Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States (GAAP). Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of management and our directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even effective internal control over financial reporting can only provide reasonable assurance of achieving their control objectives.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework).
Based on our evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2020 in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The effectiveness of our internal control over financial reporting as of December 31, 2020 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report, which is included herein.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Operations
W&T Offshore, Inc. and subsidiaries, referred to herein as “W&T,” “we,” “us,” “our,” or the “Company”, is an independent oil and natural gas producer with substantially all of its operations in the Gulf of Mexico. We are active in the exploration, development and acquisition of oil and natural gas properties. Our interest in fields, leases, structures and equipment are primarily owned by the parent company, W&T Offshore, Inc. (on a stand-alone basis, the “Parent Company”) and our 100% owned subsidiary, W & T Energy VI, LLC (“Energy VI”) and through our proportionately consolidated interest in Monza Energy, LLC (“Monza”), as described in more detail in Note 4.
Basis of Presentation
Our consolidated financial statements include the accounts of W&T Offshore, Inc. and its majority-owned subsidiaries. Our interests in oil and gas joint ventures are proportionately consolidated. All significant intercompany transactions and amounts have been eliminated for all years presented. Our consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) and the appropriate rules and regulations of the Securities and Exchange Commission (“SEC”).
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods and the reported amounts of proved oil and natural gas reserves. Actual results could differ from those estimates.
Realized Prices
The price we receive for our crude oil, natural gas liquids (“NGLs”) and natural gas production directly affects our revenues, profitability, cash flows, liquidity, access to capital, proved reserves and future rate of growth. The average realized prices of these commodities decreased in 2020 compared to the average realized prices in 2019.
Accounting Standard Updates Effective January 1, 2020
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326) (“ASU 2016-13”) and subsequently issued additional guidance on this topic. The new guidance eliminates the probable recognition threshold and broadens the information to consider past events, current conditions and forecasted information in estimating credit losses. This amendment did not have a material impact on our financial statements and did not affect the opening balance of Retained Deficit.
In August 2017, the FASB issued Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815) – Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”) and subsequently issued additional guidance on this topic. The amendments in ASU 2017-12 require an entity to present the earnings effect of the hedging instrument in the same income statement line in which the earning effect of the hedged item is reported. This presentation enables users of financial statements to better understand the results and costs of an entity’s hedging program. Also, relative to current GAAP, this approach simplifies the financial statement reporting for qualifying hedging relationships. As we do not designate our commodity derivative instruments as qualifying hedging instruments, this amendment did not impact the presentation of the changes in fair values of our commodity derivative instruments on our financial statements.
Cash Equivalents
We consider all highly liquid investments purchased with original or remaining maturities of three months or less at the date of purchase to be cash equivalents.
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenue Recognition
We recognize revenue from the sale of crude oil, NGLs, and natural gas when our performance obligations are satisfied. Our contracts with customers are primarily short-term (less than 12 months). Our responsibilities to deliver a unit of crude oil, NGL, and natural gas under these contracts represent separate, distinct performance obligations. These performance obligations are satisfied at the point in time control of each unit is transferred to the customer. Pricing is primarily determined utilizing a particular pricing or market index, plus or minus adjustments reflecting quality or location differentials.
We record oil and natural gas revenues based upon physical deliveries to our customers, which can be different from our net revenue ownership interest in field production. These differences create imbalances that we recognize as a liability only when the estimated remaining recoverable reserves of a property will not be sufficient to enable the under-produced party to recoup its entitled share through production. We do not record receivables for those properties in which we have taken less than our ownership share of production. At December 31, 2020 and 2019, $3.5 million and $3.6 million, respectively, were included in current liabilities related to natural gas imbalances.
Concentration of Credit Risk
Our customers are primarily large integrated oil and natural gas companies and large commodity trading companies. The majority of our production is sold utilizing month-to-month contracts that are based on bid prices. We attempt to minimize our credit risk exposure to purchasers of our oil and natural gas, joint interest owners, derivative counterparties and other third-party entities through formal credit policies, monitoring procedures, and letters of credit or guarantees when considered necessary.
The following table identifies customers from whom we derived 10% or more of our receipts from sales of crude oil, NGLs and natural gas:
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Customer
|
|
|
|
|
|
|
|
|
|
|
|
|
BP Products North America
|
|
|
39
|
%
|
|
|
40
|
%
|
|
|
20
|
%
|
Mercuria Energy America Inc.
|
|
|
10
|
%
|
|
|
**
|
|
|
|
**
|
|
Shell Trading (US) Co./ Shell Energy N.A.
|
|
|
**
|
|
|
|
11
|
%
|
|
|
30
|
%
|
Vitol Inc.
|
|
|
**
|
|
|
|
12
|
%
|
|
|
14
|
%
|
Williams Field Services
|
|
|
13
|
%
|
|
|
**
|
|
|
|
**
|
|
We believe that the loss of any of the customers above would not result in a material adverse effect on our ability to market future oil and natural gas production as replacement customers could be obtained in a relatively short period of time on terms, conditions and pricing substantially similar to those currently existing.
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accounts Receivables and Allowance for Credit Losses
Our accounts receivables are recorded at their historical cost, less an allowance for credit losses. The carrying value approximates fair value because of the short-term nature of such accounts. In addition to receivables from sales of our production to our customers, we also have receivables from joint interest owners on properties we operate. In certain arrangements, we have the ability to withhold future revenue disbursements to recover amounts due us from the joint interest partners. A loss methodology is used to develop the allowance for credit losses on material receivables to estimate the net amount to be collected. The loss methodology uses historical data, current market conditions and forecasts of future economic conditions. The following table describes the balance and changes to the allowance for credit losses (in thousands):
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Allowance for credit losses, beginning of period
|
|
$
|
9,898
|
|
|
$
|
9,692
|
|
|
$
|
9,114
|
|
Additional provisions for the year
|
|
|
417
|
|
|
|
206
|
|
|
|
1,233
|
|
Uncollectible accounts written off or collected
|
|
|
(1,192
|
)
|
|
|
—
|
|
|
|
(655
|
)
|
Allowance for credit losses, end of period
|
|
$
|
9,123
|
|
|
$
|
9,898
|
|
|
$
|
9,692
|
|
Prepaid expenses and other assets
Amounts recorded in Prepaid expenses and other assets on the Consolidated Balance Sheets are expected to be realized within one year. The following table provides the primary components (in thousands):
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Derivatives – current (1)
|
|
$
|
2,752
|
|
|
$
|
7,266
|
|
Unamortized bonds/insurance premiums
|
|
|
4,717
|
|
|
|
4,357
|
|
Prepaid deposits related to royalties
|
|
|
4,473
|
|
|
|
7,980
|
|
Prepayment to vendors
|
|
|
1,429
|
|
|
|
10,202
|
|
Other
|
|
|
461
|
|
|
|
886
|
|
Prepaid expenses and other assets
|
|
$
|
13,832
|
|
|
$
|
30,691
|
|
|
(1)
|
Includes both open and closed contracts.
|
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Properties and Equipment
We use the full-cost method of accounting for oil and natural gas properties and equipment, which are recorded at cost. Under this method, all costs associated with the acquisition, exploration, development and abandonment of oil and natural gas properties are capitalized. Acquisition costs include costs incurred to purchase, lease or otherwise acquire properties. Exploration costs include costs of drilling exploratory wells and external geological and geophysical costs, which mainly consist of seismic costs. Development costs include the cost of drilling development wells and costs of completions, platforms, facilities and pipelines. Costs associated with production, certain geological and geophysical costs and general and administrative costs are expensed in the period incurred.
Oil and natural gas properties included in the amortization base are amortized using the units-of-production method based on production and estimates of proved reserve quantities. In addition to costs associated with evaluated properties and capitalized asset retirement obligations (“ARO”), the amortization base includes estimated future development costs to be incurred in developing proved reserves as well as estimated plugging and abandonment costs, net of salvage value, related to developing proved reserves. Future development costs related to proved reserves are not recorded as liabilities on the balance sheet, but are part of the calculation of depletion expense. Oil and natural gas properties and equipment include costs of unproved properties. The cost of unproved properties related to significant acquisitions are excluded from the amortization base until it is determined that proved reserves can be assigned to such properties or until such time as we have made an evaluation that impairment has occurred. The costs of drilling exploratory dry holes are included in the amortization base immediately upon determination that such wells are non-commercial.
Sales of proved and unproved oil and natural gas properties, whether or not being amortized currently, are accounted for as adjustments of capitalized costs with no gain or loss recognized unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and natural gas.
Furniture, fixtures and non-oil and natural gas property and equipment are depreciated using the straight-line method based on the estimated useful lives of the respective assets, generally ranging from five to seven years. Leasehold improvements are amortized over the shorter of their economic lives or the lease term. Repairs and maintenance costs are expensed in the period incurred.
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):
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Oil and natural gas properties and equipment
|
|
$
|
8,567,509
|
|
|
$
|
8,532,196
|
|
Furniture, fixtures and other
|
|
|
20,847
|
|
|
|
20,317
|
|
Total property and equipment
|
|
|
8,588,356
|
|
|
|
8,552,513
|
|
Less accumulated depreciation, depletion and amortization
|
|
|
7,901,478
|
|
|
|
7,803,715
|
|
Oil and natural gas properties and other, net
|
|
$
|
686,878
|
|
|
$
|
748,798
|
|
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Ceiling Test Write-Down
Under the full-cost method of accounting, we are required to perform a “ceiling test” calculation quarterly, which determines a limit on the book value of our oil and natural gas properties. If the net capitalized cost of oil and natural gas properties (including capitalized ARO) net of related deferred income taxes exceeds the ceiling test limit, the excess is charged to expense on a pre-tax basis and separately disclosed. Any such write downs are not recoverable or reversible in future periods. The ceiling test limit is calculated as: (i) the present value of estimated future net revenues from proved reserves, less estimated future development costs, discounted at 10%; (ii) plus the cost of unproved oil and natural gas properties not being amortized; (iii) plus the lower of cost or estimated fair value of unproved oil and natural gas properties included in the amortization base; and (iv) less related income tax effects. Estimated future net revenues used in the ceiling test for each period are based on current prices for each product, defined by the SEC as the unweighted average of first-day-of-the-month commodity prices over the prior twelve months for that period. All prices are adjusted by field for quality, transportation fees, energy content and regional price differentials.
We did not record a ceiling test write-down during 2020, 2019 or 2018. If average crude oil and natural gas prices decrease below average pricing during 2020, we may incur ceiling test write-downs during 2021 or in future periods.
Asset Retirement Obligations
We are required to record a separate liability for the present value of our ARO, with an offsetting increase to the related oil and natural gas properties on our balance sheet. We have significant obligations to plug and abandon well bores, remove our platforms, pipelines, facilities and equipment and restore the land or seabed at the end of oil and natural gas production operations. These obligations are primarily associated with plugging and abandoning wells, removing pipelines, removing and disposing of offshore platforms and site cleanup. Estimating such costs requires us to make judgments on both the costs and the timing of ARO. Asset removal technologies and costs are constantly changing, as are regulatory, political, environmental, safety and public relations considerations, which can substantially affect our estimates of these future costs from period to period. See Note 6 for additional information.
Oil and Natural Gas Reserve Information
We use the unweighted average of first-day-of-the-month commodity prices over the preceding 12-month period when estimating quantities of proved reserves. Similarly, the prices used to calculate the standardized measure of discounted future cash flows and prices used in the ceiling test for impairment are the 12-month average commodity prices. Proved undeveloped reserves may only be classified as such if a development plan has been adopted indicating that they are scheduled to be drilled within five years, with some limited exceptions allowed. Refer to Note 19 for additional information about our proved reserves.
Derivative Financial Instruments
We have exposure related to commodity prices and have used various derivative instruments to manage our exposure to commodity price risk from sales of oil and natural gas. We do not enter into derivative instruments for speculative trading purposes. We entered into commodity derivatives contracts during 2020, 2019 and 2018, and as of December 31, 2020, we had open commodity derivative instruments. When we have outstanding borrowings on our revolving bank credit facility, we may use various derivative financial instruments to manage our exposure to interest rate risk from floating interest rates. During 2020, 2019 and 2018, we did not enter into any derivative instruments related to interest rates.
Derivative instruments are recorded on the balance sheet as an asset or a liability at fair value. We have elected not to designate our derivatives instruments as hedging instruments, therefore, all changes in fair value are recognized in earnings. These derivative instruments may or may not have qualified for hedge accounting treatment.
Fair Value of Financial Instruments
We include fair value information in the notes to our consolidated financial statements when the fair value of our financial instruments is different from the book value or it is required by applicable guidance. We believe that the book value of our cash and cash equivalents, receivables, accounts payable and accrued liabilities materially approximates fair value due to the short-term nature and the terms of these instruments. We believe that the book value of our restricted deposits approximates fair value as deposits are in cash or short-term investments.
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income Taxes
We use the liability method of accounting for income taxes in accordance with the Income Taxes topic of the Accounting Standard Codification. Under this method, deferred tax assets and liabilities are determined by applying tax rates in effect at the end of a reporting period to the cumulative temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. The effects of changes in tax rates and laws on deferred tax balances are recognized in the period in which the new legislation is enacted. 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. We recognize uncertain tax positions in our financial statements when it is more likely than not that we will sustain the benefit taken or expected to be taken. We classify interest and penalties related to uncertain tax positions in income tax expense. See Note 12 for additional information.
Other Assets (long-term)
The major categories recorded in Other assets are presented in the following table (in thousands):
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
ROU assets (Note 7)
|
|
$
|
11,509
|
|
|
$
|
7,936
|
|
Unamortized debt issuance costs
|
|
|
2,094
|
|
|
|
3,798
|
|
Investment in White Cap, LLC
|
|
|
2,699
|
|
|
|
2,590
|
|
Derivatives
|
|
|
2,762
|
|
|
|
2,653
|
|
Unamortized brokerage fee for Monza
|
|
|
626
|
|
|
|
3,423
|
|
Proportional consolidation of Monza's other assets (Note 4)
|
|
|
1,782
|
|
|
|
5,308
|
|
Appeal bond deposits
|
|
|
—
|
|
|
|
6,925
|
|
Other
|
|
|
998
|
|
|
|
814
|
|
Total other assets
|
|
$
|
22,470
|
|
|
$
|
33,447
|
|
Accrued Liabilities
The major categories recorded in Accrued liabilities are presented in the following table (in thousands):
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Accrued interest
|
|
$
|
10,389
|
|
|
$
|
10,180
|
|
Accrued salaries/payroll taxes/benefits
|
|
|
4,009
|
|
|
|
2,377
|
|
Incentive compensation plans
|
|
|
—
|
|
|
|
9,794
|
|
Litigation accruals
|
|
|
436
|
|
|
|
3,673
|
|
Lease liability (Note 7)
|
|
|
394
|
|
|
|
2,716
|
|
Derivatives
|
|
|
13,620
|
|
|
|
1,785
|
|
Other
|
|
|
1,032
|
|
|
|
371
|
|
Total accrued liabilities
|
|
$
|
29,880
|
|
|
$
|
30,896
|
|
Paycheck Protection Program ("PPP")
On April 15, 2020, the Company received $8.4 million under the U.S. Small Business Administration ("SBA") PPP. As there is no definitive guidance under U.S. GAAP, we have applied the guidance under IAS 20 and accounted for the PPP as a government grant. Under IAS 20, a government grant is recognized when there is reasonable assurance that the Company has complied with the provisions of the grant.
The Company submitted an application to the SBA on August 20, 2020, requesting that the PPP funds received be applied to specific covered and non-covered payroll costs. As of the date of this filing, we have not received any response from the SBA, including any communication 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 grant.
We have elected to follow the income approach under IAS 20 and recognize earnings as funds are applied to covered expenses and classify the application of the funds as a reduction of the related expense in the Consolidated Statement of Operations. As a result, we have reduced expenses during the year ended December 31, 2020 and classified expense reductions consistent with our PPP fund application request. Within the Consolidated Statement of Operations, credits to Lease operating expenses of $2.3 million, General and administrative expenses of $4.2 million and reductions to Interest expense, net of $1.9 million were recognized for the year ended December 31, 2020. Should the SBA reject the Company's application on the utilization of funds, 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%.
Debt Issuance Costs
Debt issuance costs associated with the Credit Agreement are amortized using the straight-line method over the scheduled maturity of the debt. Debt issuance costs associated with all other debt are deferred and amortized over the scheduled maturity of the debt utilizing the effective interest method. Unamortized debt issuance costs associated with our Credit Agreement is reported within Other Assets (noncurrent) and unamortized debt issuance costs associated with our other debt instruments are reported as a reduction in Long-term debt – carrying value in the Consolidated Balance Sheets. See Note 2 for additional information.
Discounts Provided on Debt Issuance
Discounts were recorded in Long-term debt – carrying value in the Consolidated Balance Sheets and were amortized over the term of the related debt using the effective interest method.
Gain on Debt Transactions
During 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. During 2018, the refinancing of our capital structure resulted in a gain of $47.1 million as a result of writing off the carrying value adjustments related to the debt issued in 2016, partially offset by premiums paid to repurchase and retire, repay or redeem all of our prior debt instruments. See Note 2 for additional information.
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Liabilities (long-term)
The major categories recorded in Other liabilities are presented in the following table (in thousands):
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Dispute related to royalty deductions
|
|
$
|
5,467
|
|
|
$
|
4,687
|
|
Dispute related to royalty-in-kind
|
|
|
—
|
|
|
|
250
|
|
Lease liability (Note 7)
|
|
|
11,360
|
|
|
|
4,419
|
|
Derivatives
|
|
|
4,384
|
|
|
|
—
|
|
Black Elk escrow
|
|
|
11,103
|
|
|
|
—
|
|
Other
|
|
|
624
|
|
|
|
632
|
|
Total other liabilities (long-term)
|
|
$
|
32,938
|
|
|
$
|
9,988
|
|
Share-Based Compensation
Compensation cost for share-based payments to employees and non-employee directors is based on the fair value of the equity instrument on the date of grant and is recognized over the period during which the recipient is required to provide service in exchange for the award. The fair value for equity instruments subject to only time or to Company performance measures was determined using the closing price of the Company’s common stock at the date of grant. We recognize share-based compensation expense on a straight line basis over the period during which the recipient is required to provide service in exchange for the award. Estimates are made for forfeitures during the vesting period, resulting in the recognition of compensation cost only for those awards that are estimated to vest and estimated forfeitures are adjusted to actual forfeitures when the equity instrument vests. See Note 10 for additional information.
Other Expense (Income), Net
For 2020, the amount consists primarily of expenses related to the amortization of the brokerage fee paid in connection with the Joint Venture Drilling Program (as defined in Note 4). For 2019, the amount consists primarily of federal royalty obligation reductions claimed in the current year related to capital deductions from prior periods, and partially offset by expenses related to the amortization of the brokerage fee paid in connection with the Joint Venture Drilling Program. For 2018, the amount consists primarily of credits related to the de-recognition of certain liabilities that had exceeded the statute of limitations, partially offset by expense related to the amortization of the brokerage fee paid in connection with the Joint Venture Drilling Program.
Earnings Per Share
Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per share under the two-class method when the effect is dilutive. See Note 13 for additional information.
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Long-Term Debt
The components of our long-term debt are presented in the following tables (in thousands):
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Credit Agreement borrowings
|
|
$
|
80,000
|
|
|
$
|
105,000
|
|
|
|
|
|
|
|
|
|
|
Senior Second Lien Notes:
|
|
|
|
|
|
|
|
|
Principal
|
|
|
552,460
|
|
|
|
625,000
|
|
Unamortized debt issuance costs
|
|
|
(7,174
|
)
|
|
|
(10,467
|
)
|
Total Senior Second Lien Notes
|
|
|
545,286
|
|
|
|
614,533
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
625,286
|
|
|
$
|
719,533
|
|
Aggregate annual maturities of amounts recorded for long-term debt as of December 31, 2020 are as follows (in millions): 2021–$0.0; 2022–$80.0; 2023–$552.5. See below for a discussion of our debt instruments.
9.75% Senior Second Lien Notes Due 2023
On October 18, 2018, we issued $625.0 million of 9.75% Senior Second Lien Notes due 2023 (the “Senior Second Lien Notes”), which were issued at par with an interest rate of 9.75% per annum that matures on November 1, 2023, and are governed under the terms of the Indenture of the Senior Second Lien Notes (the “Indenture”), entered into by and among the Company, the Guarantors, and Wilmington Trust, National Association, as trustee (the “Trustee”). The estimated annual effective interest rate on the Senior Second Lien Notes was 10.3%, which includes 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.
On and after November 1, 2020, we may redeem the Senior Second Lien Notes, in whole or in part, at redemption prices (expressed as percentages of the principal amount thereof) equal to 104.875% for the 12-month period beginning November 1, 2020, 102.438% for the 12-month period beginning November 1, 2021, and 100.000% on November 1, 2022 and thereafter, plus accrued and unpaid interest, if any, to the redemption date. The Senior Second Lien Notes are guaranteed by W&T Energy VI and W & T Energy VII, LLC (together, the “Guarantor Subsidiaries”). If we experience certain change of control events, we will be required to offer to repurchase the notes at 101.000% of the principal amount, plus accrued and unpaid interest, if any, to the repurchase date.
The Senior Second Lien Notes are secured by a second-priority lien on all of our assets that are secured under the Credit Agreement (defined below). 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 restricted 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 unrestricted 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.
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Credit Agreement
Concurrently with the issuance of the Senior Second Lien Notes, we renewed our credit facility by entering into the Sixth Amended and Restated Credit Agreement (the “Credit Agreement”), dated as of October 18, 2018, among the Company, as borrower, the Guarantor Subsidiaries from time to time party thereto, Lenders from time to time party thereto and Toronto Dominion (Texas) LLC, as administrative agent with a maturity date of October 18, 2022. The primary terms of the Credit Agreement as of December 31, 2020, as amended, are as follows, with certain terms defined under the Credit Agreement:
|
●
|
The borrowing base is $215.0 million.
|
|
●
|
Letters of credit may be issued in 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 will not be 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 debt outstanding under the Credit Agreement on the last day of the most recent quarter to EBITDAX for the trailing four quarters.
|
|
●
|
The Current Ratio, as defined in the Credit Agreement, must be maintained at greater than 1.00 to 1.00.
|
|
●
|
We are required to have deposit accounts only with banks under the Credit Agreement with certain exceptions.
|
|
●
|
We are required to provide first priority liens on properties constituting at 90% of total proved reserves of the Company as set forth on reserve reports required to be delivered under the Credit Agreement.
|
|
●
|
To the extent there are borrowings, the Applicable Margins, as defined in the Credit Agreement, for Eurodollar Loans range from 2.75% to 3.75% per annum and the Applicable Margins for ABR loans range from 1.75% to 2.75% per annum. The specific Applicable Margin rate is based on the Borrowing Base Utilization Percentage.
|
|
|
|
|
●
|
The commitment fee is 50.0 basis points.
|
|
|
|
|
●
|
We are required to have derivative contracts for a minimum of 50% of projected production for 18 months based on existing proved developed producing reserves and certain other criteria and have met this requirement. We may enter into derivative contracts with counter parties within the Credit Agreement or with other counter parties meeting certain criteria described in the Credit Agreement.
|
Availability under the Credit Agreement is subject to semi-annual redeterminations of our borrowing base to occur on or before May 15 and November 14 each calendar year, and certain additional redeterminations that may be requested at the discretion of either the lenders or the Company. The borrowing base is calculated by our lenders based on their evaluation of our proved reserves and their own internal criteria. Any redetermination by our lenders to change our borrowing base will result in a similar change in the availability under the Credit Agreement. The Credit Agreement’s security is collateralized by a first priority lien on substantially all of our oil and natural gas properties and certain personal property.
Borrowings outstanding under the Credit Agreement are reported in the table above. As of December 31, 2020 and 2019, we had $4.4 million and $5.8 million, respectively, outstanding in letters of credit under the Credit Agreement. The estimated annual effective interest rate on borrowings, exclusive of debt issuance costs, commitment fees and other fees was 3.8%.
As of December 31, 2020 and for all prior measurement periods, we were in compliance with all applicable covenants of the Credit Agreement and Senior Second Lien Notes.
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On January 6, 2021, we entered into a Waiver, Consent to Second Amendment to Intercreditor Agreement and Fifth Amendment to Sixth Amended and Restated Credit Agreement (the “Fifth Amendment”) dated as of January 6, 2021, among the Company, certain of its guarantor subsidiaries, Toronto Dominion (Texas) LLC, individually and as administrative agent, and certain of the Company’s lenders and other parties thereto (as heretofore amended, the “Credit Agreement”). The Fifth Amendment, which became effective as of January 6, 2021, amends the Sixth Amended and Restated Credit Agreement (the “Fifth Amendment”) dated as of October 18, 2018. The Fifth Amendment includes the following changes, among other things, to the Credit Agreement:
|
●
|
Reduces the borrowing base under the Credit Agreement from $215.0 million to $190.0 million.
|
|
●
|
Amends and waives certain hedging requirements for projected natural gas production volumes of the Company to the extent that certain identified existing hedge contracts may cause non-compliance with minimum swap requirements for hedged volumes for any test date related to any calendar quarterly period ended on or before December 31, 2022 and requires that all natural gas hedge contracts entered into after December 13, 2020 until the December 31, 2022 test date (or such earlier date as provided in the Fifth Amendment) shall be in the form of swaps and not collars or puts until swaps represent at least 50% of natural gas hedge positions for all months required to be hedged by the Credit Agreement.
|
|
●
|
Establishes procedures for the Company to propose additional hedge counterparties and directs the administrative agent to enter into hedge intercreditor agreements with one or more hedge counterparties from time to time.
|
|
●
|
Establishes a customary anti-cash hoarding prepayment requirement in the event the cash balances of the Company exceed $25.0 million (subject to customary adjustments) at the end of any calendar month.
|
Under the Fifth Amendment, the lenders under the Credit Agreement have also consented to and executed certain conforming amendments necessitated by the Fifth Amendment proposed to be made to that certain Intercreditor Agreement among Toronto Dominion (Texas) LLC, as Original Priority Lien Agent and Wilmington Trust, National Association, as Second Lien Trustee and as Second Lien Collateral Agent.
For information about fair value measurements of our long-term debt, refer to Note 3.
Refinancing Transaction in 2018
On October 18, 2018, funds from the issuances of the Senior Second Lien Notes, borrowings under the Credit Agreement and cash on hand were used to repurchase and retire, repay or redeem all of the prior debt instruments, which are listed below. The issuance of the Senior Second Lien Notes, execution of the Credit Agreement and extinguishment of the prior debt instruments are collectively referred to as the “Refinancing Transaction”. A net gain of $47.1 million was recorded as a result of the Refinancing Transaction, comprised of the write off of carrying value adjustments of the prior debt instruments and partially offset by premiums paid. The effect on both basic and diluted earnings per share for 2018 was $0.33 per share, which assumes the gain would not affect our income tax expense for 2018.
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Prior Debt Instruments
The following debt instruments were repurchased and retired, repaid or redeemed, including interest and applicable premiums as part of the Refinancing Transaction on October 18, 2018:
|
●
|
11.00% 1.5 Lien Term Loan, (the “1.5 Lien Term Loan”) due November 15, 2019, $75.0 million principal outstanding on October 18, 2018.
|
|
●
|
9.00% Term Loan, due May 15, 2020, $300.0 million principal outstanding on October 18, 2018 (the "Second Lien Term Loan").
|
|
●
|
9.00%/10.75% Senior Second Lien PIK Toggle Notes (the “Second Lien PIK Toggle Notes”), due May 15, 2020, $177.5 million principal outstanding on October 18, 2018.
|
|
●
|
8.50%/10.00% Senior Third Lien PIK Toggle Notes (the “Third Lien PIK Toggle Notes”), due June 15, 2021, $160.9 million principal outstanding on October 18, 2018.
|
|
●
|
8.500% Senior Notes (the “Unsecured Senior Notes”), due June 15, 2019, $189.8 million principal outstanding on October 18, 2018.
|
3. Fair Value Measurements
Under GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of an asset should reflect its highest and best use by market participants, whether using an in-use or an in-exchange valuation premise. The fair value of a liability should reflect the risk of nonperformance, which includes, among other things, the Company’s credit risk.
Valuation techniques are generally classified into three categories: the market approach; the income approach; and the cost approach. The selection and application of one or more of these techniques requires significant judgment and is primarily dependent upon the characteristics of the asset or liability, the principal (or most advantageous) market in which participants would transact for the asset or liability and the quality and availability of inputs. Inputs to valuation techniques are classified as either observable or unobservable within the following hierarchy:
|
●
|
Level 1 – quoted prices in active markets for identical assets or liabilities.
|
|
●
|
Level 2 – inputs other than quoted prices that are observable for an asset or liability. These include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs).
|
|
●
|
Level 3 – unobservable inputs that reflect our expectations about the assumptions that market participants would use in measuring the fair value of an asset or liability.
|
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present the fair value of our derivatives and long-term debt (in thousands):
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Assets:
|
|
|
|
|
|
|
|
|
Derivatives instruments - open contracts, current
|
|
$
|
2,705
|
|
|
$
|
6,921
|
|
Derivatives instruments - open contracts, long-term
|
|
|
2,762
|
|
|
|
2,653
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivatives instruments - open contracts, current
|
|
|
13,291
|
|
|
|
1,785
|
|
Derivatives instruments - open contracts, long-term
|
|
|
4,384
|
|
|
|
—
|
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Agreement
|
|
$
|
80,000
|
|
|
$
|
80,000
|
|
|
$
|
105,000
|
|
|
$
|
105,000
|
|
Senior Second Lien Notes
|
|
|
545,286
|
|
|
|
393,352
|
|
|
|
614,533
|
|
|
|
597,188
|
|
As of December 31, 2020 and 2019, the carrying value of our open derivative contracts equaled the estimated fair value. We measure the fair value of our derivative contracts by applying the income approach using models with inputs that are classified within Level 2 of the valuation hierarchy. The inputs used to measure the fair value of our derivative contracts 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.
The fair value of our Senior Second Lien Notes is based on quoted prices, although the market is not an active market; therefore, the fair value is classified within Level 2. The carrying amount of debt under our Credit Agreement approximates fair value because the interest rates are variable and reflective of current market rates.
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Joint Venture Drilling Program
In March 2018, W&T and two other initial members formed and initially funded Monza, which jointly participates with us in the exploration, drilling and development of certain drilling projects (the “Joint Venture Drilling Program”) in the Gulf of Mexico. Subsequent to the initial closing, additional investors joined as members of Monza during 2018 and total commitments by all members, including W&T's commitment outside of Monza, were $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 working interest in the projects and our indirect interest through our interest in Monza, for contributing 20.0% of the estimated total well costs plus associated leases and providing access to available infrastructure at agreed-upon rates. Any exceptions to this structure are approved by the Monza board. W&T is the operator for seven of the nine wells completed through December 31, 2020.
The members of Monza are made up of third-party investors, W&T and an entity owned and controlled by Mr. Tracy W. Krohn, our Chairman and Chief Executive Officer. The Krohn entity invested as a minority investor on the same terms and conditions as the third-party investors, and its investment is limited to 4.5% of total invested capital within Monza. The entity affiliated with Mr. Krohn has made a capital commitment to Monza of $14.5 million.
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 working interest in the projects and our indirect interest through our interest in Monza, for contributing 20.0% of the estimated total well costs plus associated leases and providing access to available infrastructure at agreed-upon rates. Any exceptions to this structure are approved by the Monza board.
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 December 31, 2020, nine wells have been completed of which six were producing as of December 31, 2020. W&T is the operator for seven of the nine wells completed through December 31, 2020.
Through December 31, 2020, members of Monza made partner capital contributions, including our contributions of working interest in the drilling projects, to Monza totaling $289.3 million and received cash distributions totaling $70.8 million. Our net contribution to Monza, reduced by distributions received, as of December 31, 2020 was $51.8 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, of which the total exposure cannot be estimated at this time.
Consolidation and Carrying Amounts
Our interest in Monza is considered to be a variable interest that we account for using proportional consolidation. Through December 31, 2020, there have been no events or changes that would cause a redetermination of the variable interest status. We do not fully consolidate Monza because we are not considered the primary beneficiary. As of December 31, 2020, in the Consolidated Balance Sheet, we recorded $9.9 million, net, in Oil and natural gas properties and other, net, $1.8 million in Other assets, $0.2 million in ARO and $1.3 million, net, increase in working capital in connection with our proportional interest in Monza’s assets and liabilities. As of December 31, 2019, in the Consolidated Balance Sheet, we recorded $16.1 million, net, in Oil and natural gas properties and other, net, $5.3 million in Other assets, $0.1 million in ARO and $2.7 million, net, increase in working capital in connection with our proportional interest in Monza’s assets and liabilities. Additionally, during 2020 and 2019, we called on Monza to provide cash to fund its portion of certain Joint Venture Drilling Program projects in advance of capital expenditure spending, and the unused balances as of December 31, 2020 and 2019 were $7.3 million and $5.3 million, respectively, which are included in the Consolidated Balance Sheet in Advances from joint interest partners. For 2020, in the 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. For 2019, in the Consolidated Statement of Operations, we recorded $11.9 million in Total revenues and $7.4 million in Operating costs and expenses in connection with our proportional interest in Monza’s operations.
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Acquisitions and Divestitures
Mobile Bay Properties
In August 2019, we completed the purchase of Exxon Mobil Corporation's ("Exxon") interests in and operatorship of oil and gas producing properties in the eastern region of the Gulf of Mexico offshore Alabama and related onshore and offshore facilities and pipelines, (the "Mobile Bay Properties"). After taking into account customary closing adjustments and an effective date of January 1, 2019, cash consideration paid by us was $169.8 million which includes expenses related to the acquisition. We also assumed the related ARO and certain other obligations associated with these assets. The acquisition was funded from cash on hand and borrowings of $150.0 million under the Credit Agreement, which were previously undrawn. We determined that the assets acquired did not meet the definition of a business; therefore, the transaction was accounted for as an asset acquisition. The following table presents the purchase price allocation (in thousands):
|
|
2019
|
|
Oil and natural gas properties and other, net - at cost:
|
|
$
|
192,373
|
|
Other assets
|
|
|
4,838
|
|
|
|
|
|
|
Current liabilities
|
|
|
1,559
|
|
Asset retirement obligations
|
|
|
21,684
|
|
Other liabilities
|
|
|
4,132
|
|
During 2020, we completed the purchase of the remaining interest in two federal Mobile Bay fields from Chevron U.S.A. Inc. ("Chevron"). After taking into account customary closing adjustments and an effective date of January 1, 2020, cash consideration paid by us was $2.2 million which includes expenses related to the acquisition.
Magnolia Field
In December 2019, we completed the purchase of ConocoPhillips Company's ("Conoco") interests in and operatorship of oil and gas producing properties at Garden Banks blocks 783 and 784 (the "Magnolia Field"). After taking into account customary closing adjustments and an effective date of October 1, 2019, cash consideration was $15.9 million which includes cash expenses related to the acquisition. We also assumed the related ARO. The acquisition was funded from cash on hand. We determined that the assets acquired did not meet the definition of a business; therefore, the transaction was accounted for as an asset acquisition. The following table presents the purchase price allocation (in thousands):
|
|
2019
|
|
Oil and natural gas properties and other, net - at cost:
|
|
$
|
23,791
|
|
|
|
|
|
|
Asset retirement obligations
|
|
|
7,842
|
|
During 2020, we completed the purchase of the remaining interest in the Magnolia field from Marubeni Oil & Gas (USA) ("Marubeni"). After taking into account customary closing adjustments and an effective date of October 1, 2019, cash consideration paid by us was $1.5 million which includes expenses related to the acquisition.
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Heidelberg Field
On April 5, 2018, we completed the purchase of Cobalt International Energy, Inc.'s 9.375% non-operated working interests located in Green Canyon blocks 859, 903 and 904 (the "Heidelberg Field"). After taking into account customary closing adjustments and an effective date of January 1, 2018, cash consideration was $16.8 million which includes cash expenses related to the acquisition. We determined that the assets acquired did not meet the definition of a business; therefore, the transaction was accounted for as an asset acquisition. In connection with this transaction, we were required to furnish a letter of credit of $9.4 million to a pipeline company as consignee. We recognized ARO of $3.6 million as a component of the transaction. In conjunction with the purchase of an interest in the Heidelberg field, we assumed contracts with certain pipeline companies that contain minimum quantities obligations through 2028 resulting in an estimated commitment of $19.6 million as of the purchase date.
Permian Basin
On September 28, 2018, we completed the divestiture of substantially all of our ownership in an overriding royalty interests in the Permian Basin. The net proceeds received were $56.6 million, which was recorded as a reduction to our full-cost pool.
6. Asset Retirement Obligations
Asset retirement obligations associated with the retirement and decommissioning of tangible long-lived assets are required to be recognized as a liability in the period in which a legal obligation is incurred and becomes determinable, with an offsetting increase in the carrying amount of the associated asset. The cost of the tangible asset, including the initially recognized ARO, is depleted such that the cost of the ARO is recognized over the useful life of the asset. The fair value of the ARO is measured using expected cash outflows associated with the ARO, discounted at our credit-adjusted risk-free rate when the liability is initially recorded. Accretion expense is recognized over time as the discounted liability is accreted to its expected settlement value.
The following table is a reconciliation of our ARO (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Asset retirement obligations, beginning of period
|
|
$
|
355,594
|
|
|
$
|
310,137
|
|
Liabilities settled
|
|
|
(3,339
|
)
|
|
|
(11,443
|
)
|
Accretion of discount
|
|
|
22,521
|
|
|
|
19,460
|
|
Liabilities incurred and assumed through acquisition
|
|
|
4,860
|
|
|
|
29,887
|
|
Revisions of estimated liabilities (1)
|
|
|
13,068
|
|
|
|
7,553
|
|
Asset retirement obligations, end of period
|
|
|
392,704
|
|
|
|
355,594
|
|
Less current portion
|
|
|
17,188
|
|
|
|
21,991
|
|
Long-term
|
|
$
|
375,516
|
|
|
$
|
333,603
|
|
|
(1)
|
Revisions in 2020 and 2019 were due to changes in scope, weather impact, revisions to actual expenses versus estimates and revisions related to non-operated properties.
|
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Leases
Our lease contracts consist of office leases, a land lease and various pipeline right-of-way contracts. For these contracts, a right-of-use ("ROU") asset and lease liability was established based on our assumptions of the term, inflation rates and incremental borrowing rates. At inception, contracts are reviewed to determine whether the agreement contains a lease. To the extent an arrangement is determined to include a lease, it is classified as either an operating or a finance lease, which dictates the pattern of expense recognition in the income statement. All of these lease contracts are operating leases.
During 2020, we terminated the existing office lease and executed a new lease on separate office space. The term of the previous office lease ended in December 2020. The term of the new office lease extends to February 2032 and has the option to renew for up to another 10 years. During 2019, various pipeline rights-of-way contracts and a land lease were acquired, assumed, renewed or otherwise entered into, primarily in conjunction with acquiring the Mobile Bay Properties. The term of each pipeline right-of-way contract is 10 years with various effective dates, and each has an option to renew for up to another ten years. It is expected renewals beyond 10 years can be obtained as renewals were granted to the previous lessees. The land lease has an option to renew every five years extending to 2085. The expected term of the rights-of way and land leases was estimated to approximate the life of the related reserves. We recorded ROU assets and lease liabilities using a discount rate of 9.75% for the office lease and 10.75% for the other leases due to their longer expected term.
The amounts disclosed herein primarily represent costs associated with properties operated by the Company that are presented on a gross basis and do not reflect the Company’s net proportionate share of such amounts. A portion of these costs have been or will be billed to other working interest owners. The Company’s share of these costs is included in property and equipment, lease operating expense or general and administrative expense, as applicable. The components of lease costs were as follows (in thousands):
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Operating lease cost, excluding short-term leases
|
|
$
|
3,060
|
|
|
$
|
2,902
|
|
Short-term lease cost (1)
|
|
|
1,633
|
|
|
|
22,152
|
|
Total lease cost
|
|
$
|
4,693
|
|
|
$
|
25,054
|
|
(1)
|
Short-term lease costs are reported at gross amounts and primarily represent costs incurred for drilling rigs, most of which are short-term contracts not recognized as a right-of-use asset and lease liability on the balance sheet. The majority of such costs were recorded within Oil and natural gas properties, net, on the Consolidated Balance Sheet.
|
|
|
The present value of the fixed lease payments recorded as the Company’s right-of-use asset and liability, adjusted for initial direct costs and incentives are as follows (in thousands):
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
ROU assets
|
|
$
|
11,509
|
|
|
$
|
7,936
|
|
|
|
|
|
|
|
|
|
|
Lease liability:
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
394
|
|
|
$
|
2,716
|
|
Other liabilities
|
|
|
11,360
|
|
|
|
4,419
|
|
Total lease liability
|
|
$
|
11,754
|
|
|
$
|
7,135
|
|
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below presents the weighted average remaining lease term and discount rate related to leases (in thousands):
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Weighted average remaining lease term:
|
|
14.8 years
|
|
|
14.3 years
|
|
Weighted average discount rate:
|
|
|
10.2
|
%
|
|
|
10.4
|
%
|
The table below presents the supplemental cash flow information related to leases (in thousands):
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Operating cash outflow from operating leases
|
|
$
|
1,825
|
|
|
$
|
1,827
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
$
|
5,142
|
|
|
$
|
6,373
|
|
Undiscounted future minimum payments as of December 31, 2020 are as follows (in thousands):
2021
|
|
$
|
394
|
|
2022
|
|
|
1,134
|
|
2023
|
|
|
1,625
|
|
2024
|
|
|
2,023
|
|
2025
|
|
|
1,512
|
|
Thereafter
|
|
|
17,461
|
|
Total lease payments
|
|
|
24,149
|
|
Present value adjustment
|
|
|
(12,395
|
)
|
Total
|
|
$
|
11,754
|
|
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Restricted Deposits for ARO
Restricted deposits as of December 31, 2020 and 2019 consisted of funds escrowed for collateral related to the future plugging and abandonment obligations of certain oil and natural gas properties.
Pursuant to the Purchase and Sale Agreement with Total E&P USA Inc. (“Total E&P”), security for future plugging and abandonment of certain oil and natural gas properties is required either through surety bonds or payments to an escrow account or a combination thereof. Monthly payments are made to an escrow account and these funds are returned to us once verification is made that the security amount requirements have been met. See Note 15 for potential future security requirements.
During the year ended December 31, 2020, W&T received $13.9 million of cash as a restricted deposit to be used exclusively for payment of certain asset retirement obligations related to properties sold by W&T to Black Elk Energy Offshore Operations, LLC (“Black Elk”) in connection with the liquidation of Black Elk under Chapter 11 of the U.S. Bankruptcy Code. The cash was retained in an escrow account and recorded within Restricted Deposits for Asset Retirement Obligations on the Consolidated Balance Sheet as of December 31, 2020. $11.1 million was recorded in Other Liabilities as of December 31, 2020 as our estimate of the additional asset retirement obligations to be funded from the restricted deposit account.
9. Derivative Financial Instruments
During 2020, 2019 and 2018, we entered into commodity contracts for crude oil and natural gas which related to a portion of our expected production for the time frames covered by the contracts. The crude oil contracts were based on West Texas Intermediate (“WTI”) crude oil prices as quoted off the New York Mercantile Exchange (“NYMEX”). The natural gas contracts are based on Henry Hub natural gas prices as quoted off the NYMEX. The open contracts as of December 31, 2020 are presented in the following tables:
Crude Oil: Open Swap Contracts, Priced off WTI (NYMEX)
|
|
Period
|
|
Notional Quantity (Bbls/day)
|
|
|
Notional Quantity (Bbls)
|
|
|
Weighted Strike Price
|
|
Jan 2021 - Dec 2021
|
|
|
4,000
|
|
|
|
1,460,000
|
|
|
$
|
42.06
|
|
Jan 2022 - Feb 2022
|
|
|
3,000
|
|
|
|
177,000
|
|
|
$
|
42.98
|
|
Mar 2022 - May 2022
|
|
|
2,044
|
|
|
|
188,006
|
|
|
$
|
42.33
|
|
Crude Oil: Open Collar Contracts - Priced off WTI (NYMEX)
|
|
Period
|
|
Notional Quantity (Bbls/day)
|
|
|
Notional Quantity (Bbls)
|
|
|
Put Option Weighted Strike Price (Bought)
|
|
|
Call Option Weighted Strike Price (Sold)
|
|
Jan.2021 - Feb 2022
|
|
|
1,770
|
|
|
|
750,422
|
|
|
$
|
35.00
|
|
|
$
|
50.00
|
|
Mar 2022 - May 2022
|
|
|
2,000
|
|
|
|
184,000
|
|
|
$
|
35.00
|
|
|
$
|
48.50
|
|
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Natural Gas: Open Call Contracts, Bought, Priced off Henry Hub (NYMEX)
|
|
Period
|
|
Notional Quantity (MMBtu/day)
|
|
|
Notional Quantity (MMBtu)
|
|
|
Strike Price
|
|
Feb 2021 - Dec. 2022
|
|
|
40,000
|
|
|
|
27,960,000
|
|
|
$
|
3.00
|
|
Natural Gas: Open Swap Contracts, Bought, Priced off Henry Hub (NYMEX)
|
|
Period
|
|
Notional Quantity (MMBtu/day)
|
|
|
Notional Quantity (MMBtu)
|
|
|
Strike Price
|
|
Jan 2021 - Dec 2021
|
|
|
10,000
|
|
|
|
3,650,000
|
|
|
$
|
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
|
|
Natural Gas: Open Collar Contracts, Priced off Henry Hub (NYMEX)
|
|
Period
|
|
Notional Quantity (MMBtu/day)
|
|
|
Notional Quantity (MMBtu)
|
|
|
Put Option Weighted Strike Price (Bought)
|
|
|
Call Option Weighted Strike Price (Sold)
|
|
Jan 2021 - Dec 2022
|
|
|
40,000
|
|
|
|
29,200,000
|
|
|
$
|
1.83
|
|
|
$
|
3.00
|
|
Jan 2021 - Dec 2021
|
|
|
30,000
|
|
|
|
10,950,000
|
|
|
$
|
2.18
|
|
|
$
|
3.00
|
|
Jan 2022 - Feb 2022
|
|
|
30,000
|
|
|
|
1,770,000
|
|
|
$
|
2.20
|
|
|
$
|
4.50
|
|
Mar 2022 - May 2022
|
|
|
10,000
|
|
|
|
92,000
|
|
|
$
|
2.25
|
|
|
$
|
3.40
|
|
The following amounts were recorded in the Consolidated Balance Sheets in the categories presented and include the fair value of open contracts and closed contracts, which had not yet settled (in thousands):
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Prepaid and other assets – current
|
|
$
|
2,752
|
|
|
$
|
7,266
|
|
Other assets – non-current
|
|
|
2,762
|
|
|
|
2,653
|
|
Accrued liabilities
|
|
|
13,620
|
|
|
|
1,785
|
|
The amounts recorded on the Consolidated Balance Sheets are on a gross basis. If these were recorded on a net settlement basis, it would not have resulted in any differences in reported amounts.
Changes in the fair value and settlements of our commodity derivative contracts were as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Derivative loss (gain)
|
|
$
|
(23,808
|
)
|
|
$
|
59,887
|
|
|
$
|
(53,798
|
)
|
Cash receipts (payments), net, on commodity derivative contract settlements, which include derivative premium payments, are included within Net cash provided by operating activities on the Consolidated Statements of Cash Flows and were as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Derivative cash receipts (payments), net
|
|
$
|
45,196
|
|
|
$
|
13,941
|
|
|
$
|
(28,164
|
)
|
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Share-Based Awards and Cash-Based Awards
Incentive Compensation Plan
The W&T Offshore, Inc. Amended and Restated Incentive Compensation Plan, and subsequent amendments, (the “Plan”) was approved by our shareholders. The Plan covers the Company’s eligible employees and consultants and includes both cash and share-based compensation awards. The Plan grants the Compensation Committee of the Board of Directors administrative authority over all participants, and grants the CEO with authority over the administration of awards granted to participants that are not subject to section 16 of the Exchange Act (as applicable, the “Compensation Committee”).
Pursuant to the terms of the Plan, the Compensation Committee establishes the vesting or performance criteria applicable to the award and may use a single measure or combination of business measures as described in the Plan. Also, individual goals may be established by the Compensation Committee. Performance awards may be granted in the form of stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), bonus stock, dividend equivalents, or other awards related to stock, and awards may be paid in cash, stock, or any combination of cash and stock, as determined by the Compensation Committee. The performance awards granted under the Plan can be measured over a performance period of up to 10 years and annual incentive awards (a type of performance award) will generally be paid within 90 days following the applicable year end.
Share-based Awards: Restricted Stock Units
During 2019 and 2018, the Company granted RSUs under the Plan to certain of its employees. There were no RSUs granted in 2020. RSUs are a long-term compensation component and are granted to certain employees, and are subject to satisfaction of certain predetermined performance criteria and adjustments at the end of the applicable performance period based on the results achieved.
As of December 31, 2020, there were 10,347,591shares 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, 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. During 2020, 2019 and 2018, only shares of common stock were used to settle all vested RSUs. The Company expects to settle RSUs that vest in the future using shares of common stock.
RSUs currently outstanding relate to the 2019 grants, which were subject to predetermined performance criteria applied against the applicable performance period. These RSUs continue to be subject to employment-based criteria and vesting generally occurs in December of the second year after the grant. See the table below for anticipated vesting by year.
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 during 2019 and 2018 were determined using the Company’s closing price on the grant date. We are also required to 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.
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During 2019, RSUs granted were subject to adjustments based on achievement of a combination of performance criteria, which was comprised of: (i) net income before net interest expense; income tax (benefit) expense; depreciation, depletion, amortization and accretion; unrealized commodity derivative gain or loss; amortization of derivative premiums; bad debt reserve; litigation; and other (“Adjusted EBITDA”) for 2019 and (ii) Adjusted EBITDA as a percent of total revenue (“Adjusted EBITDA Margin”) for 2019. Adjustments range from 0% to 100% based upon actual results compared against pre-defined performance levels. For 2019, the Company achieved below target and above threshold for both Adjusted EBITDA and Adjusted EBITDA Margin, therefore only a portion of the amount granted will be eligible for vesting.
During 2018, RSUs granted were subject to adjustments based on achievement of a combination of performance criteria, which was comprised of: (i) Adjusted EBITDA for 2018 and (ii) Adjusted EBITDA Margin for 2018. Adjustments range from 0% to 100% based upon actual results compared against pre-defined performance levels. For 2018, the Company achieved target for both Adjusted EBITDA and Adjusted EBITDA Margin.
A summary of activity related to RSUs is as follows:
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
Restricted Stock Units
|
|
|
Weighted Average Grant Date Fair Value Per Share
|
|
|
Restricted Stock Units
|
|
|
Weighted Average Grant Date Fair Value Per Share
|
|
|
Restricted Stock Units
|
|
|
Weighted Average Grant Date Fair Value Per Share
|
|
Nonvested, beginning of period
|
|
|
1,614,722
|
|
|
$
|
5.73
|
|
|
|
3,355,917
|
|
|
$
|
3.90
|
|
|
|
5,765,251
|
|
|
$
|
2.48
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
994,698
|
|
|
|
4.51
|
|
|
|
988,955
|
|
|
|
6.90
|
|
Vested
|
|
|
(787,203
|
)
|
|
|
6.90
|
|
|
|
(1,475,373
|
)
|
|
|
2.76
|
|
|
|
(2,261,665
|
)
|
|
|
2.21
|
|
Forfeited
|
|
|
(63,831
|
)
|
|
|
5.80
|
|
|
|
(1,260,520
|
)
|
|
|
3.37
|
|
|
|
(1,136,624
|
)
|
|
|
2.68
|
|
Nonvested, end of period
|
|
|
763,688
|
|
|
$
|
4.51
|
|
|
|
1,614,722
|
|
|
$
|
5.73
|
|
|
|
3,355,917
|
|
|
$
|
3.90
|
|
Subject to the satisfaction of service conditions, the RSUs outstanding as of December 31, 2020 are eligible to vest in 2021.
RSUs fair value at grant date - There were no RSUs granted during 2020. During 2019 and 2018, the grant date fair value of RSUs granted was $4.5 million and $6.8 million, respectively.
RSUs fair value at vested date - The fair value of the RSUs that vested during 2020, 2019 and 2018 was $2.0 million, $7.0 million and $11.0 million, respectively, based on the Company’s closing price on the vesting date.
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Share-Based Awards: Restricted Stock
Under the Directors Compensation Plan, shares of restricted stock (“Restricted Shares”) were issued in 2020, 2019 and 2018 to the Company’s non-employee directors as a component of their compensation arrangement. Vesting occurs upon completion of the specified vesting period and one-third of each grant vests each year over a three-year period. The holders of Restricted Shares generally have the same rights as a shareholder of the Company with respect to such shares, including the right to vote and receive dividends or other distributions paid with respect to the shares. Restricted Shares are subject to forfeiture until vested and cannot be sold, transferred or otherwise disposed of during the restriction period.
As of December 31, 2020, there were 473,244 shares of common stock available for issuance in satisfaction of awards under the Directors Compensation Plan. Reductions in shares available are made when Restricted Shares are granted.
A summary of activity related to Restricted Shares is as follows:
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
Restricted Shares
|
|
|
Weighted Average Grant Date Fair Value Per Share
|
|
|
Restricted Shares
|
|
|
Weighted Average Grant Date Fair Value Per Share
|
|
|
Restricted Shares
|
|
|
Weighted Average Grant Date Fair Value Per Share
|
|
Nonvested, beginning of period
|
|
|
123,180
|
|
|
$
|
4.55
|
|
|
|
181,832
|
|
|
$
|
3.08
|
|
|
|
246,528
|
|
|
$
|
2.27
|
|
Granted
|
|
|
109,376
|
|
|
|
2.56
|
|
|
|
46,360
|
|
|
|
6.04
|
|
|
|
41,544
|
|
|
|
6.74
|
|
Vested
|
|
|
(78,428
|
)
|
|
|
2.38
|
|
|
|
(105,012
|
)
|
|
|
2.67
|
|
|
|
(106,240
|
)
|
|
|
2.64
|
|
Nonvested, end of period
|
|
|
154,128
|
|
|
$
|
4.24
|
|
|
|
123,180
|
|
|
$
|
4.55
|
|
|
|
181,832
|
|
|
$
|
3.08
|
|
Subject to the satisfaction of service conditions, the Restricted Shares outstanding as of December 31, 2020 are expected to vest as follows:
|
|
Restricted Shares
|
|
2021
|
|
|
138,676
|
|
2022
|
|
|
15,452
|
|
Total
|
|
|
154,128
|
|
Restricted stock fair value at grant date - The grant date fair value of restricted stock granted during 2020, 2019 and 2018 was $0.3 million each year for all years presented based on the Company’s closing price on the date of grant.
Restricted stock fair value at vested date - The fair value of the restricted stock that vested during 2020, 2019 and 2018 was $0.2 million, $0.5 million and $0.7 million, respectively, based on the Company’s closing price on the date of vesting.
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Share-Based Compensation
A summary of compensation expense under share-based payment arrangements is as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Share-based compensation expense from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units
|
|
$
|
3,555
|
|
|
$
|
3,410
|
|
|
$
|
3,260
|
|
Restricted stock
|
|
|
404
|
|
|
|
280
|
|
|
|
280
|
|
Total
|
|
$
|
3,959
|
|
|
$
|
3,690
|
|
|
$
|
3,540
|
|
As of December 31, 2020, unrecognized share-based compensation expense related to our awards of RSUs and Restricted Shares was $1.2 million and $0.2 million, respectively. Unrecognized compensation expense will be recognized through November 2021 for our RSUs and April 2022 for our Restricted Shares.
Cash-based Awards
In addition to share-based compensation, short-term, cash-based awards were granted under the Plan to substantially all eligible employees in 2019 and 2018. The short-term, cash-based awards, which are generally a short-term component of the Plan, are 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, these cash-based awards included an additional financial condition requiring Adjusted EBITDA less reported Interest Expense Incurred for any fiscal quarter plus the three preceding quarters to exceed defined levels measured over defined time periods for each cash-based award. No cash-based incentive awards were granted in 2020 under the Plan, and therefore, no cash-based incentive award compensation expense for 2020 has been recorded. The Compensation Committee has deferred its decision regarding the potential awarding of incentive compensation, including by the exercise of discretion. During 2018, long-term, cash awards were granted to certain employees subject to pre-define performance criteria. Expense is recognized over the service period once the business criteria, individual performance criteria and financial condition are met.
|
●
|
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 in 2019 for a portion of the 2019 cash-based awards. Payments were made in March 2020 and are subject to all the terms of the 2019 Annual Incentive Award Agreement.
|
|
●
|
In 2018, the Company, as part of its long-term incentive program, granted cash awards to certain employees that will vest over a three-year service period.
|
|
●
|
For the 2018 long-term, cash-based awards, incentive compensation expense was determined based on the Company achieving certain performance metrics for 2018 and is being recognized over the September 2018 to November 2020 period (the service period of the award). The 2018 long-term, cash-based awards were paid on December 15, 2020 subject to participants meeting certain employment-based criteria.
|
|
●
|
For the 2018 short-term, cash-based awards, incentive compensation expense was determined based on the Company achieving certain performance metrics for 2018 combined with individual performance criteria for 2018 and was recognized over the January 2018 to February 2019 period. The 2018 short-term, cash-based awards were paid during March 2019.
|
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Share-Based Awards and Cash-Based Awards Compensation Expense
A summary of compensation expense related to share-based awards and cash-based awards is as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Share-based compensation included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
$
|
3,959
|
|
|
$
|
3,690
|
|
|
$
|
3,540
|
|
Cash-based incentive compensation included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expense
|
|
|
849
|
|
|
|
2,206
|
|
|
|
3,596
|
|
General and administrative
|
|
|
4,019
|
|
|
|
8,897
|
|
|
|
9,586
|
|
Total charged to operating income
|
|
$
|
8,827
|
|
|
$
|
14,793
|
|
|
$
|
16,722
|
|
Discretionary Bonus to Employees in 2021
On February 15, 2021, the Company received approval from the Compensation Committee of the Board of Directors for the one-time payment of a discretionary cash bonus in the amount of $7.6 million, payable in equal installments on March 15, 2021 and April 15, 2021, subject to employment on those dates.
11. Employee Benefit Plan
We maintain a defined contribution benefit plan (the “401(k) Plan”) in compliance with Section 401(k) of the Internal Revenue Code (“IRC”), which covers those employees who meet the 401(k) Plan’s eligibility requirements. During 2020, 2019, and 2018 the time periods where matching occurred, the Company’s matching contribution was 100% of each participant’s contribution up to a maximum of 6% of the participant’s eligible compensation, subject to limitations imposed by the IRC. The 401(k) Plan provides 100% vesting in Company match contributions on a pro rata basis over five years of service (20% per year). Our expenses relating to the 401(k) Plan were $2.3 million, $2.0 million, and $2.0 million for 2020, 2019 and 2018, respectively.
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Income Taxes
Income Tax (Benefit) Expense
Components of income tax (benefit) expense were as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Current
|
|
$
|
134
|
|
|
$
|
(11,092
|
)
|
|
$
|
35
|
|
Deferred
|
|
|
(30,287
|
)
|
|
|
(64,102
|
)
|
|
|
500
|
|
Total income tax (benefit) expense
|
|
$
|
(30,153
|
)
|
|
$
|
(75,194
|
)
|
|
$
|
535
|
|
Reconciliation
The reconciliation of income taxes computed at the U.S. federal statutory tax rate to our income tax (benefit) expense is as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Income tax (benefit) expense at the federal statutory rate
|
|
$
|
1,604
|
|
|
$
|
(233
|
)
|
|
$
|
52,366
|
|
Compensation adjustments
|
|
|
1,373
|
|
|
|
971
|
|
|
|
457
|
|
State income taxes
|
|
|
75
|
|
|
|
(175
|
)
|
|
|
560
|
|
Uncertain tax position
|
|
|
—
|
|
|
|
(11,523
|
)
|
|
|
—
|
|
Impact of U.S. legislative changes
|
|
|
(21,345
|
)
|
|
|
—
|
|
|
|
487
|
|
Valuation allowance
|
|
|
(12,018
|
)
|
|
|
(64,704
|
)
|
|
|
(53,980
|
)
|
Other
|
|
|
158
|
|
|
|
470
|
|
|
|
645
|
|
Total income tax (benefit) expense
|
|
$
|
(30,153
|
)
|
|
$
|
(75,194
|
)
|
|
$
|
535
|
|
Our effective tax rate for the years 2020, 2019 and 2018 differed from the applicable federal statutory rate of 21.0% primarily due to the impact of the valuation allowance on our deferred tax assets, which is discussed below. As a result, effective tax rates for the years presented above are not meaningful.
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred Tax Assets and Liabilities
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities were as follows (in thousands):
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
$
|
37,535
|
|
|
$
|
21,647
|
|
Derivatives
|
|
|
—
|
|
|
|
—
|
|
Investment in non-consolidated entity
|
|
|
8,070
|
|
|
|
14,716
|
|
Other
|
|
|
2,588
|
|
|
|
2,283
|
|
Total deferred tax liabilities
|
|
|
48,193
|
|
|
|
38,646
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
—
|
|
|
|
—
|
|
Derivatives
|
|
|
3,416
|
|
|
|
1,409
|
|
Asset retirement obligations
|
|
|
84,332
|
|
|
|
76,924
|
|
Federal net operating losses
|
|
|
47,307
|
|
|
|
15,265
|
|
State net operating losses
|
|
|
8,136
|
|
|
|
7,393
|
|
Interest expense limitation carryover
|
|
|
16,304
|
|
|
|
48,458
|
|
Share-based compensation
|
|
|
419
|
|
|
|
965
|
|
Valuation allowance
|
|
|
(22,361
|
)
|
|
|
(54,436
|
)
|
Other
|
|
|
4,843
|
|
|
|
6,584
|
|
Total deferred tax assets
|
|
|
142,396
|
|
|
|
102,562
|
|
Net deferred tax assets (liabilities)
|
|
$
|
94,203
|
|
|
$
|
63,916
|
|
Income Taxes Receivable, Refunds and Payments
As of December 31, 2020, we do not have any current income taxes receivable. As of December 31, 2019, we had current income taxes receivable of $1.9 million which was received in 2020 and related to a net operating loss (“NOL”) carryback claim for the year 2017 that we carried back to prior years. During 2019, we received refunds of $51.8 million related to our NOL carryback claims for the years 2012, 2013 and 2014 that were carried back to prior years. Additionally, we received $4.5 million in interest income associated with the refunds in 2019. These carryback claims, in addition to the 2017 claim, were made pursuant to IRC Section 172(f) (related to rules regarding “specified liability losses”), which permits certain platform dismantlement, well abandonment and site clearance costs to be carried back 10 years. During the years ending December 31, 2020 and 2019, we did not make any tax payments of significance.
Net Operating Loss and Interest Expense Limitation Carryover
The table below presents the details of our net operating loss and interest expense limitation carryover as of December 31, 2020 (in thousands):
|
|
Amount
|
|
|
Expiration Year
|
|
Federal net operating loss
|
|
$
|
225,274
|
|
|
|
earliest is 2037
|
|
State net operating loss
|
|
|
136,440
|
|
|
|
2026-2038
|
|
Interest expense limitation carryover
|
|
|
75,341
|
|
|
|
N/A
|
|
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Valuation Allowance
During 2020 and 2019, we recorded a decrease in the valuation allowance of $32.1 million and $63.3 million, respectively, related to federal and state deferred tax assets. 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.
Throughout 2020, the Company has been assessing the realizability of our deferred tax assets by considering positive factors such as, when considering the Company’s results for the twelve months ended December 31, 2018, 2019 and 2020, the Company has cumulative pre-tax income during this three year period. Based on the assessment, we determined that the Company’s ability to maintain long-term profitability despite near-term changes in commodity prices and operating costs demonstrated that a portion of the Company’s net deferred tax assets would more likely than notbe realized. During 2020, we released $32.1 million of the valuation allowance, resulting in an income tax benefit in 2020 primarily as a result of the enactment of the Coronavirus Aid, Relief and Economic Security Act (“Cares Act”) on March 27, 2020 and the issuance by the United States Treasury Department (Treasury) of final and proposed regulations under Internal Revenue Code (“IRC”) Section 163(j) on July 28, 2020 that provided additional guidance and clarification to the business interest expense limitation The portion of the valuation allowance remaining relates to state net operating losses, charitable contributions carryover and the disallowed interest limitation carryover under IRC section 163(j). As of December 31, 2020, the Company’s valuation allowance was $22.4 million.
Uncertain Tax Positions
The table below sets forth the beginning and ending balance of the total amount of unrecognized tax benefits. During 2019, the settlement of our net operating loss carryback claims with the IRS effectively allowed us to also settle our uncertain tax position which resulted in a change in our unrecognized tax benefits and materially impacted our income tax benefit.
Reconciliation of the balances of our uncertain tax positions are as follows (in thousands):
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Balance, beginning of period
|
|
$
|
—
|
|
|
$
|
9,482
|
|
Decrease during the period
|
|
|
—
|
|
|
|
(9,482
|
)
|
Balance, end of period
|
|
$
|
—
|
|
|
$
|
—
|
|
Years open to examination
The tax years from 2017 through 2020 remain open to examination by the tax jurisdictions to which we are subject.
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Earnings Per Share
The Company’s unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are deemed participating securities and are included in the computation of earnings per share under the two-class method when the effect is dilutive.
The following table presents the calculation of basic and diluted earnings per common share (in thousands, except per share amounts):
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Net income
|
|
$
|
37,790
|
|
|
$
|
74,086
|
|
|
$
|
248,827
|
|
Less portion allocated to nonvested shares
|
|
|
437
|
|
|
|
1,371
|
|
|
|
9,727
|
|
Net income allocated to common shares
|
|
$
|
37,353
|
|
|
$
|
72,715
|
|
|
$
|
239,100
|
|
Weighted average common shares outstanding
|
|
|
141,622
|
|
|
|
140,583
|
|
|
|
139,002
|
|
Basic and diluted earnings per common share
|
|
$
|
0.26
|
|
|
$
|
0.52
|
|
|
$
|
1.72
|
|
14. Supplemental Cash Flow Information
The following table reflects our supplemental cash flow information (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Supplemental cash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest (1)
|
|
$
|
59,183
|
|
|
$
|
66,720
|
|
|
$
|
61,501
|
|
Cash paid for income taxes
|
|
|
159
|
|
|
|
51
|
|
|
|
138
|
|
Cash refunds received for income taxes
|
|
|
2,007
|
|
|
|
51,833
|
|
|
|
11,126
|
|
Cash paid for share-based compensation (2)
|
|
|
—
|
|
|
|
—
|
|
|
|
1,130
|
|
Cash received for interest income
|
|
|
603
|
|
|
|
7,720
|
|
|
|
2,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruals of property and equipment
|
|
|
3,035
|
|
|
|
29,662
|
|
|
|
18,575
|
|
ARO - additions, dispositions and revisions, net
|
|
|
17,928
|
|
|
|
37,440
|
|
|
|
19,877
|
|
|
(1)
|
During 2018, cash paid for interest included amounts related to the debt instruments issued during 2016, which were accounted for under ASC 470-60 and recorded against the carrying value of the debt instruments on the Consolidated Balance Sheets and included in financing activities on the Consolidated Statements of Cash Flows. No interest was capitalized in the periods presented.
|
|
(2)
|
During 2020 and 2019, only common shares were used to settle vested RSUs and Restricted Shares. During 2018, cash was used to settle vested RSUs related to the retirement of executive officers and shares of common stock were used to settle all other vested RSUs and to settle Restricted Shares.
|
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Commitments
See Note 7 for information on leases.
Pursuant to the Purchase and Sale Agreement with Total E&P, we may fulfill security requirements related to ARO for certain properties through securing surety bonds, or through making payments to an escrow account under a formula pursuant to the agreement, or a combination thereof, until certain prescribed thresholds are met. Once the threshold is met for that year, excess funds in the escrow account are returned to us. As of December 31, 2020, we had surety bonds related to the agreement with Total E&P totaling $93.7 million and had no amounts in escrow. The threshold escalates to $103.0 million for 2023 in $3.0 million per year increments.
Pursuant to the Purchase and Sale Agreement with Shell Offshore Inc. (“Shell”) related to ARO for certain properties, we have surety bonds that are subject to re-appraisal by either party. As of December 31, 2020, neither party had requested a re-appraisal to be made. The current security requirement of $64.0 million, which we have met, could be increased up to $94.0 million depending on certain conditions and circumstances.
Pursuant to the Purchase and Sale Agreement with Exxon related to ARO for certain properties, we were required to obtain $30.0 million of surety bonds as of December 31, 2020. This amount increases on June 1 of the following years to $33.0 million - 2021; $36.3 million - 2022; $40.0 million - 2023; $44.0 million - 2024; $48.3 million - 2025, and future increases in increments ranging $4.0 million to $9.0 million per year until the total amount reaches $114.0 million in 2034. We may request a redetermination with Exxon every two years by providing certain documentation as provided in the purchase agreement. We are required to maintain this scheduled level of bonds until the properties are fully plugged, abandoned, and restored in accordance with applicable laws and regulations.
Pursuant to the Purchase and Sale Agreement with Conoco related to ARO for certain properties, we were required to obtain $49.0 million of surety bonds and are required to maintain this level of bonds until the properties are fully plugged, abandoned, and restored in accordance with applicable laws and regulations.
During 2020, 2019 and 2018, we had surety bonds primarily related to our decommissioning obligations or ARO. Total expenses related to surety bonds, inclusive of the surety bonds in connection with the Total E&P and Shell agreements described above, were $5.4 million, $4.7 million, and $5.9 million during 2020, 2019 and 2018, respectively. The amount of future commitments is dependent on rates charged in the market place and when asset retirements are completed. Estimated future expenses related to surety bonds were based on current market prices and estimates of the timing of asset retirements, of which some wells and structures are estimated to extend to 2065. Future payment estimates are: 2021–$5.8 million; 2022–$5.6 million; 2023 - $5.7 million; 2024 - $5.6 million; 2025–$5.6 million and thereafter–$57.9 million. Future surety bond costs may change due to a number of factors, including changes and interpretations of regulations by the BOEM.
In conjunction with the purchase of an interest in the Heidelberg field, we assumed contracts with certain pipeline companies that contain minimum quantities obligations that extend to 2028. For 2020, 2019 and 2018 expense recognized for the difference between the quantities shipped and the minimum obligations was $4.5 million, $4.5 million and $2.3 million, respectively. As of December 31, 2020, the estimated future costs are: 2021–$2.5 million; 2022–$1.8 million; 2023–$1.2 million; 2024 - $0.8 million; 2025 - $0.6 million and thereafter–$0.7 million.
We have no drilling rig commitments as of December 31, 2020.
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During 2020, 2019 and 2018, there were certain transactions between us and other companies our CEO either controlled or in which he had an ownership interest. Our CEO owns an aircraft that the Company used for business purposes and the CEO used for his personal matters pursuant to his employment contract, and these costs were paid by the Company. Airplane services transactions were approximately $0.3 million, $1.2 million and $1.3 million for the years 2020, 2019 and 2018 respectively. Our CEO has ownership interests in certain wells operated by us (such ownership interests pre-date our initial public offering). Revenues are disbursed and expenses are collected in accordance with ownership interest. Proportionate insurance premiums were paid to us and proportionate collections of insurance reimbursements attributable to damage on certain wells were disbursed. A company that provides marine transportation and logistics services to W&T employs the spouse of our CEO. The rates charged for these marine and transportation services were generally either equal to or below rates charged by non-related, third-party companies and/or otherwise determined to be of the best value to the Company. Payments to such company totaled $14.4 million, $22.8 million and $21.0 million in 2020, 2019 and 2018, respectively. The spouse received commissions partially based on services rendered to W&T which were approximately $0.1 million in 2020, 2019 and 2018. During 2018, an entity controlled by our CEO participated in the Senior Second Lien Note issuance for an $8.0 million principal commitment on the same terms as the other lenders. See Note 4 for information on a related party transaction concerning Monza.
17. Contingencies
Apache Lawsuit
On December 15, 2014, Apache filed a lawsuit against the Company, Apache Deepwater, L.L.C. vs. W&T Offshore, Inc., alleging that W&T breached the joint operating agreement related to, among other things, the abandonment of three deepwater wells in the Mississippi Canyon area of the Gulf of Mexico. A trial court judgment was rendered from the U.S. District Court for the Southern District of Texas on May 31, 2017 directing the Company to pay Apache $49.5 million including prejudgment interest, attorney's fees and costs. We unsuccessfully appealed that judgment through a process ending with the denial of a writ of certiorari to the United States Supreme Court. A deposit of $49.5 million we made in June of 2017 with the registry of the court was distributed during 2019 pursuant to an agreement with Apache.
Due to funds being distributed during 2019, amounts previously recorded of $49.5 million in Other assets (long-term) and $49.5 million recorded in Other liabilities (long-term) on the Consolidated Balance Sheet as of December 31, 2018 were reversed during 2019 and interest income of $1.9 million was recorded in Interest expense, net on the Consolidated Statements of Operations in 2019.
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Appeal with 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 was denied in May 2014. On June 17, 2014, we filed an appeal with the Interior Board of Land Appeals (“IBLA”) under the DOI. On January 27, 2017, the IBLA affirmed the decision of the ONRR requiring W&T to pay approximately $4.7 million in additional royalties. We filed a motion for reconsideration of the IBLA decision on March 27, 2017. Based on a statutory deadline, we filed an appeal of the IBLA decision on July 25, 2017 in the U.S. District Court for the Eastern District of Louisiana. We were required to post a bond in the amount of $7.2 million and cash collateral of $6.9 million in order to appeal the IBLA decision. On December 4, 2018, the IBLA denied our motion for reconsideration. On February 4, 2019, we filed our first amended complaint, and the government has filed its Answer in the Administrative Record. On July 9, 2019, we filed an Objection to the Administrative Record and Motion to Supplement the Administrative Record, asking the court to order the government to file a complete privilege log with the record. Following a hearing on July 31, 2019, the Court ordered the government to file a complete privilege log. In an Order dated December 18, 2019, the court ordered the government to produce certain contracts subject to a protective order and to produce the remaining documents in dispute to the court for in camera review. Ultimately, the court upheld the government’s assertion of privilege and the parties commenced briefing on the merits. At this point, 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 January 2020, the cash collateral in the amount of $6.9 million securing the appeal bond in this matter was released to us. In compliance with the ONRR’s request for W&T to increase the surety posted in the appeal, the penal sum of the bond posted is currently $8.2 million.
Royalties-In-Kind (“RIK”)
Under a program of the Minerals Management Service (“MMS”) (a Department of Interior ("DOI") agency and predecessor to the ONRR), royalties must be paid “in-kind” rather than in value from federal leases in the program. The MMS added to the RIK program our lease at the East Cameron 373 field beginning in November 2001, where in some months we over delivered volumes of natural gas and under delivered volumes of natural gas in other months for royalties owed. The MMS elected to terminate receiving royalties in-kind in October 2008, causing the imbalance to become fixed for accounting purposes. The MMS ordered us to pay an amount based on its interpretation of the program and its calculations of amounts owed. We disagreed with MMS’s interpretations and calculations and filed an appeal with the IBLA, of which the IBLA ruled in MMS’ favor. We filed an appeal with the District Court of the Western District of Louisiana, who assigned the case to a magistrate to review and issue a ruling, and the District Court upheld the magistrate’s ruling on May 29, 2018. We filed an appeal on July 24, 2018. Part of the ruling was in favor of our position and part was in favor of MMS’ position. We appealed the ruling to the U.S. Fifth Circuit Court of Appeals and the government filed a cross-appeal. The Fifth Circuit issued its ruling on December 23, 2019, holding that, while the DOI has statutory authority to switch the method of royalty payment from volumes ("in-kind") to cash ("in value"), the "cashout" methodology that the DOI ordered W&T to implement was unenforceable because that methodology was a "substantive rule" that the DOI adopted in violation of the Administrative Procedure Act. In addition, the Fifth Circuit held that the DOI's claim was unlawfully inflated because DOI improperly failed to give W&T credit for all royalty volumes delivered. The Fifth Circuit remanded the case to the district court to implement the court's decision on appeal. Based on the combination of (i) the DOI's concessions concerning the scope of W&T's liability (e.g., that W&T is only liable for its working interest share of the royalty volumes at issue), and (ii) the Fifth Circuit's ruling, we estimate that the value of the DOI's claim against W&T is no greater than $250,000 and have adjusted the liability reserve for this matter as of December 31, 2020 to such amount.
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Notices of Proposed Civil Penalty Assessment
During 2020 and 2019, we did not pay any civil penalties to the BSEE related to Incidents of Noncompliance (“INCs”) at various offshore locations. In January 2021, we executed a Settlement Agreement with the Bureau of Safety and Environmental Enforcement (“BSEE”) which resolved nine pending civil penalties issued by BSEE. The civil penalties pertained to INCs 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, with the first installment due in March 2021. In addition, W&T committed to implement a Safety Improvement Plan with various deliverables due over a period ending in 2022.
Royalties – “Unbundling” Initiative
The ONRR has 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 quarter 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-K, 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. During 2020, 2019 and 2018, we paid $0.2 million, $0.4 million and $0.6 million, respectively, of additional royalties and expect to pay more in the future. We are not able to determine the range of any additional royalties or if such amounts would be material.
Supplemental Bonding Requirements by the BOEM
The BOEM requires that lessees demonstrate financial strength and reliability according to its regulations or provide acceptable financial assurances to satisfy lease obligations, including decommissioning activities on the OCS. As of the filing date of this Form 10-K, the Company is in compliance with its financial assurance obligations to the BOEM and has no outstanding BOEM orders related to assurance obligations. W&T and other offshore Gulf of Mexico producers may in the ordinary course receive future demands for financial assurances from the BOEM as the BOEM continues to reevaluate its requirements for financial assurances.
Surety Bond Issuers’ Collateral Requirements
The issuers of surety bonds in some cases have requested and received additional collateral related to surety bonds for plugging and abandonment activities. We may be required to post collateral at any time pursuant to the terms of our agreement with various sureties under our existing bonds, if they so demand at their discretion. We did not receive any such collateral demands from surety bond providers during 2020 or 2019.
Other 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.
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Selected Quarterly Financial Data—UNAUDITED
Unaudited quarterly financial data are as follows (in thousands, except per share amounts):
|
|
1st Quarter
|
|
|
2nd Quarter
|
|
|
3rd Quarter
|
|
|
4th Quarter
|
|
Year Ended December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
124,128
|
|
|
$
|
55,241
|
|
|
$
|
72,517
|
|
|
|
94,748
|
|
Operating (loss) income
|
|
|
71,811
|
|
|
|
(28,041
|
)
|
|
|
(19,510
|
)
|
|
|
349
|
|
Net (loss) income (1)
|
|
|
65,980
|
|
|
|
(5,904
|
)
|
|
|
(13,339
|
)
|
|
|
(8,947
|
)
|
Basic and diluted (loss) earnings per common share (2)
|
|
|
0.46
|
|
|
|
(0.04
|
)
|
|
|
(0.09
|
)
|
|
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
116,080
|
|
|
$
|
134,701
|
|
|
$
|
132,221
|
|
|
$
|
151,894
|
|
Operating income
|
|
|
(30,976
|
)
|
|
|
37,379
|
|
|
|
35,399
|
|
|
|
16,847
|
|
Net (loss) income (1)
|
|
|
(47,761
|
)
|
|
|
36,389
|
|
|
|
75,899
|
|
|
|
9,559
|
|
Basic and diluted earnings per common share (2)
|
|
|
(0.34
|
)
|
|
|
0.25
|
|
|
|
0.53
|
|
|
|
0.07
|
|
(1)
|
During 2020, we recorded a derivative (gain) loss of $(61.9) million, 15.4 million, 11.2 million, and $11.5 million in the first, second, third and fourth quarters, respectively. During 2020, we recorded gain on debt transactions of $47.5 million. During 2020, we recorded income tax expense (benefit) of $6.5 million, ($8.7) million, ($21.1) million and ($6.9) million in the first, second, third and fourth quarters, respectively. During 2019, we recorded a derivative loss (gain) of $48.9 million, ($1.8) million, ($5.9) million, and $18.7 million in the first, second, third and fourth quarters, respectively. During 2019, we recorded income tax expense (benefit) of $0.2 million, ($11.7) million, ($55.5) million and ($8.2) million in the first, second, third and fourth quarters, respectively.
|
(2)
|
The sum of the individual quarterly earnings (loss) per common share may not agree with the yearly amount due to each quarterly calculation is based on income for that quarter and the weighted average common shares outstanding for that quarter.
|
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. Supplemental Oil and Gas Disclosures—UNAUDITED
Geographic Area of Operation
All of our proved reserves are located within the United States in the Gulf of Mexico. Therefore, the following disclosures about our costs incurred, results of operations and proved reserves are on a total-company basis.
Capitalized Costs
Net capitalized costs related to our oil, NGLs and natural gas producing activities are as follows (in millions):
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Net capitalized costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved oil and natural gas properties and equipment
|
|
$
|
8,567.5
|
|
|
$
|
8,532.2
|
|
|
$
|
8,169.9
|
|
Accumulated depreciation, depletion and amortization related to oil, NGLs and natural gas activities
|
|
|
(7,890.9
|
)
|
|
|
(7,793.3
|
)
|
|
|
(7,665.1
|
)
|
Net capitalized costs related to producing activities
|
|
$
|
676.6
|
|
|
$
|
738.9
|
|
|
$
|
504.8
|
|
Costs Incurred In Oil and Gas Property Acquisition, Exploration and Development Activities
The following costs were incurred in oil and gas acquisition, exploration, and development activities (in millions):
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Costs incurred: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved properties acquisitions
|
|
$
|
8.1
|
|
|
$
|
223.8
|
|
|
$
|
24.1
|
|
Exploration (2) (3)
|
|
|
7.4
|
|
|
|
30.6
|
|
|
|
49.9
|
|
Development
|
|
|
23.6
|
|
|
|
114.5
|
|
|
|
56.2
|
|
Total costs incurred in oil and gas property acquisition, exploration and development activities
|
|
$
|
39.1
|
|
|
$
|
368.9
|
|
|
$
|
130.2
|
|
|
(1)
|
Includes net additions from capitalized ARO of $15.2 million, $37.5 million, and $20.3 million during 2020, 2019, and 2018, respectively. These adjustments for ARO are associated with acquisitions, liabilities incurred, divestitures and revisions of estimates.
|
|
(2)
|
Includes seismic costs of $0.3 million, $7.8 million, and $1.5 million incurred during 2020, 2019, and 2018, respectively.
|
|
(3)
|
Includes geological and geophysical costs charged to expense of $4.5 million, $5.7 million, and $5.4 million during 2020, 2019, and 2018, respectively.
|
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Depreciation, depletion, amortization and accretion expense
The following table presents our depreciation, depletion, amortization and accretion expense per barrel equivalent (“Boe”) of products sold:
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Depreciation, depletion, amortization and accretion per Boe
|
|
$
|
7.82
|
|
|
$
|
10.01
|
|
|
$
|
11.24
|
|
Oil and Natural Gas Reserve Information
There are numerous uncertainties in estimating quantities of proved reserves and in providing the future rates of production and timing of development expenditures. The following reserve information represents estimates only and are inherently imprecise and may be subject to substantial revisions as additional information such as reservoir performance, additional drilling, technological advancements and other factors become available. Decreases in the prices of oil, NGLs and natural gas could have an adverse effect on the carrying value of our proved reserves, reserve volumes and our revenues, profitability and cash flow. We are not the operator with respect to 22.1% of our proved developed non-producing reserves as of December 31, 2020 so we may not be in a position to control the timing of all development activities. We are the operator for substantially all of our proved undeveloped reserves as of December 31, 2020. In prior years, we were not the operator of substantially all proved undeveloped reserves.
The following sets forth estimated quantities of our net proved, proved developed and proved undeveloped oil, NGLs and natural gas reserves. All of the reserves are located in the United States with all located in state and federal waters in the Gulf of Mexico. The reserve estimates exclude insignificant royalties and interests owned by the Company due to the unavailability of such information. In addition to other criteria, estimated reserves are assessed for economic viability based on the unweighted average of first-day-of-the-month commodity prices over the period January through December for the year in accordance with definitions and guidelines set forth by the SEC and the FASB. The prices used do not purport, nor should it be interpreted, to present the current market prices related to our estimated oil and natural gas reserves. Actual future prices and costs may differ materially from those used in determining our proved reserves for the periods presented. The prices used are presented in the section below entitled “Standardized Measure of Discounted Future Net Cash Flows”.
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Energy Equivalent Reserves (1)
|
|
|
|
Oil (MMBbls)
|
|
|
NGLs (MMBbls)
|
|
|
Natural Gas (Bcf)
|
|
|
Oil Equivalent (MMBoe)
|
|
|
Natural Gas Equivalent (Bcfe)
|
|
Proved reserves as of Dec. 31, 2017
|
|
|
34.4
|
|
|
|
7.8
|
|
|
|
192.2
|
|
|
|
74.2
|
|
|
|
445.3
|
|
Revisions of previous estimates (2)
|
|
|
11.6
|
|
|
|
2.8
|
|
|
|
40.4
|
|
|
|
21.1
|
|
|
|
126.7
|
|
Extensions and discoveries (3)
|
|
|
0.5
|
|
|
|
0.3
|
|
|
|
7.7
|
|
|
|
2.1
|
|
|
|
12.6
|
|
Purchase of minerals in place (4)
|
|
|
1.5
|
|
|
|
0.4
|
|
|
|
9.4
|
|
|
|
3.4
|
|
|
|
20.7
|
|
Sales of minerals in place (5)
|
|
|
(2.2
|
)
|
|
|
(0.2
|
)
|
|
|
(7.2
|
)
|
|
|
(3.5
|
)
|
|
|
(21.2
|
)
|
Production
|
|
|
(6.7
|
)
|
|
|
(1.3
|
)
|
|
|
(32.0
|
)
|
|
|
(13.3
|
)
|
|
|
(80.0
|
)
|
Proved reserves as of Dec. 31, 2018
|
|
|
39.1
|
|
|
|
9.8
|
|
|
|
210.5
|
|
|
|
84.0
|
|
|
|
504.1
|
|
Revisions of previous estimates (6)
|
|
|
1.4
|
|
|
|
(1.5
|
)
|
|
|
(16.9
|
)
|
|
|
(3.0
|
)
|
|
|
(18.2
|
)
|
Extensions and discoveries (7)
|
|
|
0.9
|
|
|
|
0.1
|
|
|
|
1.2
|
|
|
|
1.1
|
|
|
|
6.7
|
|
Purchase of minerals in place (8)
|
|
|
3.1
|
|
|
|
17.4
|
|
|
|
417.6
|
|
|
|
90.1
|
|
|
|
540.9
|
|
Production
|
|
|
(6.7
|
)
|
|
|
(1.3
|
)
|
|
|
(41.3
|
)
|
|
|
(14.8
|
)
|
|
|
(89.0
|
)
|
Proved reserves as of Dec. 31, 2019
|
|
|
37.8
|
|
|
|
24.5
|
|
|
|
571.1
|
|
|
|
157.4
|
|
|
|
944.5
|
|
Revisions of previous estimates (9)
|
|
|
(0.9
|
)
|
|
|
(5.9
|
)
|
|
|
31.6
|
|
|
|
(1.4
|
)
|
|
|
(8.8
|
)
|
Extensions and discoveries (10)
|
|
|
0.2
|
|
|
|
0.0
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
1.3
|
|
Purchase of minerals in place (11)
|
|
|
0.7
|
|
|
|
0.4
|
|
|
|
14.8
|
|
|
|
3.6
|
|
|
|
21.8
|
|
Production
|
|
|
(5.6
|
)
|
|
|
(1.7
|
)
|
|
|
(48.4
|
)
|
|
|
(15.4
|
)
|
|
|
(92.3
|
)
|
Proved reserves as of Dec. 31, 2020
|
|
|
32.2
|
|
|
|
17.3
|
|
|
|
569.3
|
|
|
|
144.4
|
|
|
|
866.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-end proved developed reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
24.0
|
|
|
|
16.5
|
|
|
|
550.2
|
|
|
|
132.2
|
|
|
|
793.3
|
|
2019
|
|
|
28.0
|
|
|
|
21.7
|
|
|
|
504.9
|
|
|
|
133.8
|
|
|
|
802.9
|
|
2018
|
|
|
31.5
|
|
|
|
7.8
|
|
|
|
166.8
|
|
|
|
67.0
|
|
|
|
402.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-end proved undeveloped reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 (12)
|
|
|
8.2
|
|
|
|
0.9
|
|
|
|
19.1
|
|
|
|
12.2
|
|
|
|
73.2
|
|
2019
|
|
|
9.8
|
|
|
|
2.8
|
|
|
|
66.2
|
|
|
|
23.6
|
|
|
|
141.6
|
|
2018
|
|
|
7.6
|
|
|
|
2.0
|
|
|
|
43.7
|
|
|
|
17.0
|
|
|
|
101.9
|
|
Volume measurements:
|
|
|
MMBbls – million barrels for crude oil, condensate or NGLs
|
|
Bcf – billion cubic feet
|
MMBoe – million barrels of oil equivalent
|
|
Bcfe – billion cubic feet of gas equivalent
|
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1)
|
The conversion to barrels of oil equivalent and cubic feet equivalent were determined using the energy-equivalent ratio of six Mcf of natural gas to one barrel of crude oil, condensate or NGLs (totals may not compute due to rounding). The energy-equivalent ratio does not assume price equivalency, and the energy-equivalent prices for crude oil, NGLs and natural gas may differ significantly.
|
(2)
|
Primarily related to upward revisions at our Mahogany field and our Ship Shoal 028 field. Additionally, increases of 2.3 MMBoe were due to price revisions.
|
(3)
|
Primarily related to extensions and discoveries of 1.3 MMBoe at our Viosca Knoll 823 (Virgo) field and 0.7 MMBoe at our Ewing Bank 910 field.
|
(4)
|
Primarily related to our Ship Shoal 028 field and our Green Canyon 859 field (Heidelberg).
|
(5)
|
Primarily related to conveyance of interest in properties related to the JV Drilling Program.
|
(6)
|
Increases primarily related to upward revisions to our Ship Shoal 028 field and our Main Pass 108 field. Decreases of 10.0 MMBoe were due to price revisions for all proved reserves, which include estimated price revisions of the purchase of minerals in place from the date of purchase to December 31, 2019.
|
(7)
|
Primarily related to extensions and discoveries of 0.9 MMBoe at our Mississippi Canyon 800 (Gladden) field.
|
(8)
|
Primarily related to the Mobile Bay Properties and Magnolia acquisitions.
|
(9)
|
Decreases of 27.7 MMBoe were due to price revisions for all proved reserves. Increases of 26.2 MMBoe were primarily related to technical revisions at our Mobile Bay and Fairway properties.
|
(10)
|
Primarily related to the discovery at East Cameron 338 field.
|
(11)
|
Primarily related to the Mobile Bay Properties and Mahogany working interest acquisitions.
|
(12)
|
We believe that we will be able to develop all but 2.3 MMBoe (approximately 19%) of the total of 12.2 MMBoe reserves classified as proved undeveloped (“PUDs”) at December 31, 2020, within five years from the date such reserves were initially recorded. The lone exceptions are at the Mississippi Canyon 243 field ("Matterhorn") and Viosca Knoll 823 ("Virgo") deepwater fields where future development drilling has been planned as sidetracks of existing wellbores due to conductor slot limitations and rig availability. Two sidetrack PUD locations, one each at Matterhorn and Virgo, will be delayed until an existing well is depleted and available to sidetrack. We also plan to recomplete and convert an existing producer at Matterhorn to water injection for improved recovery following depletion of existing well. Based on the latest reserve report, these PUD locations are expected to be developed in 2022 and 2024.
|
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Standardized Measure of Discounted Future Net Cash Flows
The following presents the standardized measure of discounted future net cash flows related to our proved oil and natural gas reserves together with changes therein. Future cash inflows represent expected revenues from production of period-end quantities of proved reserves based on the unweighted average of first-day-of-the-month commodity prices for the periods presented. All prices are adjusted by field for quality, transportation fees, energy content and regional price differentials. Due to the lack of a benchmark price for NGLs, a ratio is computed for each field of the NGLs realized price compared to the crude oil realized price. Then, this ratio is applied to the crude oil price using FASB/SEC guidance. The average commodity prices weighted by field production and after adjustments related to the proved reserves are as follows:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Oil - per barrel
|
|
$
|
37.78
|
|
|
$
|
58.11
|
|
|
$
|
65.21
|
|
|
$
|
46.58
|
|
NGLs per barrel
|
|
|
10.29
|
|
|
|
18.72
|
|
|
|
29.73
|
|
|
|
22.65
|
|
Natural gas per Mcf
|
|
|
2.05
|
|
|
|
2.63
|
|
|
|
3.13
|
|
|
|
2.86
|
|
Future production, development costs and ARO are based on costs in effect at the end of each of the respective years with no escalations. Estimated future net cash flows, net of future income taxes, have been discounted to their present values based on a 10% annual discount rate.
The standardized measure of discounted future net cash flows does not purport, nor should it be interpreted, to present the fair market value of our oil and natural gas reserves. These estimates reflect proved reserves only and ignore, among other things, future changes in prices and costs, revenues that could result from probable reserves which could become proved reserves in 2021 or later years and the risks inherent in reserve estimates. The standardized measure of discounted future net cash flows relating to our proved oil and natural gas reserves is as follows (in millions):
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Standardized Measure of Discounted Future Net Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
Future cash inflows
|
|
$
|
2,561.2
|
|
|
$
|
4,153.8
|
|
|
$
|
3,500.9
|
|
Future costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
|
(1,257.4
|
)
|
|
|
(1,901.1
|
)
|
|
|
(958.5
|
)
|
Development and abandonment
|
|
|
(707.4
|
)
|
|
|
(794.7
|
)
|
|
|
(628.3
|
)
|
Income taxes
|
|
|
(60.5
|
)
|
|
|
(170.5
|
)
|
|
|
(293.9
|
)
|
Future net cash inflows before 10% discount
|
|
|
535.9
|
|
|
|
1,287.5
|
|
|
|
1,620.2
|
|
10% annual discount factor
|
|
|
(42.2
|
)
|
|
|
(300.6
|
)
|
|
|
(553.2
|
)
|
Total
|
|
$
|
493.7
|
|
|
$
|
986.9
|
|
|
$
|
1,067.0
|
|
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The change in the standardized measure of discounted future net cash flows relating to our proved oil and natural gas reserves is as follows (in millions):
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Changes in Standardized Measure
|
|
|
|
|
|
|
|
|
|
|
|
|
Standardized measure, beginning of year
|
|
$
|
986.9
|
|
|
$
|
1,067.0
|
|
|
$
|
740.6
|
|
Increases (decreases):
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and transfers of oil and gas produced, net of production costs
|
|
|
(168.6
|
)
|
|
|
(315.8
|
)
|
|
|
(398.1
|
)
|
Net changes in price, net of future production costs
|
|
|
(503.7
|
)
|
|
|
(376.4
|
)
|
|
|
571.5
|
|
Extensions and discoveries, net of future production and development costs
|
|
|
2.8
|
|
|
|
27.0
|
|
|
|
53.6
|
|
Changes in estimated future development costs
|
|
|
(15.9
|
)
|
|
|
(6.0
|
)
|
|
|
(114.7
|
)
|
Previously estimated development costs incurred
|
|
|
1.4
|
|
|
|
19.3
|
|
|
|
48.4
|
|
Revisions of quantity estimates
|
|
|
(65.2
|
)
|
|
|
116.4
|
|
|
|
307.6
|
|
Accretion of discount
|
|
|
111.8
|
|
|
|
107.4
|
|
|
|
50.5
|
|
Net change in income taxes
|
|
|
87.7
|
|
|
|
62.9
|
|
|
|
(133.4
|
)
|
Purchases of reserves in-place
|
|
|
44.6
|
|
|
|
298.3
|
|
|
|
27.8
|
|
Sales of reserves in-place
|
|
|
—
|
|
|
|
—
|
|
|
|
(54.1
|
)
|
Changes in production rates due to timing and other
|
|
|
11.9
|
|
|
|
(13.2
|
)
|
|
|
(32.7
|
)
|
Net (decrease) increase
|
|
|
(493.2
|
)
|
|
|
(80.1
|
)
|
|
|
326.4
|
|
Standardized measure, end of year
|
|
$
|
493.7
|
|
|
$
|
986.9
|
|
|
$
|
1,067.0
|
|