Even before oil and gas prices started to slide in 2014, W&T Offshore's (NYSE:WTI) financials weren't showing a company in the best of health. It was spending loads of money on its offshore assets in the Gulf of Mexico, and loading up on debt in the process. This issue was exacerbated in the past several quarters, and this quarter the company started to make moves that show serious signs of stress. Let's take a quick look at the most recent results from W&T Offshore and whether or not its actions are actually helping.
By the numbers
|Metric||Q3 2016||Q2 2016||Q3 2015|
|Revenue||$107.4 million||$99.6 million||$126.2 million|
|EBITDA||$175.1 million||$35.0 million||$69.4 million|
|Earnings per share||$0.48||($1.58)||($6.29)|
|Cash flow from operations||($9.2 million)||($11.2 million)||$134.8 million|
Even though W&T's overall production numbers were down compared to the prior quarter, there were a couple nuanced changes that resulted in the slight gain in revenue. One is that natural gas production actually increased while oil and natural gas liquids (NGLs) declined. At the same time, realized natural gas prices increased 42% from the prior quarter to $2.93 per thousand cubic feet.
The reason that earnings are so much higher than the prior quarters is because the company realized a $123 million gain on the early extinguishment of debt in the quarter. If we strip out that gain as well as an impairment of oil and gas properties, earnings would have been a per-share loss of $0.24. This is much more in line with the prior quarters when they are all compared on a normalized basis.
W&T continues to cut costs, but that hasn't been quite enough to turn a profit. The combination of lease operating costs, gathering and transportation costs, and general and administrative expenses declined 15% compared to this time last year. The thing that is really holding the company back, profitability-wise, is its interest expenses. This past quarter, interest expense was 22% of total revenue, or 43% of cash operating profits. With an interest burden that high, it is going to be extremely difficult to get back top profitability. Perhaps it would be slightly less of a concern if the company was generating cash from operations that could be used to fund its capital program and pay down some debt, but it isn't anywhere to be found.
Probably the thing worth noting this past quarter was some of the financial dealings the company did to help ease its debt burden. The company exchanged $710 million worth of its senior notes due in 2019 for $301 million in second- and third-lien payment-in-kind notes due in 2020 and 2021, respectively, as well as 60 million shares of common stock. With payment-in-kind notes, the company doesn't have to pay cash interest throughout the term of the loan. Rather, the interest is added to the principal of the note and paid at the end.
These are the kinds of moves that only an extremely financially distressed company makes. The dead giveaway that this is a deal to stave off insolvency is the fact that those new payment-in-kind notes carry interest rates greater than 8.5%.
What management had to say
CEO Tracy Krohn wanted to highlight that this most recent debt exchange for those payment-in-kind notes and the share issuance have given the company a little more wiggle room, financially speaking. The big focus, though, is to get its costs down and expand its drilling program for 2017. He said in the Q3 earnings press release:
We are pleased to have received the support of our shareholders and senior noteholders in completing our Exchange Transaction, significantly improving our liquidity which in turn will allow us to turn our focus toward new capital projects. While operating margins are still below our historic levels, they have improved from early in the year, allowing us to expand our capital program in 2016, currently estimated at $60 million, and pursue projects that were delayed when margins began declining rapidly. We are currently working on our plan for 2017 and expect to increase our capital budget to levels well above 2016 expenditures. We intend to devote more capital to drilling and completing new wells along with an expanded recompletion program.
Although we are encouraged by the improved commodity prices, we remain diligent about cost control and are maintaining a prudent approach to spending. Over the last two years, we have reduced LOE [Lease operating expenses] by 48% and G&A expense by 40% and believe that we can continue to drive down costs. Our objective is to maintain steady production on a modest capital budget in the range of $75 million to $150 million per year until we are confident that the time is right to return to a more robust growth profile.
What a Fool believes
All of the signs in W&T Offshore's results point to a company that is in some deep water. The kind of financial moves the company made this past quarter are clear signs of distress that only keep the window of solvency open for a little while longer. Considering that, it's hard to see how spending more on drilling in 2017 is going to solve these issues. Perhaps a rapid rise in oil and gas prices would make all of W&T's woes go away, but there aren't a whole lot of signals that suggest this is going to happen soon. For investors, there are just way too many red flags being put up at W&T for anyone to consider this a worthwhile investment.
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