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Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


Form 10-Q


 

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

For the quarterly period ended June 30, 2020

or

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

For the transition period from _______________ to ________________

Commission File Number 1-32414


W&T OFFSHORE, INC.

(Exact name of registrant as specified in its charter)


Texas

72-1121985

(State of incorporation)

(IRS Employer Identification Number)

  

Nine Greenway Plaza, Suite 300, Houston, Texas

77046-0908

(Address of principal executive offices)

(Zip Code)

(713) 626-8525

(Registrant’s telephone number, including area code)

 


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

 

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

 

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

 

Large accelerated filer ☐

 

Accelerated filer

Non-accelerated filer ☐

 

Smaller reporting company

  

Emerging growth company

 

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

 

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

 

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

     

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.00001

 

WTI

 

New York Stock Exchange

 

As of August 4, 2020, there were 141,668,942 shares outstanding of the registrant’s common stock, par value $0.00001.



 

 

 

 

 

 

 

 

W&T OFFSHORE, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

   

Page

PART I –FINANCIAL INFORMATION

 
     

Item 1.

Financial Statements

1
 

Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019

1
 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2020 and 2019

2
 

Condensed Consolidated Statements of Changes in Shareholders’ Deficit for the Three and Six Months Ended June 30, 2020 and 2019

3
 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019

4
 

Notes to Condensed Consolidated Financial Statements

5

Item 2.

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

22

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

Item 4.

Controls and Procedures

37
   

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

38

Item 1A.

Risk Factors

38

Item 6.

Exhibits

39
   

SIGNATURE

40

 

 

Table of Contents

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

  

June 30,

  

December 31,

 
  

2020

  

2019

 

Assets

        

Current assets:

        

Cash and cash equivalents

 $36,506  $32,433 

Receivables:

        

Oil and natural gas sales

  22,383   57,367 

Joint interest and other, net

  14,657   19,400 

Income taxes

     1,861 

Total receivables

  37,040   78,628 

Prepaid expenses and other assets (Note 1)

  32,566   30,691 

Total current assets

  106,112   141,752 
         

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

  713,063   748,798 
         

Restricted deposits for asset retirement obligations

  29,912   15,806 

Deferred income taxes

  66,124   63,916 

Other assets (Note 1)

  27,535   33,447 

Total assets

 $942,746  $1,003,719 

Liabilities and Shareholders’ Deficit

        

Current liabilities:

        

Accounts payable

 $52,368  $102,344 

Undistributed oil and natural gas proceeds

  15,776   29,450 

Advance from joint interest partner

  11,129   5,279 

Asset retirement obligations

  12,506   21,991 

Accrued liabilities (Note 1)

  22,668   30,896 

Total current liabilities

  114,447   189,960 
         

Long-term debt: (Note 2)

        

Principal

  632,460   730,000 

Carrying value adjustments

  (8,238)  (10,467)

Long term debt - carrying value

  624,222   719,533 
         

Asset retirement obligations, less current portion

  362,301   333,603 

Other liabilities (Note 1)

  28,998   9,988 

Commitments and contingencies

      

Shareholders’ deficit:

        

Preferred stock, $0.00001 par value; 20,000 shares authorized; 0 issued for both periods

      

Common stock, $0.00001 par value; 200,000 shares authorized, 144,538 issued and 141,669 outstanding at both periods

  1   1 

Additional paid-in capital

  549,117   547,050 

Retained deficit

  (712,173)  (772,249)

Treasury stock, at cost; 2,869 shares for both dates presented

  (24,167)  (24,167)

Total shareholders’ deficit

  (187,222)  (249,365)

Total liabilities and shareholders’ deficit

 $942,746  $1,003,719 

 

See Notes to Condensed Consolidated Financial Statements

 

 

1

 

 

W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands except per share data)

(Unaudited)

 

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 

Revenues:

                               

Oil

  $ 30,645     $ 109,195     $ 115,295     $ 195,898  

NGLs

    1,917       4,640       8,369       11,088  

Natural gas

    21,364       19,567       50,664       41,405  

Other

    1,315       1,299       5,041       2,390  

Total revenues

    55,241       134,701       179,369       250,781  

Operating costs and expenses:

                               

Lease operating expenses

    28,313       40,341       83,088       83,797  

Production taxes

    1,143       317       2,059       733  

Gathering and transportation

    3,301       7,068       8,750       13,491  

Depreciation, depletion, amortization and accretion

    29,483       38,073       68,609       71,839  

General and administrative expenses

    5,628       13,328       19,591       27,437  

Derivative loss (gain)

    15,414       (1,805 )     (46,498 )     47,081  

Total costs and expenses

    83,282       97,322       135,599       244,378  

Operating (loss) income

    (28,041 )     37,379       43,770       6,403  

Interest expense, net

    14,816       12,207       31,926       28,489  

Gain on purchase of debt

    (28,968 )           (47,469 )      

Other expense, net

    751       478       1,474       809  

(Loss) income before income tax benefit

    (14,640 )     24,694       57,839       (22,895 )

Income tax benefit

    (8,736 )     (11,695 )     (2,237 )     (11,523 )

Net (loss) income

  $ (5,904 )   $ 36,389     $ 60,076     $ (11,372 )

Basic and diluted (loss) earnings per common share

  $ (0.04 )   $ 0.25     $ 0.42     $ (0.08 )

 

 

See Notes to Condensed Consolidated Financial Statements.

 

2

Table of Contents

 

 

W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT

(In thousands)

(Unaudited)

 

   

Common Stock Outstanding

   

Additional Paid-In

   

Retained

   

Treasury Stock

   

Total Shareholders’

 
   

Shares

   

Value

   

Capital

   

Deficit

   

Shares

   

Value

   

Deficit

 

Balances, March 31, 2020

    141,669     $ 1     $ 548,098     $ (706,269 )     2,869     $ (24,167 )   $ (182,337 )

Share-based compensation

                1,019                         1,019  
Stock Issued                                          

Net loss

                      (5,904 )                 (5,904 )

Balances, June 30, 2020

    141,669     $ 1     $ 549,117     $ (712,173 )     2,869     $ (24,167 )   $ (187,222 )

 

 

   

Common Stock Outstanding

   

Additional Paid-In

   

Retained

   

Treasury Stock

   

Total Shareholders’

 
   

Shares

   

Value

   

Capital

   

Deficit

   

Shares

   

Value

   

Deficit

 

Balances, March 31, 2019

    140,644     $ 1     $ 545,627     $ (894,096 )     2,869     $ (24,167 )   $ (372,635 )

Share-based compensation

                1,259                         1,259  
Stock Issued     46                                      

Net income

                      36,389                   36,389  

Balances, June 30, 2019

    140,690     $ 1     $ 546,886     $ (857,707 )     2,869     $ (24,167 )   $ (334,987 )

 

 

   

Common Stock Outstanding

   

Additional Paid-In

   

Retained

   

Treasury Stock

   

Total Shareholders’

 
   

Shares

   

Value

   

Capital

   

Deficit

   

Shares

   

Value

   

Deficit

 

Balances, December 31, 2019

    141,669     $ 1     $ 547,050     $ (772,249 )     2,869     $ (24,167 )   $ (249,365 )

Share-based compensation

                2,067                         2,067  

Stock Issued

                                         

Net income

                      60,076                   60,076  

Balances, June 30, 2020

    141,669     $ 1     $ 549,117     $ (712,173 )     2,869     $ (24,167 )   $ (187,222 )

 

 

   

Common Stock Outstanding

   

Additional Paid-In

   

Retained

   

Treasury Stock

   

Total Shareholders’

 
   

Shares

   

Value

   

Capital

   

Deficit

   

Shares

   

Value

   

Deficit

 

Balances, December 31, 2018

    140,644     $ 1     $ 545,705     $ (846,335 )     2,869     $ (24,167 )   $ (324,796 )

Share-based compensation

                1,181                         1,181  

Stock Issued

    46                                      

Net loss

                      (11,372 )                 (11,372 )

Balances, June 30, 2019

    140,690     $ 1     $ 546,886     $ (857,707 )     2,869     $ (24,167 )   $ (334,987 )


 

See Notes to Condensed Consolidated Financial Statements

 

3

Table of Contents

 

 

W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

  

Six Months Ended June 30,

 
  

2020

  

2019

 

Operating activities:

        

Net income (loss)

 $60,076  $(11,372)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

        

Depreciation, depletion, amortization and accretion

  68,609   71,839 

Amortization of debt items and other items

  3,682   2,485 

Share-based compensation

  2,067   1,181 

Derivative (gain) loss

  (46,498)  47,081 

Cash receipts on derivative settlements, net

  37,566   12,792 
Gain on purchase of debt  (47,469)   

Deferred Income taxes

  (2,207)  (11,523)

Changes in operating assets and liabilities:

        

Oil and natural gas receivables

  34,984   5,992 

Joint interest receivables

  4,743   (24,162)

Prepaid expenses and other assets

  3,505   (8,134)
Income tax  2,008    

Asset retirement obligation settlements

  (2,164)  (2,641)

Cash advance from JV partner

  5,850   18,527 

Accounts payable, accrued liabilities and other

  (31,274)  4,251 

Net cash provided by operating activities

  93,478   106,316 

Investing activities:

        

Investment in oil and natural gas properties and equipment

  (39,949)  (63,149)
Acquisition of property interest in oil and natural gas properties  (456)  (10,000)

Purchases of furniture, fixtures and other

  (70)   

Net cash used in investing activities

  (40,475)  (73,149)
Financing activities:        

Borrowings on credit facility

  25,000    

Repayments on credit facility

  (50,000)   
Purchase of Senior Second Lien Notes  (23,930)   

Debt issuance costs and other

     (751)

Net cash used in financing activities

  (48,930)  (751)

Increase in cash and cash equivalents

  4,073   32,416 

Cash and cash equivalents, beginning of period

  32,433   33,293 

Cash and cash equivalents, end of period

 $36,506  $65,709 

 

See Notes to Condensed Consolidated Financial Statements.

 

4

Table of Contents

 

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

 

 

1.

Basis of Presentation

 

Operations.  W&T Offshore, Inc. (with subsidiaries referred to herein as “W&T,” “we,” “us,” “our,” or the “Company”) is an independent oil and natural gas producer with substantially all of its operations offshore in the Gulf of Mexico.  The Company is active in the exploration, development and acquisition of oil and natural gas properties. Our interests in fields, leases, structures and equipment are primarily owned by the Company and its 100%-owned subsidiary, W & T Energy VI, LLC, and through our proportionately consolidated interest in Monza Energy LLC (“Monza”), as described in more detail in Note 4.

 

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

 

Operating results for interim periods are not necessarily indicative of the results that may be expected for the entire year.  These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

 

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

 

Recent Events.  The pandemic spread of the disease caused by a new strain of coronavirus (“COVID-19”) and other world events have significantly impacted the price of crude oil and the demand for crude oil beginning in March of 2020.  Additionally, prices for natural gas liquids (“NGLs”) and natural gas decreased in the three months ended June 30, 2020 compared to the prior quarter and prior year levels, all of which have impacted revenues for the three and six months ended June 30, 2020.  While crude oil prices have partially recovered in June 2020 from recent historical lows in April 2020, the perceived risks and volatility have increased in 2020 to date compared to recent years.  Natural gas prices have remained at 2nd quarter levels through July 2020. The Company has taken measures to reduce operating costs and capital expenditures in response.  Management's assessment is the Company has adequate liquidity to meet the criteria of a going concern as defined under GAAP.  See Note 2, Long-Term Debt and Note 12, Subsequent Events, for additional information.  

 

Accounting Standard Updates effective January 1, 2020 

 

Credit Losses -  In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 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. The amendment did not have a material impact on our financial statements and did not affect the opening balance of Retained Deficit.

 

Derivatives and Hedging - 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 earnings 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.

 

 

 

 

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

 

 

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.

 

Paycheck Protection Program (“PPP”).  On April 15, 2020, the Company received $8.4 million under the U.S. Small Business Administration (“SBA”) PPP.  We have elected an accounting policy to analogize International Accounting Standards 20, Accounting for Government Grants and Disclosure of Government Assistance (“IAS 20”), to account for the PPP. 

 

Under IAS 20, a government grant is recognized when there is reasonable assurance that the Company has complied with the provisions of the grant.  Management believes the Company has met all the requirements under the PPP and, after submitting an application to the SBA on the utilization of the funds, 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 funds as a reduction of the related expense in the Condensed Consolidated Statement of Operations.

 

During the covered period, we have applied all PPP funds to covered payroll and non-payroll expenses per the PPP. As a result, we have reduced expenses during the quarter ended June 30, 2020 to reflect PPP fund application. Within the Condensed Consolidated Statement of Operations, credits to Lease operating expenses of $2.3 million, General and administrative expenses of $5.0 million and reductions to Interest expense, net, of $1.1 million were recognized for the three and six months ended June 30, 2020.  Should the SBA reject the Company's application on the utilization of the 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 2025 with an annual interest rate of 1%.

 

Credit Risk and Allowance for Credit Losses.  Our revenue has been concentrated in certain major oil and gas companies.  For the year ended December 31, 2019 and for the six months ended June 30, 2020, approximately 63% and 54%, respectively, of our revenue was from three major oil and gas companies and a substantial majority of our receivables were from sales with major oil and gas companies.  We also have receivables related to joint interest arrangements primarily with mid-size oil and gas companies with a substantial majority of the net receivable balance concentrated in less than ten companies.  A loss  methodology is used to develop the allowance for credit losses on material receivables to estimate the net amount to be collected.  The loss methodology uses historical data, current market conditions and forecasts of future economic conditions.  Our maximum exposure at any time would be the receivable balance.  The receivables, Joint interest and other, net, reported on the Condensed Consolidated Balance Sheets are reduced for the allowance for credit losses.  The roll forward of the allowance for credit losses is as follows: 

 

Allowance for credit losses, December 31, 2019

 $9,898 

Additional provisions

  598 

Uncollectible accounts written off

   

Allowance for credit losses, June 30, 2020

 $10,496 

 

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

 

 

  

June 30, 2020

  

December 31, 2019

 

Derivatives - current (1)

 $17,770  $7,266 

Unamortized insurance/bond premiums

  6,269   4,357 

Prepaid deposits related to royalties

  6,813   7,980 

Prepayment to vendors

  1,638   10,202 

Other

  76   886 

Prepaid expenses and other assets

 $32,566  $30,691 

 

 

(1)

Includes closed contracts which have not yet settled.

 

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

 

 

  

June 30, 2020

  

December 31, 2019

 

Oil and natural gas properties and equipment, at cost

 $8,553,306  $8,532,196 

Furniture, fixtures and other

  20,387   20,317 

Total property and equipment

  8,573,693   8,552,513 

Less: Accumulated depreciation, depletion and amortization

  7,860,630   7,803,715 

Oil and natural gas properties and other, net

 $713,063  $748,798 

 

 

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

 

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

 

 

  

June 30, 2020

  

December 31, 2019

 

Right-of-Use assets (Note 7)

 $12,546  $7,936 

Unamortized debt issuance costs

  2,678   3,798 

Investment in White Cap, LLC

  3,118   2,590 

Unamortized brokerage fee for Monza

  2,130   3,423 

Proportional consolidation of Monza's other assets (Note 4)

  2,553   5,308 

Derivative assets

  3,486   2,653 

Appeal bond deposits

     6,925 

Other

  1,024   814 

Total other assets (long-term)

 $27,535  $33,447 

 

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

 

 

  

June 30, 2020

  

December 31, 2019

 

Accrued interest

 $10,357  $10,180 

Accrued salaries/payroll taxes/benefits

  3,112   2,377 

Incentive compensation plans

  1,174   9,794 

Litigation accruals

  3,673   3,673 

Lease liability (Note 7)

  2,130   2,716 

Derivatives - current

  1,779   1,785 

Other

  443   371 

Total accrued liabilities

 $22,668  $30,896 

 

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

 

 

  

June 30, 2020

  

December 31, 2019

 

Dispute related to royalty deductions

 $4,687  $4,687 

Dispute related to royalty-in-kind

  250   250 
Derivatives  2,137    

Lease liability (Note 7)

  9,834   4,419 

Black Elk escrow and other

  12,090   632 

Total other liabilities (long-term)

 $28,998  $9,988 

 

 

 

 

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

 

 

2.

Long-Term Debt

 

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

 

 

  

June 30, 2020

  

December 31, 2019

 

Credit Agreement borrowings

 $80,000  $105,000 
         

Senior Second Lien Notes:

        

Principal

  552,460   625,000 

Unamortized debt issuance costs

  (8,238)  (10,467)

Total Senior Second Lien Notes

  544,222   614,533 
         

Total long-term debt

 $624,222  $719,533 

 

Credit Agreement

 

On October 18, 2018, we entered into the Sixth Amended and Restated Credit Agreement (as amended, the “Credit Agreement”), which matures on October 18, 2022. 

 

On June 17, 2020, the lenders under the Credit Agreement completed their semi-annual borrowing base redetermination and entered into the Third Amendment and Waiver (the “Third Amendment”) to the Credit Agreement.  Although the Company had not violated any covenants, the Third Amendment provides less stringent covenant requirements given the recent changes in the oil and gas markets.  The Third Amendment includes the following changes, among other things, to the Credit Agreement (terms used below are defined in the Credit Agreement,):

 

 

 

 

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

 

 

 

The borrowing base under the Credit Agreement was reduced from $250.0 million to $215.0 million.

 

 

Increased the interest rate margin by 25 basis points.

 

 

Amended the financial covenants as follows:  

 

 

 

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.

 

 

 

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.

 

 

 

Increase the requirement to provide first priority liens on properties constituting at least 85% to 90% of total proved reserves of the Company as set forth on reserve reports required to be delivered under the Credit Agreement.

 

Availability under the Credit Agreement is subject to semi-annual redeterminations of our borrowing base and the next scheduled redetermination is in the fall of 2020.  Additional redeterminations  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 is collateralized by a first priority lien on properties constituting at least 90% of the total proved reserves of the Company as set forth on reserve reports required to be delivered under the Credit Agreement and certain personal property.  The annualized interest rate on borrowings outstanding for the six months ended June 30, 2020 was 3.9%, which excludes debt issuance costs, commitment fees and other fees.

 

Letters of credit may be issued in amounts up to $30.0 million, provided sufficient availability under the Credit Agreement exists.  As of June 30, 2020 and December 31, 2019, we had $6.1 million and $5.8 million, respectively, of letters of credit issued and outstanding under the Credit Agreement.

 

 

 

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

 

9.75% Senior Second Lien Notes Due 2023

 

On October 18, 2018, 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 and mature on November 1, 2023, and are governed under the terms of the Indenture of the Senior Second Lien Notes (the “Indenture”).  The estimated annual effective interest rate on the Senior Second Lien Notes is 10.4%, which includes amortization of debt issuance costs.  Interest on the Senior Second Lien Notes is payable in arrears on May 1 and November 1 of each year.

 

During the six months ended June 30, 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. 

 

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

 

Covenants 

 

As of June 30, 2020 and for all prior measurement periods, we were in compliance with all applicable covenants of the Credit Agreement and the Indenture.

 

Fair Value Measurements 

 

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

 

10

 

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

 

 

3.

Fair Value Measurements

 

Derivative Financial Instruments

 

We measure the fair value of our open derivative financial instruments by applying the income approach, using models with inputs that are classified within Level 2 of the valuation hierarchy.  The inputs used for the fair value measurement of our open derivative financial instruments are the exercise price, the expiration date, the settlement date, notional quantities, the implied volatility, the discount curve with spreads and published commodity future prices.  Our open derivative financial instruments are reported in the Condensed Consolidated Balance Sheets using fair value.  See Note 6, Derivative Financial Instruments, for additional information on our derivative financial instruments.

 

The following table presents the fair value of our open derivative financial instruments (in thousands):

 

  

June 30, 2020

  

December 31, 2019

 

Assets:

        

Derivatives instruments - open contracts, current

 $15,266  $6,921 

Derivatives instruments - open contracts, long-term

  3,486   2,653 
         

Liabilities:

        

Derivatives instruments - open contracts, current

  1,779   1,785 
Derivatives instruments - open contracts, long-term  2,137    

 

Long-Term Debt

 

We believe the carrying value of our debt under the Credit Agreement approximates fair value because the interest rates are variable and reflective of current market rates. The fair value of our Senior Second Lien Notes was measured using quoted prices, although the market is not a very active market. The fair value of our long-term debt was classified as Level 2 within the valuation hierarchy.  See Note 2, Long-Term Debt for additional information on our long-term debt.

 

The following table presents the carrying value and fair value of our long-term debt (in thousands):

 

  

June 30, 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

  544,222   346,862   614,533   597,188 

 

 

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

 

 

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 to fund its retained interest in Monza projects held outside of Monza, are $361.4 million.  Through June 30, 2020, nine wells have been completed.  As of June 30, 2020, one additional well was drilled to target depth, but not completed as of this date.  W&T contributed 88.94% of its working interest in certain identified undeveloped drilling projects to Monza and retained 11.06% of its working interest.  The Joint Venture Drilling Program is structured so that we initially receive an aggregate of 30.0% of the revenues less expenses, through both our direct ownership of our retained working interest in the Monza projects and our indirect interest through our interest in Monza, for contributing 20.0% of the estimated total well costs plus associated leases and providing access to available infrastructure at agreed-upon rates.  Any exceptions to this structure are approved by the Monza board.  W&T is the operator for seven of the nine wells completed through June 30, 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.

 

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 June 30, 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 $60.4 million.  Our net contribution to Monza, reduced by distributions received, as of June 30, 2020 was $54.0 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 June 30, 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 of Monza.  As of June 30, 2020, in the Condensed Consolidated Balance Sheet, we recorded $13.1 million, net, in Oil and natural gas properties and other, net, $2.6 million in Other assets, $0.2 million in ARO and $1.4 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 Condensed 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 the six months ended June 30, 2020 and during the year ended December 31, 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 June 30, 2020 and December 31, 2019 were $11.1 million and $5.3 million, respectively, which are included in the Condensed Consolidated Balance Sheet in Advances from joint interest partners.  For the six months ended June 30, 2020, in the Condensed Consolidated Statement of Operations, we recorded $4.8 million in Total revenues and $6.3 million in Operating costs and expenses in connection with our proportional interest in Monza’s operations.  For the six months ended June 30, 2019, in the Condensed Consolidated Statement of Operations, we recorded $4.0 million in Total revenues and, $2.5 million in Operating costs and expenses in connection with our proportional interest in Monza’s operations.

 

 

 

 

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

 

 

5.

Asset Retirement Obligations

 

Our asset retirement obligations (“ARO”) represent the estimated present value of the amount incurred to plug, abandon and remediate our properties at the end of their productive lives.

 

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

 

Balances, December 31, 2019

 $355,594 

Liabilities settled

  (2,164)

Accretion of discount

  11,684 

Liabilities incurred, including acquisitions

  2,814 

Revisions of estimated liabilities

  6,879 

Balances, June 30, 2020

  374,807 

Less current portion

  12,506 

Long-term

 $362,301 

 

 

6.

Derivative Financial Instruments

 

Our market risk exposure relates primarily to commodity prices and, from time to time, we use various derivative instruments to manage our exposure to this commodity price risk from sales of our crude oil and natural gas.  All of the present derivative counterparties are also lenders or affiliates of lenders participating in our Credit Agreement.  We are exposed to credit loss in the event of nonperformance by the derivative counterparties; however, we currently anticipate that each of our derivative counterparties will be able to fulfill their contractual obligations.  We are not required to provide additional collateral to the derivative counterparties and we do not require collateral from our derivative counterparties.

 

We have elected not to designate our commodity derivative contracts as hedging instruments; therefore, all changes in the fair value of derivative contracts were recognized currently in earnings during the periods presented.  The cash flows of all of our commodity derivative contracts are included in Net cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows.

 

We entered into commodity contracts for crude oil and natural gas which related to a portion of our expected future production.  The crude oil contracts are based on West Texas Intermediate (“WTI”) crude oil prices and the natural gas contracts are based off the Henry Hub prices, both of which are quoted off the New York Mercantile Exchange (“NYMEX”).  The open contracts as of June 30, 2020 are presented in the following tables:

 

Crude Oil: Open Swap Contracts, Priced off WTI (NYMEX)

 

Period

 

Notional Quantity (Bbls/day) (1)

  

Notional Quantity (Bbls) (1)

  

Strike Price

 

Jan 2021 - Dec 2021

  1,000   365,000  $41.00 

Crude Oil: Open Call Contracts - Bought, Priced off WTI (NYMEX)

 

Period

 

Notional Quantity (Bbls/day) (1)

  

Notional Quantity (Bbls) (1)

  

Strike Price

 

July 2020 - Dec. 2020

  10,000   1,840,000  $67.50 

 

Crude Oil: Open Collar Contracts - Priced off WTI (NYMEX)

 

Period

 

Notional Quantity (Bbls/day) (1)

  

Notional Quantity (Bbls) (1)

  

Put Option Weighted Strike Price (Bought)

  

Call Option Weighted Strike Price (Sold)

 

July 2020 - Dec. 2020

  10,000   1,840,000  $45.00  $63.51 

 

 

(1)

Bbls = Barrels

 

 

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


 

Natural Gas: Open Swap Contracts, Bought, Priced off Henry Hub (NYMEX)

 

Period

 

Notional Quantity (MMBtu/day) (2)

  

Notional Quantity (MMBtu) (2)

  

Strike Price

 

Sept 2020 - Dec 2020

  10,000   1,220,000  $2.03 

 

 

Natural Gas: Open Call Contracts, Bought, Priced off Henry Hub (NYMEX)

 

Period

 

Notional Quantity (MMBtu/day) (2)

  

Notional Quantity (MMBtu) (2)

  

Strike Price

 

August 2020 - Dec. 2022

  40,000   35,320,000  $3.00 

 

 

Natural Gas: Open Collar Contracts, Priced off Henry Hub (NYMEX)

 

Period

 

Notional Quantity (MMBtu/day) (2)

  

Notional Quantity (MMBtu) (2)

  

Put Option Weighted Strike Price (Bought)

  

Call Option Weighted Strike Price (Sold)

 

August 2020 - Dec. 2022

  40,000   35,320,000  $1.83  $3.00 
August 2020 - Dec. 2020  10,000   1,530,000  $1.75  $2.58 
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 

 

 

(2)

MMBtu = Million British Thermal Units

 

The following amounts were recorded in the Condensed 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):

 

  

June 30,

  

December 31,

 
  

2020

  

2019

 

Prepaid expenses and other assets

 $17,770  $7,266 

Other assets (long-term)

  3,486   2,653 
Accrued liabilities  1,779   1,785 
Other liabilities (long-term)  2,137    

 

The amounts recorded on the Condensed Consolidated Balance Sheets are on a gross basis.  If these were recorded on a net settlement basis, it would not have resulted in any material differences in reported amounts.

 

Changes in the fair value and settlements of our commodity derivative contracts were as follows (in thousands):

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Derivative loss (gain)

 $15,414  $(1,805) $(46,498) $47,081 

 

 

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

 

 

Cash receipts on commodity derivative contract settlements, net, are included within Net cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows and were as follows (in thousands):

 

  

Six Months Ended June 30,

 
  

2020

  

2019

 

Cash receipts on derivative settlements, net

 $37,566  $12,792 

 

 

7.

Leases

 

Our contract arrangements accounted for under the applicable GAAP for 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. 

 

During the six months ended June 30, 2020, we terminated the existing office lease and executed a new lease on separate office space.  The remaining term of the current office lease extends to December 2020.  The term of the new office lease extends to February 2032.  When calculating the ROU asset and lease liability at the commencement of the new office lease, we have reduced future cash outflows by the lease incentive to be received.

 

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 leases and 10.75% for the other leases due to their longer expected term. 

 

Amounts related to leases recorded within our Condensed Consolidated Balance Sheet are as follows (in thousands):

 

 

  

June 30, 2020

  

December 31, 2019

 

ROU assets

 $12,546  $7,936 
         

Lease liability:

        

Accrued liabilities

 $2,130  $2,716 

Other liabilities

  9,834   4,419 

Total lease liability

 $11,964  $7,135 

 

 

 

 

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

 

 

8.

Share-Based Compensation and Cash-Based Incentive Compensation

 

Awards to Employees. In 2010, the W&T Offshore, Inc. Amended and Restated Incentive Compensation Plan (as amended from time to time, the “Plan”) was approved by our shareholders.  During 2019, 2018 and 2017, the Company granted restricted stock units (“RSUs”) under the Plan to certain of its employees.  RSUs are a long-term compensation component, 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.  In addition to share-based awards, the Company may grant to its employees cash-based incentive awards under the Plan, which may be used as short-term and long-term compensation components of the awards, and are subject to satisfaction of certain predetermined performance criteria.

 

As of June 30, 2020, there were 10,874,043 shares of common stock available for issuance in satisfaction of awards under the Plan.  The shares available for issuance are reduced on a one-for-one basis when RSUs are settled in shares of common stock, which shares of common stock are issued net of withholding tax through the withholding of shares.  The Company has the option following vesting to settle RSUs in stock or cash, or a combination of stock and cash. The Company expects to settle RSUs that vest in the future using shares of common stock.

 

RSUs currently outstanding relate to the 2019 and 2018 grants.  The 2019 and 2018 grants were subject to predetermined performance criteria applied against the applicable performance period.  All the RSUs currently outstanding are 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, 2018 and 2017 were determined using the Company’s closing price on the grant date.  We also estimate forfeitures, resulting in the recognition of compensation cost only for those awards that are expected to actually vest.

 

All RSUs awarded are subject to forfeiture until vested and cannot be sold, transferred or otherwise disposed of during the restricted period.

 

A summary of activity related to RSUs during the six months ended June 30, 2020 is as follows:

 

  

Restricted Stock Units

 
      

Weighted Average

 
      

Grant Date Fair

 
  

Units

  

Value Per Unit

 

Nonvested, December 31, 2019

  1,614,722  $5.73 

Forfeited

  (37,753)  6.21 

Nonvested, June 30, 2020

  1,576,969   5.71 

 

 

For the outstanding RSUs issued to the eligible employees as of June 30, 2020, vesting is expected to occur as follows (subject to forfeitures): 

 

  

Restricted Stock Units

 

2020

  794,814 

2021

  782,155 

Total

  1,576,969 

 

 

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

 

Awards to Non-Employee Directors.  Under the W&T Offshore, Inc. 2004 Directors Compensation Plan (as amended from time to time, the “Director Compensation Plan”), shares of restricted stock (“Restricted Shares”) have been granted to the Company’s non-employee directors.  Grants to non-employee directors were made during 2019, 2018 and 2017.  During the second quarter of 2020, our shareholders approved increasing the shares available by 500,000 shares.  As of June 30, 2020, there were 582,620 shares of common stock available for issuance in satisfaction of awards under the Director Compensation Plan.  The shares available are reduced on a one-to-one basis when Restricted Shares are granted.

 

We recognize compensation cost for share-based payments to non-employee directors over the period during which the recipient is required to provide service in exchange for the award.  Compensation cost is based on the fair value of the equity instrument on the date of grant.  The fair values for the Restricted Shares granted were determined using the Company’s closing price on the grant date.  No forfeitures were estimated for the non-employee directors’ awards.

 

The Restricted Shares are subject to service conditions and vesting occurs at the end of specified service periods unless otherwise approved by the Board of Directors.  Restricted Shares cannot be sold, transferred or disposed of during the restricted period.  The holders of Restricted Shares generally have the same rights as a shareholder of the Company with respect to such Restricted Shares, including the right to vote and receive dividends or other distributions paid with respect to the Restricted Shares.

 

A summary of activity related to Restricted Shares during the six months ended June 30, 2020 is as follows:

 

 

Restricted Shares

    

Weighted Average

    

Grant Date Fair

 

Shares

  

Value Per Share

Nonvested, December 31, 2019

123,180

  

$ 4.55

Vested

(78,428)

  

3.57

Nonvested, June 30, 2020

44,752

  

6.27

 

For the outstanding Restricted Shares issued to the non-employee directors as of June 30, 2020, vesting is expected to occur as follows (subject to any forfeitures):

 

  

Restricted Shares

 

2021

  29,300 

2022

  15,452 

Total

  44,752 

 

Share-Based Compensation.  Share-based compensation expense is recorded in the line General and administrative expenses in the Condensed Consolidated Statements of Operations.  No share-based awards have been granted to date in 2020 under the Plan, and therefore, no share-based 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.  The tax benefit related to compensation expense recognized under share-based payment arrangements was not meaningful and was minimal due to our income tax situation.  A summary of incentive compensation expense under share-based payment arrangements is as follows (in thousands):

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Share-based compensation expense from:

                

Restricted stock units (1)

 $949  $1,189  $1,927  $1,041 

Restricted Shares

  70   70   140   140 

Total

 $1,019  $1,259  $2,067  $1,181 

 

 

(1)

For the six months ended June 30, 2019, share-based compensation expense includes adjustments for a former executive's forfeitures.

 

Unrecognized Share-Based Compensation.  As of June 30, 2020, unrecognized share-based compensation expense related to our awards of RSUs and Restricted Shares was $3.0 million and $0.2 million, respectively.  Unrecognized share-based compensation expense will be recognized through November 2021 for RSUs and April 2022 for Restricted Shares.

 

 

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

 

Cash-Based Incentive Compensation.  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 (terms as defined in the awards) for any fiscal quarter plus the three preceding quarters to exceed defined levels measured over defined time periods for each cash-based award.  No cash-based awards have been granted to date in 2020 under the Plan, and therefore, no cash-based 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-defined 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 over the  January 2019 to February 2020 period (the service period of the award).  Payments were made in March 2020 and are subject to all the terms of the 2019 Annual Incentive Award Agreement.

 

 

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 will be eligible for payment on December 14, 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.

 

 

A summary of compensation expense related to share-based awards and cash-based awards is as follows (in thousands):

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Share-based compensation included in:

                

General and administrative expenses

 $1,019  $1,259  $2,067  $1,181 

Cash-based incentive compensation included in:

                

Lease operating expense (1)

     402   849   279 

General and administrative expenses (1)

  159   1,243   3,790   3,338 

Total charged to operating income

 $1,178  $2,904  $6,706  $4,798 

 

 

(1)

Includes adjustments of accruals to actual payments.

 

 

 

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

 

 

9.

Income Taxes 

 

Tax Benefit and Tax Rate.  Income tax benefit for the three months and six months ended June 30, 2020, was $8.7 million and $2.2 million, respectively.  Income tax benefit for the three and six months ended June 30, 2019, was $11.7 million and $11.5 million, respectively.  For the three and six months ended June 30, 2020, our effective tax rate  primarily differed from the statutory Federal tax rate for adjustments recorded related to the enactment of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) on March 27, 2020.  The CARES Act modified certain income tax statutes, including changes related to the business interest expense limitation under Internal Revenue Service ("IRS") Code Section 163(j).  During the three months ended June 30, 2019, we reversed a liability related to an uncertain tax position that was effectively settled with the IRS, which resulted in a net tax benefit for the three and six months ended June 30, 2019.  Our effective tax rate was not meaningful for any of the periods presented.  

 

Valuation Allowance.  Deferred tax assets are recorded related to net operating losses and temporary differences between the book and tax basis of assets and liabilities expected to produce tax deductions in future periods.  The realization of these assets depends on recognition of sufficient future taxable income in specific tax jurisdictions in which those temporary differences or net operating losses are deductible.  In assessing the need for a valuation allowance on our deferred tax assets, we consider whether it is more likely than not that some portion or all of them will not be realized.     

 

As of June 30, 2020 and December 31, 2019, our valuation allowance was $45.9 million and $54.4 million, respectively, and relates primarily to state net operating losses and the disallowed interest limitation carryover. 

 

Income Taxes Receivable.  As of December 31, 2019, we had current income taxes receivable of $1.9 million, which was received during the six months ended June 30, 2020.  The refund related primarily to a net operating loss (“NOL”) carryback claim for 2017 that was carried back to prior years.

 

During the six months ended June 30, 2020, we did not make any income tax payments of significance.  During the six months ended June 30, 2019, we did not receive any income tax claims or make any income tax payments of significance.

 

The tax years 2016 through 2019 remain open to examination by the tax jurisdictions to which we are subject.

 

 

 

10.

Earnings Per Share

 

The following table presents the calculation of basic and diluted (loss) earnings per common share (in thousands, except per share amounts): 

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Net (loss) income

 $(5,904) $36,389  $60,076  $(11,372)

Less portion allocated to nonvested shares

     666   707    

Net (loss) income allocated to common shares

 $(5,904) $35,723  $59,369  $(11,372)

Weighted average common shares outstanding

  141,597   140,567   141,571   140,507 
                 

Basic and diluted (loss) earnings per common share

 $(0.04) $0.25  $0.42  $(0.08)
                 

Shares excluded due to being anti-dilutive (weighted-average)

  1,665         2,978 

 

 

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

 

 

11.

Contingencies

 

Appeal with the Office of Natural Resources Revenue (“ONRR”).  In 2009, we recognized allowable reductions of cash payments for royalties owed to the ONRR for transportation of their deepwater production through our subsea pipeline systems.  In 2010, the ONRR audited our calculations and support related to this usage fee, and in 2010, we were notified that the ONRR had disallowed approximately $4.7 million of the reductions taken.  We recorded a reduction to other revenue in 2010 to reflect this disallowance with the offset to a liability reserve; however, we disagree with the position taken by the ONRR.  We filed an appeal with the ONRR, which was denied in May 2014.  On June 17, 2014, we filed an appeal with the IBLA under the Department of the Interior.  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 with the surety in order to appeal the IBLA decision, of which the cash collateral held by the surety was subsequently returned during the first quarter of 2020.  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.  Following in camera review, the Court upheld the government’s assertion of privilege, and the parties are proceeding with drafting Cross-Motions for Summary Judgment, which will be the basis for the court’s ruling.  We filed our Motion for Summary Judgment on June 22, 2020, and we expect the government’s Cross Motion for Summary Judgment and Opposition to W&T’s Motion for Summary Judgment to be filed by August 26, 2020.

 

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-Q, we have not received a response from the ONRR related to our submissions.  These open ONRR unbundling reviews, and any further similar reviews, could ultimately result in an order for payment of additional royalties under our Federal oil and gas leases for current and prior periods.  While the amounts paid for the six months ended June 30, 2020 and 2019 were immaterial, we are not able to determine the range of any additional royalties or, if and when assessed, whether such amounts would be material.

 

Notices of Proposed Civil Penalty Assessment.  During the six months ended June 30, 2020 and 2019, we did not pay any civil penalties to the Bureau of Safety and Environmental Enforcement ("BSEE") related to Incidents of Noncompliance (“INCs”) at various offshore locations.  We currently have nine open civil penalties issued by the BSEE from INCs, which have not been settled as of the filing date of this Form 10-Q.  The INCs underlying these open civil penalties cite alleged non-compliance with various safety-related requirements and procedures occurring at separate offshore locations on various dates ranging from July 2012 to January 2018.  The proposed civil penalties for these INCs total $7.7 million.  As of June 30, 2020 and December 31, 2019, we have accrued approximately $3.5 million, which is our best estimate of the final settlements once all appeals have been exhausted.  Our position is that the proposed civil penalties are excessive given the specific facts and circumstances related to these INCs.  We are exploring the possibility of settling these civil penalties with the BSEE.

 

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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

 

12.

Subsequent Events

 

COVID-19 Impacts on Economic Environment.   On  January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of COVID-19 and the risks to the international community as the virus spread globally beyond its point of origin.  In March 2020, the WHO classified the COVID-19 as a pandemic based on the rapid increase in exposure globally.  During the second quarter of 2020 and thus far during the third quarter of 2020, there have been continued and, in some cases, increasing outbreaks of COVID-19 in the United States, particularly in Houston, Texas, where our corporate office is located, Louisiana and Alabama, where we conduct substantially all of our operations. 

 

The COVID-19 pandemic and resulting government restrictions, along with decisions by the Russian and Saudi governments to increase supply in March 2020, created a significant decrease in global crude oil demand causing a substantial decrease in crude oil prices and increasing the volatility of the market.  Additionally, prices for NGLs and natural gas decreased in the three months ended June 30, 2020 compared to the prior quarter and prior year levels, all of which have impacted revenues for the three and six months ended June 30, 2020.  This economic environment has caused oil and gas operators to reduce their capital expenditure budgets, reduce activity and shut-in significant production.  The full impact of the COVID-19 pandemic and the volatility in crude oil prices continue to evolve as of the date of this Quarterly Report.  However, the scope and length of this economic downturn and the ultimate effect on the prices of crude oil and natural gas cannot be determined and we could be adversely affected in future periods.

 

We are actively monitoring the impact on our results of operations, financial position, and liquidity for the remainder of 2020.  In response to the market changes, we have reduced our capital expenditure budget for the remainder of 2020, experienced production shut-ins from non-operated oil and gas properties and shut-in a limited number of our operated oil and gas properties.

 

 

 

 

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

The following discussion and analysis should be read in conjunction with our accompanying unaudited condensed consolidated financial statements and the notes to those financial statements included in Item 1 of this Quarterly Report on Form 10-Q.  The following discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”).  These forward-looking statements involve risks, uncertainties and assumptions. If the risks or uncertainties materialize or the assumptions prove incorrect, our results may differ materially from those expressed or implied by such forward-looking statements and assumptions.  All statements other than statements of historical fact are statements that could be deemed forward-looking statements, such as those statements that address activities, events or developments that we expect, believe or anticipate will or may occur in the future.  These statements are based on certain assumptions and analyses made by us in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate in the circumstances.  Known material risks that may affect our financial condition and results of operations are discussed in Item 1A, Risk Factors, and market risks are discussed in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of our Annual Report on Form 10-K for the year ended December 31, 2019 and this Quarterly Report on Form 10-Q, Part II, Item 1A, Risk Factors, and may be discussed or updated from time to time in subsequent reports filed with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof.  We assume no obligation, nor do we intend to update these forward-looking statements.  Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “W&T,” “we,” “us,” “our” and the “Company” refer to W&T Offshore, Inc. and its consolidated subsidiaries.

 

Overview 

 

We are an independent oil and natural gas producer, active in the exploration, development and acquisition of oil and natural gas properties in the Gulf of Mexico.  As of June 2020, we hold working interests in 48 offshore fields in federal and state waters (39 producing and nine fields capable of producing).  We currently have under lease approximately 772,000 gross acres (523,000 net acres) spanning across the OCS off the coasts of Louisiana, Texas, Mississippi and Alabama, with approximately 557,000 gross acres on the conventional shelf and approximately 215,000 gross acres in the deepwater.  A majority of our daily production is derived from wells we operate.  Our interest in fields, leases, structures and equipment are primarily owned by W&T Offshore, Inc. and our wholly-owned subsidiary, W & T Energy VI, LLC, a Delaware limited liability company and through our proportionately consolidated interest in Monza, as described in more detail in Financial Statements and Supplementary Data – Note 4 – Joint Venture Drilling Program under Part I, Item 1 in this Form 10-Q.

 

Recent Events

 

Due to circumstances related to the outbreak of COVID-19, various measures have been taken by federal, state and local governments to reduce the rate of spread of COVID-19.  These measures and other factors have resulted in a decrease of general economic activity and a corresponding decrease in global and domestic energy demand impacting commodity pricing.  In addition, actions by the Organization of Petroleum Exporting Countries and other high oil exporting countries like Russia (“OPEC+”) have negatively impacted crude oil prices.  These rapid and unprecedented events have pushed crude oil storage near capacity and driven prices down significantly.  These events have been the primary cause of the significant supply-and-demand imbalance for oil, significantly lowering oil pricing.  Further, during the second quarter of 2020 and thus far during the third quarter of 2020, there have been continued and, in some cases, increasing outbreaks of COVID-19 in the United States, particularly in Houston, Texas, where our corporate offices are located, and Louisiana and Alabama, where we conduct substantially all of our operations.  These conditions may continue to exist in future periods, constraining our ability to store and move production to downstream markets, or affecting future decisions to delay or curtail development activity or temporarily shut-in production which could further reduce cash flow.

 

 

22

 

 

The Company has responded to COVID-19 events and current economic conditions as follows:

 

 

Our capital expenditure forecast for 2020 has been reduced significantly from our initial budget in response to the unprecedented decrease in crude oil prices experienced in the first quarter of 2020.  Excluding acquisitions and plugging and abandonment expenditures, we are currently estimating capital expenditures to range from $15 million to $25 million for 2020 and ARO spending to be in the range of $2 million to $4 million.  We continue to closely monitor current and forecasted commodity prices to assess what changes, if any, should be made to our 2020 plans and are unable to predict the duration or impact of COVID-19 and OPEC+ actions have on our business.  Additionally, primarily as a result of substantially lower oil prices, the borrowing base under the Credit Agreement was reduced from $250.0 million to $215.0 million during the second quarter of 2020.

 

 

During the second quarter, we shut-in production in selected oil-weighted properties operated by the Company and experienced production shut-ins at certain non-operated properties due to the decline in oil prices.  The Company has restored the majority of such non-operated production that was previously shut-in.  Additionally, the Company was also able to restore some of its operated production that was shut-in due to low oil prices, but continues to monitor commodity prices to determine the appropriate time to return the remaining fields online.

 

 

We have taken proactive steps in our field operations and corporate offices to protect the health and safety of our employees and contractors.  At W&T’s corporate offices, the Company mandated a work-from-home policy on March 23, 2020 and ensured that all employees had the ability to continue performing their work duties remotely.  W&T reopened its corporate office and has implemented actions to protect its employees working in its offices.  In our field operations, the Company instituted screening of all personnel prior to entry to heliports, shore-based facilities and Alabama gas treatment plants, which includes a questionnaire and temperature check.  The Company conducts daily temperature screenings at all onshore offices and offshore facilities and implemented procedures for distancing and hygiene at its onshore offices and field locations.  We continue to monitor national, state and local government directives to continually assess our health and safety protocol.

 

See the Liquidity and Capital Resources section in this Part II for a discussion of our liquidity and other aspects as a result of the decrease in commodity prices.   See Item 1A, Risk Factors, under Item II of this Form 10-Q. 

 

 

Oil and Natural Gas Production and Commodity Pricing

 

Our financial condition, cash flow and results of operations are significantly affected by the volume of our crude oil, NGLs and natural gas production and the prices that we receive for such production.  Our production volumes for the six months ended June 30, 2020 were comprised of 37.3% crude oil and condensate, 10.4% NGLs and 52.3% natural gas, determined on a barrel of oil equivalent (“Boe”) using the energy equivalency ratio of six thousand cubic feet (“Mcf”) of natural gas to one barrel of crude oil, condensate or NGLs.  The conversion ratio does not assume price equivalency, and the price per one Boe for crude oil, NGLs and natural gas has differed significantly in the past.  For the six months ended June 30, 2020, revenues from the sale of crude oil and NGLs made up 68.9% of our total revenues compared to 82.5% for the six months ended June 30, 2019.  For the six months ended June 30, 2020, our combined total production expressed in equivalent volumes on a daily basis was 39.7% higher than for the six months ended June 30, 2019, primarily due to the acquisition of the Mobile Bay properties described below.  For the six months ended June 30, 2020, our total revenues were 28.5% lower than the six months ended June 30, 2019 due to lower realized prices for crude oil, NGLs and natural gas and partially offset the higher volumes.  See Results of Operations – Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019 in this Item 2 for additional information. 

 

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”).  For the six months ended June 30, 2020, the average net production of the Mobile Bay Properties was approximately 17,100 net Boe per day.  

 

 

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Our operating results are strongly influenced by the price of the commodities that we produce and sell.  The price of those commodities is affected by both domestic and international factors, including domestic production.  During the six months ended June 30, 2020, our average realized crude oil price was $35.57 per barrel.  This is a decrease from our average realized crude oil price of $61.96 per barrel, or 42.6%, for the six months ended June 30, 2019.  Per the Energy Information Administration ("EIA"), crude oil prices using West Texas Intermediate ("WTI") pricing decreased to $36.58 per barrel during the six months ended June 30, 2020 compared to $57.39 during the six months ended June 30, 2019 representing a decrease of 36.3% for the six months ended June 30, 2020.  Crude oil prices have partially recovered from their April lows, with an average WTI spot price of $38.31 per barrel for the month of June 2020, and $40.34 per barrel for the first two weeks of July 2020, but still remain depressed compared to the same periods in 2019.

 

Our average realized crude oil sales price differs from the WTI benchmark average crude price primarily due to premiums or discounts, crude oil quality adjustments, volume weighting (collectively referred to as differentials) and other factors.  Crude oil quality adjustments can vary significantly by field.  All of our crude oil is produced offshore in the Gulf of Mexico and is characterized as Poseidon, Light Louisiana Sweet (“LLS”), Heavy Louisiana Sweet (“HLS”) and others.  WTI is frequently used to value domestically produced crude oil, and the majority of our crude oil production is priced using the spot price for WTI as a base price, then adjusted for the type and quality of crude oil and other factors.  Similar to crude oil prices, the differentials for our offshore crude oil have also experienced volatility in the past.  The monthly average differentials of WTI versus Poseidon, LLS and HLS for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 decreased approximately $4.00 to $5.00 per barrel and averaged ($0.36), $2.80, and $2.17 per barrel, respectively, for these three types of crude oil for the six months ended June 30, 2020.
 

Our average realized price of natural gas of $1.85 per Mcf for the six months ended June 30, 2020 was lower than the average realized price of $2.81 per Mcf for the six months ended June 30, 2019 by 34.2%.  The average Henry Hub ("HH") natural gas price of $1.87 per Mcf for the six months ended June 30, 2020 was lower than the average HH natural gas price of $2.84 per Mcf for the six months ended June 30, 2019 by 34.2%. Per the EIA, this decrease was due to lower demand.  Working inventories of natural gas as of June 30, 2020 were 37% higher than the comparable year ago period.

 
Our average realized price of NGLs for the six months ended June 30, 2020 was 52.2% lower than the average realized price for the six months ended June 30, 2019. Two major components of our NGLs, ethane and propane, typically make up over 70% of an average NGL barrel.  For the six months ended June 30, 2020 compared to the six months ended June 30, 2019, average prices for domestic ethane decreased by 32% and average domestic propane prices decreased by 35% as measured using a price index for Mount Belvieu.  The average prices for other domestic NGLs components decreased 28% to 43% for the six months ended June 30, 2020 compared to the same period in 2019.  Due to the acquisition of the Mobile Bay Properties, our volumes of NGLs have increased, but at lower realized prices than experienced for the Company's overall realized prices.  We believe the change in prices for NGLs is mostly a function of the change in crude oil prices combined with changes in propane supply and demand. 

 

According to Baker Hughes, the number of working rigs drilling for oil and natural gas on land in the U.S. as reported in their July 17, 2020 report was significantly lower than a year ago, decreasing to 253 rigs compared to 954 rigs a year ago.  The oil rig count decreased to 180 rigs compared to 779 rigs a year ago and the gas and miscellaneous rigs decreased to 73 rigs from 175 a year ago.  In the Gulf of Mexico, the number of working rigs was 12 rigs (all oil) compared to 25 (23 oil and two natural gas) a year ago.   

 

 

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Results of Operations

 

 

The following tables set forth selected financial and operating data for the periods indicated (all values are net to our interest unless indicated otherwise):

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2020

   

2019

   

Change

   

%

   

2020

   

2019

   

Change

   

%

 
   

(In thousands, except percentages and per share data)

 

Financial:

                                                               

Revenues:

                                                               

Oil

  $ 30,645     $ 109,195     $ (78,550 )     (71.9 )%   $ 115,295     $ 195,898     $ (80,603 )     (41.1 )%

NGLs

    1,917       4,640       (2,723 )     (58.7 )%     8,369       11,088       (2,719 )     (24.5 )%

Natural gas

    21,364       19,567       1,797       9.2 %     50,664       41,405       9,259       22.4 %

Other

    1,315       1,299       16       1.2 %     5,041       2,390       2,651       110.9 %

Total revenues

    55,241       134,701       (79,460 )     (59.0 )%     179,369       250,781       (71,412 )     (28.5 )%

Operating costs and expenses:

                                                               

Lease operating expenses

    28,313       40,341       (12,028 )     (29.8 )%     83,088       83,797       (709 )     (0.8 )%

Production taxes

    1,143       317       826       260.6 %     2,059       733       1,326       180.9 %

Gathering and transportation

    3,301       7,068       (3,767 )     (53.3 )%     8,750       13,491       (4,741 )     (35.1 )%

Depreciation, depletion, amortization and accretion

    29,483       38,073       (8,590 )     (22.6 )%     68,609       71,839       (3,230 )     (4.5 )%

General and administrative expenses

    5,628       13,328       (7,700 )     (57.8 )%     19,591       27,437       (7,846 )     (28.6 )%

Derivative loss (gain)

    15,414       (1,805 )     17,219       NM       (46,498 )     47,081       (93,579 )     NM  

Total costs and expenses

    83,282