$0.2 million, respectively. For the three months ended March 31, 2022 and 2021, our effective tax rate differed from the statutory Federal tax rate primarily by the impact of state income taxes. For the three months ended March 31, 2020, our effective tax rate primarily differed from the statutory Federal tax rate for adjustments recorded related to the enactment of the CARES Act on March 27, 2020. The CARES Act modified certain income tax statutes, including changes related to the business interest expense limitation under Code Section 163(j). Our effective tax rate was 21.9% and 21.4% for the three months ended March 31, 2022 and three months ended March 31, 2021, and 9.0% for the three months ended March 31, 2020. respectively. Valuation Allowance.Allowance – Deferred tax assets are recorded related to net operating losses and temporary differences between the book and tax basis of assets and liabilities expected to produce tax deductions in future periods. The realization of these assets depends on recognition of sufficient future taxable income in specific tax jurisdictions in which those temporary differences or net operating losses are deductible. In assessing the need for a valuation allowance on our deferred tax assets, we consider whether it is more likely than not that some portion or all of them will not be realized. As of March 31, 2021 2022 and December 31, 2020, 2021, our valuation allowance was $22.0$25.8 million and $22.4$24.4 million, respectively, and relates primarily to state net operating losses and the disallowed interest expense limitation carryover. Income Taxes Receivable, Refunds and Payments.Payments – As of March 31, 2021 2022 and December 31, 2020, 2021, we did not have any outstanding current income taxes receivable.As of During the three months ended March 31, 2020, we had current income taxes receivable of $1.9 million, which was received during the quarter ended June 30,2020. The refund related primarily to a net operating loss carryback claim for 2017 that was carried back to prior years. During the three months ended 2022 and March 31, 2021, and 2020,we did not receive any income tax refunds or make any income tax payments of significance. The tax years 20172018 through 20202021 remain open to examination by the tax jurisdictions to which we are subject. 9.
NOTE 11 — EARNINGS PER SHARE | Earnings Per Share
|
The following table presents the calculation of basic and diluted (loss) earnings per common share (in thousands, except per share amounts): | | Three Months Ended March 31, | | | | 2021 | | | 2020 | | Net (loss) income | | $ | (746 | ) | | $ | 65,980 | | Less portion allocated to nonvested shares | | | 0 | | | | 791 | | Net (loss) income allocated to common shares | | $ | (746 | ) | | $ | 65,189 | | Weighted average common shares outstanding | | | 142,151 | | | | 141,546 | | | | | | | | | | | Basic and diluted (loss) earnings per common share | | $ | (0.01 | ) | | $ | 0.46 | | | | | | | | | | | Shares excluded due to being anti-dilutive (weighted-average) | | | 0 | | | | 0 | |
| | | | | | | | | Three Months Ended March 31, | | | 2022 | | 2021 | Net loss | | $ | (2,457) | | $ | (746) | Less portion allocated to nonvested shares | | | 0 | | | — | Net loss allocated to common shares | | $ | (2,457) | | $ | (746) | | | | | | | | Weighted average common shares outstanding - basic | | | 142,942 | | | 142,151 | Dilutive effect of securities | | | 0 | | | — | Weighted average common shares outstanding - diluted | | | 142,942 | | | 142,151 | Earnings per common share: | | | | | | | Basic | | $ | (0.02) | | $ | (0.01) | Diluted | | | (0.02) | | | (0.01) | | | | | | | | Shares excluded due to being anti-dilutive (weighted-average) | | | 717 | | | 919 |
W&T OFFSHORE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)NOTE 12 — CONTINGENCIES
Appeal with the Office of Natural Resources Revenue (“ONRR”). – In 2009, we recognized allowable reductions of cash payments for royalties owed to the ONRR for transportation of their deepwater production through our subsea pipeline systems. In 2010, the ONRR audited our calculations and support related to this usage fee, and in 2010, we were notified that the ONRR had disallowed approximately $4.7 million of the reductions taken. We recorded a reduction to other revenue in 2010 to reflect this disallowance with the offset to a liability reserve; however, we disagree with the position taken by the ONRR. We filed an appeal with the ONRR, which ultimately led to our posting a bond in the amount of $7.2 million and cash collateral of $6.9 million with the surety in order to appeal the IBLAInterior Board of Land Appeals decision, of which the cash collateral held by the surety was subsequently returned during the first quarter of 2020.We have continued to pursue our legal rights and, at present, the case is in front of the U.S. District Court for the Eastern District of Louisiana where both parties have filed cross-motions for summary judgment and opposition briefs. W&T has filed a Reply in support of its Motion for Summary Judgment and the government has in turn filed its Reply brief. With briefing now completed, we are waiting for the district court’s ruling on the merits. In compliance with the ONRR’s request for W&T to periodically increase the surety posted in the appeal to cover pre-and post judgementpre- and post-judgement interest, the penal sum of the bond posted is currently $8.2 million. Royalties – “Unbundling” Initiative. In 2016, the ONRR publicly announced an “unbundling” initiative to revise the methodology employed by producers in determining the appropriate allowances for transportation and processing costs that are permitted to be deducted in determining royalties under Federal oil and gas leases. The ONRR’s initiative requires re-computing allowable transportation and processing costs using revised guidance from the ONRR going back 84 months for every gas processing plant that processed our gas. In the second quarterTable of 2015, pursuant to the initiative, we received requests from the ONRR for additional data regarding our transportation and processing allowances on natural gas production related to a specific processing plant. We also received a preliminary determination notice from the ONRR asserting that our allocation of certain processing costs and plant fuel use at another processing plant was not allowed as deductions in the determination of royalties owed under Federal oil and gas leases. We have submitted revised calculations covering certain plants and time periods to the ONRR. As of the filing date of this Form 10-Q, we have not received a response from the ONRR related to our submissions. These open ONRR unbundling reviews, and any further similar reviews, could ultimately result in an order for payment of additional royalties under our Federal oil and gas leases for current and prior periods. While the amounts paid for the three months ended March 31, 2021 and 2020 were immaterial, we are not able to determine the range of any additional royalties or, if and when assessed, whether such amounts would be material.Contents
Notices of Proposed Civil Penalty Assessment.Assessments – In January 2021, we executed a Settlement Agreement with the Bureau of Safety and Environmental Enforcement (“BSEE”)BSEE which resolved nine9 pending civil penalties issued by BSEE. The civil penalties pertained to Incidents of Noncompliance (“INCs”)Non-Compliance issued by BSEE alleging regulatory non-compliance at separate offshore locations on various dates between July 2012 and January 2018, with the proposed civil penalty amounts totaling $7.7 million. Under the Settlement Agreement, W&T will pay a total of $720,000 in three annual installments. The first installment was and second installments were paid in March 2021 and March 2022, respectively.In addition, W&T committed to implement a Safety Improvement Plan with various deliverables due over a period ending in 2022, which we are on schedule to complete before the deadline. Retained Liabilities Related to Divested Property Interests – We may be subject to retained liabilities with respect to certain divested property interests by operation of law. For example, recent historical declines in commodity prices created an environment where there is an increased risk that owners and/or operators of interests purchased from us may no longer be able to satisfy plugging or abandonment obligations that attach to those interests. In that event, due to operation of law, we may be required to assume plugging or abandonment obligations for those interests. During 2021, as a result of the declaration of bankruptcy by a third party that is the indirect successor in title to certain offshore interests that we previously divested, we recorded a loss contingency accrual of $4.5 million related to the anticipated cost to decommission certain wells, pipelines, and production facilities for which we may receive decommissioning orders from BSEE. We no longer own these assets nor are they related to our current operations. We intend to seek contribution from other parties that owned an interest in the facilities. We did not recognize any additional liabilities related to divested property interests during the three months ended March 31, 2021, we did not pay any civil penalties to BSEE related to newly issued INCs. 2022. Other Claims. Claims – We are a party to various pending or threatened claims and complaints seeking damages or other remedies concerning our commercial operations and other matters in the ordinary course of our business. In addition, claims or contingencies may arise related to matters occurring prior to our acquisition of properties or related to matters occurring subsequent to our sale of properties. In certain cases, we have indemnified the sellers of properties we have acquired, and in other cases, we have indemnified the buyers of properties we have sold. We are also subject to federal and state administrative proceedings conducted in the ordinary course of business including matters related to alleged royalty underpayments on certain federal-owned properties. Although we can give no assurance about the outcome of pending legal and federal or state administrative proceedings and the effect such an outcome may have on us, we believe that any ultimate liability resulting from the outcome of such proceedings, to the extent not otherwise provided for or covered by insurance, will not have a material adverse effect on our consolidated financial position, results of operations or liquidity. NOTE 13 — SUBSEQUENT EVENTS On April 1, 2022, the Company entered into a purchase and sale agreement with an undisclosed 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 during the three months ended March 31, 2022 from ANKOR. The transaction had an effective date and closing date of April 1, 2022.Cash consideration of approximately $17.5 million was paid to the seller.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements
The following discussion and analysis should be read in conjunction with our accompanying unaudited condensed consolidated financial statementsCondensed Consolidated Financial Statements and the notes to those financial statements included in Part I, Item 1 of this Quarterly Report, on Form 10-Q. as well as our audited Consolidated Financial Statements and the notes thereto in our 2021 Annual Report and the Related Management’s Discussion and Analysis of Financial Condition and the Results of Operations included in Part II, Item 7 of our 2021 Annual Report. Forward-Looking Statements The following discussion contains forward-looking statementsinformation in this report includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact included in this report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “forecast,” “may,” “objective,” “plan,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements involveare based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. These forward-looking statements are subject risks, uncertainties and assumptions.assumptions, most of which are difficult to predict and many of which are beyond our control. If the risks or uncertainties materialize or the assumptions prove incorrect, our results may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, such as those statements that address activities, events or developments that we expect, believe or anticipate will or may occur in the future. These statements are based on certain assumptions and analyses made by us in light of our experience and perception of historical trends, current conditions, estimates, expected future developments and other factors we believe are appropriate in the circumstances. Known material risks that may affect our financial condition and results of operations are discussed in Part I, Item 1A, Risk Factors, and market risks are discussed in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of our 2021 Annual Report, on Form 10-K for the year ended December 31, 2020 and this Quarterly Report on Form 10-Q, Part II, Item 1A, Risk Factors, and may be discussed or updated from time to time in subsequent reports filed with the Securities and Exchange Commission. SEC. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We assume no obligation, nor doShould one or more of the risks or uncertainties described herein occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. All forward-looking statements, expressed or implied, included in this report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we intendor persons acting on our behalf may issue. Except as otherwise required by applicable law, we disclaim any duty to update theseany forward-looking statements. Unlessstatements, all of which are expressly qualified by the context requires otherwise, referencesstatements in this section, to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q to “W&T,” “we,” “us,” “our” and the “Company” refer to W&T Offshore, Inc. and its consolidated subsidiaries. Report. Overview We are an independent oil and natural gas producer, active in the exploration, development and acquisition of oil and natural gas properties in the Gulf of Mexico. As of March 2021,31, 2022, we hold working interests in 4247 offshore fields in federal and state waters (40(44 fields producing and 23 fields capable of producing, with 34which include 39 fields in federal waters and 8 in state waters). We currently have under lease approximately 709,000655,000 gross acres (503,000(453,200 net acres) spanning across the outer continental shelf ("OCS"(“OCS”) off the coasts of Louisiana, Texas, Mississippi and Alabama, with approximately 500,0008,000 gross acres in Alabama State waters, 466,000 gross acres on the conventional shelf and approximately 209,000181,000 gross acres in the deepwater. A majority of our daily production is derived from wells we operate. Our interestinterests in fields, leases, structures and equipment are primarily owned by W&T Offshore, Inc. and our wholly-owned subsidiary,subsidiaries, Aquasition LLC, Aquasition II LLC, W & T Energy VI, LLC, a Delaware limited liability companycompanies, and through our proportionately consolidated interest in Monza, as described in more detail in Financial Statements and Supplementary Data – Note 46 – Joint Venture Drilling Program under Part I, Item 1 in this Form 10-Q.Quarterly Report. Recent Events Reduced economic activityWhile the current outlook for commodity prices is favorable and our operations are no longer significantly impacted by confinement restrictions related to COVID-19, the potential risk of disruption to our operations continues as the emergence of a new variant of COVID-19 could adversely impact our operations, or commodity prices could significantly decline from current levels. The ongoing COVID-19 pandemic has caused changes in energy demandoutbreak continues to evolve and, supply overduring the past year and will continue to affect these patterns in the future. As COVID-19 vaccines have been more widely distributed, global economic activity is improving and commodity prices are currently at pre-pandemic levels. However, the energy markets remain subject to heightened levels of uncertainty as responses to COVID-19 and COVID-19 variants continue to evolve. We will continue to monitor the effects of the pandemic on the energy markets in the future.
Under the Consolidated Appropriations Act, 2021 passed by the United States Congress and signed by the President on December 27, 2020, provisions of the CARES Act were extended and modified making the Company eligible for a refundable employee retention credit subject to meeting certain criteria. See Financial Statements – Note 1 – Basis of Presentation under Part 1, Item 1, and Liquidity and Capital Resources in this Item 2 of this Form 10-Q for additional information.
During the firstfourth quarter of 2021, we completeda new variant emerged, the consolidationOmicron variant. New variants of our twothe virus continue to emerge and it is difficult to assess if such variants will cause meaningful disruptions in economic activity across the world and if there will be any significant impacts in demand for energy because of the ongoing pandemic.
The recent invasion of parts of Ukraine by Russia and the impact of world sanctions against Russia and the potential for retaliatory acts from Russia are world events that can result in potential commodities and securities market disruptions that could affect world oil and natural gas processing plants in Alabama. We estimate future cost savingsmarkets and the volatility of approximately $5 million per year relatedoil and gas commodity prices and thus impact the Company’s business, stock trading price and availability of capital. Additionally, while Organization of Petroleum Exporting Countries (“OPEC”) and other major oil producing countries (“OPEC Plus”) remained committed to steady and predictable production increases throughout 2022, it is difficult to determine whether it will change its production output policy or whether its members will remain committed to the plant consolidation efforts.production quotas set by the organization as a result of these events. Known Trends and Uncertainties Volatility in Oil, NGL and Natural Gas Production and Commodity Pricing OurPrices – Our financial condition, cashcash flow and results of operations are significantly affected by the volume of our crude oil, NGLs and natural gas production and the prices that we receive for such production. Our production volumesrealized sales prices received for the three months ended March 31, 2021were comprised of 38.6% crude oil and condensate, 11.0% NGLs and 50.4% natural gas, determined on a barrel of oil equivalent (“Boe”) using the energy equivalency ratio of six thousand cubic feet (“Mcf”) of natural gas to one barrel of crude oil, condensate or NGLs. The conversion ratio does not assume price equivalency, and the price per one Boe forour crude oil, NGLs and natural gas has differed significantlyproduction are affected by many factors outside of our control, including changes in market supply and demand, which are impacted by weather conditions, pipeline capacity constraints, inventory storage levels, domestic production activities and political issues, and international geopolitical and economic events. As a result, we cannot accurately predict future commodity prices and, therefore, we cannot determine with any degree of certainty what effect increases or decreases in these prices will have on our drilling program, production volumes or revenues.
Per the past. For the three months ended March 31, 2021, revenues from the sale ofEnergy Information Administration ("EIA"), average crude oil and NGLs made up 69.6% of our total revenues comparedprices using the WTI daily spot price increased to 73.4% for the three months ended March 31, 2020. For the three months ended March 31, 2021, our combined total production expressed in equivalent volumes on a daily basis was 25.9% lower than for the three months ended March 31, 2020, due to shut-ins of various properties related to well economics, the freeze in February 2021 primarily affecting the Mobile Bay area, and ongoing hurricane repairs; reservoir management of fields; and natural production declines. For the three months ended March 31, 2021, our total revenues were 1.2% higher than the three months ended March 31, 2020 due to higher realized prices for crude oil, NGLs and natural gas and partially offset by lower volumes. See Results of Operations – Three Months Ended March 31, 2021, Compared to the Three Months Ended March 31, 2020 in this Item 2 for additional information. Our operating results are strongly influenced by the price of the commodities that we produce and sell. The price of those commodities is affected by both domestic and international factors, including domestic production. During the three months ended March 31, 2021, our average realized crude oil price was $56.73 per barrel. This is an increase of 22.4% from our average realized crude oil price of $46.33$95.18 per barrel during the three months ended March 31, 2020. Per the Energy Information Administration ("EIA"), crude oil prices using average WTI daily spot pricing increased2022 compared to $58.09 per barrel during the three months ended March 31, 2021 compared to $45.34 per barrel during the three months ended March 31, 2020 representing an increase of 28.1%(63.8% increase). Crude oil prices have recovered to pre-pandemic levels from their April 2020 lows caused by the ongoing COVID-19 pandemic as the vaccine has been more widely distributed and economic activity has increased.
OurThe NYMEX Henry Hub average realized crude oil sales price differs from the WTI benchmark average crude price primarily due to premiums or discounts, crude oil quality adjustments, volume weighting (collectively referred to as differentials) and other factors. Crude oil quality adjustments can vary significantly by field. All of our crude oil is produced offshore in the Gulf of Mexico and is characterized as Poseidon, Light Louisiana Sweet (“LLS”), Heavy Louisiana Sweet (“HLS”) and others. WTI is frequently used to value domestically produced crude oil, and the majority of our crude oil production is priced using thedaily natural gas spot price for WTI as a base price, then adjusted for the type and quality of crude oil and other factors. Similarincreased to crude oil prices, the differentials for our offshore crude oil have also experienced volatility in the past. The monthly average differentials of Poseidon, LLS and HLS to WTI for the three months ended March 31, 2021 averaged ($0.01), $2.02, and $1.65 per barrel, respectively, and each differential has decreased in the range of $0.10 to $2.00 per barrel compared to the three months ended March 31, 2020.
Our average realized price of natural gas of $3.35$4.67 per Mcf for the three months ended March 31, 2021 was 75.4% higher than the average realized price of $1.91 per Mcf for the three months ended March 31, 2020. The average Henry Hub ("HH") daily natural gas spot price of2022 compared to $3.50 per Mcf for the three months ended March 31, 2021 was 84.6% higher than the average HH natural gas price of $1.90 per Mcf for the three months ended March 31, 2020. Per the EIA, this increase was due to increased demand from the U.S. power sector caused by much colder-than-normal temperatures across the country during February 2021. Price effects in February 2021 were amplified because the rise in demand occurred amid a drop in natural gas production due to well freeze-offs.
Our average realized price of NGLs of $ 23.88 per barrel for the three months ended March 31, 2021 was 83.2% higher than the average realized price of $13.03 per barrel for the three months ended March 31, 2020. Two major components of our NGLs, ethane and propane, typically make up over 70% of an average NGL barrel. For the three months ended March 31, 2021 compared to the three months ended March 31, 2020, average prices for domestic ethane increased by 72% and average domestic propane prices increased by 141% as measured using a price index for Mount Belvieu. The average prices for other domestic NGLs components increased from 43% to 65% for the three months ended March 31, 2021 compared to the same period in 2020. We believe the change in prices for NGLs is mostly a function of the change in crude oil prices combined with changes in propane supply and demand. Per the EIA, propane prices increased as a result of increased demand during the colder weather in February 2021.
According to Baker Hughes, the number of working rigs drilling for oil and natural gas on land in the U.S. as reported in their April 16, 2021 report was lower than a year ago, decreasing to 439 rigs compared to 529 rigs a year ago. The oil rig count decreased to 344 rigs compared to 438 rigs a year ago and the gas and miscellaneous rigs increased slightly to 95 rigs from 91 a year ago. In the Gulf of Mexico, the number of working rigs was 12 rigs (all oil) compared to 17 (all oil) a year ago.
Results of Operations
The following tables set forth selected financial and operating data for the periods indicated (all values are net to our interest unless indicated otherwise):
| | Three Months Ended March 31, | | | | 2021 | | | 2020 | | | Change | | | % | | | | (In thousands, except percentages and per share data) | | Financial: | | | | | | | | | | | | | | | | | Revenues: | | | | | | | | | | | | | | | | | Oil | | $ | 78,140 | | | $ | 84,650 | | | $ | (6,510 | ) | | | (7.7 | )% | NGLs | | | 9,359 | | | | 6,452 | | | | 2,907 | | | | 45.1 | % | Natural gas | | | 36,209 | | | | 29,300 | | | | 6,909 | | | | 23.6 | % | Other | | | 1,939 | | | | 3,726 | | | | (1,787 | ) | | | (48.0 | )% | Total revenues | | | 125,647 | | | | 124,128 | | | | 1,519 | | | | 1.2 | % | Operating costs and expenses: | | | | | | | | | | | | | | | | | Lease operating expenses | | | 42,357 | | | | 54,775 | | | | (12,418 | ) | | | (22.7 | )% | Production taxes | | | 1,996 | | | | 916 | | | | 1,080 | | | | 117.9 | % | Gathering and transportation | | | 4,319 | | | | 5,449 | | | | (1,130 | ) | | | (20.7 | )% | Depreciation, depletion, amortization and accretion | | | 26,637 | | | | 39,126 | | | | (12,489 | ) | | | (31.9 | )% | General and administrative expenses | | | 10,712 | | | | 13,963 | | | | (3,251 | ) | | | (23.3 | )% | Derivative loss (gain) | | | 24,578 | | | | (61,912 | ) | | | 86,490 | | | | NM | | Total costs and expenses | | | 110,599 | | | | 52,317 | | | | 58,282 | | | | 111.4 | % | Operating income | | | 15,048 | | | | 71,811 | | | | (56,763 | ) | | | NM | | Interest expense, net | | | 15,034 | | | | 17,110 | | | | (2,076 | ) | | | (12.1 | )% | Gain on debt transactions | | | — | | | | (18,501 | ) | | | 18,501 | | | | NM | | Other expense, net | | | 963 | | | | 723 | | | | 240 | | | | 33.2 | % | (Loss) income before income tax (benefit) expense | | | (949 | ) | | | 72,479 | | | | (73,428 | ) | | | (101.3 | )% | Income tax (benefit) expense | | | (203 | ) | | | 6,499 | | | | (6,702 | ) | | | NM | | Net (loss) income | | $ | (746 | ) | | $ | 65,980 | | | $ | (66,726 | ) | | | NM | | Basic and diluted (loss) earnings per common share | | $ | (0.01 | ) | | $ | 0.46 | | | $ | (0.47 | ) | | | NM | |
NM – not meaningful
| | Three Months Ended March 31, | | | | 2021 | | | 2020 | | | Change | | | % | | Operating: (1) (2) | | | | | | | | | | | | | | | | | Net sales: | | | | | | | | | | | | | | | | | Oil (MBbls) | | | 1,377 | | | | 1,827 | | | | (450 | ) | | | (24.6 | )% | NGLs (MBbls) | | | 392 | | | | 495 | | | | (103 | ) | | | (20.8 | )% | Natural gas (MMcf) | | | 10,799 | | | | 15,307 | | | | (4,508 | ) | | | (29.5 | )% | Total oil equivalent (MBoe) | | | 3,569 | | | | 4,873 | | | | (1,304 | ) | | | (26.8 | )% | | | | | | | | | | | | | | | | | | Average daily equivalent sales (Boe/day) | | | 39,657 | | | | 53,553 | | | | (13,896 | ) | | | (25.9 | )% | Average realized sales prices: | | | | | | | | | | | | | | | | | Oil ($/Bbl) | | $ | 56.73 | | | $ | 46.33 | | | $ | 10.40 | | | | 22.4 | % | NGLs ($/Bbl) | | | 23.88 | | | | 13.03 | | | | 10.85 | | | | 83.3 | % | Natural gas ($/Mcf) | | | 3.35 | | | | 1.91 | | | | 1.44 | | | | 75.4 | % | Oil equivalent ($/Boe) | | | 34.66 | | | | 24.71 | | | | 9.95 | | | | 40.3 | % | Oil equivalent ($/Boe), including realized commodity derivatives) | | | 32.35 | | | | 26.63 | | | | 5.71 | | | | 21.4 | % | | | | | | | | | | | | | | | | | | Average per Boe ($/Boe): | | | | | | | | | | | | | | | | | Lease operating expenses | | $ | 11.87 | | | $ | 11.24 | | | $ | 0.63 | | | | 5.6 | % | Gathering and transportation | | | 1.21 | | | | 1.12 | | | | 0.09 | | | | 8.0 | % | Production costs | | | 13.08 | | | | 12.36 | | | | 0.72 | | | | 5.8 | % | Production taxes | | | 0.56 | | | | 0.19 | | | | 0.37 | | | | 194.7 | % | DD&A | | | 7.46 | | | | 8.03 | | | | (0.57 | ) | | | (7.1 | )% | G&A expenses | | | 3.00 | | | | 2.87 | | | | 0.13 | | | | 4.5 | % | Operating costs | | $ | 24.10 | | | $ | 23.45 | | | $ | 0.65 | | | | 2.8 | % |
(1)
| The conversion to barrels of oil equivalent and cubic feet equivalent were determined using the energy equivalency ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or NGLs (totals may not compute due to rounding). The conversion ratio does not assume price equivalency, and the price on an equivalent basis for oil, NGLs and natural gas may differ significantly. | | | (2) | Some average figures and variance percentages in this table may not compute due to rounding. |
Volume measurements not previously defined:
| | | MBbls — thousand barrels for crude oil, condensate or NGLs
| | Mcf — thousand cubic feet
| MBoe — thousand barrels of oil equivalent
| | MMcf — million cubic feet
|
Three Months Ended March31, 2021Compared to the Three Months Ended March31, 2020
Due to the volatility in crude oil prices and to a lesser extent, volatility in prices for natural gas and NGL, the results of the three months ended March 31, 2021 may not be indicative of future periods. See “Liquidity and Capital Resources – Liquidity Overview” below for additional information.
Revenues. Total revenues increased $1.5 million, or 1.2%, to $125.6 million for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020. Oil revenues decreased $6.5 million, or 7.7%, NGLs revenues increased $2.9 million, or 45.1%, natural gas revenues increased $6.9 million, or 23.6%, and other revenues decreased $1.8 million. The decrease in oil revenues was attributable to a decrease in sales volumes of 24.6%, partially offset by 22.4% increase in the average realized sales price to $56.73 per barrel for the three months ended March 31, 2021 from $46.33 per barrel for the three months ended March 31, 2020 The increase in NGLs revenues was attributable to a 83.3% increase in the average realized sales price to $23.88 per barrel for the three months ended March 31, 2021 from $13.03 per barrel for the three months ended March 31, 2020, partially offset by a 20.8% decrease in sales volumes. The increase in natural gas revenues was attributable to a 75.4% increase in the average realized price to $3.35 per Mcf for the three months ended March 31, 2021 from $1.91 per Mcf for the three months ended March 31, 2020, partially offset by a decrease in sales volumes of 29.5%. Overall, sales volumes decreased 25.9% on a Boe/day basis due to shut-ins of various properties related to well economics, the freeze in February 2021 primarily affecting the Mobile Bay area, and ongoing hurricane repairs; reservoir management of fields; and natural production declines. Our estimate of deferred production for the three months ended March 31, 2021 was approximately 5,200 Boe per day as compared to 3,600 Boe per day for the three months ended March 31, 2020 due primarily to the shut-ins at various properties.
Revenues from oil and NGLs as a percent of our total revenues were 69.6% for the three months ended March 31, 2021 compared to 73.4% for the three months ended March 31, 2020. Our average realized NGLs sales price as a percent of our average realized crude oil sales price increased to 42.1% for the three months ended March 31, 2021 compared to 28.1% for the three months ended March 31, 2020.
Lease operating expenses. Lease operating expenses, which include base lease operating expenses, workovers, and facilities maintenance expense, decreased $12.4 million, or 22.7%, to $42.4 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. On a component basis, base lease operating expenses decreased $13.1 million, workover expenses decreased $1.0 million, facilities maintenance expense decreased $0.9 million, and hurricane repairs increased $2.6 million. Base lease operating expenses decreased primarily due to reduced expenses of $4.8 million at Mobile Bay and Fairway from successful cost cutting efforts; $4.3 million of reduced expenses related to fields that were no longer producing during the three months ended March 31, 2021 as compared(33.4% increase). These increases were primarily caused by increased demand related to the same period in 2020; $1.8 million of reduced contract labor and transportation costs and contract processing costs; $0.7 million of reduced insurance expenses; other cost reduction measures at various fields of $0.2 million; and credits to expensesupply uncertainties due to royalty adjustmentsRussia’s invasion of $1.3 million. The decreases in workover expensesUkraine and facilities maintenance expense were due to fewer projects undertaken. Lastly, we incurred $2.6 million in expenses related to hurricane repairs at various fields during the three months ended March 31, 2021 that we did not incur during the prior year period.
Production taxes. Production taxes increased $1.1 million to $2.0 million in the three months ended March 31, 2021 compared to the three months ended March 31, 2020 due to the increase in realized natural gas prices, partially offset by decreased natural gas production volumes.
Gathering and transportation. Gathering and transportation expenses decreased $1.1 million to $4.3 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 due to decreased natural gas production volumes.
Depreciation, depletion, amortization and accretion (“DD&A”). DD&A, which includes accretion for ARO, decreased to $7.46 per Boe for the three months ended March 31, 2021 from $8.03 per Boe for the three months ended March 31, 2020. On a nominal basis, DD&A decreased 31.9% to $26.6 million for the three months ended March 31, 2021 from $39.1 million for the three months ended March 31, 2020. The decline in the DD&A rate per Boe was driven by the decline in depreciable base as a result of reduced capital spending over the past year compared to the relatively small change in proved reserves over the same period.
General and administrative expenses (“G&A”). G&A was $10.7 million for the three months ended March 31, 2021, decreasing 23.3% from $14.0 million for the three months ended March 31, 2020. The decrease was primarily due to lower incentive compensation expenses and payroll expenses of $2.4 million, the $2.1 million employee retention credit, and decreases of $1.0 million in other miscellaneous G&A expense items; partially offset by decreased overhead allocations to partners (credits to expense) of $1.0 million, an increase in legal costs of $0.8 million, and an increase in surety bond costs of $0.4 million associated with the additional working interest acquired at Mobile Bay in the fourth quarter of 2020. See Financial Statements – Note 1 – Basis of Presentation under Part 1, Item 1, and Liquidity and Capital Resources in this Item 2 of this Form 10-Q for additional information on the employee retention credit. G&A on a per Boe basis was $3.00 per Boe for the three months ended March 31, 2021 compared to $2.87 per Boe for the three months ended March 31, 2020.
Derivative loss (gain). The three months ended March 31, 2021 includes a $24.6 million derivative loss primarily due to increased crude oil prices during March 2021 compared to oil prices during December 2020, which decreased the estimated fair value of open crude oil contracts between the two measurement dates. The three months ended March 31, 2020 includes a $61.9 million derivative gain, primarily due to decreased crude oil prices during March 2020 as compared to oil prices during December 2019, which increased the estimated fair value of open crude oil contracts between the two measurement dates.
Interest expense, net. Interest expense, net, was $15.0 million and $17.1 million for the three months ended March 31, 2021 and 2020, respectively. The decrease in 2021 is primarily due to lower principal balances of the Senior Second Lien Notes and reductions to outstanding borrowings under the Credit Agreement, partially offset by lower interest income.
Income tax (benefit) expense. Our income tax (benefit) expense was $(0.2) million and $6.5 million for the three months ended March 31, 2021 and 2020, respectively. For the three months ended March 31, 2021, our income tax benefit differed from the statutory Federal tax rate primarily by the impact of state income taxes. For the three months ended March 31, 2020, our effective tax rate primarily differed from the statutory Federal tax rate for adjustments recorded related to the enactment of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) on March 27, 2020. The CARES Act modified certain income tax statutes, including changes related to the business interest expense limitation under Code Section 163(j). Our effective tax rate was 21.4% for the three months ended March 31, 2021 and 9.0% for the three months ended March 31, 2020.
As of March 31, 2021, the valuation allowance on our deferred tax assets was $22.0 million. We continually evaluate the need to maintain a valuation allowance on our deferred tax assets. Any future reduction of a portion or all of the valuation allowance would result in a non-cash income tax benefit in the period the decision occurs. See Financial Statements – Note 8 –Income Taxes under Part I, Item 1 of this Form 10-Q for additional information.
Liquidity and Capital Resources
Liquidity Overview
Our primary liquidity needs are to fund capital and operating expenditures and strategic acquisitions to allow us to replace our oil and natural gas reserves, repay and service outstanding borrowings, operate our properties and satisfy our ARO obligations. We have funded such activities in the past with cash on hand, net cash provided by operating activities, sales of property, securities offerings and bank borrowings and expect to continue to do so in the future. As of March 31, 2021, we had $53.4 million cash on hand, availability of $137.6 million under the Credit Agreement and no maturities of long-term debt until October 2022. We currently expect our cash on hand, net cash provided by operating activities and our available sources of liquidity to be sufficient to meet our cash requirements over the next 12 months. In the event of long-term market deterioration, the Company may need additional liquidity, which would require us to evaluate alternatives and take appropriate actions. The Company’s next borrowing base redetermination is scheduled for spring 2021.
Given the relative strength in the debt markets due to higher oil and natural gas prices, we are looking into alternative financing options that have the possibility of providing longer tenors, less restrictive covenants and more reliable source of capital for acquisitions without semi-annual redeterminations.
Sources and Uses of Cash
Cash Flow and Working Capital. Net cash provided by operating activities for the three months ended March 31, 2021 and 2020 was $45.0 million and $84.3 million, respectively. Production volumes decreased by 26.8% measured on a Boe per day basis due to field shut-ins, reservoir management and natural declines, which caused revenues to decrease by $30.8 million. Oil, Natural gas and NGLs had higher average realized sales prices per Boe. Our combined average realized sales price per Boe increased by 40.3% for the three months ended March 31, 2021 compared to the three months ended March 31, 2020, which caused total revenues to increase $34.1 million.
Other items affecting operating cash flows were higher receivable balances, which decreased operating cash flows by $15.5 million for the three months ended March 31, 2021 compared to a decrease of $29.1 million for the three months ended March 31, 2020; decreased cash advance balances from joint venture partners, which decreased operating cash flows by $1.0 million for the three months ended March 31, 2021 compared to an increase of $13.0 million for the three months ended March 31, 2020; cash derivative payments, net which decreased operating cash flows $4.6 million for the three months ended March 31, 2021 compared to cash derivative receipts, net, which increased operating cash flows $4.4 million for the three months ended March 31, 2020; and a return of collateral related to a bond of $6.9 million which occurred during the three months ended March 31, 2020, with no such return occurring during the three months ended March 31, 2021. Other working capital items accounted for the remaining changes in net cash provided by operating activities.
Net cash used in investing activities primarily represents our acquisitions of and investments in oil and gas properties and equipment. Net cash used in investing activities for the three months ended March 31, 2021 and 2020 was $3.3 million and $35.6 million, respectively. Net cash used in investing activities for the three months ended March 31, 2021 included $1.8 million in working capital changes associated with capital expenditures incurred in 2020 but paid during the three months ended March 31, 2021. During the three months ended March 31, 2020, the purchase of the remaining 25% interest in the Magnolia field was consummated for approximately $2.0 million.
Net cash used in financing activities for the three months ended March 31, 2021 and 2020 was $32.0 million and $33.5 million, respectively. The net cash used for the three months ended March 31, 2021 included repayment of $32.0 million of borrowings under the Credit Agreement. The net cash used for the three months ended March 31, 2020 included repayment of $25.0 million of borrowings under the Credit Agreement and $8.5 million to purchase $27.5 million principal of Senior Second Lien Notes on the open market.
Derivative Financial Instruments. From time to time, we use various derivative instruments to manage a portion of our exposure to commodity price risk from sales of oil and natural gas. During the three months ended March 31, 2021, we entered into derivative contracts for crude oil and natural gas for a portion of our future production. See Financial Statements – Note 6 – Derivative Financial Instruments under Part I, Item 1 of this Form 10-Q for additional information. The following table summarizes the historical results of our hedging activities:
| | Three Months Ended | | | | March 31, | | | December 31, | | | March 31, | | | | 2021 | | | 2020 | | | 2020 | | Crude Oil ($/Bbl): | | | | | | | | | | | | | Average realized sale price, before the effects of derivative settlements | | $ | 56.73 | | | $ | 42.84 | | | $ | 46.33 | | Effects of realized commodity derivatives | | | (5.58 | ) | | | 1.39 | | | | 5.26 | | Average realized sales price, including realized commodity derivative | | $ | 51.15 | | | $ | 44.23 | | | $ | 51.59 | | Natural Gas ($/Mcf) | | | | | | | | | | | | | Average realized sale price, before the effects of derivative settlements | | $ | 3.35 | | | $ | 2.63 | | | $ | 1.91 | | Effects of realized commodity derivatives | | | (0.05 | ) | | | (0.17 | ) | | | (0.01 | ) | Average realized sales price, including realized commodity derivative | | $ | 3.30 | | | $ | 2.46 | | | $ | 1.90 | | | | | | | | | | | | | | |
Asset Retirement Obligations. Each quarter, we review and revise our ARO estimates. Our ARO estimates as of March 31, 2021 and December 31, 2020 were $398.9 million and $392.7 million, respectively. As our ARO estimates are for work to be performed in the future, and in the case of our non-current ARO, extend from one to many years in the future, actual expenditures could be substantially different than our estimates. See Risk Factors, under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 for additional information.
Income Taxes. We do not expect to make any significant income tax payments during 2021, and we did not have any outstanding current income taxes receivable as of March 31, 2021. See Financial Statements – Note 8 –Income Taxes under Part I, Item 1 of this Form 10-Q for additional information.
Capital Expenditures
The level of our investment in oil and natural gas properties changes from time to time depending on numerous factors, including the prices of crude oil, NGLs and natural gas, acquisition opportunities, available liquidity and the results of our exploration and development activities.
Our capital expenditures for the three months ended March 31, 2021 were $1.6 million compared to $11.5 million in the three months ended March 31, 2020. Overall capital expenditures decreased by $10.0 million in the current quarter compared to the prior year quarter, largely due to a slowdown in exploration and development spending in the current year. Our exploration and development spending decreased $8.8 million compared to prior year, primarily in the conventional shelf area due to the fact that our current year capital budget is weighted toward the second half of 2021. Other leasehold costs decreased $1.5 million during the three months ended March 31, 2021, compared to the prior year which included Magnolia and Mobile Bay acquisition costs, and seismic costs increased $0.4 million period over period. Excluding acquisitions and plugging and abandonment expenditures, we are currently estimating capital expenditures to range from $30 million to $60 million for 2021 and ARO spending to range from $17 million to $21 million.
The capital expenditures are included within Oil and natural gas properties and other, net on the Condensed Consolidated Balance Sheets and recorded on an incurred basis. The capital expenditures reported within the Investing section of the Condensed Consolidated Statements of Cash Flows include adjustments to report cash payments related to capital expenditures. Net cash used in investing activities for the three months ended March 31, 2021 included $1.8 million in working capital changes associated with capital expenditures incurred in 2020 but paid during the three months ended March 31, 2021. Our capital expenditures for the three months ended March 31, 2021 were financed by cash flow from operations and cash on hand.
Drilling Activity
We did not drill any wells in the three months ended March 31, 2021. During the three months ended March 31, 2020, we drilled the East Cameron 349 B-1 well (Cota) to target depth. We expect initial production to commence in the fourth quarter of 2021, subject to completion of certain infrastructure and the level of commodity prices. The Cota well is in the Monza Joint Venture Drilling Program. See Financial Statements – Note 4 –Joint Venture Drilling Program under Part I, Item 1 of this Form 10-Q for additional information.
Debt
Credit Agreement. As of March 31, 2021, borrowings outstanding under the Credit Agreement were $48.0 million and letters of credit issued under the Credit Agreement were $4.4 million. During the three months ended March 31, 2021, we repaid $32.0 million of borrowings. Availability under our Credit Agreement as of March 31, 2021 was $137.6 million. The Credit Agreement matures on October 18, 2022.
Availability under our Credit Agreement is subject to semi-annual redeterminations of our borrowing base, which was lowered from $215.0 million to $190.0 million following redetermination on January 6, 2021. The next redetermination is scheduled to occur in the spring of 2021. Generally, we must be in compliance with the covenants in our Credit Agreement in order to access borrowings under the Credit Agreement.
We currently have six lenders under our Credit Agreement. While we do not anticipate any difficulties in obtaining funding from any of these lenders as of the date of the filing of this Quarterly Report, any difficulties in obtaining funding from any of these lenders at this time, and any lack of or delay in funding by members of our banking group could negatively impact our liquidity position. See Financial Statements – Note 2 –Long-Term Debt under Part I, Item 1 of this Form 10-Q for additional information.
Senior Second Lien Notes. As of March 31, 2021, we 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 Senior Second Lien Notes are secured by a second-priority lien on all of our assets that are secured under the Credit Agreement. See Financial Statements – Note 2 – Long-Term Debt under Part I, Item 1 of this Form 10-Q for additional information.
Debt Covenants. The Credit Agreement and Senior Second Lien Notes contain financial covenants calculated as of the last day of each fiscal quarter, which include thresholds on financial ratios, as defined in the respective Credit Agreement and the indenture related to the Senior Second Lien Notes. We were in compliance with all applicable covenants of the Credit Agreement and the Senior Second Lien Notes indenture as of and for the period ended March 31, 2021. See Financial Statements – Note 2 – Long-Term Debt under Part I, Item 1 of this Form 10-Q for additional information.
Paycheck Protection Program. On April 15, 2020, the Company received $8.4 million under the PPP. During the eligible period, the Company incurred eligible expenses in excess of the amount received. The PPP funds are structured as a loan, but management of the Company believes the Company has met all the requirements for forgiveness of the total loan under the PPP. The Company submitted an application to the U.S. Small Business Administration ("SBA") on August 20, 2020, requesting that the PPP funds received be applied to specific covered and non-covered payroll costs. As of the date of this filing, we have not received a response from the SBA regarding the SBA's acceptance of our application. Management believes the Company has met all of the requirements under the PPP and will not be required to repay any portion of the funds received. Accordingly, no debt was recorded on the Consolidated Balance Sheet as of December 31, 2020. Should the SBA reject the Company's application of the PPP funds being applied to specific covered payroll and non-payroll costs, the Company may be required to repay all or a portion of the funds received under the PPP under an amortization schedule through April 2022 with an annual interest rate of 1%.
Employee Retention Credit. Under the Consolidated Appropriations Act, 2021 passed by the United States Congress and signed by the President on December 27, 2020, provisions of the CARES Act were extended and modified making the Company eligible for a refundable employee retention credit subject to meeting certain criteria. The Company recognized a $2.1 million employee retention credit during the three months ended March 31, 2021 which is included as a credit to General and administrative expenses in the Condensed Consolidated Statement of Operations.
Uncertainties
general expanding economic activity. Bureau of Ocean Energy Management (“BOEM”) Matters.Matters – In order to cover the various decommissioning obligations of lessees on the OCS, the BOEM generally requires that lessees post some form of acceptable financial assurance that such obligations will be met, such as surety bonds. The cost of such bonds or other financial assurance can be substantial, and we can provide no assurance that we can continue to obtain bonds or other surety in all cases. As many BOEM regulations are being reviewed by the agency,Department of the Interior, we may be subject to additional financial assurance requirements in the future. As of the filing date of this Form 10-Q, we are in compliance with our financial assurance obligations to the BOEM and have no outstanding BOEM orders related to supplemental financial assurance obligations. We and other offshore Gulf of Mexico producers may, in the ordinary course of business, receive requests or demands in the future for financial assurances from the BOEM. Surety Bond Collateral.Collateral – Some of the sureties that provide us surety bonds used for supplemental financial assurance purposes or bonds associated with our appeals of Department of the Interior’s orders or demands have historically requested and received collateral from us, and may request additional collateral from us in the future, which could be significant and materially impact our liquidity. In addition, pursuant to the terms of our agreements with various sureties under our existing bonds or under any additional bonds we may obtain, we are required to post collateral at any time, on demand, at the surety’s discretion. No additional demands were made to us by sureties during 20212022 as of the filing date of this Form 10-Q and we currently do not have surety bond collateral outstanding. The issuance of any additional surety bonds or other security to satisfy future BOEM orders, collateral requests from surety bond providers, and collateral requests from other third parties may require the posting of cash collateral, which may be significant, and may require the creation of escrow accounts. Results of Operations Insurance CoverageThree Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021
Insurance Coverage. We currently carry multiple layersRevenues
Our revenues are derived from the sale of insurance coverageour oil and natural gas production, as well as the sale of NGLs. Our oil, natural gas and NGL revenues do not include the effects of derivatives, which are reported in “Derivative loss” in our Energy Package (definedCondensed Consolidated Statements of Operations. The following table presents our sources of revenue as certain insurance policies relatinga percentage of total revenue: | | | | | | | Three Months Ended March 31, | | 2022 | | 2021 | Oil | 64.2 | % | | 62.2 | % | NGLs | 7.2 | % | | 7.4 | % | Natural gas | 26.9 | % | | 28.9 | % | Other | 1.6 | % | | 1.5 | % |
The information below provides a discussion of, and an analysis of significant variance in, our oil, natural gas and NGL revenues, production volumes and realized sales prices (which exclude the effect of hedging unless otherwise stated) for the three months ended March 31, 2022 and 2021: | | | | | | | | | | | | | Three Months Ended March 31, | | | 2022 | | 2021 | | | Change | | | | | (In thousands, except realized price data) | | Revenues: | | | | | | | | | | | Oil | | $ | 122,702 | | $ | 78,140 | | $ | 44,562 | | NGLs | | | 13,820 | | | 9,359 | | | 4,461 | | Natural gas | | | 51,366 | | | 36,209 | | | 15,157 | | Other | | | 3,116 | | | 1,939 | | | 1,177 | | Total revenues | | $ | 191,004 | | $ | 125,647 | | $ | 65,357 | | | | | | | | | | | | | Production Volumes: | | | | | | | | | | | Oil (MBbls) | | | 1,304 | | | 1,377 | | | (73) | | NGLs (MBbls) | | | 349 | | | 392 | | | (43) | | Natural gas (MMcf) | | | 10,471 | | | 10,799 | | | (328) | | Total oil equivalent (MBoe) | | | 3,398 | | | 3,569 | | | (171) | | | | | | | | | | | | | Average daily equivalent sales (Boe/day) | | | 37,756 | | | 39,657 | | | (1,901) | | | | | | | | | | | | | Average realized sales prices: | | | | | | | | | | | Oil ($/Bbl) | | $ | 94.10 | | $ | 56.73 | | $ | 37.37 | | NGLs ($/Bbl) | | | 39.60 | | | 23.88 | | | 15.72 | | Natural gas ($/Mcf) | | | 4.91 | | | 3.35 | | | 1.55 | | Oil equivalent ($/Boe) | | | 55.29 | | | 34.66 | | | 20.63 | | Oil equivalent ($/Boe), including realized commodity derivatives | | | 42.43 | | | 32.35 | | | 10.08 | |
| | | Volume measurements not previously defined: | | | MBbls — thousand barrels for crude oil, condensate or NGLs | | Mcf — thousand cubic feet | MBoe — thousand barrels of oil equivalent | | MMcf – million cubic feet |
Changes in average sales prices (which does not give effect to hedging) and sales volumes caused the following changes to our oil, NGL and natural gas properties which include named windstorm coverage) covering our operating activities, with higher limits of coverage for higher valued propertiesrevenues between the three months ended March 31, 2022 and wells. The current policy limits for well control range from $30.0 million to $500.0 million depending2021 (in thousands): | | | | | | | | | | Price | | Volume | | Total | Oil | $ | 48,707 | | $ | (4,145) | | $ | 44,562 | NGLs | | 5,488 | | | (1,028) | | | 4,460 | Natural gas | | 16,256 | | | (1,098) | | | 15,158 | | $ | 70,451 | | $ | (6,271) | | $ | 64,180 |
Realized Prices on the risk profileSale of Oil,NGLs and contractual requirements. With respectNatural Gas – Our average realized crude oil sales price differs from the WTI benchmark average crude price due primarily to coverage for named windstorms, we have a $162.5 million aggregate limit covering all of our higher valued properties,premiums or discounts, crude oil quality adjustments, and $150 million for all other properties subjectvolume weighting (collectively referred to a retention of $30.0 million. Included within the $162.5 million aggregate limit is total loss only coverage on our Mahogany platform, which has no retention. The operational and named windstorm coverages are effective for one year beginning June 1, 2020. Coverage for pollution causing a negative environmental impact is provided under the well control and other sections within the policy. Our general and excess liability policies are effective for one year beginning May 1, 2021 and provide for $300.0 million of coverage for bodily injury and property damage liability, including coverage for liability claims resulting from seepage, pollution or contamination. With respect to the Oil Spill Financial Responsibility requirement under the Oil Pollution Act of 1990, we are required to evidence $35.0 million of financial responsibility to the BSEE and we have insurance coverage of such amount.
Although we were able to renew our general and excess liability policies effective on May 1, 2021, and we have bound our Energy Package for the year commencing June 1, 2021, our insurers may not continue to offer this type and level of coverage to us in the future, or our costs may increase substantiallyas differentials). Crude oil quality adjustments can vary significantly by field as a result of quality and location. All of our crude oil is produced offshore in the Gulf of Mexico and is primarily characterized as Poseidon, Light Louisiana Sweet (“LLS”), and Heavy Louisiana Sweet (“HLS”). Similar to crude oil prices, the differentials for our offshore crude oil have also been volatile in the past. The monthly average differentials of WTI versus Poseidon and HLS for 2022 declined on average by approximately $0.27 - $1.97 per barrel compared to 2021 for these types of crude oils while LLS increased premiumsby an average of $0.14 per barrel with the Poseidon having negative differential and there could bethe LLS and HLS having positive differentials as measured on an increased riskindex basis. Similar to crude oil prices, the differentials for our offshore crude oil have also experienced volatility in the past.
Two major components of uninsured losses that may have been previously insured, allour NGLs, ethane and propane, typically make up over 70% of which could have a material adverse effect on our financial condition and results of operations. We are also exposedan average NGL barrel. For the three months ended March 31, 2022 compared to the possibilitythree months ended March 31, 2021, average prices for domestic ethane increased by 67.5% and average domestic propane prices increased by 45.0% as measured using a price index for Mount Belvieu. The average prices for other domestic NGLs components increased from 65.5% to 72.5% for the three months ended March 31, 2022 compared to the same period in 2021. We believe the change in prices for NGLs is mostly a function of the change in crude oil prices combined with changes in propane supply and demand. The actual prices we realize from the sale of natural gas differ from the quoted NYMEX Henry Hub price as a result of quality and location differentials. Currently, the sales points of our gas production are generally within close proximity to the Henry Hub which creates a minimal differential in the prices we receive for our production versus average Henry Hub prices. Oil,NGLs, and Natural Gas Volumes – Production volumes decreased by 171 MBoe to 3,398 MBoe in the first quarter of 2022 compared to the same period in 2021, primarily due to natural declines of producing wells and shut-ins related to well maintenance, which were partially offset by the acquisition of property interests during the first quarter of 2022 and other production deferrals during the first quarter of 2021. See Financial Statements – Note 4 – Acquisitions under Part I, Item 1 of this Quarterly Report for additional information. Deferred production for 2022 related to maintenance events collectively resulted in deferred production of 0.7 MMBoe, compared to 0.5 MMBoe in 2021. Operating Expenses The following table presents information regarding costs and expenses and selected average costs and expenses per Boe sold for the periods presented and corresponding changes: | | | | | | | | | | Three Months Ended March 31, | | 2022 | | 2021 | | | Change | | | (In thousands, except per Boe data) | Operating expenses: | | | | | | | | | Lease operating expenses | $ | 43,411 | | $ | 42,357 | | $ | 1,054 | Gathering, transportation and production taxes | | 5,267 | | | 6,315 | | | (1,048) | Depreciation, depletion, amortization and accretion | | 30,911 | | | 26,637 | | | 4,274 | General and administrative expenses | | 13,776 | | | 10,712 | | | 3,064 | Total operating expenses | $ | 93,365 | | $ | 86,021 | | $ | 7,344 | | | | | | | | | | Average per Boe ($/Boe): | | | | | | | | | Lease operating expenses | $ | 12.78 | | $ | 11.87 | | $ | 0.91 | Gathering, transportation and production taxes | | 1.55 | | | 1.77 | | | (0.22) | DD&A | | 9.10 | | | 7.46 | | | 1.64 | G&A expenses | | 4.05 | | | 3.00 | | | 1.05 | Operating costs | $ | 27.48 | | $ | 24.10 | | $ | 3.38 |
Lease operating expenses – Lease operating expenses, which include base lease operating expenses, workovers, and facilities maintenance expense, increased $1.1 million to $43.4 million for the three months ended March 31, 2022 compared to $42.4 million for the three months ended March 31, 2021. On a component basis, base lease operating expenses decreased $0.4 million, workover expenses increased $2.6 million, facilities maintenance expense increased $1.2 million, and hurricane repairs decreased $2.3 million. Base lease operating expenses decreased primarily due to decreased contract labor and supplies at various fields offset by increased expenses related to the fields acquired from ANKOR. The increases in workover expenses and facilities maintenance expense were due to an increase in projects undertaken. Workovers and facilities maintenance expenses consist of costs associated with major remedial operations on completed wells to restore, maintain or improve the well’s production. Since these remedial operations are not regularly scheduled, workover and maintenance expense are not necessarily comparable from period to period. Lastly, during the three months ended March 31, 2021 we incurred $2.3 million in expenses related to repairs associated with hurricanes that we did not incur during the three months ended March 31, 2022. Gathering, transportation and production taxes – Gathering, transportation and production taxes decreased $1.0 million in the three months ended March 31, 2022 compared to the three months ended March 31, 2021 primarily due to a one-time adjustment of $2.7 million in the current quarter related to the calculation of production taxes payable. This decrease was partially offset by increased costs of $1.7 million due to the increase in realized natural gas prices and increased NGL prices in the three months ended March 31, 2022 as compared to the comparable prior year period. Depreciation, depletion, amortization and accretion (“DD&A”) – DD&A, which includes accretion for ARO, increased to $9.10 per Boe for the three months ended March 31, 2022 from $7.46 per Boe for the three months ended March 31, 2021. On a nominal basis, DD&A increased 20.6%, or $4.3 million for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. The rate per Boe increased year-over-year mostly as a result of increases in the future development costs included in the depreciable base associated with an increase in economic proved undeveloped wells due to higher oil and gas prices compared to the smaller increase in proved reserves over the comparable prior year period. This increase was partially offset by the decrease in production volumes. General and administrative expenses (“G&A”) – G&A expense increased $3.1 million, to $13.8 million for the three months ended March 31, 2022 as compared to $10.7 million for the three months ended March 31, 2021. The increase was primarily due a $2.1 million employee retention credit recorded during the three months ended March 31, 2021 that did not recur during the three months ended March 31, 2022 as well as an increase in employee salaries and allowances for credit losses. Other Income and Expense The following table presents the components of other income and expense for the periods presented and corresponding changes: | | | | | | | | | | Three Months Ended March 31, | | | | | 2022 | | 2021 | | | Change | | | (In thousands) | Other income and expenses: | | | | | | | | | Derivative loss | $ | 79,997 | | $ | 24,578 | | $ | 55,419 | Interest expense, net | | 19,883 | | | 15,034 | | | 4,849 | Other expense, net | | 905 | | | 963 | | | (58) | Income tax expense (benefit) | | (689) | | | (203) | | | (486) |
Derivative loss – During the three months ended March 31, 2022, an $80.0 million derivative loss was recorded for crude oil and natural gas derivative contracts. Of the total derivative loss, approximately $36.3 million and $43.7 million were associated with the unrealized loss and realized loss, respectively. The realized derivative loss recorded in 2022 includes approximately $4.2 million of derivative premium amortization. The remaining realized derivative loss and unrealized derivative loss were primarily due to crude oil and natural gas prices rising throughout the three months ended March 31, 2022 as compared to prices as of December 31, 2021, which decreased the estimated fair value of open contracts and decreased the settlement value of closed contracts. During the three months ended March 31, 2021, a $24.6 million derivative loss was recorded for crude oil and natural gas derivative contracts. The total derivative loss includes an $8.2 million realized derivative loss and a $16.3 million unrealized derivative loss. The realized derivative loss recorded in 2021 was primarily due to crude oil prices rising during the first quarter of 2021 from prior historic lows, which increased the settlement value of closed contracts; the realized derivative loss includes $0.5 million of derivative premium amortization. The unrealized derivative loss in 2021 was primarily due to crude oil prices rising in the first quarter of 2021, which decreased the estimated fair value of open contracts. Interest expense, net – Interest expense, net, was $19.9 million and $15.0 million for the three months ended March 31, 2022 and 2021, respectively. The increase of $4.9 million in 2022 is primarily due to interest expense on the principal balance of the Term Loan. Income tax benefit – Our income tax benefit was $0.7 million and $0.2 million for the three months ended March 31, 2022 and 2021, respectively. For the three months ended March 31, 2022 and 2021, our income tax benefit differed from the statutory Federal tax rate primarily by the impact of state income taxes. Our effective tax rate was 21.9% and 21.4% for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, the valuation allowance on our deferred tax assets was $25.8 million. We continually evaluate the need to maintain a valuation allowance on our deferred tax assets. Any future reduction of a portion or all of the valuation allowance would result in a non-cash income tax benefit in the period the decision occurs. See Financial Statements – Note 9 –Income Taxes under Part I, Item 1 of this Quarterly Report for additional information. Liquidity and Capital Resources Liquidity Overview Our primary liquidity needs are to fund capital and operating expenditures and strategic acquisitions to allow us to replace our oil and natural gas reserves, repay and service outstanding borrowings, operate our properties and satisfy our ARO obligations. We have funded such activities in the past with cash on hand, net cash provided by operating activities, sales of property, securities offerings and bank and other borrowings and expect to continue to do so in the future. The primary sources of our liquidity are cash from operating activities and borrowings under our Credit Agreement. As of March 31, 2022, we had $215.5 million cash on hand and $50.0 million available under our Credit Agreement, based on a borrowing base of $50.0 million. At current pricing levels, we expect our cash flows to cover our liquidity requirements for the foreseeable future and we expect additional financing sources to be available if needed. Additionally, we believe our access to the equity markets from our ATM Program, our reserve based lending currently available under our Credit Agreement, along with our cash position, will provide us with sufficient liquidity to continue our growth to take advantage of the current commodity environment. As of March 31, 2022, we 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. We intend to commence discussions promptly with potential lenders and institutional investors regarding 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. We also may seek financings with longer tenors and market based covenants to continue to provide working and potential acquisition capital as well as provide funding for refinancing of all or a portion of our Senior Second Lien Notes. The terms of such financings, which may replace or augment our Credit Agreement and refinance all or a portion of our Senior Second Lien Notes, may vary significantly from those under the Credit Agreement and our Senior Second Lien Notes. Sources and Uses of Cash | | | | | | | | | | | | Three Months Ended March 31, | | | | | | 2022 | | 2021 | | | Change | | | | (In thousands) | Operating activities | | $ | 27,537 | | $ | 44,964 | | $ | (17,427) | Investing activities | | | (44,962) | | | (3,331) | | | (41,631) | Financing activities | | | (12,899) | | | (32,000) | | | 19,101 |
Operating activities – Net cash provided by operating activities decreased $17.4 million for the three months ended March 31, 2022 compared to the corresponding period in 2021. This was primarily due to (i) an increase in derivative settlements payments, which decreased operating cash flows by $30.5 million, for the three months ended March 31, 2022 compared to $4.6 million in derivative cash settlement payments which decreased operating cash flows for the three months ended March 31, 2021; and (ii) an increase in settlements of AROs which decreased operating cash flows $5.5 million as compared to $1.0 million for the three months ended March 31, 2022 and 2021, respectively. Other items affecting operating cash flows were changes in operating assets and liabilities (excluding ARO settlements) which decreased operating cash flows by $47.3 million as compared a $2.2 million decrease in operating cash flows during the three months ended March 31, 2021, primarily related to higher oil and natural gas receivables balances due to higher realized prices and higher cash advance balances from joint venture partners, partially offset by higher payables and accrued liabilities balances. These decreases in operating cash flow were partially offset by the $65.4 million increase in revenue in the three months ended March 31, 2022 as compared to the prior year period. Our combined average realized sales price per Boe increased by 59.5% for the three months ended March 31, 2022 compared to the three months ended March 31, 2021, which caused total revenues to increase $70.5 million. The increase to revenues was slightly offset by a 4.8% decrease in total sales volumes during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021, which caused revenues to decrease $6.3 million. Investing activities – Net cash used in investing activities increased $41.6 million for the three months ended March 31, 2022 compared to the corresponding period in 2021. The increase was primarily due to the acquisition of properties for $30.2 million along with other additional capital spending during the three months ended March 31, 2022 compared to the same period in 2021. Financing activities – Net cash used in financing activities decreased $19.1 million for the three months ended March 31, 2022 compared to the corresponding period in 2021. The net cash provided for the three months ended March 31, 2022 included $12.6 million in repayments of the Term Loan. The three months ended March 31, 2021 consisted of repayments of the Credit Facility of $32.0 million. Derivative Financial Instruments – From time to time, we use various derivative instruments to manage a portion of our exposure to commodity price risk from sales of oil and natural gas. See Financial Statements – Note 8 – Derivative Financial Instruments under Part I, Item 1 of this Quarterly Report for additional information about our derivative activities. The following table summarizes the historical results of our hedging activities: | | | | | | | | | Three Months Ended March 31, | | | 2022 | | 2021 | Crude Oil ($/Bbl): | | | | | | | Average realized sales price, before the effects of derivative settlements | | $ | 94.10 | | $ | 56.73 | Effects of realized commodity derivatives | | | (16.62) | | | (5.58) | Average realized sales price, including realized commodity derivatives | | $ | 77.48 | | $ | 51.15 | Natural Gas ($/Mcf) | | | | | | | Average realized sales price, before the effects of derivative settlements | | $ | 4.91 | | $ | 3.35 | Effects of realized commodity derivatives | | | (2.10) | | | (0.05) | Average realized sales price, including realized commodity derivatives | | $ | 2.81 | | $ | 3.30 |
Income Taxes – For 2022, we expect substantially all of our income taxes to be unable to buy insurance at any price or that if we do have claims, the insurers will not pay our claims.deferred. We do not carry business interruption insurance.have any outstanding current income taxes receivable nor did we make any tax payments during the quarter ended March 31, 2022. See Financial Statements – Note 9 –Income Taxes under Part I, Item 1 of this Quarterly Report for additional information. Capital Expenditures The level of our investment in oil and natural gas properties changes from time to time depending on numerous factors, including the prices of crude oil, NGLs and natural gas, acquisition opportunities, available liquidity and the results of our exploration and development activities. Contractual ObligationsOur capital expenditures for the three months ended March 31, 2022 were $47.6 million compared to $1.6 million in the three months ended March 31, 2021. Overall capital expenditures increased by $46.0 million in the current quarter compared to the prior year quarter primarily due to the $30.2 million acquisition of property interests as described in Financial Statements – Note 4 – Acquisitions under Part I, Item 1 of this Quarterly Report. Our exploration and development activities increased $13.3 million (approximately $5.3 million of that increase was in the conventional shelf and $8.0 million in the deepwater area) as compared to the prior year, primarily due to the return to normal capital spending activities, which had been lower in the prior year in response to the COVID-19 pandemic and the related economic effects. Other leasehold costs increased $3.0 million, primarily related to seismic spending as compared to the prior year.
The capital expenditures are included within Oil and natural gas properties and other, net on the Condensed Consolidated Balance Sheets and recorded on an accrual basis. The capital expenditures reported within the Investing section of the Condensed Consolidated Statements of Cash Flows include adjustments to report cash payments related to capital expenditures. Net cash used in investing activities for the three months ended March 31, 2022 included $2.6 million in working capital changes associated with capital expenditures incurred during the three months ended March 31, 2022, but not yet paid. Our capital expenditures for the three months ended March 31, 2022 were financed by cash flow from operations and cash on hand. Updated informationAcquisitions – As described in Financial Statements – Note 4 – Acquisitions under Part I, Item 1 of this Quarterly Report, on February 1, 2022, the Companyacquired working interest 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 from ANKOR. 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 approximately $30.2 million was paid to the sellers. The transaction was funded using cash on hand.
Asset Retirement Obligations – Each quarter, we review and revise our ARO estimates. Our ARO estimates as of March 31, 2022 and December 31, 2021 were $475.0 million and $424.5 million, respectively. The increase is primarily due to the acquisition of assets from ANKOR, moving additional projects to current term, and an increase in current pricing.As our ARO estimates are for work to be performed in the future, and in the case of our non-current ARO, extend from one to many years in the future, actual expenditures could be substantially different than our estimates. See Risk Factors, under Part I, Item 1A of our 2021 Annual Report for additional information. Drilling Activity We did not drill any wells in the three months ended March 31, 2022. During the three months ended March 31, 2022, we completed the East Cameron 349 B-1 well (Cota). The Cota well is in the Monza Joint Venture Drilling Program. See Financial Statements – Note 6 –Joint Venture Drilling Program under Part I, Item 1 of this Form 10-Q for additional information. Debt Term Loan – As of March 31, 2022, we had $178.2 million of Term Loan principal outstanding. The Term Loan requires quarterly amortization payments commencing September 30, 2021, 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 its subsidiaries other than Subsidiary Borrowers and the subsidiary that owns the equity of the Subsidiary Borrowers, and is not secured by any assets other than first lien security interests in the equity in the Subsidiary Borrowers and a first lien mortgage security interest and mortgages on certain contractual obligations is provided inassets of Subsidiary Borrowers (the Mobile Bay Properties). See Financial Statements – Note 2 –Debt under Part I, Item 1 of this Quarterly Report for additional information. Credit Agreement. March 31, 2022, we had no borrowings outstanding under the Credit Agreement. Senior Second Lien Notes – As of March 31, 2022, we 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 Senior Second Lien Notes are secured by a second-priority lien on all of our assets that are secured under the Credit Agreement. See Financial Statements – Note 2 – Long-Term Debt and Note 5 – Asset Retirement ObligationsunderPart I, Item 1 of this Form 10-Q. Quarterly Report for additional information. Debt Covenants – The Term Loan, Credit Agreement, and Senior Second Lien Notes contain financial covenants calculated as of the last day of each fiscal quarter, which include thresholds on financial ratios, as defined in the respective Subsidiary Credit Agreement, Credit Agreement and the indenture related to the Senior Second Lien Notes. We were in compliance with all applicable covenants of the Term Loan, Credit Agreement and the Senior Second Lien Notes indenture as of and for the period ended March 31, 2022. See Financial Statements – Note 2 – Debt under Part I, Item 1 of this Quarterly Report for additional information. The Subsidiary Borrowers On May 19, 2021, we formed A-I LLC and A-II LLC, both indirect, wholly-owned subsidiaries of W&T Offshore, Inc., through their parent, Aquasition Energy LLC (collectively, the Aquasition Entities”). Concurrently, A-I LLC and A-II II LLC, entered into a credit agreement providing for the Term Loan in an initial aggregate principal amount equal to $215.0 million. Proceeds of the Term Loan were used by A-I LLC and A-II LLC to fund the acquisition of the Mobile Bay Properties and the Midstream Assets, respectively, from the Company. The Term Loan is non-recourse to the Company and any subsidiaries other than the Aquasition Entities, and is secured by the first lien security interests in the equity of the Aquasition Entities and a first lien mortgage security interest in the Mobile Bay Properties. The See Financial Statements – Note 5 – Mobile Bay Transaction underPart II, Item 1 in this Quarterly Report for additional information. At that time, we designated the Aquasition Entities as unrestricted subsidiaries under the Indenture governing our Senior Second Lien Notes (the “Unrestricted Subsidiaries”). Having been so designated, the Unrestricted Subsidiaries do not guarantee the Senior Second Lien Notes and the liens on the assets sold to the Unrestricted Subsidiaries have been released under the Credit Agreement. The Unrestricted Subsidiaries are not bound by the covenants contained in the Credit Agreement or the Senior Second Lien Notes. Under the Subsidiary Credit Agreement and related instruments, assets of the Aquasition Entities may not be available to mortgage or pledge as security to secure new indebtedness of the Company and its other subsidiaries. See Financial Statements – Note 2 – Debt under Part I, Item 1 in this Quarterly Report for additional information. Below is consolidating balance sheet information reflecting the elimination of the accounts of our Unrestricted Subsidiaries from our Consolidated Balance Sheet as of March 31, 2022 (in thousands): | | | | | | | | | | | | Consolidated Balance Sheet | | Eliminations of Unrestricted Subsidiaries | | Consolidated Balance Sheet of restricted subsidiaries | Assets | | | | | | | | | | Current assets: | | | | | | | | | | Cash and cash equivalents | | $ | 215,475 | | $ | (33,356) | | $ | 182,119 | Restricted cash | | | 4,417 | | | — | | | 4,417 | Receivables: | | | | | | | | | | Oil and natural gas sales | | | 92,693 | | | (35,946) | | | 56,747 | Joint interest, net | | | 14,221 | | | 7,159 | | | 21,380 | Total receivables | | | 106,914 | | | (28,787) | | | 78,127 | Prepaid expenses and other assets | | | 103,061 | | | (203) | | | 102,858 | Total current assets | | | 429,867 | | | (62,346) | | | 367,521 | Oil and natural gas properties and other, net | | | 731,692 | | | (275,497) | | | 456,195 | Restricted deposits for asset retirement obligations | | | 21,958 | | | — | | | 21,958 | Deferred income taxes | | | 103,238 | | | — | | | 103,238 | Other assets | | | 63,392 | | | 20,987 | | | 84,379 | Total assets | | $ | 1,350,147 | | $ | (316,856) | | $ | 1,033,291 | Liabilities and Shareholders’ Deficit | | | | | | | | | | Current liabilities: | | | | | | | | | | Accounts payable | | $ | 75,716 | | $ | (22,989) | | $ | 52,727 | Undistributed oil and natural gas proceeds | | | 33,575 | | | (7,477) | | | 26,098 | Asset retirement obligations | | | 67,274 | | | — | | | 67,274 | Accrued liabilities | | | 209,845 | | | (86,217) | | | 123,628 | Current portion of long-term debt | | | 39,881 | | | (39,881) | | | — | Income tax payable | | | 177 | | | — | | | 177 | Total current liabilities | | | 426,468 | | | (156,564) | | | 269,904 | Long-term debt | | | | | | | | | | Principal | | | 690,808 | | | (138,348) | | | 552,460 | Unamortized debt issuance costs | | | (10,372) | | | 6,108 | | | (4,264) | Long-term debt, net | | | 680,436 | | | (132,240) | | | 548,196 | Asset retirement obligations, less current portion | | | 407,682 | | | (56,001) | | | 351,681 | Other liabilities | | | 84,833 | | | (67,773) | | | 17,060 | Deferred income taxes | | | 113 | | | — | | | 113 | Common stock | | | 1 | | | — | | | 1 | Additional paid-in capital | | | 553,175 | | | — | | | 553,175 | Retained deficit | | | (778,394) | | | 95,722 | | | (682,672) | Treasury stock, at cost | | | (24,167) | | | — | | | (24,167) | Total shareholders’ deficit | | | (249,385) | | | 95,722 | | | (153,663) | Total liabilities and shareholders’ deficit | | $ | 1,350,147 | | $ | (316,856) | | $ | 1,033,291 |
Below is Consolidating Statement of Operations information reflecting the elimination of the accounts of our Unrestricted Subsidiaries from our Consolidated Statement of Operations for the three months ended March 31, 2022 (in thousands): | | | | | | | | | | | | | Consolidated | | | Eliminations of Unrestricted Subsidiaries | | | Consolidated restricted subsidiaries | Revenues: | | | | | | | | | | Oil | | $ | 122,702 | | $ | (195) | | $ | 122,507 | NGLs | | | 13,820 | | | (8,574) | | | 5,246 | Natural gas | | | 51,366 | | | (36,352) | | | 15,014 | Other | | | 3,116 | | | (2,394) | | | 722 | Total revenues | | | 191,004 | | | (47,515) | | | 143,489 | Operating expenses: | | | | | | | | | | Lease operating expenses | | | 43,411 | | | (10,326) | | | 33,085 | Gathering, transportation and production taxes | | | 5,267 | | | (3,259) | | | 2,008 | Depreciation, depletion, amortization and accretion | | | 30,911 | | | (5,686) | | | 25,225 | General and administrative expenses | | | 13,776 | | | (316) | | | 13,460 | Total operating expenses | | | 93,365 | | | (19,587) | | | 73,778 | Operating (loss) income | | | 97,639 | | | (27,928) | | | 69,711 | | | | | | | | | | | Interest expense, net | | | 19,883 | | | (4,778) | | | 15,105 | Derivative loss (gain) | | | 79,997 | | | (96,158) | | | (16,161) | Other expense, net | | | 905 | | | — | | | 905 | (Loss) income before income taxes | | | (3,146) | | | 73,008 | | | 69,862 | Income tax benefit | | | (689) | | | — | | | (689) | Net (loss) income | | $ | (2,457) | | $ | 73,008 | | $ | 70,551 |
The following table presents our produced oil, NGLs and natural gas volumes (net to our interests) from the Subsidiary Borrowers for the three months ended March 31, 2022: | | | | | Three Months Ended March 31, | Production Volumes: | 2022 | Oil (MBbls) | | 4 | NGLs (MBbls) | | 226 | Natural gas (MMcf) | | 7,330 | Total oil equivalent (MBoe) | | 1,452 |
Contractual Obligations As of March 31, 2021,2022, there were no long-term drilling rig commitments. Except for scheduled utilization, other contractualContractual obligations as of March 31, 20212022 did not change materially from the disclosures in Management’s Discussion and Analysis of Financial Condition and Results of Operations, under Part II, Item 7 of our 2021 Annual Report on Form 10-K for the year ended December 31, 2020. Report. Critical Accounting Policies and Estimates Our significantWe consider accounting policies related to oil and natural gas properties, proved reserve estimates, fair value measure of financial instruments, asset retirement obligations, revenue recognition and income taxes as critical accounting policies. These policies include significant estimates made by management using information available at the time the estimates are made. However, these estimates could change materially if different information or assumptions were used.
There have been no changes to our critical accounting policies which are summarized in Management’s Discussion and Analysis of Financial StatementsCondition and Supplementary DataResults of Operations under Part II, Item 87 of our 2021 Annual Report on Form 10-K for the year ended December 31, 2020. See Financial Statements – Note 1 – Basis of Presentation under Part 1, Item 1of this Form 10-Q for additional information. Report. Recent Accounting Pronouncements There was no recently issued accounting standards material to us. See Financial Statements – Note 1 – Basis of Presentation under Part 1, Item 1, of this Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk Information about the types of market risks for the three months ended March 31, 20212022 did not change materially from the disclosures in Quantitative and Qualitative Disclosures About Market Risk under Part II, Item 7A of our 2021 Annual Report on Form 10-K for the year ended December 31, 2020.Report. In addition, the information contained herein should be read in conjunction with the related disclosures in our 2021 Annual Report on Form 10-K for the year ended December 31, 2020.Report. Commodity Price Risk. Our revenues, profitability and future rate of growth substantially depend upon market prices of crude oil, NGLs and natural gas, which fluctuate widely. Crude oil, NGLs and natural gas price declines in the past have adversely affected our revenues, net cash provided by operating activities and profitability in the past and sustained current prices would have significant impacts on our business in the future. During the three months ended March 31, 2021, we entered into derivative crude oil and natural gas contracts related to a portion of our estimated future production. We historically have not designated our commodity derivatives as hedging instruments and any future derivative commodity contracts are not expected to be designated as hedging instruments. Use of these contracts may reduce the effects of volatile crude oil and natural gas prices, but they also may limit future income from favorable price movements. See Financial Statements – Note 6 – Derivative Financial Instruments under Part I, Item 1 of this Form 10-Q for additional information.
Interest Rate Risk. As of March 31, 2021, we had $48.0 million borrowings outstanding under our Credit Agreement and were subject to the variable London Interbank Offered Rate and the Applicable Margin. We did not have any derivative instruments related to interest rates.
Item 4. Controls and Procedures We have established disclosure controls and procedures designed to ensure that material information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC and that any material information relating to us is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate to allow timely decisions regarding required disclosures. In designing and evaluating our disclosure controls and procedures, our management recognizes that controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving desired control objectives. In reaching a reasonable level of assurance, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As required by Exchange Act Rule 13a-15(b), we performed an evaluation, under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based on that evaluation, our CEO and CFO have each concluded that as of March 31, 2021,2022, our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that our controls and procedures are designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. During the quarter ended March 31, 2021,2022, there was no change in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings See Financial Statements – Note 1012 –Contingencies under Part I Item 1 of this Form 10-QQuarterly Report for information on various legal proceedings to which we are a party or our properties are subject. Item 1A. Risk Factors New climate disclosure rules proposed by the SEC may increase our costs of compliance and adversely impact our business. InvestorsOn March 21, 2022, the U.S. Securities and Exchange Commission proposed new rules relating to the disclosure of a range of climate-related risks. We are currently assessing the proposed rule, but at this time we cannot predict the costs of implementation or any potential adverse impacts resulting from the rule. To the extent this rule is finalized as proposed, we could incur increased costs relating to the assessment and disclosure of climate-related risks. We may also face increased litigation risks related to disclosures made pursuant to the rule if finalized as proposed. In addition, enhanced climate disclosure requirements could accelerate the trend of certain stakeholders and lenders restricting or seeking more stringent conditions with respect to their investments in certain carbon-intensive sectors. The SEC proposes certain phase-in compliance dates under the proposed rule for disclosure of Scope 1, 2, and 3 greenhouse gas (“GHG”) emissions. As initially proposed, accelerated filers such as us would be obligated to disclose Scope 1 and 2 GHG emissions for fiscal year 2024 in the 2025 filing year and disclose Scope 3 GHG emissions for fiscal year 2025 in the 2026 filing year. For more information on our risks related to Environmental, Social and Governance matters and attention to climate change, seeRisk Factors “Increasing attention to Environmental, Social and Governance (“ESG”) matters may impact our business” and “The threat of climate change could result in increased costs and reduced demand for the oil and natural gas we produce, which could have a material adverse effect on our business, results of operations, financial condition and cash flows” included in Part I, Item 1A of our 2021 Annual Report.
In addition to the information set forth in this Quarterly Report, investors should carefully consider the risk factors and other cautionary statements included under Part I, Item 1A, Risk Factors, in our 2021 Annual Report, on Form 10-K for the year ended December 31, 2020, together with all of the other information included in this document, in our AnnualQuarterly Report, on Form 10-K and in our other public filings, press releaseswhich could materially affect our business, financial condition or future results. Additional risks and discussions withuncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our management. The potential effects of crude oil prices are discussed under Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2020 and also discussed in the Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Overview section of this Form 10-Q.
business, financial condition or future results. Notwithstanding the matters discussed herein, there have been no material changes in our risk factors as previously disclosed in Part I, Item 1A, Risk Factors, in our 2021 Annual Report on Form 10-K for the year ended December 31, 2020.Report. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Mine Safety Disclosures None. Item 5. Other Information None.
Item 6. Exhibits | | | Exhibit Number | | Description | | | | 3.1 | | Amended and Restated Articles of Incorporation of W&T Offshore, Inc. (Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K, filed February 24, 2006 (File No. 001-32414).) | | | | 3.2 | | Second Amended and Restated Bylaws of W&T Offshore, Inc. (Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K, filed March 22, 2019 (File No. 001-32414))
| | | | 3.3
| | Certificate of Amendment to the Amended and Restated Articles of Incorporation of W&T Offshore, Inc. (Incorporated by reference to Exhibit 3.3 of the Company’s Quarterly Report on Form 10-Q, filed July 31, 2012 (File No. 001-32414)) | | | | 3.43.3
| | Certificate of Amendment to the Amended and Restated Articles of Incorporation of W&T Offshore, Inc., dated as of September 6, 2016. (Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K, filed September 6, 2016 (File No. 001-32414)) | | | | 10.13.4 | | Waiver, ConsentSecond Amended and Restated Bylaws of W&T Offshore, Inc. (Incorporated by reference to Second Amendment to Intercreditor Agreement and FifthExhibit 3.1 of the Company’s Current Report on Form 8-K, filed March 22, 2019 (File No. 001-32414))
| | | | 10.1 | | Tenth Amendment to Sixth Amended and Restated Credit Agreement dated January 6, 2021, by and among W&T Offshore, Inc., Toronto Dominion (Texas) LLC,effective as agent and the various agents and lenders party thereto (Incorporated by reference to exhibit 10.1 of the Company’s Current Report on Form 8-K, filed on January 12, 2021 (File No. 001-32414)).March 8, 2022. | | | | 31.1* | | Section 302 Certification of Chief Executive Officer.Officer | | | | 31.2* | | Section 302 Certification of Chief Financial Officer.Officer | | | | 32.1* | | Section 906 Certification of Chief Executive Officer and Chief Financial Officer.Officer | | | | 101.INS* | | Inline XBRL Instance Document.Document | | | | 101.SCH* | | Inline XBRL Schema Document.Document | | | | 101.CAL* | | Inline XBRL Calculation Linkbase Document.Document | | | | 101.DEF* | | Inline XBRL Definition Linkbase Document.Document | | | | 101.LAB* | | Inline XBRL Label Linkbase Document.Document | | | | 101.PRE* | | Inline XBRL Presentation Linkbase Document.Document | | | | 104*104* | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* | *Filed or furnished herewith.
| Filed or furnished herewith.
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SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 6, 2021. 4, 2022. | | | | W&T OFFSHORE, INC. | | | | By: | /s/ Janet Yang | | | Janet Yang | | | Executive Vice President and Chief Financial Officer (Principal Financial Officer), duly authorized to sign on behalf of the registrant
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