# W&T OFFSHORE INC (WTI) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from W&T OFFSHORE INC's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1288403/000155837023003153/wti-20221231x10k.htm
Accession: 0001558370-23-003153
Filing date: 2023-03-08
Report date: 2022-12-31
Extracted from a substantive MD&A body after the formal Item 7 span was a TOC or reference stub. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/WTI/
All MD&A years: /company/WTI/mda/
Previous year: /company/WTI/mda/fy2021/ (FY 2021)
Next year: /company/WTI/mda/fy2023/ (FY 2023)

Results of Operations

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

Revenues

Our revenues are derived from the sale of our oil and natural gas production, as well as the sale of NGLs. Our oil, natural gas and NGL revenues do not include the effects of derivatives, which are reported in “Derivative loss (gain)” in our Consolidated Statements of Operations. The following table presents our sources of revenue as a percentage of total revenue:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","Year Ended December 31,"],["\u200b","2022","","2021"],["Oil","56.9","%","\u200b","59.1","%"],["NGLs","6.2","%","\u200b","7.9","%"],["Natural gas","35.2","%","\u200b","31.1","%"],["Other","1.7","%","\u200b","1.9","%"]]
[[/GREPCENT_TABLE]]

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The information below provides a discussion of, and an analysis of significant variance in, our oil, natural gas and NGL revenues, production volumes and average sales prices for the years ended December 31, 2022 and 2021 (in thousands):

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended December 31,","\u200b","\u200b","\u200b"],["\u200b","","2022","","2021","\u200b","\u200b","Change"],["\u200b","","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Revenues:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Oil","\u200b","$","524,274","\u200b","$","329,557","\u200b","$","194,717"],["NGLs","\u200b","","56,964","\u200b","","44,343","\u200b","","12,621"],["Natural gas","\u200b","","323,831","\u200b","","173,749","\u200b","","150,082"],["Other","\u200b","","15,928","\u200b","","10,361","\u200b","","5,567"],["Total revenues","\u200b","$","920,997","\u200b","$","558,010","\u200b","$","362,987"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Production Volumes:","\u200b","","","\u200b","","","\u200b"],["Oil (MBbls)","\u200b","","5,602","\u200b","","4,998","\u200b","","604"],["NGLs (MBbls)","\u200b","","1,554","\u200b","","1,450","\u200b","","104"],["Natural gas (MMcf)","\u200b","","44,808","\u200b","","44,790","\u200b","","18"],["Total oil equivalent (MBoe)","\u200b","","14,624","\u200b","","13,913","\u200b","","711"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Average daily equivalent sales (Boe/day)","\u200b","\u200b","40,067","","\u200b","38,118","\u200b","\u200b","1,949"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Average realized sales prices:","\u200b","\u200b","","","\u200b","","\u200b","","\u200b"],["Oil ($/Bbl)","\u200b","$","93.59","\u200b","$","65.94","\u200b","$","27.65"],["NGLs ($/Bbl)","\u200b","","36.66","\u200b","","30.59","\u200b","","6.07"],["Natural gas ($/Mcf)","\u200b","","7.23","\u200b","","3.88","\u200b","","3.35"],["Oil equivalent ($/Boe)","\u200b","","61.89","\u200b","","39.36","\u200b","\u200b","22.53"],["Oil equivalent ($/Boe), including realized commodity derivatives(1)","\u200b","\u200b","59.15","\u200b","\u200b","32.89","\u200b","","26.26"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","(1)","Excludes the effects of premium amortization and write-offs. \u200b"]]
[[/GREPCENT_TABLE]]

Changes in average sales prices and sales volumes caused the following changes to our oil, NGL and natural gas revenues between the years ended December 31, 2022 and 2021 (in thousands):

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","Price","","Volume","\u200b","Total"],["Oil","$","154,890","\u200b","$","39,827","\u200b","$","194,717"],["NGLs","","9,422","\u200b","","3,199","\u200b","","12,621"],["Natural gas","","150,011","\u200b","\u200b","71","\u200b","","150,082"],["\u200b","$","314,323","\u200b","$","43,097","\u200b","$","357,420"]]
[[/GREPCENT_TABLE]]

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Realized Prices on the Sale of Oil, NGLs and Natural Gas – Our average realized crude oil sales price differs from the WTI benchmark average crude price due primarily to premiums or discounts, crude oil quality adjustments, and volume weighting (collectively referred to as differentials). Crude oil quality adjustments can vary significantly by field as a result of quality and location. For example, crude oil from our East Cameron 321 field normally receives a positive quality adjustment, whereas crude oil from our Ship Shoal 349 field normally receives a negative quality adjustment. All of our crude oil is produced offshore in the Gulf of Mexico and is primarily characterized as Poseidon, Light Louisiana Sweet (“LLS”), and Heavy Louisiana Sweet (“HLS”). Similar to crude oil prices, the differentials for our offshore crude oil have also experienced volatility in the past. The monthly average differentials of WTI versus LLS and HLS for 2022 increased on average by approximately $0.43 - $0.75 per barrel compared to 2021 for these types of crude oils with LLS and HLS having positive differentials as measured on an index basis. The monthly average differentials of WTI versus Poseidon decreased by $1.91 per barrel compared to 2021 with Poseidon having a negative differential.

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Two major components of our NGLs, ethane and propane, typically make up approximately 70% of an average NGL barrel. During 2022, average prices for domestic ethane increased by 55.6% and average domestic propane prices increased by 5.6% from 2021 as measured using a price index for Mount Belvieu. The changes in the average price for other domestic NGLs components in 2022 ranged from an increase of 11.4% to 22.5% year-over-year.

The actual prices we realize from the sale of natural gas differ from the quoted NYMEX Henry Hub price as a result of quality and location differentials. Currently, the sales points of our gas production are generally within close proximity to the Henry Hub which creates a minimal differential in the prices we receive for our production versus average Henry Hub prices.

Oil, NGLs, and Natural Gas Volumes – Production volumes increased by 711 MBoe to 14,624 MBoe primarily due to the acquisition of the Ship Shoal 230, South Marsh Island 27/Vermilion 191, and South Marsh Island 73 fields during the first and second quarters of 2022. The increase in production from these asset acquisitions was offset by downtime related to field and well maintenance events, primarily at Mobile Bay and other OCS fields. Deferred production for 2022 related to these events collectively resulted in deferred production of 2.3 MMBoe, compared to 2.2 MMBoe in 2021.

Operating Expenses

The following table presents information regarding costs and expenses and selected average costs and expenses per Boe sold for the periods presented and corresponding changes:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended December 31,"],["\u200b","","2022","","2021","","\u200b","Change"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Operating expenses:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Lease operating expenses","\u200b","$","224,414","\u200b","$","174,582","\u200b","$","49,832"],["Gathering, transportation and production taxes","\u200b","\u200b","35,128","\u200b","\u200b","27,919","\u200b","\u200b","7,209"],["Depreciation, depletion, amortization and accretion","","\u200b","133,630","\u200b","\u200b","113,447","","\u200b","20,183"],["General and administrative expenses","\u200b","\u200b","73,747","\u200b","\u200b","52,400","\u200b","\u200b","21,347"],["Total operating expenses","\u200b","$","466,919","\u200b","$","368,348","\u200b","$","98,571"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Average per Boe ($/Boe):","\u200b","","","\u200b","","","\u200b"],["Lease operating expenses","\u200b","$","15.35","\u200b","$","12.55","\u200b","$","2.80"],["Gathering, transportation and production taxes","\u200b","","2.40","\u200b","\u200b","2.00","\u200b","","0.40"],["DD&A","\u200b","","9.14","\u200b","\u200b","8.15","\u200b","","0.99"],["G&A expenses","\u200b","","5.04","\u200b","\u200b","3.77","\u200b","","1.27"],["Operating expenses","\u200b","$","31.93","\u200b","$","26.47","\u200b","$","5.46"]]
[[/GREPCENT_TABLE]]

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Lease operating expenses – Lease operating expenses include the expense of operating and maintaining our wells, platforms and other infrastructure primarily in the Gulf of Mexico. These operating costs are comprised of several components including, direct or base lease operating expenses, insurance premiums, workover costs, facilities repairs and maintenance expenses, and hurricane repair expenses. Our lease operating costs, which depend in part on the type of commodity produced, the level of workover activity and the geographical location of the properties, increased $49.8 million to $224.4 million in 2022 compared to $174.6 million in 2021. On a per Boe basis, lease operating expenses increased to $15.35 per Boe during 2022 compared to $12.55 per Boe during 2021. On a component basis, base lease operating expenses increased $35.1 million, workover expenses increased $8.2 million and facilities maintenance expenses increased $11.8 million. These increases were partially offset by a decrease of $5.4 million in hurricane repairs.

Expenses for direct labor, materials, supplies, repair and third party costs comprise the most significant portion of our base lease operating expense. Base lease operating expenses increased primarily due to increased expenses related to the Ship Shoal 230, South Marsh Island 27/Vermilion 191, and South Marsh Island 73 fields acquired during the first half of 2022, increased labor costs, and increased insurance expense.

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Workovers and facilities maintenance expenses consist of costs associated with major remedial operations on completed wells to restore, maintain or improve the well’s production. Since these remedial operations are not regularly scheduled, workover and maintenance expense are not necessarily comparable from period to period. Lastly, during the year ended December 31, 2021 we incurred $5.4 million in expenses related to repairs associated with hurricanes that we did not incur during the year ended December 31, 2022.

Gathering, transportation and production taxes – Gathering and transportation consist of costs incurred in the post-production shipping of oil, NGLs, and natural gas to the point of sale. Production taxes consist of severance taxes levied by the Alabama Department of Revenue and the Texas Department of Revenue on production of oil and natural gas from land or water bottoms within the boundaries of each state, respectively. Gathering, transportation and production taxes increased to $35.1 million in 2022 compared to $27.9 million in 2021, primarily due to a new transportation contract related to the properties acquired in the first half of 2022. Additionally, the increase in realized natural gas and NGL prices along with an increase in oil, NGL and natural gas production during 2022 caused gathering, transportation and production taxes to increase.

Depreciation, depletion, amortization and accretion – Depreciation, depletion and amortization expense is the expensing of the capitalized costs incurred to acquire, explore and develop oil and natural gas reserves. We use the full cost method of accounting for oil and natural gas activities. See Part II, Item 8. Financial Statements and Supplementary data — Note 1 — Summary of Significant Accounting Policies for further discussion. Accretion expense is the expensing of the changes in value of our asset retirement obligations as a result of the passage of time over the estimated productive life of the related assets as the discounted liabilities are accreted to their expected settlement values. DD&A, which includes accretion for ARO, increased to $9.14 per Boe in 2022 from $8.15 per Boe in 2021. On a nominal basis, DD&A increased to $133.6 million in 2022 from $113.4 million in 2021. The DD&A rate per Boe increased mostly as a result of increases in the capital expenditures and future development costs included in the depreciable base associated with an increase in economic proved undeveloped wells due to higher oil and gas prices compared to the smaller increase in proved reserves over the comparable prior year period.

General and administrative expenses (“G&A”) – G&A expense generally consists of costs incurred for overhead, including payroll and benefits for our corporate staff, costs of maintaining our headquarters, costs of managing our production operations, bad debt expense, equity based compensation expense, audit and other fees for professional services and legal compliance. For 2022, G&A expenses were $73.7 million compared to $52.4 million in 2021. The increase is primarily due to non-recurring professional services costs incurred during the second half of 2022 after a review of processes and controls within our information technology department, including additional non-recurring expenses associated with the process of transitioning substantially all of our information technology infrastructure and related services internally or to other providers. Further, we have incurred additional legal expenses in conjunction therewith. Additionally, during 2022 we incurred increased costs related to salaries, benefits and incentive compensation as a result of the higher grant date fair values of stock awards granted during 2022 as compared to the value of awards granted in 2021, the lack of an employee retention credit provided under the CARES Act (which was received in 2021 and not received in 2022) and in response to wage and price inflation as compared to 2021 and as a result of inflation.

Other Income and Expense

The following table presents the components of other income and expense for the periods presented and corresponding changes:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended December 31,","\u200b","\u200b","\u200b"],["\u200b","","2022","","2021","","\u200b","Change"],["\u200b","\u200b","(In thousands)"],["Other income and expenses:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Derivative loss","\u200b","$","85,533","\u200b","$","175,313","\u200b","$","(89,780)"],["Interest expense, net","","","69,441","\u200b","","70,049","\u200b","","(608)"],["Other expense (income), net","","","14,295","\u200b","","(6,165)","\u200b","","20,460"],["Income tax expense (benefit)","","","53,660","\u200b","","(8,057)","\u200b","","61,717"]]
[[/GREPCENT_TABLE]]

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Derivative loss – During the year ended December 31, 2022, the $85.5 million derivative loss recorded for crude oil and natural gas derivative contracts consists of $125.1 million of realized losses on settled contracts and premium payments and $39.6 million of unrealized gain, net from the increase in fair value of open contracts. During the second quarter of 2022, the Company monetized a portion of existing hedge positions through restructuring of strike prices on certain outstanding purchased calls covering the second half of 2022 through the first quarter of 2025. This transaction resulted in net cash proceeds of $105.3 million, which are included as an offset to realized losses for 2022. During the year ended December 31, 2021, the $175.3 million derivative loss recorded for crude oil and natural gas derivative contracts consisted of $92.6 million in realized losses on settled contracts and premium payments and $82.8 million of unrealized losses from the decrease in the fair value of open oil and natural gas contracts.

Unrealized gains or losses on open derivative contracts relate to production for future periods; however, changes in the fair value of all of our open derivative contracts are recorded as a gain or loss on our Consolidated Statements of Operations at the end of each month. As a result of the derivative contracts we have on our anticipated natural gas production volumes through April 2028, we expect these activities to continue to impact net income (loss) based on fluctuations in market prices for natural gas. As of December 31, 2022, we do not have any open oil contracts. See Financial Statements and Supplementary Data – Note 10 – Derivative Financial Instruments under Part II, Item 8 in this Form 10-K for additional information.

Interest expense, net – We finance a portion of our working capital requirements, capital expenditures and acquisitions with term-based debt and, from time to time, borrowings under our Credit Agreement. As a result, we may incur interest expense that is affected by both fluctuations in interest rates and the amount of debt outstanding. Interest expense includes interest incurred under our debt agreements, the amortization of deferred financing costs (including origination and amendment fees), commitment fees, performance bond premiums and annual agency fees. Interest expense is presented net of any interest income we may receive. Interest expense, net, was $69.4 million in 2022, decreasing $0.6 million from $70.0 million in 2021. The decrease is primarily due to an increase in interest income between the two periods offset by higher interest expense related to the full year of the Term Loan payments. See Financial Statements and Supplementary Data – Note 2 – Debt under Part II, Item 8 in this Form 10-K for additional information on our debt.

Other expense (income), net – During the year ended December 31, 2022, other expense, net, was $14.3 million, compared to $6.2 million of other income, net, for 2021. During 2022, other expense primarily consists of additional expenses for net abandonment obligations pertaining to a number of legacy Gulf of Mexico properties, partially offset by non-recurring adjustments. For 2021, the amount primarily consists of other income related to the release of restrictions on the Black Elk Escrow fund, partially offset by expenses for net abandonment obligations pertaining to a number of legacy Gulf of Mexico properties and the amortization of the brokerage fee paid in connection with the Joint Venture Drilling Program. See Financial Statements and Supplementary Data – Note 9 – Restricted Deposits for ARO in Part II, Item 8 in this Form 10-K for additional information regarding the release of the Black Elk Escrow restrictions. See Financial Statements and Supplementary Data – Note 18 – Contingencies in Part II, Item 8 in this Form 10-K for additional information regarding the asset retirement obligations recorded for legacy properties.

Income tax expense (benefit) – Our income tax expense for 2022 was $53.7 million, and the income tax benefit for 2021 was $8.1 million. For 2022 and 2021, the annual effective tax rate was 18.8% and 16.3%, respectively, and the rates differed from the federal statutory rate of 21% primarily due to adjustments in the valuation allowance and the impact of state income taxes.

During 2022, our valuation allowance decreased $9.0 million primarily due to the utilization of part of our disallowed interest expense carryover. 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.

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The Company assesses available positive and negative evidence regarding its ability to realize its deferred tax assets including reversing temporary differences and projections of future taxable income during the periods in which those temporary differences become deductible, as well as negative evidence such as historical losses. Assumptions about our future taxable income are consistent with the plans and estimates used to manage our business. The Company showed positive income in 2022 and continues to project similar results into the future. Based on this, we concluded that there is enough positive evidence to outweigh any negative evidence although any changes in forecasted taxable income could have a material impact on this analysis. The portion of the valuation allowance remaining relates to state net operating losses and the disallowed interest limitation carryover under IRC section 163(j). As of December 31, 2022, the Company’s valuation allowance was $15.3 million.

Liquidity and Capital Resources

Liquidity Overview

Our primary liquidity needs are to fund capital and operating expenditures and strategic acquisitions to allow us to replace our oil and natural gas reserves, repay and service outstanding borrowings, operate our properties and satisfy our AROs. We have funded such activities in the past with cash on hand, net cash provided by operating activities, sales of property, securities offerings and bank and other borrowings, and expect to continue to do so in the future.

The primary sources of our liquidity are cash from operating activities and borrowings under our Credit Agreement. As of December 31, 2022, we had $461.4 million of available cash and $50.0 million available under our Credit Agreement, based on a borrowing base of $50.0 million. Additionally, we believe our access to the equity markets from our “at-the-market” equity offering program (“ATM Program”), our reserve based lending currently available under our Credit Agreement, along with our cash position, will provide us with additional liquidity to continue our growth to take advantage of the current commodity environment. During the year ended December 31, 2022, we sold an aggregate of 2,971,413 shares for an average price of $5.72 per share in connection with the ATM Offering and received proceeds, net of commissions and expenses, of $16.5 million.

As of December 31, 2022, we had outstanding $552.5 million principal of 9.75% Senior Second Lien Notes. On January 27, 2023, we issued $275.0 million of 11.75% Senior Second Lien Notes. The 11.75% Senior Second Lien Notes were issued at par and have a maturity date of February 1, 2026. On February 8, 2023, we redeemed all of the 9.75% Senior Second Lien Notes outstanding at a redemption price of 100.000%, plus accrued and unpaid interest to the redemption date. The Company used the net proceeds of $270.8 million from the issuance of the 11.75% Senior Second Lien Notes and cash on hand of $296.1 million to fund the redemption. See Financial Statements and Supplementary Data –Note 20 – Subsequent Events under Part II, Item 8 in this Form 10-K for additional information.

We believe that we will have adequate liquidity from cash flow from operations to fund our capital expenditure plans for 2023, fund our ARO spending for 2023 and fulfill our various other obligations. Our preliminary capital expenditure budget for 2023 has been established in the range of $90.0 million to $110.0 million, which excludes acquisitions. In our view of the outlook for 2023, we believe this level of capital expenditure will enhance our liquidity capacity throughout 2023 and beyond while providing liquidity to make strategic acquisitions. At current pricing levels, we expect our cash flows to cover our liquidity requirements and we expect additional financing sources to be available if needed. If our liquidity becomes stressed from significant reductions in realized prices, we have flexibility in our capital expenditure budget to reduce investments. We strive to maintain flexibility in our capital expenditure projects and if commodity prices improve, we may increase our investments.

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Sources and Uses of Cash 

The following table summarizes cash flows provided by (used in) by type of activity for the following periods:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended December 31,","\u200b","\u200b","\u200b"],["\u200b","","2022","\u200b","2021","","\u200b","Change"],["\u200b","\u200b","(In thousands)"],["Operating activities","","$","339,530","\u200b","$","133,668","\u200b","$","205,862"],["Investing activities","\u200b","","(95,080)","\u200b","","(27,444)","\u200b","","(67,636)"],["Financing activities","\u200b","","(28,892)","\u200b","","100,266","\u200b","","(129,158)"]]
[[/GREPCENT_TABLE]]

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Operating activities – Net cash provided by operating activities for 2022 was $339.5 million, increasing $205.9 million from 2021. The change between periods is primarily due to increased realized prices for crude oil, NGLs and natural gas in addition to increased volumes, decreased derivative settlement payments and derivative loss, and increased spending for ARO activities. Our combined average realized sales price per Boe increased 57.2% in 2022, which caused crude oil, NGLs and natural gas revenues to increase $314.3 million. In addition, increases of 5.1% in overall production volumes caused crude oil, NGLs and natural gas revenues to increase by $43.1 million.

These increases in operating cash flow were partially offset by (i) ARO settlements which decreased operating cash flows by $76.2 million as compared to $27.3 million during 2021; (ii) changes in operating assets and liabilities (excluding ARO settlements) which decreased operating cash flows by $7.2 million as compared to an increase of $33.7 million for the year ended December 31,  2021, primarily related to higher oil and natural gas receivables balances due to higher realized prices combined with lower payables and accrued liabilities balances.

Investing activities – Net cash used in investing activities increased $67.6 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021. The increase was primarily due to the acquisition of properties for $51.5 million along with other increases in capital spending during the year ended December 31, 2022 compared to 2021. See Financial Statements and Supplementary Data - Note 6 – Acquisitions under Part II, Item 8 in this Form 10-K for additional information. There were no asset sales of significance in 2022 or 2021. See discussion in Capital Expenditures below.

Financing activities – During the year ended December 31, 2022, net cash used in financing activities was $28.9 million, primarily due to four quarters of principal payments on the Term Loan offset by net proceeds received from the sales of equity securities under our ATM Program. During the year ended December 31, 2021, net cash provided by financing activities was $100.3 million which included the proceeds from the Term Loan of $206.8 million, offset by $24.1 million of principal payments on the Term Loan and repayment of $80.0 million of borrowings under the Credit Agreement. See Financial Statements and Supplementary Data - Note 1 – Significant Accounting Policies under Part II, Item 8 in this Form 10-K for additional information regarding our ATM Program.

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Derivative financial instruments – From time to time, we use various derivative instruments to manage a portion of our exposure to commodity price risk from sales of oil and natural gas. See Financial Statements and Supplementary Data – Note 10 – Derivative Financial Instruments under Part II, Item 8 in this Form 10-K for additional information about our derivative activities. The following table summarizes the historical results of our hedging activities:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended December 31,"],["\u200b","\u200b","2022","\u200b","2021"],["Crude Oil ($/Bbl):","\u200b","\u200b","","","\u200b"],["Average realized sales price, before the effects of derivative settlements","\u200b","$","93.59","\u200b","$","65.94"],["Effects of realized commodity derivatives","\u200b","","(12.35)","\u200b","","(10.44)"],["Average realized sales price, including realized commodity derivatives","\u200b","$","81.24","\u200b","$","55.50"],["Natural Gas ($/Mcf)","\u200b","","","\u200b"],["Average realized sales price, before the effects of derivative settlements","\u200b","$","7.23","\u200b","$","3.88"],["Effects of realized commodity derivatives(1)(2)","\u200b","","0.65","\u200b","","(0.84)"],["Average realized sales price, including realized commodity derivatives","\u200b","$","7.88","\u200b","$","3.04"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","(1)","The year ended December 31, 2022 includes the effect of the $138.0 million realized gain related to the monetization of certain natural gas call contracts through restructuring of strike prices.\u200b"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(2)","Excludes the effects of premium amortization.\u200b"]]
[[/GREPCENT_TABLE]]

Income taxes – As of December 31, 2022, we have current income taxes payable of $0.4 million. During 2022, we did not receive any income tax refunds. For 2022, we made $8.2 million in income tax payments.

Dividends – During 2022, 2021 and 2020, we did not pay any dividends and a suspension of dividends remains in effect.

Capital Expenditures

The level of our investment in oil and natural gas properties changes from time to time depending on numerous factors including the prices of crude oil, NGLs and natural gas, acquisition opportunities, liquidity and financing options and the results of our exploration and development activities. The following table presents our investments in oil and gas properties and equipment for exploration, development, acquisitions and other leasehold costs:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended December 31,"],["\u200b","","2022","","2021"],["\u200b","","(In thousands)"],["Exploration(1)","\u200b","$","13,339","\u200b","$","18,273"],["Development(1)","\u200b","","20,390","\u200b","","9,478"],["Acquisitions of interests","\u200b","","51,474","\u200b","","661"],["Seismic and other","\u200b","","7,903","\u200b","","4,311"],["Investments in oil and gas property/equipment \u2013 accrual basis","\u200b","$","93,106","\u200b","$","32,723"]]
[[/GREPCENT_TABLE]]

​

​

​

​

​

​

[[GREPCENT_TABLE]]
[["","(1)","Reported geographically in the subsequent table.\u200b"]]
[[/GREPCENT_TABLE]]

55

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The following table presents our exploration and development capital expenditures geographically:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended December 31,"],["\u200b","","2022","","2021"],["\u200b","","(In thousands)"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Conventional shelf (1)","\u200b","$","17,264","\u200b","$","7,872"],["Deepwater","\u200b","","16,465","\u200b","","19,879"],["Exploration and development capital expenditures \u2013 accrual basis","\u200b","$","33,729","\u200b","$","27,751"]]
[[/GREPCENT_TABLE]]

​

​

​

​

​

​

[[GREPCENT_TABLE]]
[["","(1)","Includes exploration and development capital expenditures in Alabama state waters.\u200b"]]
[[/GREPCENT_TABLE]]

The capital expenditures reported in the above two tables are included within Oil and natural gas properties and other, net on the Consolidated Balance Sheets. The capital expenditures reported within the Investing section of the Consolidated Statements of Cash Flows include adjustments for payments related to capital expenditures.

Drilling Activity – We did not drill any wells during the year ended December 31, 2022. During the year ended December 31, 2022, we completed the East Cameron 349 B-1 well (“Cota”). The Cota well is in the Monza Joint Venture Drilling Program. See Financial Statements – Note 6 –Joint Venture Drilling Program Part II, Item 8 in this Form 10-K for additional information regarding Monza. See Properties – Drilling Activity under Part I, Item 2 of this Form 10-K for drilling activity information.

See Properties – Development of Proved Undeveloped Reserves under Part I, Item 2 of this Form 10-K for a discussion on activity related to proved undeveloped reserves.

Acquisitions – As described Financial Statements and Supplementary Data - Note 6 - Acquisitions under Part II, Item 8 in this Form 10-K, the Company acquired the working interest and operatorship of certain oil and natural gas producing properties in federal shallow waters in the Gulf of Mexico at Ship Shoal 230, South Marsh Island 27/Vermilion 191, and South Marsh Island 73 fields on February 1, 2022 and April 1, 2022. After normal and customary post-effective date adjustments (including net operating cash flow attributable to the properties from the effective date to the respective close date), cash consideration of approximately $34.0 million and $17.5 million was paid to the sellers. The transaction was funded using cash on hand.

Lease Acquisitions – Over the last three years, we have acquired six leases for approximately $1.5 million from the BOEM in the Federal Offshore Lease Sales. During 2021, we were the high bidder of two leases in Federal Offshore Lease Sale 257. In January 2022, a U.S District Court issued an order that could have invalidated these leases. Effective October 1, 2022, BOEM reinstated and accepted these bids and we were awarded one of these two leases in 2022 and the other in 2023 for approximately $0.1 million and $0.2 million, respectively. We acquired four leases for approximately $1.2 million in 2020.

Divestitures – From time to time, we sell various oil and gas properties for a variety of reasons including, change of focus, perception of value and to reduce debt, among other reasons. In 2022 and 2021, there were no property sales of significance.

56

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Asset retirement obligations – Annually, we review and revise our ARO estimates. Our ARO at December 31, 2022 and 2021 were $466.4 million and $424.5 million, respectively. The increase is primarily due to the acquisition of assets as described above. These increases were partially offset by $76.2 million related to liabilities settled. Our estimate of ARO spending in 2023 is approximately $25.0 to $35.0 million. During 2022 and 2021, we revised our estimates of costs anticipated to be charged by service providers for plugging and abandonment projects and revised estimated to actual spending as invoices were processed and projects completed. As these estimates are for work to be performed in the future, and in many cases, several years in the future, actual expenditures could be substantially different than our estimates. Additionally, we revise our estimates to account for the cost to comply with any new or revised regulations, including increases in work scope and cost changes from interpretation of work scope. See Risk Factors – Our estimates of future asset retirement obligations may vary significantly from period to period and are especially significant because our operations are concentrated in the Gulf of Mexico under Part I, Item 1A and Financial Statements and Supplementary Data – Note 7 – Asset Retirement Obligations under Part II, Item 8 in this Form 10-K for additional information regarding our ARO.

Debt

The primary terms of our long-term debt, the conditions related to incurring additional debt, and the conditions and limitations concerning early repayment of certain debt are disclosed in Financial Statements and Supplementary Data –Note 2 – Debt under Part II, Item 8 in this Form 10-K.

Term Loan – As of December 31, 2022, we had $147.9 million of Term Loan principal outstanding. The Term Loan requires quarterly amortization payments, bears interest at a fixed rate of 7.0% per annum and will mature on May 19, 2028. The Term Loan is non-recourse to the Company and its subsidiaries other than the Subsidiary Borrowers (and the subsidiary that owns the equity of the Subsidiary Borrowers), and is not secured by any assets other than first lien security interests in the equity in the Borrowers and a first lien mortgage security interest and mortgages on certain assets of the Subsidiary Borrowers. 

Credit Agreement – As of December 31, 2022, we had no borrowings outstanding under the Credit Agreement. On November 7, 2022, the Company entered into the Eleventh Amendment to Sixth Amended and Restated Credit Agreement and Extension Agreement, which extended the maturity date and Lender commitment to January 3, 2024.

9.75% Senior Second Lien Notes due 2023 – As of December 31, 2022, we had $552.5 million principal outstanding of 9.75% Senior Second Lien Notes outstanding. On February 8, 2023, we redeemed all of the 9.75% Senior Second Lien Notes outstanding at a redemption price of 100.000%, plus accrued and unpaid interest to the redemption date. The Company used the net proceeds of $270.8 million from the issuance of the 11.75% Senior Second Lien Notes due 2026 and cash on hand of $296.1 million to fund the redemption and interest. See Financial Statements and Supplementary Data –Note 20 – Subsequent Events under Part II, Item 8 in this Form 10-K for additional information.

11.75% Senior Second Lien Notes due 2026 – On January 27, 2023 we issued and sold $275 million in aggregate principal amount of our 11.75% Senior Second Lien Notes at par with an interest rate of 11.75% per annum that matures on February 1, 2026. The 11.75% Senior Second Lien Notes are secured by second-priority liens on the same collateral that is secured under the Credit Agreement. See Financial Statements and Supplementary Data –Note 20 – Subsequent Events under Part II, Item 8 in this Form 10-K for additional information.

Debt Covenants – The Term Loan, Credit Agreement, and 9.75% Senior Second Lien Notes contain financial covenants calculated as of the last day of each fiscal quarter, which include thresholds on financial ratios, as defined in the respective Subsidiary Credit Agreement, the Credit Agreement and the indenture related to the 9.75% Senior Second Lien Notes. We were in compliance with all applicable covenants of the Term Loan, Credit Agreement and the 9.75% Senior Second Lien Notes indenture as of and for the period ended December 31, 2022. See Financial Statements and Supplementary Data – Note 2 – Debt under Part II, Item 8 in this Form 10-K for additional information.

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The Subsidiary Borrowers

On May 19, 2021, we formed A-I LLC and A-II LLC, both indirect, wholly-owned subsidiaries of W&T Offshore, Inc., through their parent, Aquasition Energy LLC (collectively, the Aquasition Entities”). Concurrently, A-I LLC and A-II II LLC, entered into a credit agreement providing for the Term Loan in an initial aggregate principal amount equal to $215.0 million. Proceeds of the Term Loan were used by A-I LLC and A-II LLC to fund the acquisition of the Mobile Bay Properties and the Midstream Assets, respectively, from the Company. The Term Loan is non-recourse to the Company and any subsidiaries other than the Aquasition Entities, and is secured by the first lien security interests in the equity of the Aquasition Entities and a first lien mortgage security interest in the Mobile Bay Properties. See Financial Statements and Supplementary Data – Note 4 – Subsidiary Borrowers under Part II, Item 8 in this Annual Report for additional information.

We designated the Aquasition Entities as unrestricted subsidiaries under the Indenture (the “Unrestricted Subsidiaries”). Having been so designated, the Unrestricted Subsidiaries do not guarantee the 11.75% Senior Second Lien Notes and the liens on the assets sold to the Unrestricted Subsidiaries have been released under the Credit Agreement. The Unrestricted Subsidiaries are not bound by the covenants contained in the Credit Agreement or the Indenture. Under the Subsidiary Credit Agreement and related instruments, assets of the Aquasition Entities may not be available to mortgage or pledge as security to secure new indebtedness of the Company and its other subsidiaries. See Financial Statements and Supplementary Data – Note 2 – Debt under Part II, Item 8 in this Form 10-K for additional information.

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Table of Contents

Below is consolidating balance sheet information reflecting the elimination of the accounts of our Unrestricted Subsidiaries from our Consolidated Balance Sheet as of December 31, 2022 (in thousands):

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Consolidated Balance Sheet","\u200b","Eliminations of Unrestricted Subsidiaries","\u200b","Consolidated Balance Sheet of restricted subsidiaries"],["Assets","","\u200b","","","\u200b","","","\u200b"],["Current assets:","","\u200b","","","\u200b","","","\u200b"],["Cash and cash equivalents","\u200b","$","461,357","\u200b","$","(21,764)","\u200b","$","439,593"],["Restricted cash","\u200b","\u200b","4,417","\u200b","\u200b","\u2014","\u200b","\u200b","4,417"],["Receivables:","\u200b","","","\u200b","","","\u200b"],["Oil and natural gas sales","\u200b","","66,146","\u200b","","(37,344)","\u200b","","28,802"],["Joint interest, net","\u200b","","14,000","\u200b","","5,760","\u200b","","19,760"],["Total receivables","\u200b","","80,146","\u200b","","(31,584)","\u200b","","48,562"],["Prepaid expenses and other assets","\u200b","","24,343","\u200b","","(417)","\u200b","","23,926"],["Total current assets","\u200b","","570,263","\u200b","","(53,765)","\u200b","","516,498"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Oil and natural gas properties and other, net","\u200b","","735,215","\u200b","","(280,649)","\u200b","","454,566"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Restricted deposits for asset retirement obligations","\u200b","","21,483","\u200b","","\u2014","\u200b","","21,483"],["Deferred income taxes","\u200b","","57,280","\u200b","","\u2014","\u200b","","57,280"],["Other assets","\u200b","","47,549","\u200b","","(8,473)","\u200b","","39,076"],["Total assets","\u200b","$","1,431,790","\u200b","$","(342,887)","\u200b","$","1,088,903"],["Liabilities and Shareholders\u2019 Equity (Deficit)","\u200b","","","\u200b","","","\u200b"],["Current liabilities:","\u200b","","","\u200b","","","\u200b"],["Accounts payable","\u200b","$","68,339","\u200b","$","(27,387)","\u200b","$","40,952"],["Undistributed oil and natural gas proceeds","\u200b","","41,934","\u200b","","(7,930)","\u200b","","34,004"],["Asset retirement obligations","\u200b","","25,359","\u200b","","\u2014","\u200b","","25,359"],["Accrued liabilities","\u200b","","74,041","\u200b","","(45,102)","\u200b","","28,939"],["Current portion of long-term debt","\u200b","\u200b","582,249","\u200b","\u200b","(32,119)","\u200b","\u200b","550,130"],["Income tax payable","\u200b","","412","\u200b","","\u2014","\u200b","","412"],["Total current liabilities","\u200b","","792,334","\u200b","","(112,538)","\u200b","","679,796"],["Long-term debt","\u200b","","","\u200b","","","\u200b"],["Principal","\u200b","","114,158","\u200b","","(114,158)","\u200b","","\u2014"],["Unamortized debt issuance costs","\u200b","","(2,970)","\u200b","","2,970","\u200b","","\u2014"],["Long-term debt, net","\u200b","","111,188","\u200b","","(111,188)","\u200b","","\u2014"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Asset retirement obligations, less current portion","\u200b","","441,071","\u200b","","(61,138)","\u200b","","379,933"],["Other liabilities","\u200b","","79,491","\u200b","","(47,398)","\u200b","","32,093"],["Deferred income taxes","\u200b","","72","\u200b","","\u2014","\u200b","","72"],["Common stock","\u200b","","1","\u200b","","\u2014","\u200b","","1"],["Shareholders' equity (deficit):","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Additional paid-in capital","\u200b","","576,588","\u200b","","\u2014","\u200b","","576,588"],["Retained deficit","\u200b","","(544,788)","\u200b","","(10,625)","\u200b","","(555,413)"],["Treasury stock, at cost","\u200b","","(24,167)","\u200b","","\u2014","\u200b","","(24,167)"],["Total shareholders\u2019 equity (deficit)","\u200b","","7,634","\u200b","","(10,625)","\u200b","","(2,991)"],["Total liabilities and shareholders\u2019 equity (deficit)","\u200b","$","1,431,790","\u200b","$","(342,887)","\u200b","$","1,088,903"]]
[[/GREPCENT_TABLE]]

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59

Table of Contents

Below is Consolidating Statement of Operations information reflecting the elimination of the accounts of our Unrestricted Subsidiaries from our Consolidated Statement of Operations for the year ended December 31, 2022 (in thousands):

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","Consolidated","\u200b","\u200b","Eliminations of Unrestricted Subsidiaries","\u200b","\u200b","Consolidated restricted subsidiaries"],["Revenues:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Oil","\u200b","$","524,274","\u200b","$","(899)","\u200b","$","523,375"],["NGLs","\u200b","","56,964","\u200b","","(33,367)","\u200b","","23,597"],["Natural gas","\u200b","","323,831","\u200b","","(223,826)","\u200b","","100,005"],["Other","\u200b","","15,928","\u200b","","(10,481)","\u200b","","5,447"],["Total revenues","\u200b","","920,997","\u200b","","(268,573)","\u200b","","652,424"],["Operating expenses:","\u200b","","","\u200b","","","\u200b"],["Lease operating expenses","\u200b","","224,414","\u200b","","(52,760)","\u200b","","171,654"],["Gathering, transportation and production taxes","\u200b","\u200b","35,128","\u200b","\u200b","(17,692)","\u200b","\u200b","17,436"],["Depreciation, depletion, amortization and accretion","\u200b","","133,630","\u200b","","(2,087)","\u200b","","131,543"],["General and administrative expenses","\u200b","","73,747","\u200b","","(1,451)","\u200b","","72,296"],["Total operating expenses","\u200b","","466,919","\u200b","","(73,990)","\u200b","","392,929"],["Operating income","\u200b","","454,078","\u200b","","(194,583)","\u200b","","259,495"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Interest expense, net","\u200b","","69,441","\u200b","","(14,721)","\u200b","","54,720"],["Derivative loss (gain)","\u200b","","85,533","\u200b","","(141,736)","\u200b","","(56,203)"],["Other expense, net","\u200b","","14,295","\u200b","","\u2014","\u200b","","14,295"],["Income before income taxes","\u200b","","284,809","\u200b","","(38,126)","\u200b","","246,683"],["Income tax expense","\u200b","","53,660","\u200b","","\u2014","\u200b","","53,660"],["Net income","\u200b","$","231,149","\u200b","$","(38,126)","\u200b","$","193,023"]]
[[/GREPCENT_TABLE]]

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​

The following table presents our produced oil, NGLs and natural gas volumes (net to our interests) from the Mobile Bay Properties for the periods indicated:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended December 31,","\u200b","For the period from May 19, 2021 to December 31, 2021"],["Production Volumes:","\u200b","2022","\u200b","2022"],["Oil (MBbls)","","17","","13"],["NGLs (MBbls)","","941","","603"],["Natural gas (MMcf)","","30,052","","20,417"],["Total oil equivalent (MBoe)","","5,967","","4,019"]]
[[/GREPCENT_TABLE]]

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Reserves information for the Mobile Bay properties is described in more detail under Part I Item 2, Properties, in this Form 10-K.

60

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Contractual Obligations

At December 31, 2022, we did not have any financing leases. The following table summarizes our significant contractual obligations by maturity as of December 31, 2022 (in millions):

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","","\u200b","","\u200b","","One to","","\u200b","","\u200b"],["\u200b","\u200b","\u200b","\u200b","","Less than","","Three","","Three to","","More Than"],["\u200b","\u200b","Total","\u200b","One Year","","Years","\u200b","Five Years","\u200b","Five Years"],["Long-term debt \u2013 principal","\u200b","$","700.4","\u200b","$","586.2","\u200b","$","57.7","\u200b","$","48.3","\u200b","$","8.2"],["Long-term debt \u2013 interest (1)","\u200b","","73.1","\u200b","","55.8","\u200b","","12.3","\u200b","","4.8","\u200b","","0.2"],["Operating leases","\u200b","","22.4","\u200b","","1.6","\u200b","","3.5","\u200b","","3.1","\u200b","","14.2"],["Asset retirement obligations (2)","\u200b","","466.4","\u200b","","25.4","\u200b","","98.1","\u200b","","28.2","\u200b","","314.7"],["Other liabilities and commitments (3)","\u200b","","109.4","\u200b","","8.5","\u200b","","14.4","\u200b","","13.9","\u200b","","72.6"],["Total","\u200b","$","1,371.7","\u200b","$","677.5","\u200b","$","186.0","\u200b","$","98.3","\u200b","$","409.9"]]
[[/GREPCENT_TABLE]]

​

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​

[[GREPCENT_TABLE]]
[["","(1)","Interest payments were calculated through the stated maturity date of the related debt: \u200b"]]
[[/GREPCENT_TABLE]]

(a) interest payments for the Credit Agreement were calculated using the interest rate applied to our outstanding balance as of December 31, 2022 and assumes no change in this interest rate in future periods. In addition, a commitment fee of 3.0% was applied on the available balance as of December 31, 2022 and fees related to letters of credit were estimated at the rate incurred on December 31, 2022;​

(b) interest payments on the 9.75% Senior Second Lien Notes were calculated per the terms of the notes; and​

(c) interest payments on the Term Loan were calculated at the 7.0% interest rate set forth in the Term Loan.​

[[GREPCENT_TABLE]]
[["","(2)","ARO in the above table is presented on a discounted basis, consistent with the amounts reported on the Consolidated Balance Sheet as of December 31, 2022 and are estimates of future payments. Actual payments and the timing of the payments may be significantly different than our estimates. All other amounts in the above table are presented on an undiscounted basis.\u200b"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]