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

Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

6 Months Ended

Jun. 30, 2023

NOTE 4 — 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 Condensed Consolidated Balance Sheets at fair value with settlements of such contracts, and changes in the unrealized fair value, recorded as Derivative (gain) loss on the Condensed 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 Condensed Consolidated Statements of Cash Flows.

The natural gas contracts are based off the Henry Hub prices, which is quoted off the New York Mercantile Exchange (“NYMEX”).

The following table reflects the contracted volumes and weighted average prices under the terms of the Company’s open derivative contracts as of June 30, 2023:



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

Natural Gas - Henry Hub (NYMEX)		(MMbtu)⁽¹⁾	(MMbtu)⁽¹⁾		($/MMbtu)⁽¹⁾		($/MMbtu)⁽¹⁾		($/MMbtu)⁽¹⁾
July 2023 - Dec 2023	calls	35,288	12,880,000	$	—	$	—	$	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
July 2023 - Dec 2023⁽²⁾	swaps	36,164	13,200,000	$	2.43	$	—	$	—
Jan 2024 - Dec 2024⁽²⁾	swaps	65,574	24,000,000	$	2.46	$	—	$	—
Jan 2025 - Mar 2025⁽²⁾	swaps	63,333	5,700,000	$	2.72	$	—	$	—
Apr 2025 - Dec 2025⁽²⁾	puts	62,182	17,100,000	$	—	$	2.27	$	—
Jan 2026 - Dec 2026⁽²⁾	puts	55,890	20,400,000	$	—	$	2.35	$	—
Jan 2027 - Dec 2027⁽²⁾	puts	52,603	19,200,000	$	—	$	2.37	$	—
Jan 2028 - Apr 2028⁽²⁾	puts	49,587	6,000,000	$	—	$	2.50	$	—

⁽¹⁾	^{MMbtu – Million British Thermal Units}

⁽²⁾	^{These contracts were entered into by the Company’s wholly owned subsidiary, A-I LLC, in conjunction with the Term Loan (see}^{Note 5 – Subsidiary Borrowers).}

Financial Statement Presentation

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


	June 30, 2023		December 31, 2022
Prepaid expenses and other current assets	$	1,778	$	4,954
Other assets (long-term)		17,184		23,236
Accrued liabilities		18,518		46,595
Other liabilities (long-term)		17,417		43,061

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

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Realized loss (gain)⁽¹⁾	$	300	$	(79,667)	$	530	$	(35,973)
Unrealized (gain) loss		(1,129)		70,813		(40,599)		107,116
Derivative (gain) loss, net	$	(829)	$	(8,854)	$	(40,069)	$	71,143

(1)

^{The three and six months ended June 30, 2022 includes the effect of the}^$138.0^{million realized gain related to the monetization of certain natural gas call contracts through restructuring of strike prices.}

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


	Six Months Ended June 30,
	2023		2022
Derivative (gain) loss, net	$	(40,069)	$	71,143
Derivative cash (receipts) payments, net⁽¹⁾		(4,427)		70,227
Derivative cash premium payments, net		—		(46,111)

(1)

^{The six months ended June 30, 2022 includes}^$105.3^{million of net cash receipts related to the monetization of certain natural gas call contracts through restructuring of strike prices.}