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15 Nov 2010
Approximately $450 million of debt securities affected
New York, November 15, 2010 -- Moody's Investors Service changed the outlook for W&T Offshore Inc.
(W&T) to Stable from Negative, changed the Speculative Grade
Liquidity (SGL) rating to SGL-2 from SGL-3, affirmed
the B3 Corporate Family Rating (CFR) and Probability of Default Rating
(PDR), and affirmed the Caa1 senior unsecured notes rating.
The change to a stable outlook reflects favorable reserve replacement
performance to date in 2010 from two acquisitions, a corresponding
anticipated stabilization in the company's leverage and production
trends, and an improved liquidity profile. In May of 2010
W&T announced an acquisition of Gulf of Mexico (GOM) oil and gas properties
from Total E&P USA, Inc. in which it acquired 11.6
million barrels of oil equivalent (mmboe) of proven reserves for a price
of approximately $13.47/boe including asset retirement obligations.
In November 2010 W&T announced an acquisition of GOM oil and gas properties
from Shell Offshore Inc. in which it acquired 25.7mmboe
of proven reserves, 97% of which is proven developed producing
(PDP) for a price of approximately $19.44/boe including
asset retirement obligations. Moody's views these as favorable
reserve replacement costs given the proportion of liquids versus gas production
acquired, particularly in comparison to the negative performance
trends in 2008 and 2009. The combined acquisitions were financed
with a mix of cash and revolver borrowings which keeps leverage on production
and proven reserves roughly at pre-acquisition levels. Moody's
views these acquisitions as a significant step toward halting the pre-2010
decline in reserve replacement performance.
W&T's B3 CFR reflects the company's relatively small scale and concentration
in the offshore GOM, its diversification within the GOM, and
the high decline rates, capital intensity, and operational
challenges inherent in the GOM including risks of hurricane damage to
drilling platforms and pipeline transportation infrastructure.
The rating also considers W&T's twenty seven years of operating
experience in the area. Over the past several years, as the
shallower GOM has matured, W&T has increased its activities
in the deeper areas which are inherently exposed to greater operational
challenges. The CFR is restrained by high leverage on proved developed
reserves and production volumes, particularly in light of the company's
GOM reserve profile, as well as the high finding and development
(F&D) costs and low reserve replacement rates in 2008 and 2009,
which have shown significant improvement so far in 2010.
W&T has good liquidity to meet its cash needs over the next twelve
months. At September 30, 2010, the company had $180
million of cash and approximately $405 million of availability
under its senior secured borrowing base revolver which has a current borrowing
base (prior to the acquisition of additional proven developed reserves
in the November 2010 acquisition) of $405 million. There
are no near term debt maturities with the revolver not maturing until
July of 2012 and the senior notes maturing in 2014. Covenants under
the revolver include debt / EBITDA of 3.0x and a current ratio
of 1.0x. As of September 30, 2010 W&T's
debt / EBITDA was roughly 1.0x and its current ratio was greater
than 3.0x. The November 2010 acquisition is not expected
to materially impact the current level of covenant headroom. Substantially
all of W&T's assets are pledged as security under the revolver
which limits the extent to which asset sales could provide a source of
additional liquidity if needed.
The Caa1 senior unsecured notes rating reflects both the overall probability
of default of W&T, to which Moody's assigns a PDR of B3,
and a loss given default of LGD 5 (75%). The size of the
senior secured revolver's potential priority claim relative to the senior
unsecured notes results in the notes being rated one notch beneath the
B3 CFR under Moody's Loss Given Default Methodology.
If capital productivity were to decline from year to date 2010 levels
resulting in declining reserve replacement levels, increased reserve
replacement costs, higher leverage on production and reserves,
an unfavorable production trend, or a weakened liquidity profile
then the outlook could be changed to negative or the ratings downgraded.
A positive rating action is unlikely in the near term given the uncertainty
regarding the regulatory environment, permitting processes,
and operating costs in the GOM due to the Macondo well blowout and oil
The principal methodologies used in rating W&T Offshore Inc.
were Loss Given Default for Speculative-Grade Non-Financial
Companies in the U.S., Canada and EMEA published in
June 2009, and the Independent Exploration and Production (E&P)
Industry published in December 2008. Other methodologies and factors
that may have been considered in the process of rating this issuer can
also be found on Moody's website.
W&T Offshore Inc. is an independent exploration and production
company headquartered in Houston, Texas.
Corporate Finance Group
Moody's Investors Service
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's changes W&T Offshore's outlook to stable
250 Greenwich Street
New York, NY 10007
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