W&T Offshore, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2022

NOTE 10 — DERIVATIVE FINANCIAL INSTRUMENTS

W&T’s market risk exposure relates primarily to commodity prices. The Company attempts to mitigate a portion of its commodity price risk and stabilize cash flows associated with sales of oil and natural gas production through the use of oil and natural gas swaps, costless collars, sold calls and purchased puts. The Company is exposed to credit loss in the event of nonperformance by the derivative counterparties; however, the Company currently anticipates that the derivative counterparties will be able to fulfill their contractual obligations. The Company is not required to provide additional collateral to the derivative counterparties and does not require collateral from the derivative counterparties.

W&T has elected not to designate commodity derivative contracts for hedge accounting. Accordingly, commodity derivatives are recorded on the Consolidated Balance Sheets at fair value with settlements of such contracts, and changes in the unrealized fair value, recorded as Derivative loss (gain) on the Consolidated Statements of Operations in each period presented. The cash flows of all commodity derivative contracts are included in Net cash provided by operating activities on the Consolidated Statements of Cash Flows.

The crude oil contracts are based on WTI crude oil prices and the natural gas contracts are based off the Henry Hub prices, both of which are quoted off NYMEX.

The following table reflects the contracted volumes and weighted average prices under the terms of the Company’s open derivative contracts as of December 31, 2022:



		Average
	Instrument	Daily	Total	Weighted		Weighted		Weighted
Period	Type	Volumes	Volumes	Strike Price		Put Price		Call Price

Natural Gas - Henry Hub (NYMEX)		(MMbtu)	(MMbtu)		($/MMbtu)		($/MMbtu)		($/MMbtu)
Jan 2023 - Dec 2023	calls	70,000	25,550,000	$	—	$	—	$	7.50
Jan 2024 - Dec 2024	calls	65,000	23,790,000	$	—	$	—	$	6.13
Jan 2025 - Mar 2025	calls	62,000	5,580,000	$	—	$	—	$	5.50
Jan 2023 - Dec 2023⁽¹⁾	swaps	72,329	26,400,000	$	2.48	$	—	$	—
Jan 2024 - Dec 2024⁽¹⁾	swaps	65,574	24,000,000	$	2.46	$	—	$	—
Jan 2025 - Mar 2025⁽¹⁾	swaps	63,333	5,700,000	$	2.72	$	—	$	—
Apr 2025 - Dec 2025⁽¹⁾	puts	62,182	17,100,000	$	—	$	2.27	$	—
Jan 2026 - Dec 2026⁽¹⁾	puts	55,890	20,400,000	$	—	$	2.35	$	—
Jan 2027 - Dec 2027⁽¹⁾	puts	52,603	19,200,000	$	—	$	2.37	$	—
Jan 2028 - Apr 2028⁽¹⁾	puts	49,587	6,000,000	$	—	$	2.50	$	—

⁽¹⁾	^{These contracts were entered into by the Company’s wholly owned subsidiary, A-I LLC (see}^{Note 4 – Subsidiary Borrowers).}

Financial Statement Presentation

The following fair value of derivative financial instruments amounts were recorded in the Consolidated Balance Sheets (in thousands):


	December 31,
	2022		2021
Prepaid expenses and other current assets	$	4,954	$	21,086
Other assets (long-term)		23,236		34,435
Accrued liabilities		46,595		81,456
Other liabilities (long-term)		43,061		37,989

Although the Company has master netting arrangements with its counterparties, the amounts recorded on the Consolidated Balance Sheets are on a gross basis.

Changes in the fair value and settlements of contracts are recorded on the Consolidated Statements of Operations as Derivative loss (gain). The impact of commodity derivative contracts on the Consolidated Statements of Operations was as follows (in thousands):


	Year Ended December 31,
	2022		2021		2020
Realized loss (gain)⁽¹⁾	$	125,089	$	95,187	$	(33,415)
Unrealized (gain) loss		(39,556)		80,126		9,607
Derivative loss (gain)		85,533		175,313		(23,808)

⁽¹⁾

^{The year ended December 31, 2022 includes the effects of the}^$138.0^{million realized gain related to the monetization of certain natural gas call contracts through restructuring of strike prices which occurred in June 2022.}

Cash payments on commodity derivative contract settlements, net, are included within Net cash provided by operating activities on the Consolidated Statements of Cash Flows and were as follows (in thousands):


	Year Ended December 31,
	2022		2021		2020
Derivative loss (gain)	$	85,533	$	175,313	$	(23,808)
Derivative cash (payments) receipts, net⁽¹⁾		(41,880)		(81,298)		45,196
Derivative cash premium payments		(46,111)		(40,484)		—

⁽¹⁾

^{The year ended December 31, 2022 includes}^$105.3^{million of net cash receipts related to the monetization of certain natural gas call contracts through restructuring of strike prices.}