NOTE 1 — SIGNIFICANT ACCOUNTING POLICIES

Operations

W&T Offshore, Inc. (with subsidiaries referred to herein as “W&T” or the “Company”) is an independent oil, NGL and natural gas producer with substantially all of its operations offshore in the Gulf of Mexico. The Company is active in the exploration, development and acquisition of oil and natural gas properties. Interests in fields, leases, structures and equipment are primarily owned by the Company and its 100% owned subsidiaries, W & T Energy VI, LLC, Aquasition LLC (“A-I, LLC”), and Aquasition II, LLC (“A-II LLC”), and through a proportionately consolidated interest in Monza Energy LLC (“Monza”).

Basis of Presentation

The Consolidated Financial Statements include the accounts of W&T Offshore, Inc., its majority-owned subsidiary and the proportionately consolidated interests in oil and gas joint ventures. All significant intercompany transactions have been eliminated.

The Consolidated Financial Statements have been prepared in accordance with U.S. GAAP and the appropriate rules and regulations of the SEC.

Reclassification – For presentation purposes, as of December 31, 2020, Derivative loss (gain) has been moved out of “Operating income (loss)” on the Consolidated Statement of Operations in order to conform to current period presentation. Additionally, as of December 31, 2020, Gathering and transportation and Production taxes have been combined into one line item within “Operating income” on the Consolidated Statement of Operations in order to conform to the current period presentation. Such reclassifications had no effect on the Company’s results of operations, financial position or cash flows.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods and the reported amounts of proved oil and natural gas reserves. Actual results could differ from those estimates.

Cash Equivalents

W&T considers all highly liquid investments purchased with original or remaining maturities of three months or less at the date of purchase to be cash equivalents.

Restricted Cash

As of December 31, 2021, the Company cash collateralized each of the outstanding letters of credit in the aggregate amount of approximately $4.4 million. See Note 2 –Debt for additional information.

Revenue Recognition

The Company records revenues from the sale of oil, NGLs and natural gas based on quantities of production sold to purchasers under short-term contracts (less than twelve months) at market prices when delivery to the customer has occurred, title has transferred, prices are fixed and determinable and collection is reasonably assured. Revenue from the sale of crude oil, NGLs and natural gas is recognized when performance obligations under the terms of the respective contracts are satisfied; this generally occurs with the delivery of oil, NGLs and natural gas to the customer. Each unit of product represents a separate performance obligation, therefore, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.

W&T does not record imbalance receivables for those properties in which the Company has taken less than its ownership share of production. As of December 31, 2022 and 2021, $3.5 million, is included as a current liability in Undistributed oil and natural gas proceeds on the Consolidated Balance Sheets related to natural gas imbalances.

Concentration of Credit Risk

The Company’s customers consist primarily of major oil and natural gas companies, well-established oil and pipeline companies and independent oil and gas producers and suppliers. The majority of the Company’s production is sold to customers under short-term contracts at market-based prices. The Company attempts to minimize credit risk exposure to purchasers, joint interest owners, derivative counterparties and other third-party entities through formal credit policies, monitoring procedures, and letters of credit or guarantees when considered necessary.

The following table identifies customers whose total represented 10% or more of the Company’s receipts from sales of crude oil, NGLs and natural gas:

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The loss of any of the customers above would not result in a material adverse effect on the Company’s ability to market future oil and natural gas production as replacement customers could be obtained in a relatively short period of time on terms, conditions and pricing substantially similar to those currently existing.

Accounts Receivables and Allowance for Credit Losses

Accounts Receivable are recorded at historical cost, net of an allowance for credit losses, to reflect the net amounts to be collected. Receivables consist of sales of production to customers and joint interest billings. At each reporting period, a loss methodology is used to determine the recoverability of material receivables using historical data, current market conditions and forecasts of future economic conditions to determine expected collectability.

The following table describes the balance and changes to the allowance for credit losses (in thousands):

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Prepaid expenses and other assets

Amounts recorded in Prepaid expenses and other assets on the Consolidated Balance Sheets are expected to be realized within one year. The following table provides the primary components (in thousands):

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Oil and Natural Gas Properties and Other, Net

Oil and natural gas properties and equipment are recorded at cost using the full cost method. Under this method, all costs associated with the acquisition, exploration, development and abandonment of oil and natural gas properties are capitalized. Acquisition costs include costs incurred to purchase, lease or otherwise acquire properties. Exploration costs include costs of drilling exploratory wells and external geological and geophysical costs, which mainly consist of seismic costs. Development costs include the cost of drilling development wells and costs of completions, platforms, facilities and pipelines. Costs associated with production, certain geological and geophysical costs and general and administrative costs are expensed in the period incurred.

Oil and natural gas properties included in the amortization base are amortized using the units-of-production method based on production and estimates of proved reserve quantities. In addition to costs associated with evaluated properties and capitalized asset retirement obligations, the amortization base includes estimated future development costs to be incurred in developing proved reserves as well as estimated plugging and abandonment costs, net of salvage value, related to developing proved reserves. Future development costs related to proved reserves are not recorded as liabilities on the balance sheet, but are part of the calculation of depletion expense.

Oil and natural gas properties and equipment will include costs of unproved properties when applicable. The cost of unproved properties related to significant acquisitions are excluded from the amortization base until the Company has made an evaluation that impairment has occurred. As of December 31, 2022 and 2021, there were no unproved properties included in the Oil and natural gas properties and other, net. The costs of drilling exploratory dry holes are included in the amortization base immediately upon determination that such wells are non-commercial.

Sales of proved and unproved oil and natural gas properties, whether or not being amortized currently, are accounted for as adjustments of capitalized costs with no gain or loss recognized unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and natural gas.

Furniture, fixtures and non-oil and natural gas property and equipment are depreciated using the straight-line method based on the estimated useful lives of the respective assets, generally ranging from five to seven years. Leasehold improvements are amortized over the shorter of their economic lives or the lease term. Repairs and maintenance costs are expensed in the period incurred.

The following table provides the components of Oil and natural gas properties and other, net (in thousands):

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Ceiling Test Write-Down

Under the full-cost method of accounting, the Company’s capitalized costs are limited to a quarterly ceiling test which determines a limit on the book value of oil and natural gas properties. If the net capitalized cost of oil and natural gas properties (including capitalized ARO) net of related deferred income taxes exceeds the ceiling test limit, the excess is charged to expense on a pre-tax basis and separately disclosed. Any such write downs are not recoverable or reversible in future periods.

The ceiling test limit is calculated as: (i) the present value of estimated future net revenues from proved reserves, less estimated future development costs, discounted at 10%; (ii) plus the cost of unproved oil and natural gas properties not being amortized; (iii) plus the lower of cost or estimated fair value of unproved oil and natural gas properties included in the amortization base; and (iv) less related income tax effects. Estimated future net revenues used in the ceiling test for each period are based on current prices for each product, defined by the SEC as the unweighted average of first-day-of-the-month commodity prices over the prior twelve months for that period. All prices are adjusted by field for quality, transportation fees, energy content and regional price differentials.

The Company did not record a ceiling test write-down during 2022, 2021 or 2020. If average crude oil and natural gas prices decrease below average pricing during 2022, the Company could incur ceiling test write-downs in future periods.

Oil and Natural Gas Reserve Estimates

The Company utilizes SEC pricing when estimating quantities of proved reserves and the standardized measure of discounted future cash flows. Proved undeveloped reserves may only be classified as such if a development plan has been adopted indicating that they are scheduled to be drilled within five years, with some limited exceptions allowed. Refer to Note 19 – Supplemental Oil and Gas Disclosures for additional information.

Asset Retirement Obligations

The Company has obligations to plug and abandon well bores, remove platforms, pipelines, facilities and equipment and restore the land or seabed at the end of oil and natural gas production operations. These obligations are primarily associated with plugging and abandoning wells, removing pipelines, removing and disposing of offshore platforms and site cleanup. The Company records a separate liability for the present value of ARO based on the estimated timing and amount to replace, remove or retire the associated assets, with an offsetting increase to the related oil and natural gas properties on the balance sheet.

In estimating the liability associated with its asset retirement obligations, the Company utilizes several assumptions, including a credit-adjusted risk-free interest rate, estimated costs of decommissioning services, estimated timing of when the work will be performed and a projected inflation rate. Asset removal technologies and costs are constantly changing, as are regulatory, political, environmental, safety and public relations considerations, which can substantially affect estimates of these future costs from period to period.

After initial recording, the liability is increased for the passage of time, with the increase being reflected as Accretion expense on the Consolidated Statements of Operations. If the Company incurs an amount different from the amount accrued for asset retirement obligations, the Company recognizes the difference as an adjustment to proved properties. See Note 7 – Asset Retirement Obligations for additional information.

Contingent Decommissioning Obligations

Certain counterparties in past divestiture transactions or third parties in existing leases that have filed for bankruptcy protection or undergone associated reorganizations may not be able to perform required abandonment obligations. The Company may be held jointly and severally liable for the decommissioning of various facilities and related wells. The Company accrues losses associated with decommissioning obligations when such losses are probable and reasonably estimable. When there is a range of possible outcomes, the amount accrued is the most likely outcome within the range. If no single outcome within the range is more likely than the others, the minimum amount in the range is accrued. These accruals may be adjusted as additional information becomes available. In addition, when decommissioning obligations are reasonably possible, the Company discloses an estimate for a possible loss or range of loss (or a statement that such an estimate cannot be reasonably made). See Note 18 —Contingencies for additional information.

Derivative Financial Instruments

The Company uses commodity price derivative instruments to manage exposure to commodity price risk from sales of oil and natural gas. The Company does not enter into derivative instruments for speculative trading purposes.

Derivative instruments are recorded on the balance sheet as an asset or a liability at fair value. The Company does not designate derivatives instruments as hedging instruments, therefore, all changes in fair value are recognized in Derivative loss (gain) on the Consolidated Statement of Operations. See Note 10 – Derivative Financial Instruments for additional information.

Fair Value of Financial Instruments

Fair value information is included in the notes to the Consolidated Financial Statements when the fair value of the financial instruments is different from the book value or when it is required by U.S. GAAP. The carrying amount of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short-term, highly liquid nature of these instruments. See Note 3 – Fair Value Measurements for additional information.

Income Taxes

The Company’s provision for income taxes includes U.S. state and federal taxes. Income taxes are recorded in accordance with accounting for income taxes under U.S. GAAP which results in the recognition of deferred tax assets and liabilities determined by applying tax rates in effect at the end of a reporting period to the cumulative temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. The effects of changes in tax rates and laws on deferred tax balances are recognized in the period in which the new legislation is enacted. A valuation allowance is established on deferred tax assets when it is more likely than not that some portion or all of the related tax benefits will not be realized.

During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. Such uncertain tax positions are recognized in the Consolidated Financial Statements when it is determined that the relevant tax authority would more likely than not sustain the position following an audit. Any interest and penalties related to uncertain tax positions are recorded in Income tax expense. See Note 13 – Income Taxes for additional information.

Other Assets (long-term)

The major categories recorded in Other assets are presented in the following table (in thousands):

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Accrued Liabilities

The major categories recorded in Accrued liabilities are presented in the following table (in thousands):

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Paycheck Protection Program (“PPP”)

On April 15, 2020, the Company received $8.4 million under the U.S. Small Business Administration (“SBA”) PPP. The Company’s application to the SBA requesting that the PPP funds received be applied to specific covered and non-covered payroll costs was accepted and approved for full forgiveness on June 11, 2021. As there is no definitive guidance under U.S. GAAP, the Company has applied the guidance under IAS 20 and accounted for the PPP as a government grant. Under IAS 20, a government grant is recognized when there is reasonable assurance that the Company has complied with the provisions of the grant. Accordingly, the funds received were recorded as a reduction to General and administrative expenses on the Consolidated Statement of Operations during the year-ended December 31, 2020. No such credit was recognized during the years ended December 31, 2022 or 2021.

Debt Issuance Costs

Debt issuance costs associated with the Credit Agreement are amortized using the straight-line method over the scheduled maturity of the debt. The unamortized debt issue costs associated with the Credit Agreement are reported within Prepaid expenses and other assets in the Consolidated Balance Sheets.

Debt issuance costs associated with the 9.75% Senior Second Lien Notes and the Term Loan are amortized using the effective interest method over the scheduled maturity of the debt. The unamortized debt issuance costs associated with the current debt instruments are reported as a reduction to the carrying value of Current portion of long-term debt, net in the Consolidated Balance Sheet. Unamortized debt issuance costs associated with the long term portion of debt instruments is reported as a reduction of the carrying value of Long-term debt, net in the Consolidated Balance Sheets. See Note 2 –Debt for additional information.

Gain on Debt Transactions

During 2020, the Company acquired $72.5 million in principal of the outstanding 9.75% Senior Second Lien Notes for $23.9 million and recorded a non-cash gain on purchase of debt of $47.5 million.

Other Liabilities (long-term)

The major categories recorded in Other liabilities are presented in the following table (in thousands):

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At-the-Market Equity Offering

On March 18, 2022, the Company filed a prospectus supplement related to the issuance and sale of up to $100,000,000 of shares of common stock under the Company’s ATM Program. The designated sales agent is entitled to a placement fee of up to 3.0% of the gross sales price per share sold. During the year ended December 31, 2022, the Company 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.

Share-Based Compensation

Compensation cost for share-based payments to employees and non-employee directors is based on the fair value of the equity instrument on the date of grant and is recognized over the period during which the recipient is required to provide service in exchange for the award. The fair value for equity instruments subject to only time or to Company performance measures was determined using the closing price of the Company’s common stock at the date of grant. The fair value for equity instruments subject to market-based performance measures was determined using a Monte Carlo valuation model with estimates made as of the grant date. Share-based compensation expense is recognized over the period during which the recipient is required to provide service in exchange for the award. Estimates are made for forfeitures during the vesting period, resulting in the recognition of compensation cost only for those awards that are expected to vest and estimated forfeitures are adjusted to actual forfeitures when the equity instrument vests. See Note 11 – Share-Based Awards and Cash-Based Awards for additional information.

Employee Retention Credit

Under the Consolidated Appropriations Act, 2021 passed by the United States Congress and signed by the President on December 27, 2020, provisions of the Coronavirus Aid, Relief and Economic Security Act were extended and modified making the Company eligible for a refundable employee retention credit subject to meeting certain criteria. The Company recognized a $2.1 million employee retention credit during the year ended December 31, 2021. The funds received were recorded as a reduction to General and administrative on the Consolidated Statement of Operations during the year ended December 31, 2021. No such credit was recognized during the years ended December 31, 2022 or 2020.

Other Expense (Income), Net

For the year ended December 31, 2022, Other expense (income), net primarily consists of other expense related to the additional contingent decommissioning obligations recognized during the year ended December 31, 2021.

For the year ended December 31, 2021, the amount primarily consists of income related to the release restrictions on the Black Elk Escrow fund, partially offset by expenses related to the amortization of the brokerage fee paid in connection with the Joint Venture Drilling Program, offset by contingent decommissioning obligation recognized during the year ended December 31, 2021.

For the year ended December 31, 2020, the amount primarily consists of expenses related to the amortization of the brokerage fee paid in connection with the Joint Venture Drilling Program.

See Note 9 – Restricted Deposits for ARO and Note 18 —Contingencies for additional information.

Earnings Per Share

Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per share under the two-class method when the effect is dilutive. See Note 14 – Earnings Per Share for additional information.