W&T Offshore announced financial and operational results for the fourth quarter and full year 2008.
Some of the highlights include:
Tracy W. Krohn, Chairman and Chief Executive Officer, commented, "2008 was a record year for the Company in terms of revenue and EBITDA. We also faced many challenges. The most significant of those challenges included production interruptions from two hurricanes in the Gulf of Mexico and severe commodity price swings that have required us to report a non-cash ceiling test impairment as well as negative revisions to our proved reserves. However, as we enter the first few months of 2009, we remain confident in our ability to build on the Company's long-term track record for successfully finding and purchasing reserves. Also, as production volumes increase and service costs decline, we believe we can continue to generate healthy operating cash flow over time. Furthermore, our strong liquidity position allows us to remain flexible in pursuing various growth alternatives including acquisitions, drilling and other strategic opportunities."
Revenues, Net Income and EPS: Net loss for the fourth quarter of 2008 was $851.4 million, or $11.21 per diluted share, on revenues of $108.3 million, compared to net income for the same quarter of 2007 of $49.4 million, or $0.65 per diluted share, on revenues of $339.5 million. Net income decreased in the fourth quarter 2008, principally due to a ceiling test impairment of $1.2 billion, a decrease in our average realized price to $6.68 per thousand cubic feet equivalent ("Mcfe") from $9.88 per Mcfe in 2007, and the deferral of production caused by Hurricane Gustav in late August 2008 and Hurricane Ike in early September 2008.
The net loss for the fourth quarter of 2008 includes the impact of the $1.2 billion ceiling test impairment ($769 million after-tax) and a $2.6 million unrealized derivative gain ($1.7 million after-tax). For the fourth quarter of 2007, net income reflects the impact of an unrealized derivative loss of $16.5 million ($11.3 million after-tax). Without the effect of the ceiling test impairment and the unrealized derivative gain, the net loss for the fourth quarter of 2008 would have been approximately $84.3 million, or $1.11 per diluted share. Net income without the effect of the unrealized derivative loss for the corresponding quarter of 2007 would have been approximately $60.7 million, or $0.80 per diluted share. See "Non-GAAP Information" later in this release.
The net loss for the year ended December 31, 2008 was $558.8 million, or $7.36 per diluted share. Without the effect of the ceiling test impairment and an unrealized derivative gain of $13.5 million ($9.1 million after-tax), net income would have been $200.9 million or $2.64 per diluted share, on revenues of $1.2 billion. This compares to net income of $144.3 million, or $1.90 per diluted share, on revenues of $1.1 billion for 2007. Excluding the effect of the unrealized derivative loss and the loss on extinguishment of debt, net income would have been $171.5 million and earnings per diluted share would have been $2.26 in the 2007 period. Adjusted net income increased in 2008 from 2007 due to higher average commodity prices throughout a majority of 2008 and lower lease operating expenses ("LOE"). This was partially offset by lower production as a result of damages caused by Hurricanes Gustav and Ike, increased depreciation, depletion, amortization and accretion ("DD&A") and higher general and administrative expenses ("G&A"). The decrease in unadjusted net income from 2007 to 2008 is primarily attributable to the ceiling test impairment recorded in 2008.
Cash Flow from Operating activities and Adjusted EBITDA
EBITDA and Adjusted EBITDA are non-GAAP measures and are defined in "Non-GAAP Information" later in this press release. Adjusted EBITDA for the fourth quarter of 2008 was $22.2 million, compared to $252.4 million during the prior year's fourth quarter, or a 91% decrease. Net cash provided by operating activities for 2008 increased 28% to $882.5 million from $688.6 million in 2007. Adjusted EBITDA was $883.9 million for the year ended December 31, 2008, or an 8% increase, when compared to $820.0 million for the prior year period. Cash flow from operating activities and adjusted EBITDA were higher in 2008 due to higher realized prices on sales of our oil and natural gas production.
Production and Prices
During the fourth quarter of 2008, we sold 10.5 billion cubic feet ("Bcf") of natural gas at an average price of $5.90 per thousand cubic feet ("Mcf") and 1.0 million barrels ("MMBbls") of oil and natural gas liquids at an average price of $48.59 per barrel ("Bbl"). On a natural gas equivalent ("Bcfe") basis, we sold 16.2 Bcfe at an average price of $6.68 per Mcfe. For the fourth quarter of 2007, we sold 21.2 Bcf of natural gas at an average price of $7.28 per Mcf and 2.2 MMBbls of oil and natural gas liquids at an average price of $84.62 per Bbl. On a Bcfe basis, we sold 34.3 Bcfe at an average price of $9.88 per Mcfe. Lower volumes in fourth quarter of 2008 were largely due to deferred production from Hurricanes Gustav and Ike. For the year ended December 31, 2008, we sold 56.1 Bcf of natural gas at an average price of $9.40 per Mcf and 7.0 MMBbls of oil and natural gas liquids at an average price of $98.72 per Bbl. On a Mcfe basis, the Company sold 97.9 Bcfe at an average price of $12.42 per Mcfe.
In 2007, the Company sold 76.7 Bcf of natural gas at an average price of $7.20 per Mcf and 8.3 MMBbls of oil and natural gas liquids at an average price of $67.58 per Bbl. On a Mcfe basis, the Company sold 126.5 Bcfe at an average price of $8.80 per Mcfe during the year ended December 31, 2007. Again, the decrease in annual production in 2008 from 2007 is largely due to shut-in production from Hurricanes Gustav and Ike.
Lease Operating Expenses
LOE for the fourth quarter of 2008 increased to $73.2 million, or $4.51 per Mcfe, from $65.6 million, or $1.91 per Mcfe, in the fourth quarter of 2007. LOE for the year ended December 31, 2008 was $229.7 million, or $2.35 per Mcfe, compared to $234.8 million, or $1.86 per Mcfe, in 2007.
The increases on a per Mcfe basis in quarterly and year-to-date LOE are primarily attributable to deferral of production caused by Hurricanes Gustav and Ike. On a nominal basis, lease operating expenses for the fourth quarter of 2008 increased primarily due to $15.9 million in hurricane repair expenses in the fourth quarter of 2008 that were either not covered by insurance or have yet to be recovered from our insurance underwriters, versus $3.7 million during the fourth quarter of 2007.
Total LOE for full year 2008 decreased due to lower workover expenses, a decrease in work performed by others on our non-operated properties and a decrease in insurance premiums, partially offset by higher operating costs and hurricane repair costs.
Depreciation, depletion, amortization and accretion
DD&A decreased to $108.6 million, or $6.69 per Mcfe, in the fourth quarter of 2008 from $159.6 million, or $4.65 per Mcfe, in the same period of 2007. Total DD&A decreased due to lower production volumes. DD&A for the year ended 2008 was $521.8 million, or $5.33 per Mcfe, compared to DD&A of $532.9 million, or $4.21 per Mcfe, for the same period in 2007. On a nominal basis, DD&A decreased due to decreased volumes produced in 2008, partially offset by a 23% reduction in proved reserves for the year ended December 31, 2008.
Ceiling Test Impairment
The Company incurred a non-cash ceiling test impairment of $1.2 billion (resulting in a charge to earnings of approximately $769 million after-tax) to the carrying value of the Company's proved oil and gas properties as of December 31, 2008. The impairment results from the application of the full cost "ceiling test" under the full cost method of accounting. Under full cost accounting requirements, the carrying value of the Company's oil and gas properties is evaluated on a quarterly basis and is limited to the present value of expected future cash flows of proved reserves using a 10-percent discount rate based on prices and costs at the end of the quarter plus the cost of unevaluated oil and gas properties (i.e. the cost center ceiling). A ceiling test impairment occurs when the carrying value of the oil and gas properties exceeds the cost center ceiling. The impairment is primarily attributable to lower prices for both oil and natural gas at December 31, 2008. The ceiling test impairment charge is a non-cash item and does not impact any of the covenants on the Company's debt obligations.
At December 31, 2008, the prices that were used were $37.71 per barrel for oil and natural gas liquids and $6.17 per Mcf natural gas, which represent the December 31, 2008 market prices adjusted for the Company's average basis differentials. The further decline in oil and natural gas prices after December 31, 2008 may require us to record an additional ceiling test impairment in 2009. Conversely, if prices were to increase, reserves that were deemed uneconomic at December 31, 2008 may become economical again and allow such reserves to be reinstated. Again, any further ceiling test impairment will not impact any of the covenants of the Company's debt obligations and is a non-cash item.
Capital Expenditures and Operations Update
For the year ended December 31, 2008, capital expenditures were $774.9 million, consisting of $116.6 million for the acquisition of Apache's interest in Ship Shoal 349 field, $337.6 million for exploration, $265.3 million for development activities and $55.4 million for seismic, capitalized interest and other leasehold costs. This compares to capital expenditures in 2007 of $361.2 million (before disposition of $1.8 million). Our capital expenditures for the year ended December 31, 2008 were financed by net cash provided by operating activities and cash on hand.
In 2008, the Company made discoveries and successfully completed 18 of 24 exploration wells, for a success rate of 75%, which included 16 out of 19 conventional shelf wells, and two of five wells on the deep shelf. Additionally, the Company successfully drilled and completed two of two development wells, both of which were on the conventional shelf. For the 26 wells drilled in 2008, the Company achieved a success rate of 77%. Drilling Highlights: In the fourth quarter of 2008, the Company was 67% successful in the drilling of six exploration wells. One of the wells was located on the deep shelf while the remaining five were on the conventional shelf.
Furthermore, at year-end 2008 we were in the early stages of drilling three exploration wells and two development wells. To date, we have drilled three successful exploration wells and one non-commercial development well.
In 2008, W&T replaced 108% of its production through the drill-bit and acquisitions, excluding revisions and extensions. As of December 31, 2008, total proved reserves were 491.1 Bcfe, compared to proved reserves of 638.8 Bcfe as of December 31, 2007, a net reduction of 23%. This decline in reserves was primarily due to the decline in oil and natural gas prices. Year-end 2008 proved reserves are comprised of 46% natural gas and 54% oil and natural gas liquids. The present value of our total proved reserves discounted at 10%, which includes the impact of estimated asset retirement obligations and future income taxes, is $930.9 million, based on year-end prices of $6.17 per Mcf of natural gas and $37.71 per Bbl of oil and natural gas liquids. These prices represent the December 31, 2008 market prices adjusted for basis differentials. The Company's estimate of proved reserves is based on a reserve report prepared by Netherland, Sewell & Associates, Inc., the Company's independent petroleum consultant.
2009 Capital Expenditures Budget
As a result of continued economic uncertainty, our drilling and capital expenditures in 2009 will be less than our drilling and capital expenditures in 2008. Our capital expenditure budget for 2009 is approximately $220 to $270 million and includes estimates for the completion of wells that were in progress at the end of 2008, wells or projects that we are presently committed to, lease saving operations, development wells where the rig is on location, scheduled recompletions and the development of our Green Canyon Block 646 prospect ("Daniel Boone"). We anticipate fully funding our 2009 capital expenditures with internally generated cash flow, and cash on hand. We do not budget for acquisitions.
The guidance for first quarter and full year 2009 represents the Company's best estimate of likely future results, and is affected by the factors described below in "Forward-Looking Statements."
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