|W&T OFFSHORE INC filed this Form 10-Q on 05/04/2017|
During the three months ended March 31, 2017, the number of working rigs drilling for oil and natural gas in the U.S. was significantly above year ago levels for land based rigs, but was lower for offshore rigs. According to Baker Hughes, the oil rig count at March 2016, December 2016 and March 2017 was 362, 525 and 662, respectively. The U.S. natural gas rig count at March 2016, December 2016 and March 2017 was 88, 132 and 160 respectively. In the Gulf of Mexico, the number of working rigs was 24 rigs (19 oil and 5 natural gas) at March 2016; 22 rigs (22 oil and no natural gas) at December 2016; and 22 rigs (21 oil and one natural gas) at March 2017. The majority of working rigs in the Gulf of Mexico are currently “floaters” with very few jack-up rigs working.
As required by the full cost accounting rules, we perform our ceiling test calculation each quarter using the SEC pricing guidelines, which require using the 12-month average commodity price for each product, calculated as the unweighted arithmetic average of the first-day-of-the-month price adjusted for price differentials. The average price using the SEC required methodology at March 31, 2017 was $44.10 per barrel for WTI crude oil and $2.73 per MMBtu for Henry Hub natural gas before adjustments. For the three months ended March 31, 2017, we did not have a ceiling test write-down. For the three months ended March 31, 2016, we recorded a ceiling test write-down of the carrying value of our oil and natural gas properties of $116.6 million due primarily to lower prices of crude oil and natural gas. Incurrence of write downs is dependent primarily on the price of crude oil and natural gas, but also is affected by quantities of proved reserves, future development costs and future lease operating costs.
We performed a pro-forma calculation to determine if a ceiling test impairment write-down would be likely in the second quarter of 2017 based only on changes to prices using the assumptions that projected prices are the same as most recently published first-day-of-the month prices to compute a pro-forma 12-month average. In this pro-forma calculation, no changes were assumed for proved reserves from the March 31, 2017 levels other than price and no changes were assumed for other factors. The pro-forma calculation indicated that there would not have been a ceiling-test write down for the first quarter of 2017 using these pro-forma prices. This pro-forma calculation may not be predictive of the second quarter of 2017, as other factors besides price will impact the ceiling test calculation.
During the first quarter of 2017, the BOEM issued notices that provide for a six-month extension for both “sole-liability” and “non-sole liability” properties related to the implementation of NTL #2016-01, which includes financial assurances related to asset retirement obligations for leases, ROWs and RUEs. We continue to have discussions with the BOEM regarding these matters. These matters are more fully discussed in the Liquidity and Capital Resources section of this Item II of this Form 10-Q.
We have set our initial 2017 capital expenditure budget at $125.0 million, which is above the capital expenditures incurred in 2016 of $48.6 million, but reduced from investment levels in 2015 and 2014 of $231.4 million and $630.0 million, respectively. Because of the level of commodity prices and the outlook for the remainder of the 2017, we believe this capital expenditure level should enable us to maintain or increase production in 2017 over 2016, while at the same time, allow cash balances to build and leave our revolving bank credit facility undrawn (assuming current commodity price and cost levels). While the 2017 capital projects are expected to impact 2017 production to a degree, the bulk of the impact on production is expected to be in 2018 and beyond. We strive to maintain flexibility in our capital expenditure projects and if prices improve, we may increase our investments.
With respect to our costs, we have realized significant reductions in our lease operating expenses and general and administrative expenses as a result of our cost reduction programs, which included headcount and contractor usage reductions, combined with reduced rates from vendors for supplies, equipment and contract labor. These cost reduction programs and reduced supplier rates have also lowered capital expenditures, ARO settlements and ARO estimates.
Our short term focus is on liquidity, cost reductions, fulfilling our obligations and making investments with short payback time frames. In light of our somewhat limited access to capital and liquidity, we are continually assessing our plans. We continue to closely monitor current and forecasted prices to assess if changes are needed to our plans. See our Annual Report on Form 10-K for the year ended December 31, 2016, Item 1A, Risk Factors, for additional information.