UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, ~~2020~~2021

☐	~~TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to ________________

Commission File Number 1-32414

W&T OFFSHORE, ~~INC.~~INC.

(Exact name of registrant as specified in its charter)


Texas		72-1121985
(State of incorporation)		(IRS Employer Identification Number)

~~Nine Greenway Plaza, Suite 300, Houston, Texas~~	~~77046-0908~~

5718 Westheimer Road, Suite 700, Houston, Texas		77057-5745
(Address of principal executive offices)		(Zip Code)

~~(713) 626-8525~~

(713) 626-8525

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every interactive data file required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☐	Accelerated filer	☑
Non-accelerated filer ☐	Smaller reporting company	☐
	Emerging growth company	☐

Indicate by check mark whether the registrant is a shell company. Yes ☐ No ☑

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Securities registered pursuant to section 12(b) of the Act:

~~Securities registered pursuant to section 12(b) of the Act:~~

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.00001	WTI	~~New York Stock Exchange~~	New York Stock Exchange

As of ~~August~~ ~~4, 2020,~~ July 31, 2021 there were ~~141,668,942~~142,367,242 shares outstanding of the registrant’s common stock, par value $0.00001.

Table of Contents

W&T OFFSHORE, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

			Page
PART I –FINANCIAL INFORMATION
		1

Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets as of June 30, ~~2020~~2021 and December 31, ~~2019~~2020	1
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, ~~2020~~2021 and ~~2019~~2020	2
	Condensed Consolidated Statements of Changes in Shareholders’ Deficit for the Three and Six Months Ended June 30, ~~2020~~2021 and ~~2019~~2020	3
	Condensed Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, ~~2020~~2021 and ~~2019~~2020	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22 23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	37


PART II – OTHER INFORMATION		38
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 6.	Exhibits	39

SIGNATURE		40 41

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)


	June 30,		December 31,
	2021		2020
Assets
Current assets:
Cash and cash equivalents	$	209,148	$	43,726
Receivables:
Oil and natural gas sales		50,220		38,830
Joint interest, net		11,750		10,840
Total receivables		61,970		49,670
Prepaid expenses and other assets (Note 1)		30,705		13,832
Total current assets		301,823		107,228

Oil and natural gas properties and other, net (Note 1)		657,657		686,878

Restricted deposits for asset retirement obligations		29,820		29,675
Deferred income taxes		107,337		94,331
Other assets (Note 1)		42,395		22,470
Total assets	$	1,139,032	$	940,582
Liabilities and Shareholders’ Deficit
Current liabilities:
Accounts payable	$	54,624	$	48,612
Undistributed oil and natural gas proceeds		28,688		19,167
Asset retirement obligations		23,888		17,188
Accrued liabilities (Note 1)		100,363		29,880
Current portion of long-term debt		36,771		—
Income tax payable		63		153
Total current liabilities		244,397		115,000
Long-term debt (Note 2)
Principal		730,689		632,460
Unamortized debt issuance costs		(12,773)		(7,174)
Long-term debt, net		717,916		625,286

Asset retirement obligations, less current portion		380,115		375,516
Other liabilities (Note 1)		56,259		32,938
Deferred income taxes		128		128
Commitments and contingencies (Note 11)		—		—
Shareholders’ deficit:
Preferred stock, $0.00001 par value; 20,000 shares authorized; 0 issued at June 30, 2021 and December 31, 2020		—		—
Common stock, $0.00001 par value; 200,000 shares authorized; 145,236 issued and 142,367 outstanding at June 30, 2021; 145,174 issued and 142,305 outstanding at December 31, 2020		1		1
Additional paid-in capital		551,260		550,339
Retained deficit		(786,877)		(734,459)
Treasury stock, at cost; 2,869 shares at June 30, 2021 and December 31, 2020		(24,167)		(24,167)
Total shareholders’ deficit		(259,783)		(208,286)
Total liabilities and shareholders’ deficit	$	1,139,032	$	940,582

June 30,

December 31,

2020

2019

Assets

Current assets:

Cash and cash equivalents
$ 36,506 $ 32,433
Receivables:

Oil and natural gas sales
22,383 57,367
Joint interest and other, net
14,657 19,400
Income taxes
— 1,861
Total receivables
37,040 78,628
Prepaid expenses and other assets (Note 1)
32,566 30,691
Total current assets
106,112 141,752

Oil and natural gas properties and other, net - at cost (Note 1)
713,063 748,798

Restricted deposits for asset retirement obligations
29,912 15,806
Deferred income taxes
66,124 63,916
Other assets (Note 1)
27,535 33,447
Total assets
$ 942,746 $ 1,003,719
Liabilities and Shareholders’ Deficit

Current liabilities:

Accounts payable
$ 52,368 $ 102,344
Undistributed oil and natural gas proceeds
15,776 29,450
Advance from joint interest partner
11,129 5,279
Asset retirement obligations
12,506 21,991
Accrued liabilities (Note 1)
22,668 30,896
Total current liabilities
114,447 189,960

Long-term debt: (Note 2)

Principal
632,460 730,000
Carrying value adjustments
(8,238 ) (10,467 )
Long term debt - carrying value
624,222 719,533

Asset retirement obligations, less current portion
362,301 333,603
Other liabilities (Note 1)
28,998 9,988
Commitments and contingencies
— —
Shareholders’ deficit:

Preferred stock, $0.00001 par value; 20,000 shares authorized; 0 issued for both periods
— —
Common stock, $0.00001 par value; 200,000 shares authorized, 144,538 issued and 141,669 outstanding at both periods
1 1
Additional paid-in capital
549,117 547,050
Retained deficit
(712,173 ) (772,249 )
Treasury stock, at cost; 2,869 shares for both dates presented
(24,167 ) (24,167 )
Total shareholders’ deficit
(187,222 ) (249,365 )
Total liabilities and shareholders’ deficit
$ 942,746 $ 1,003,719

See Notes to Condensed Consolidated Financial Statements

Table of Contents

W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands except per share data)

(Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Revenues:
Oil	$	88,013	$	30,645	$	166,153	$	115,295
NGLs		8,833		1,917		18,193		8,369
Natural gas		32,470		21,364		68,679		50,664
Other		3,512		1,315		5,451		5,041
Total revenues		132,828		55,241		258,476		179,369
Operating costs and expenses:
Lease operating expenses		47,552		28,313		89,909		83,088
Production taxes		1,956		1,143		3,952		2,059
Gathering and transportation		4,824		3,301		9,143		8,750
Depreciation, depletion, amortization and accretion		30,952		29,483		57,589		68,609
General and administrative expenses		13,986		5,628		24,698		19,591
Derivative loss (gain)		81,440		15,414		106,020		(46,498)
Total costs and expenses		180,710		83,282		291,311		135,599
Operating (loss) income		(47,882)		(28,041)		(32,835)		43,770

Interest expense, net		16,530		14,816		31,564		31,926
Gain on debt transactions		0		(28,968)		0		(47,469)
Other expense, net		—		751		963		1,474
(Loss) income before income taxes		(64,412)		(14,640)		(65,362)		57,839
Income tax benefit		(12,740)		(8,736)		(12,944)		(2,237)
Net (loss) income	$	(51,672)	$	(5,904)	$	(52,418)	$	60,076
Basic and diluted (loss) earnings per common share	$	(0.36)	$	(0.04)	$	(0.37)	$	0.42

Three Months Ended June 30,

Six Months Ended June 30,

2020

2019

2020

2019

Revenues:

Oil
$ 30,645 $ 109,195 $ 115,295 $ 195,898
NGLs
1,917 4,640 8,369 11,088
Natural gas
21,364 19,567 50,664 41,405
Other
1,315 1,299 5,041 2,390
Total revenues
55,241 134,701 179,369 250,781
Operating costs and expenses:

Lease operating expenses
28,313 40,341 83,088 83,797
Production taxes
1,143 317 2,059 733
Gathering and transportation
3,301 7,068 8,750 13,491
Depreciation, depletion, amortization and accretion
29,483 38,073 68,609 71,839
General and administrative expenses
5,628 13,328 19,591 27,437
Derivative loss (gain)
15,414 (1,805 ) (46,498 ) 47,081
Total costs and expenses
83,282 97,322 135,599 244,378
Operating (loss) income
(28,041 ) 37,379 43,770 6,403
Interest expense, net
14,816 12,207 31,926 28,489
Gain on purchase of debt
(28,968 ) — (47,469 ) —
Other expense, net
751 478 1,474 809
(Loss) income before income tax benefit
(14,640 ) 24,694 57,839 (22,895 )
Income tax benefit
(8,736 ) (11,695 ) (2,237 ) (11,523 )
Net (loss) income
$ (5,904 ) $ 36,389 $ 60,076 $ (11,372 )
Basic and diluted (loss) earnings per common share
$ (0.04 ) $ 0.25 $ 0.42 $ (0.08 )

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT

(In thousands)

(Unaudited)


	Common Stock			Additional							Total
	Outstanding			Paid-In		Retained		Treasury Stock			Shareholders’
	Shares	Value		Capital		Deficit		Shares	Value		Deficit
Balances at March 31, 2020	141,669	$	1	$	548,098	$	(706,269)	2,869	$	(24,167)	$	(182,337)
Share-based compensation	0		0		1,019		0	0		0		1,019
Stock Issued	0		0		0		0	0		0		0
Net loss	—		—		—		(5,904)	—		—		(5,904)
Balances at June 30, 2020	141,669	$	1	$	549,117	$	(712,173)	2,869	$	(24,167)	$	(187,222)

Common Stock Outstanding

Additional Paid-In

Retained

Treasury Stock

Total Shareholders’

Shares

Value

Capital

Deficit

Shares

Value

Deficit

Balances, March 31, 2020
141,669 $ 1 $ 548,098 $ (706,269 ) 2,869 $ (24,167 ) $ (182,337 )
Share-based compensation
— — 1,019 — — — 1,019
Stock Issued — — — — — — —
Net loss
— — — (5,904 ) — — (5,904 )
Balances, June 30, 2020
141,669 $ 1 $ 549,117 $ (712,173 ) 2,869 $ (24,167 ) $ (187,222 )


	Common Stock			Additional							Total
	Outstanding			Paid-In		Retained		Treasury Stock			Shareholders’
	Shares	Value		Capital		Deficit		Shares	Value		Deficit
Balances at March 31, 2021	142,305	$	1	$	550,793	$	(735,205)	2,869	$	(24,167)	$	(208,578)
Share-based compensation	0				467		0	0		0		467
Stock Issued	62		0		0		0	0		0		0
Net loss	0		0		0		(51,672)	0		0		(51,672)
Balances at June 30, 2021	142,367	$	1	$	551,260	$	(786,877)	2,869	$	(24,167)	$	(259,783)


	Common Stock			Additional							Total
	Outstanding			Paid-In		Retained		Treasury Stock			Shareholders’
	Shares	Value		Capital		Deficit		Shares	Value		Deficit
Balances at December 31, 2019	141,669	$	1	$	547,050	$	(772,249)	2,869	$	(24,167)	$	(249,365)
Share-based compensation	—		—		2,067		—	—		—		2,067
Stock Issued	—		—		—		—	—		—		—
Net income	—		—		—		60,076	—		—		60,076
Balances at June 30, 2020	141,669	$	1	$	549,117	$	(712,173)	2,869	$	(24,167)	$	(187,222)

Common Stock Outstanding

Additional Paid-In

Retained

Treasury Stock

Total Shareholders’

Shares

Value

Capital

Deficit

Shares

Value

Deficit

Balances, March 31, 2019
140,644 $ 1 $ 545,627 $ (894,096 ) 2,869 $ (24,167 ) $ (372,635 )
Share-based compensation
— — 1,259 — — — 1,259
Stock Issued 46 — — — — — —
Net income
— — — 36,389 — — 36,389
Balances, June 30, 2019
140,690 $ 1 $ 546,886 $ (857,707 ) 2,869 $ (24,167 ) $ (334,987 )


	Common Stock			Additional							Total
	Outstanding			Paid-In		Retained		Treasury Stock			Shareholders’
	Shares	Value		Capital		Deficit		Shares	Value		Deficit
Balances at December 31, 2020	142,305	$	1	$	550,339	$	(734,459)	2,869	$	(24,167)	$	(208,286)
Share-based compensation	—		—		921		—	—		—		921
Stock Issued	62		—		—		—	—		—		—
Net loss	—		—		—		(52,418)	—		—		(52,418)
Balances at June 30, 2021	142,367	$	1	$	551,260	$	(786,877)	2,869	$	(24,167)	$	(259,783)

Common Stock Outstanding

Additional Paid-In

Retained

Treasury Stock

Total Shareholders’

Shares

Value

Capital

Deficit

Shares

Value

Deficit

Balances, December 31, 2019
141,669 $ 1 $ 547,050 $ (772,249 ) 2,869 $ (24,167 ) $ (249,365 )
Share-based compensation
— — 2,067 — — — 2,067
Stock Issued
— — — — — — —
Net income
— — — 60,076 — — 60,076
Balances, June 30, 2020
141,669 $ 1 $ 549,117 $ (712,173 ) 2,869 $ (24,167 ) $ (187,222 )

Common Stock Outstanding

Additional Paid-In

Retained

Treasury Stock

Total Shareholders’

Shares

Value

Capital

Deficit

Shares

Value

Deficit

Balances, December 31, 2018
140,644 $ 1 $ 545,705 $ (846,335 ) 2,869 $ (24,167 ) $ (324,796 )
Share-based compensation
— — 1,181 — — — 1,181
Stock Issued
46 — — — — — —
Net loss
— — — (11,372 ) — — (11,372 )
Balances, June 30, 2019
140,690 $ 1 $ 546,886 $ (857,707 ) 2,869 $ (24,167 ) $ (334,987 )

See Notes to Condensed Consolidated Financial Statements

Table of Contents

W&T OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Six Months Ended June 30,
	2021		2020
Operating activities:
Net (loss) income	$	(52,418)	$	60,076
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation, depletion, amortization and accretion		57,589		68,609
Amortization of debt items and other items		2,967		3,682
Share-based compensation		921		2,067
Derivative loss (gain)		106,020		(46,498)
Derivative cash (payments) receipts, net		(41,130)		37,566
Gain on debt transactions		0		(47,469)
Deferred income taxes		(13,006)		(2,207)
Changes in operating assets and liabilities:
Oil and natural gas receivables		(11,390)		34,984
Joint interest receivables		(910)		4,743
Prepaid expenses and other assets		(17,605)		3,505
Income tax		(92)		2,008
Asset retirement obligation settlements		(11,213)		(2,164)
Cash advances from JV partners		(3,925)		5,850
Accounts payable, accrued liabilities and other		30,386		(31,274)
Net cash provided by operating activities		46,194		93,478
Investing activities:
Investment in oil and natural gas properties and equipment		(5,856)		(14,138)
Changes in operating assets and liabilities associated with investing activities		(3,078)		(25,811)
Acquisition of property interests		0		(456)
Purchases of furniture, fixtures and other		2		(70)
Net cash used in investing activities		(8,932)		(40,475)
Financing activities:
Borrowings on credit facility		—		25,000
Repayments on credit facility		(80,000)		(50,000)
Purchase of Senior Second Lien Notes		0		(23,930)
Proceeds from Term Loan		215,000		—
Debt issuance costs and other		(6,840)		—
Net cash provided by (used in) financing activities		128,160		(48,930)
Increase in cash and cash equivalents		165,422		4,073
Cash and cash equivalents, beginning of period		43,726		32,433
Cash and cash equivalents, end of period	$	209,148	$	36,506

Six Months Ended June 30,

2020

2019

Operating activities:

Net income (loss)
$ 60,076 $ (11,372 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation, depletion, amortization and accretion
68,609 71,839
Amortization of debt items and other items
3,682 2,485
Share-based compensation
2,067 1,181
Derivative (gain) loss
(46,498 ) 47,081
Cash receipts on derivative settlements, net
37,566 12,792
Gain on purchase of debt (47,469 ) —
Deferred Income taxes
(2,207 ) (11,523 )
Changes in operating assets and liabilities:

Oil and natural gas receivables
34,984 5,992
Joint interest receivables
4,743 (24,162 )
Prepaid expenses and other assets
3,505 (8,134 )
Income tax 2,008 —
Asset retirement obligation settlements
(2,164 ) (2,641 )
Cash advance from JV partner
5,850 18,527
Accounts payable, accrued liabilities and other
(31,274 ) 4,251
Net cash provided by operating activities
93,478 106,316
Investing activities:

Investment in oil and natural gas properties and equipment
(39,949 ) (63,149 )
Acquisition of property interest in oil and natural gas properties (456 ) (10,000 )
Purchases of furniture, fixtures and other
(70 ) —
Net cash used in investing activities
(40,475 ) (73,149 )
Financing activities:
Borrowings on credit facility
25,000 —
Repayments on credit facility
(50,000 ) —
Purchase of Senior Second Lien Notes (23,930 ) —
Debt issuance costs and other
— (751 )
Net cash used in financing activities
(48,930 ) (751 )
Increase in cash and cash equivalents
4,073 32,416
Cash and cash equivalents, beginning of period
32,433 33,293
Cash and cash equivalents, end of period
$ 36,506 $ 65,709

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)1. Basis of Presentation

1.	~~Basis of Presentation~~

Operations.W&T Offshore, Inc. (with subsidiaries referred to herein as “W&T,” “we,” “us,” “our,” or the “Company”) is an independent oil 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. Our interests in fields, leases, structures and equipment are primarily owned by the Company and its 100%~~-owned subsidiary,~~ owned subsidiaries, W & T Energy VI, LLC, Aquasition LLC, and Aquasition II, LLC, and through our proportionately consolidated interest in Monza Energy LLC (“Monza”), as described in more detail in Note 4.5.

Interim Financial Statements.The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim periods and the appropriate rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, the condensed consolidated financial statements do not include all of the information and footnote disclosures required by GAAP for complete financial statements for annual periods. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

Operating results for interim periods are not necessarily indicative of the results that may be expected for the entire year. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K10-K for the year ended December 31, ~~2019.~~2020.

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 and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

~~Recent Events.~~ ~~The pandemic spread of the disease caused by a new strain of coronavirus (“COVID-~~~~19”~~~~) and other world events have significantly impacted the price of crude oil and the demand for crude oil beginning in~~ ~~March~~ of ~~2020.~~ ~~Additionally, prices for natural gas liquids (“NGLs”) and natural gas decreased in the~~ ~~three~~ ~~months ended~~ ~~June 30, 2020~~ ~~compared to the prior quarter and prior year levels, all of which have impacted revenues for the~~ ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ ~~June 30, 2020.~~ ~~While crude oil prices have partially recovered in~~ ~~June 2020~~ ~~from recent historical lows in~~ ~~April 2020,~~ ~~the perceived risks and volatility have increased in~~ ~~2020~~ ~~to date compared to recent years. Natural gas prices have remained at~~ ~~2nd~~ ~~quarter levels through~~ ~~July 2020.~~ The Company has taken measures to reduce operating costs and capital expenditures in response. Management's assessment is the Company has adequate liquidity to meet the criteria of a going concern as defined under GAAP. See Note 2,~~Long-Term Deb~~~~t and Note~~ ~~12,~~~~Subsequent Events~~~~, for additional information.~~

Accounting ~~Standard~~Standards Updates effective January 1, ~~2020~~

2021

~~Credit Losses -~~Simplifying the Accounting for Income Taxes. In ~~June 2016,~~ December 2019, the Financial Accounting Standards Board ~~(“FASB”~~("FASB") issued Accounting Standards Update ~~(“ASU”~~("ASU") No.~~2016~~-~~13,~~ 2019-12, ~~Financial Instruments – Credit Losses~~Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic ~~326~~~~) (“~~740 and by clarifying and amending existing guidance. ASU ~~2016~~-~~13”~~)2019-12 is effective for annual and ~~subsequently issued additional guidance on this topic. The new guidance eliminates~~interim financial statement periods beginning after December 15, 2020. Adoption of the ~~probable recognition threshold and broadens the information to consider past events, current conditions and forecasted information in estimating credit losses. The~~ amendment did not have a material impact on our financial statements ~~and did~~ ~~not~~ ~~affect the opening balance of Retained Deficit.~~or disclosures.

~~Derivatives and Hedging -~~ In ~~August 2017,~~ ~~the FASB issued Accounting Standards Update~~ ~~No.~~~~2017~~-~~12,~~~~Derivatives and Hedging (Topic~~ ~~815~~~~) – Targeted Improvements to Accounting for Hedging Activities~~ ~~(“ASU~~ ~~2017~~-~~12”~~~~) and subsequently issued additional guidance on this topic. The amendments in ASU~~ ~~2017~~-12 require an entity to present the earnings effect of the hedging instrument in the same income statement line in which the earnings effect of the hedged item is reported. This presentation enables users of financial statements to better understand the results and costs of an entity’s hedging program. Also, relative to current GAAP, this approach simplifies the financial statement reporting for qualifying hedging relationships. As we do ~~not~~ ~~designate our commodity derivative instruments as qualifying hedging instruments, this amendment did~~ ~~not~~ ~~impact the presentation of the changes in fair values of our commodity derivative instruments on our financial statements.~~

~~Table of Contents~~

W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Revenue Recognition.We recognize revenue from the sale of crude oil, NGLs, and natural gas when our performance obligations are satisfied. Our contracts with customers are primarily short-term (less than 12 months). Our responsibilities to deliver a unit of crude oil, NGL, and natural gas under these contracts represent separate, distinct performance obligations. These performance obligations are satisfied at the point in time control of each unit is transferred to the customer. Pricing is primarily determined utilizing a particular pricing or market index, plus or minus adjustments reflecting quality or location differentials.

~~Paycheck Protection Program (“PPP”).~~ On ~~April 15,~~Employee Retention Credit. Under the Consolidated Appropriations Act, 2021 passed by the United States Congress and signed by the President on December 27, 2020,~~the Company received $8.4 million under the U.S. Small Business Administration (“SBA”) PPP. We have elected an accounting policy to analogize International Accounting Standards~~ ~~20,~~ ~~Accounting for Government Grants and Disclosure of Government Assistance (“IAS~~ ~~20”~~~~), to account for the PPP.~~

~~Under IAS~~ ~~20,~~ ~~a government grant is recognized when there is reasonable assurance that the Company has complied with the~~ provisions of the ~~grant. Management believes~~Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) were extended and modified making the Company ~~has met all~~eligible for a refundable employee retention credit subject to meeting certain criteria. The Company recognized a $2.1 million employee retention credit during the ~~requirements under the PPP and, after submitting an application to the SBA on the utilization of the funds, will~~ ~~not~~ ~~be required to repay any portion of the grant. We have elected to follow the income approach under IAS~~ 20 ~~and recognize earnings as funds are applied to covered expenses and classify the application of funds~~six months ended June 30, 2021 which is included as a ~~reduction of the related expense~~credit to General and administrative expenses in the Condensed Consolidated Statement of Operations.

~~During the covered period, we have applied all PPP funds to covered payroll and non-payroll expenses per the PPP. As a result, we have reduced expenses during the quarter ended~~ ~~June 30, 2020~~ ~~to reflect PPP fund application. Within the Condensed Consolidated Statement~~Table of ~~Operations, credits to~~ ~~Lease operating expenses~~ ~~of $2.3 million,~~ ~~General and administrative expenses~~ ~~of $5.0 million and reductions to~~ ~~Interest expense, net~~~~, of $1.1 million were recognized for the~~ ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ ~~June 30, 2020.~~ ~~Should the SBA reject the Company's application on the utilization of the funds, the Company~~ ~~may~~ ~~be required to repay all or a portion of the funds received under the PPP under an amortization schedule through~~ ~~April 2025~~ ~~with an annual interest rate of~~ ~~1%.~~Contents

Credit Risk and Allowance for Credit Losses.Our revenue has been concentrated in certain major oil and gas companies. For the six months ended June 30, 2021, and the year ended December 31, ~~2019~~ 2020, approximately 64% and ~~for the~~ ~~six~~ ~~months ended~~ ~~June 30, 2020,~~ ~~approximately 63% and 54%~~62%, respectively, of our revenue was from ~~three~~3 major oil and gas companies and a substantial majority of our receivables were from sales with major oil and gas companies. We also have receivables related to joint interest arrangements primarily with mid-size oil and gas companies with a substantial majority of the net receivable balance concentrated in less than ~~ten~~10 companies. A loss methodology is used to develop the allowance for credit losses on material receivables to estimate the net amount to be collected. The loss methodology uses historical data, current market conditions and forecasts of future economic conditions. Our maximum exposure at any time would be the receivable balance. The receivables ~~Joint~~related to joint interest ~~and other, net~~,billings are reported on the Condensed Consolidated Balance Sheets ~~are reduced for~~net of the allowance for credit losses. The ~~roll forward of the~~ allowance for credit losses iswas $9.1 million as ~~follows:~~ of June 30, 2021 and December 31, 2020.
Allowance for credit losses, December 31, 2019
$ 9,898
Additional provisions
598
Uncollectible accounts written off
—
Allowance for credit losses, June 30, 2020
$ 10,496
Prepaid Expenses and Other Assets. The amounts recorded are expected to be realized within one year and the major categories are presented in the following table (in thousands):

June 30, 2020

December 31, 2019

Derivatives - current ⁽¹⁾
$ 17,770 $ 7,266
Unamortized insurance/bond premiums
6,269 4,357
Prepaid deposits related to royalties
6,813 7,980
Prepayment to vendors
1,638 10,202
Other
76 886
Prepaid expenses and other assets
$ 32,566 $ 30,691

June 30, 2021

December 31, 2020
Derivatives – current (1)

$
14,021

$
2,752
Unamortized insurance/bond premiums

6,195

4,717
Prepaid deposits related to royalties

4,544

4,473
Prepayment to vendors

4,775

1,429
Other

1,170

461
Prepaid expenses and other assets

$
30,705

$
13,832
(1)(1)
Includes closed contracts which have not yet settled.
Oil and Natural Gas Properties and Other, ~~Net~~ ~~– At Cost.~~ Net. Oil and natural gas properties and equipment are recorded at cost using the full cost method. There were no amounts excluded from amortization as of the dates presented in the following table (in thousands):

June 30, 2021

December 31, 2020
Oil and natural gas properties and equipment, at cost

$
8,583,983

$
8,567,509
Furniture, fixtures and other

20,845

20,847
Total property and equipment

8,604,828

8,588,356
Less: Accumulated depreciation, depletion, amortization and impairment

7,947,171

7,901,478
Oil and natural gas properties and other, net

$
657,657

$
686,878

June 30, 2020

December 31, 2019

Oil and natural gas properties and equipment, at cost
$ 8,553,306 $ 8,532,196
Furniture, fixtures and other
20,387 20,317
Total property and equipment
8,573,693 8,552,513
Less: Accumulated depreciation, depletion and amortization
7,860,630 7,803,715
Oil and natural gas properties and other, net
$ 713,063 $ 748,798
6

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W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Other Assets (long-term). The major categories are presented in the following table (in thousands):

June 30, 2021

December 31, 2020
Right-of-Use assets

$
10,783

$
11,509
Unamortized debt issuance costs

1,333

2,094
Investment in White Cap, LLC

2,995

2,699
Unamortized brokerage fee for Monza

0

626
Proportional consolidation of Monza's other assets (Note 5)

4,209

1,782
Derivatives

21,005

2,762
Other

2,070

998
Total other assets (long-term)

$
42,395

$
22,470

June 30, 2020

December 31, 2019

Right-of-Use assets (Note 7)
$ 12,546 $ 7,936
Unamortized debt issuance costs
2,678 3,798
Investment in White Cap, LLC
3,118 2,590
Unamortized brokerage fee for Monza
2,130 3,423
Proportional consolidation of Monza's other assets (Note 4)
2,553 5,308
Derivative assets
3,486 2,653
Appeal bond deposits
— 6,925
Other
1,024 814
Total other assets (long-term)
$ 27,535 $ 33,447

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Accrued Liabilities. The major categories are presented in the following table (in thousands):

June 30, 2021

December 31, 2020
Accrued interest

$
10,185

$
10,389
Accrued salaries/payroll taxes/benefits

4,218

4,009
Litigation accruals

570

436
Lease liability

673

394
Derivatives

82,832

13,620
Other

1,885

1,032
Total accrued liabilities

$
100,363

$
29,880

June 30, 2020

December 31, 2019

Accrued interest
$ 10,357 $ 10,180
Accrued salaries/payroll taxes/benefits
3,112 2,377
Incentive compensation plans
1,174 9,794
Litigation accruals
3,673 3,673
Lease liability (Note 7)
2,130 2,716
Derivatives - current
1,779 1,785
Other
443 371
Total accrued liabilities
$ 22,668 $ 30,896
Paycheck Protection Program ("PPP"). On April 15, 2020, the Company received $8.4 million under the PPP offered by the U.S. Small Business Administration ("SBA"). We applied the guidance under IAS 20 and accounted for the PPP as a government grant. The Company submitted an application to the SBA on August 20, 2020,requesting that the PPP funds received be applied to specific covered and non-covered payroll costs. On June 11, 2021, we received notification that the SBA accepted our application and approved forgiveness of our PPP; therefore, we will not be required to repay the grant.

Other Liabilities (long-term). The major categories are presented in the following table (in thousands):

June 30, 2021

December 31, 2020
Dispute related to royalty deductions

$
5,247

$
5,467
Derivatives

28,122

4,384
Lease liability

11,062

11,360
Black Elk escrow

11,102

11,103
Other

726

624
Total other liabilities (long-term)

$
56,259

$
32,938

June 30, 2020

December 31, 2019

Dispute related to royalty deductions
$ 4,687 $ 4,687
Dispute related to royalty-in-kind
250 250
Derivatives 2,137 —
Lease liability (Note 7)
9,834 4,419
Black Elk escrow and other
12,090 632
Total other liabilities (long-term)
$ 28,998 $ 9,988

7

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W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)2.        Debt
2.
~~Long-Term Debt~~
The components of our ~~long-term~~ debt are presented in the following table (in thousands):

June 30, 2021

December 31, 2020
Term Loan:

Principal

$
215,000

$
—
Unamortized debt issuance costs

(6,718)

—
Total Term Loan

208,282

—

Company Credit Agreement borrowings:

—

80,000

Senior Second Lien Notes:




Principal

552,460

552,460
Unamortized debt issuance costs

(6,055)

(7,174)
Total Senior Second Lien Notes

546,405

545,286

Less current portion

(36,771)

—
Total long-term debt, net

$
717,916

$
625,286

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Current Portion of Long-Term Debt

June 30, 2020

December 31, 2019

Credit Agreement borrowings
$ 80,000 $ 105,000

Senior Second Lien Notes:

Principal
552,460 625,000
Unamortized debt issuance costs
(8,238 ) (10,467 )
Total Senior Second Lien Notes
544,222 614,533

Total long-term debt
$ 624,222 $ 719,533
As of June 30, 2021, the current portion of long-term debt of $36.8 million represented principle payments due within one year on the Term Loan (defined below).
Term Loan (Subsidiary Credit ~~Agreement~~
Agreement)
On May 19, 2021, Aquasition LLC (“A-I LLC”) and Aquasition II LLC (“A-II LLC”) (collectively, the “Borrowers”), both Delaware limited liability companies and indirect, wholly-owned subsidiaries of W&T Offshore, Inc., entered into a credit agreement (the “Subsidiary Credit Agreement”) providing for a term loan in an aggregate principal amount equal to $215.0 million (the “Term Loan”). The Term Loan requires quarterly amortization payments commencing September 30, 2021. The Term Loan bears interest at a fixed rate of 7% per annum and will mature on May 19, 2028. The Term Loan is non-recourse to the Company and any subsidiaries other than the Borrowers and the subsidiary that owns the equity in the Borrowers, and is secured by the first lien security interests in the equity of the Borrowers and a first lien mortgage security interest and mortgages on certain assets of the Borrowers (the Mobile Bay Properties, defined below).

In exchange for the net cash proceeds received by the Borrowers from the Term Loan, the Company assigned to (a) A-I LLC all of its interests in certain oil and gas leasehold interests and associated wells and units located in State of Alabama waters and U.S. federal waters in the offshore Gulf of Mexico, Mobile Bay region (such assets, the “Mobile Bay Properties”) and (b) A-II LLC its interest in certain gathering and processing assets located (i) in State of Alabama waters and U.S. federal waters in the offshore Gulf of Mexico, Mobile Bay region and (ii) onshore near Mobile, Alabama, including offshore gathering pipelines, an onshore crude oil treating and sweetening facility, an onshore gathering pipeline, and associated assets (such assets, the “Midstream Assets”). A portion of the proceeds to the Company was used to repay the $48.0 million outstanding balance on its reserve-based lending facility under the Company Credit Agreement (defined below), with the majority of the proceeds to W&T expected to be used for general corporate purposes, including oil and gas acquisitions, development activities, and other opportunities to grow the Company’s broader asset base. We refer to the transactions contemplated by the Subsidiary Credit Agreement, including the assignment of the Mobile Bay Properties to A-I LLC and the assignment of the Midstream Assets to A-II LLC as the “Mobile Bay Transaction”.

For information about Mobile Bay Transaction refer to Note 4, Mobile Bay Transaction.

Company Credit Agreement
On October 18, 2018, we entered into the Sixth Amended and Restated Credit Agreement (as amended, the ~~“Credit~~“Company Credit Agreement”), which matures on October 18, 2022.
On ~~June 17, 2020,~~~~the lenders under the~~May 19, 2021, we entered into a Waiver, Consent to Second Amendment to Intercreditor Agreement and Sixth Amendment to Sixth Amended and Restated Credit Agreement ~~completed their semi-annual borrowing base redetermination and entered into~~(the “Sixth Amendment”) which amended the ~~Third Amendment and Waiver (the “Third Amendment”) to the~~Company Credit Agreement. ~~Although the Company had~~ ~~not~~ ~~violated any covenants, the Third~~The Sixth Amendment, ~~provides less stringent covenant requirements given the recent changes in the oil and gas markets. The Third Amendment includes the following changes,~~ among other things, to(i) amended the Company Credit Agreement ~~(terms used below are defined~~to effectuate the Mobile Bay Transaction (as discussed under Term Loan above and Note 4, Mobile Bay Transaction below) by specifically permitting the Mobile Bay Transaction and related transactions under certain covenants and (ii) consented to and waived certain technical defaults arising from the formation of certain company subsidiaries that were formed in advance of, and in order to effectuate, the consummation of the Mobile Bay Transaction and related transactions. On July 15, 2021, the Company entered into a Waiver and Seventh Amendment to Sixth Amended and Restated Credit Agreement (the “Seventh Amendment”): dated effective June 30, 2021, which further amended the Company Credit Agreement.

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W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The primary terms and covenants associated with the Company Credit Agreement as of June 30, 2021, as amended by the Sixth and Seventh Amendments, are as follows, with capitalized terms defined under the Company Credit Agreement:

•·

The borrowing base was $190.0 million, subject to the next redetermination on or about October 1, 2021.

Letters of credit may be issued in amounts up to $30.0 million, provided availability under the Company Credit Agreement ~~was reduced from $250.0 million to $215.0 million.~~exists.

•

~~Increased the interest rate margin by 25 basis points.~~

•

~~Amended the financial covenants as follows:~~

•·

From the period ended June 30, 2020 through the period ended December 31, 2021 (the "Waiver Period"), the Company ~~will~~ is not be required to comply with the Leverage Ratio covenant. The Leverage Ratio, as defined in the Company Credit Agreement, is limited to 3.00 to 1.00 for quarters ending March 31, 2022 and thereafter.

•·

During the Waiver Period, the Company will be required to maintain a 2.00 to 1.00 ratio limit of first lien debt outstanding under the Company Credit Agreement on the last day of the most recent quarter to EBITDAX for the trailing four quarters.

•

~~Increase the requirement to provide~~ ~~first~~ ~~priority liens on properties constituting at least 85% to 90% of total proved reserves of the Company as set forth on reserve reports required to be delivered under the Credit Agreement.~~

·The Current Ratio, as defined in the Company Credit Agreement, must be maintained at greater than 1.00 to 1.00.

Availability under the Company Credit Agreement is subject to semi-annual redeterminations of our borrowing base and, the next scheduled redetermination is into occur on or about October 1, 2021. Subsequent to the ~~fall of~~ ~~2020.~~ ~~Additional~~October 2021 redetermination, additional redeterminations may be requested at the discretion of either the lenders or the Company. The borrowing base is calculated by our lenders based on their evaluation of our proved reserves and their own internal criteria. Any redetermination by our lenders to change our borrowing base will result in a similar change in the availability under the Company Credit Agreement. The Company currently has 0 borrowings outstanding under the Company Credit Agreement and has agreed to not to make borrowings under the Company Credit Agreement unless and until the next semi-annual redetermination of our borrowing base occurs and the Company complies with certain revised hedging requirements.

The Company used a portion of the proceeds from Mobile Bay Transaction to repay the $48.0 million outstanding balance on its reserve-based lending facility under the Company Credit Agreement. All liens on the Mobile Bay Properties granted to secure obligations under the Company Credit Agreement were released in connection with the transfer of such assets to Borrowers. The Company Credit Agreement is collateralized by a first priority lien on properties constituting at least 90% of the total proved reserves of the Company as set forth on reserve reports required to be delivered under the Company Credit Agreement and certain personal ~~property.~~property, excluding those liens released in the Mobile Bay Transaction as described above.

As of June 30, 2021 and December 31, 2020, we had $4.4 million of letters of credit issued and outstanding under the Company Credit Agreement. NaN borrowings under the Company Credit Agreement were outstanding as of June 30, 2021 and $80.0 million in borrowings were outstanding under the Company Credit Agreement as of December 31, 2020. The annualized interest rate on borrowings outstanding for the six months ended June 30,~~2020~~ 2021 was ~~3.9%~~3.2%, w~~hic~~hwhich excludes debt issuance costs, commitment fees and other fees.

~~Letters of credit~~ ~~may~~ ~~be issued in amounts up to $30.0 million, provided sufficient availability under the Credit Agreement exists. As of~~ ~~June~~ ~~30,~~~~2020~~ ~~and~~ ~~December 31, 2019,~~ ~~we had $6.1 million and $5.8 million, respectively, of letters of credit issued and outstanding under the Credit Agreement.~~

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W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

9.75% Senior Second Lien Notes Due 2023

On October 18, 2018, we issued $625.0 million of 9.75% Senior Second Lien Notes due 2023 (the “Senior Second Lien Notes”), which were issued at par with an interest rate of 9.75% per annum and mature on November 1, 2023, and are governed under the terms of the Indenture of the Senior Second Lien Notes (the “Indenture”). The estimated annual effective interest rate on the Senior Second Lien Notes is ~~10.4%~~ 10.3%, whichwhich includes amortization of debt issuance costs. Interest on the Senior Second Lien Notes is payable in arrears on May 1 and November 1 of each year.

During the ~~six~~ ~~months~~year ended ~~June~~ ~~30,~~December 31, 2020, we acquired $72.5 million in principal of our outstanding Senior Second Lien Notes for $23.9 million and recorded a non-cash gain on purchase of debt of $47.5 million, which included a reduction of $1.1 million related to the write-off of unamortized debt issuance costs.

No such transactions were completed during the three and six months ended June 30, 2021. As a result of these purchases, $552.5 million in principal amount of Senior Second Lien Notes remains issued and outstanding as of June 30, 2021 and December 31, 2020.

The Senior Second Lien Notes are secured by a ~~second~~~~-priority~~second-priority lien on all of our assets that are secured under the Company Credit ~~Agreement.~~Agreement, which does not include the Mobile Bay Properties and the related Midstream Assets. The Senior Second Lien Notes contain covenants that limit or prohibit our ability and the ability of certain of our subsidiaries to: (i) make investments; (ii) incur additional indebtedness or issue certain types of preferred stock; (iii) create certain liens; (iv) sell assets; (v) enter into agreements that restrict dividends or other payments from the Company’s subsidiaries to the Company; (vi) consolidate, merge or transfer all or substantially all of the assets of the Company; (vii) engage in transactions with affiliates; (viii) pay dividends or make other distributions on capital stock or subordinated indebtedness; and (ix) create subsidiaries that would not be restricted by the covenants of the Indenture. These covenants are subject to exceptions and qualifications set forth in the Indenture. In addition, most of the above described covenants will terminate if both S&P Global Ratings, a division of S&P Global Inc., and Moody’s Investors Service, Inc. assign the Senior Second Lien Notes an investment grade rating and no default exists with respect to the Senior Second Lien Notes.

Covenants

~~Covenants~~

As of June 30,~~2020~~ 2021 and for all prior measurement periods, we were in compliance with all applicable covenants of the Company Credit Agreement and the Indenture. The Seventh Amendment revised certain covenants under the Company Credit Agreement related to hedging our future production and waived compliance with such requirements, including the requirement that certain existing hedge transactions be unwound or terminated, until our next semi-annual borrowing base redetermination occurs.

Fair Value Measurements

For information about fair value measurements of our long-term debt, refer to Note 3.

~~Table of Contents~~

W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)3. Fair Value Measurements

3.	~~Fair Value Measurements~~

Derivative Financial Instruments

We measure the fair value of our open derivative financial instruments by applying the income approach, using models with inputs that are classified within Level 2 of the valuation hierarchy. The inputs used for the fair value measurement of our open derivative financial instruments are the exercise price, the expiration date, the settlement date, notional quantities, the implied volatility, the discount curve with spreads and published commodity future prices. Our open derivative financial instruments are reported in the Condensed Consolidated Balance Sheets using fair value. See Note 6,7 Derivative Financial Instruments, for additional information on our derivative financial instruments.

Table of Contents

The following table presents the fair value of our open derivative financial instruments (in thousands):

June 30, 2020

December 31, 2019

June 30, 2021

December 31, 2020
Assets:




Derivatives instruments - open contracts, current
$ 15,266 $ 6,921

$
13,111

$
2,705
Derivatives instruments - open contracts, long-term
3,486 2,653

21,005
��

2,762

Liabilities:




Derivatives instruments - open contracts, current
1,779 1,785

74,632

13,291
Derivatives instruments - open contracts, long-term 2,137 —

28,122

4,384

~~Long-Term~~ Debt
~~We believe~~The fair value of the ~~carrying~~Term Loan was measured using a discounted cash flows model and current market rates. The net value of our debt under the Company Credit Agreement approximates fair value because the interest rates are variable and reflective of current market rates. The fair value of our Senior Second Lien Notes was measured using quoted prices, although the market is not a very active market. The fair value of our ~~long-term~~ debt was classified as Level 2 within the valuation hierarchy. See Note 2 ~~Long-Term~~– Debt for additional information on our ~~long-term~~ debt.
The following table presents the ~~carrying~~net value and fair value of our long-term debt (in thousands):

June 30, 2020

December 31, 2019

Carrying Value

Fair Value

Carrying Value

Fair Value


June 30, 2021

December 31, 2020

Net Value

Fair Value

Net Value

Fair Value
Liabilities:








Credit Agreement
$ 80,000 $ 80,000 $ 105,000 $ 105,000
Term Loan

$
208,282

$
214,607

$
—

$
—
Company Credit Agreement

—

—

80,000

80,000
Senior Second Lien Notes
544,222 346,862 614,533 597,188

546,405

536,660

545,286

393,352
Total

754,687

751,267

625,286

473,352

4.        Mobile Bay Transaction

On May 19, 2021, the Company’s wholly-owned special purpose vehicles (the “SPVs”), A-I LLC and A-II LLC or the Borrowers, entered into the Subsidiary Credit Agreement providing for the Term Loan in an aggregate principal amount equal to $215.0 million. Proceeds of the Term Loan were used by the Borrowers to (i) fund the acquisition of the Mobile Bay Properties and the Midstream Assets from the Company and (ii) pay fees, commissions and expenses in connection with the transactions contemplated by the Subsidiary Credit Agreement and the other related loan documents, including to enter into certain swap and put derivative contracts described in more detail under Note 7 – Derivative Financial Instruments, of this Quarterly Report.

As part of the Mobile Bay Transaction, the SPVs entered into a management services agreement (the “Services Agreement”) with the Company, pursuant to which the Company will provide (a) certain operational and management services for (I) the Mobile Bay Properties and (II) the Midstream Assets and (b) certain corporate, general and administrative services for A-I LLC and A-II LLC (collectively in this capacity, the “Services Recipient”). Under the Services Agreement, the Company will indemnify the Services Recipient with respect to claims, losses or liabilities incurred by the Services Agreement Parties that relate to personal injury or death or property damage of the Company, in each case, arising out of performance of the Services Agreement, except to the extent of the gross negligence or willful misconduct of the Services Recipient. The Services Recipient will indemnify the Company with respect to claims, losses or liabilities incurred by the Company that relate to personal injury or death of the Services Recipient or property damage of the Services Recipient, in each case, arising out of performance of the Services Agreement, except to the extent of the gross negligence or willful misconduct of the Company. The Services Agreement will terminate upon the earlier of (a) termination of the Subsidiary Credit Agreement and payment and satisfaction of all obligations thereunder or (b) the exercise of certain remedies by the secured parties under the Subsidiary Credit Agreement and the realization by such secured parties upon any of the collateral under the Subsidiary Credit Agreement.

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The SPVs are wholly-owned subsidiaries of the Company; however, the assets of the SPVs will not be available to satisfy the debt or contractual obligations of any non-SPV entities, including debt securities or other contractual obligations of W&T Offshore, Inc., and the SPVs do not bear any liability for the indebtedness or other contractual obligations of any non-SPVs, and vice versa. As of June 30, 2021, the book value of the assets of the SPVs were $292.4 million.

W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)5. Joint Venture Drilling Program

4.	~~Joint Venture Drilling Program~~

In March 2018, W&T and ~~two~~2 other initial members formed and initially funded Monza, which jointly participates with us in the exploration, drilling and development of certain drilling projects (the “Joint Venture Drilling Program”) in the Gulf of Mexico. Subsequent to the initial closing, additional investors joined as members of Monza during 2018 and total commitments by all members, including W~~&T's~~&T’s commitment to fund its retained interest in Monza projects held outside of Monza, are $361.4 million. ~~Through~~ ~~June 30, 2020,~~ ~~nine~~ ~~wells have been completed. As of~~ ~~June 30, 2020,~~ ~~one~~ ~~additional well was drilled to target depth, but~~ ~~not~~ ~~completed as of this date.~~ W&T contributed 88.94% of its working interest in certain identified undeveloped drilling projects to Monza and retained 11.06% of its working interest. The Joint Venture Drilling Program is structured so that we initially receive an aggregate of 30.0% of the revenues less expenses, through both our direct ownership of our retained working interest in the Monza projects and our indirect interest through our interest in Monza, for contributing 20.0% of the estimated total well costs plus associated leases and providing access to available infrastructure at agreed-upon rates. Any exceptions to this structure are approved by the Monza board. ~~W&T is the operator for~~ ~~seven~~ ~~of the~~ ~~nine~~ ~~wells completed through~~ ~~June~~ ~~30,~~~~2020.~~

The members of Monza are made up of ~~third~~~~-party~~third-party investors, W&T and an entity owned and controlled by Mr. Tracy W. Krohn, our Chairman and Chief Executive Officer. The Krohn entity invested as a minority investor on the same terms and conditions as the ~~third~~~~-party~~third-party investors, and its investment is limited to 4.5% of total invested capital within Monza. The entity affiliated with Mr. Krohn has made a capital commitment to Monza of $14.5 million.

Monza is an entity separate from any other entity with its own separate creditors who will be entitled, upon its liquidation, to be satisfied out of Monza’s assets prior to any value in Monza becoming available to holders of its equity. The assets of Monza are not available to pay creditors of the Company and its affiliates.

Through June 30, 2021, 9 wells have been completed. In 2020, 1 well was drilled to target depth, which we expect to be completed in the fourth quarter of 2021. W&T is the operator for 7 of the 9 wells completed through June 30, 2021.

Through June 30,~~2020,~~ 2021, members of Monza made partner capital ~~contributions,~~contributions, including our contributions of working interest in the drilling projects, to Monza totaling ~~$289.3~~$302.4 million and received cash distributions totaling ~~$60.4~~$77.9 million. Our net contribution to Monza, reduced by distributions received, as of June 30,~~2020~~ 2021 was ~~$54.0~~$51.6 million. W&T is obligated to fund certain cost overruns to the extent they occur, subject to certain exceptions, for the Joint Venture Drilling Program wells above budgeted and contingency amounts, of which the total exposure cannot be estimated at this time.

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Consolidation and Carrying Amounts

Our interest in Monza is considered to be a variable interest that we account for using proportional consolidation. Through June 30,~~2020,~~ 2021, there have been no events or changes that would cause a redetermination of the variable interest status. We do not fully consolidate Monza because we are not considered the primary ~~beneficiary~~beneficiary of Monza. As of June 30,~~2020,~~ 2021, in the Condensed Consolidated Balance Sheet, we recorded ~~$13.1~~$6.6 million, net, in Oil and natural gas properties and other, net ~~$2.6~~, $4.2 million in Other assets ~~$0.2~~, $0.3 million in ~~ARO~~Asset Retirement Obligations ("ARO") and ~~$1.4~~$1.7 million, net, increase in working capital in connection with our proportional interest in Monza’s assets and liabilities. As of December 31, ~~2019,~~ 2020, in the Condensed Consolidated Balance Sheet, we recorded ~~$16.1~~$9.9 million, net, in Oil and natural gas properties and other, net ~~$5.3~~, $1.8 million in Other assets ~~$0.1~~, $0.2 million in ARO and ~~$2.7~~$1.3 million, net, increase in working capital in connection with our proportional interest in Monza’s assets and liabilities. Additionally, during the six months ended June 30, ~~2020~~ 2021 and during the year ended December 31, ~~2019,~~ 2020, we called on Monza to provide cash to fund its portion of certain Joint Venture Drilling Program projects in advance of capital expenditure spending, and the unused balances as of June 30,~~2020~~ 2021 and December 31, ~~2019~~ 2020 were ~~$11.1~~$3.4 million and ~~$5.3~~$7.3 million, respectively, which are included in the Condensed Consolidated Balance Sheet in Advances from joint interest ~~partners.~~partners. For the six months ended June 30,~~2020,~~ 2021, in the Condensed Consolidated Statement of Operations, we recorded ~~$4.8~~$5.5 million in Total revenues and ~~$6.3~~$6.7 million in Operating costs and expenses in connection with our proportional interest in Monza’s operations. For the ~~six~~ ~~months~~year ended ~~June~~ ~~30,~~~~2019,~~December 31, 2020, in the Condensed Consolidated Statement of Operations, we recorded ~~$4.0~~$8.4 million in Total revenues and, ~~$2.5~~$12.1 million in Operating costs and expenses in connection with our proportional interest in Monza’s operations.

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W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)6. Asset Retirement Obligations
5.
~~Asset Retirement Obligations~~

Our ~~asset retirement obligations (“ARO”)~~ARO represent the estimated present value of the amount incurred to plug, abandon and remediate our properties at the end of their productive lives.
A summary of the changes to our ARO is as follows (in thousands):

Balances, December 31, 2019
$ 355,594
Liabilities settled
(2,164 )
Accretion of discount
11,684
Liabilities incurred, including acquisitions
2,814
Revisions of estimated liabilities
6,879
Balances, June 30, 2020
374,807
Less current portion
12,506
Long-term
$ 362,301

Balances, December 31, 2020

$
392,704
Liabilities settled

(11,213)
Accretion of discount

11,895
Liabilities incurred and assumed through acquisition

417
Revisions of estimated liabilities

10,200
Balances, June 30, 2021

404,003
Less current portion

(23,888)
Long-term

$
380,115

6.

7. Derivative Financial Instruments
~~Derivative Financial Instruments~~
Our market risk exposure relates primarily to commodity prices and, from time to time, we use various derivative instruments to manage our exposure to this commodity price risk from sales of our crude oil and natural gas. All of the present derivative counterparties are also lenders or affiliates of lenders participating in our Company Credit ~~Agreement.~~Agreement or Term Loan. We are exposed to credit loss in the event of nonperformance by the derivative counterparties; however, we currently anticipate that each of our derivative counterparties will be able to fulfill their contractual obligations. We are not required to provide additional collateral to the derivative counterparties and we do not require collateral from our derivative counterparties.
We have elected not to designate our commodity derivative contracts as hedging instruments; therefore, all current period changes in the fair value of derivative contracts ~~were~~are recognized ~~currently~~ in earnings during the periods presented. The cash flows of all of our commodity derivative contracts are included in Net cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows.

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We entered into commodity contracts for crude oil and natural gas which related to a portion of our expected future production. The crude oil contracts are based on West Texas Intermediate (“WTI”) crude oil prices and the natural gas contracts are based off the Henry Hub prices, both of which are 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, ~~2020~~ ~~are presented in the following tables:~~2021:

Crude Oil: Open Swap Contracts, Priced off WTI (NYMEX)

Period

Notional Quantity (Bbls/day) (1)

Notional Quantity (Bbls) (1)

Strike Price

Jan 2021 - Dec 2021
1,000 365,000 $ 41.00
Crude Oil: Open Call Contracts - Bought, Priced off WTI (NYMEX)

Period

Notional Quantity (Bbls/day) (1)

Notional Quantity (Bbls) (1)

Strike Price

July 2020 - Dec. 2020
10,000 1,840,000 $ 67.50
Crude Oil: Open Collar Contracts - Priced off WTI (NYMEX)

Period

Notional Quantity (Bbls/day) (1)

Notional Quantity (Bbls) (1)

Put Option Weighted Strike Price (Bought)

Call Option Weighted Strike Price (Sold)

July 2020 - Dec. 2020
10,000 1,840,000 $ 45.00 $ 63.51

Average

Instrument

Daily

Total

Weighted

Weighted

Weighted
Period

Type

Volumes

Volumes

Strike Price

Put Price

Call Price

Crude Oil - WTI (NYMEX)

(Bbls)(1)

(Bbls)(1)

($/Bbl)(1)

($/Bbl)(1)

($/Bbl)(1)
Jul 2021 - Dec 2021

swap

4,000

736,000

$
42.06

$
—

$
—
Jul 2021 - Dec 2021

collar

200

36,800

$
—

$
40.00

$
54.90
Jul 2021 - Feb 2022

collar

2,024

491,733

$
—

$
38.81

$
57.24
Jan 2022 - Feb 2022

swap

3,000

177,000

$
42.98

$
—

$
—
Mar 2022 - May 2022

swap

2,044

188,006

$
42.33

$
—

$
—
Mar 2022 - May 2022

collar

2,000

184,000

$
—

$
35.00

$
48.50
Mar 2022 - Sept 2022

swap

1,615

345,638

$
54.53

$
—

$
—
Mar 2022 - Sept 2022

collar

1,615

345,638

$
—

$
45.00

$
62.50
Oct 2022

swap

2,172

67,332

$
58.50

$
—

—
Oct 2022

collar

2,172

67,332

$
—

$
46.00

66.50
Nov 2022

swap

2,176

65,280

$
58.25

$
—

—
Nov 2022

collar

2,176

65,280

$
—

$
46.00

66.30

Natural Gas - Henry Hub (NYMEX)

(MMbtu)(2)

(MMbtu)(2)

($/MMbtu)(2)

($/MMbtu)(2)

($/MMbtu)(2)
Jul 2021 - Dec 2021

collar

30,000

5,520,000

$
—

$
2.18

$
3.00
Jul 2021 - Dec 2021

swap

10,000

1,840,000

$
2.62

$
—

$
—
Jul 2021 - Dec 2021

call

40,000

7,360,000

$
—

$
—

$
3.50
Jul 2021 - Dec 2022

collar

40,000

21,960,000

$
—

$
1.83

$
3.00
Jul 2021 - Dec 2022

call

40,000

21,960,000

$
—

$
—

$
3.00
Jan 2022 - Feb 2022

collar

30,000

1,830,000

$
—

$
2.20

$
4.50
Jan 2022 - Dec 2022

call

37,000

13,505,000

$
—

$
—

$
3.50
Jan 2022

swap

20,000

620,000

$
2.79

$
—

$
—
Feb 2022

swap

30,000

840,000

$
2.79

$
—

$
—
Mar 2022 - May 2022

collar

10,000

920,000

$
—

$
2.25

$
3.40
Mar 2022 - May 2022

swap

10,544

970,075

$
2.69

$
—

$
—
Apr 2022 - Sept 2022

swap

12,428

2,274,311

$
2.44

$
—

$
—
Oct 2022

swap

16,129

499,999

$
2.56

$
—

$
—
Nov 2022

swap

17,570

527,100

$
2.63

$
—

$
—
Jan 2023 - Dec 2023

call

70,000

25,550,000

$
—

$
—

$
3.50
Jul 2021 - Mar 2025 (3)

swap

72,920

99,900,000

$
2.63

$
—

$
—
Apr 2025 - Apr 2028 (3)

put

55,684

62,700,000

$
—

$
2.35

$
—
(1)(1)
Bbls = Barrels
(2) MMbtu = Million British Thermal Units
(3) These contracts were entered into by the Company’s wholly owned subsidiary, A-I LLC, in conjunction with the Mobile Bay Transaction (see Note 4 Mobile Bay Transaction).

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W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Natural Gas: Open Swap Contracts, Bought, Priced off Henry Hub (NYMEX)

Period

Notional Quantity (MMBtu/day) (2)

Notional Quantity (MMBtu) (2)

Strike Price

Sept 2020 - Dec 2020
10,000 1,220,000 $ 2.03
Natural Gas: Open Call Contracts, Bought, Priced off Henry Hub (NYMEX)

Period

Notional Quantity (MMBtu/day) (2)

Notional Quantity (MMBtu) (2)

Strike Price

August 2020 - Dec. 2022
40,000 35,320,000 $ 3.00
Natural Gas: Open Collar Contracts, Priced off Henry Hub (NYMEX)

Period

Notional Quantity (MMBtu/day) (2)

Notional Quantity (MMBtu) (2)

Put Option Weighted Strike Price (Bought)

Call Option Weighted Strike Price (Sold)

August 2020 - Dec. 2022
40,000 35,320,000 $ 1.83 $ 3.00
August 2020 - Dec. 2020 10,000 1,530,000 $ 1.75 $ 2.58
Jan 2021 - Dec 2021 30,000 10,950,000 $ 2.18 $ 3.00
Jan 2022 - Feb 2022 30,000 1,770,000 $ 2.20 $ 4.50
(2)
~~MMBtu = Million British Thermal Units~~
The following amounts were recorded in the Condensed Consolidated Balance Sheets in the categories presented and include the fair value of open contracts, and closed contracts which had not yet settled (in thousands):

June 30,

December 31,

2020

2019

Prepaid expenses and other assets
$ 17,770 $ 7,266

June 30,

December 31,


2021

2020
Prepaid expenses and other current assets

$
14,021

$
2,752
Other assets (long-term)
3,486 2,653

21,005

2,762
Accrued liabilities 1,779 1,785

82,832

13,620
Other liabilities (long-term) 2,137 —

28,122

4,384

The amounts recorded on the Condensed Consolidated Balance Sheets are on a gross basis. ~~If these were recorded on a net settlement basis, it would~~ ~~not~~ ~~have resulted in any material differences in reported amounts.~~
Changes in the fair value and settlements of contracts are recorded on the Condensed Consolidated Statements of Operations as Derivative loss (gain). The impact of our commodity derivative contracts has on the condensed consolidated Statements of Operations were as follows (in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

2020

2019

2020

2019

Derivative loss (gain)
$ 15,414 $ (1,805 ) $ (46,498 ) $ 47,081

Three Months Ended June 30,

Six Months Ended June 30,


2021

2020

2021

2020
Realized loss (gain)

$
15,357

$
(22,578)

$
23,602

$
(31,970)
Unrealized loss (gain)

66,083

37,992

82,418

(14,528)
Derivative loss (gain)

$
81,440

$
15,414

$
106,020

$
(46,498)
14

~~Table of Contents~~
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Cash receipts 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,

2020

2019

Cash receipts on derivative settlements, net
$ 37,566 $ 12,792

Six Months Ended June 30,


2021

2020
Derivative loss (gain)

$
106,020

$
(46,498)
Derivative cash (payments) receipts, net

(41,130)

37,566

7.
~~Leases~~

Our contract arrangements accounted for under the applicable GAAP for lease contracts consist of office leases, a land lease and various pipeline right-of-way contracts. For these contracts, a right-of-use ("ROU") asset and lease liability was established based on our assumptions of the term, inflation rates and incremental borrowing rates.
~~During the~~ ~~six~~ ~~months ended~~ ~~June 30, 2020,~~ ~~we terminated the existing office lease and executed a new lease on separate office space. The remaining term of the current office lease extends to~~ ~~December 2020.~~ ~~The term of the new office lease extends to~~ ~~February 2032.~~ ~~When calculating the ROU asset and lease liability at the commencement of the new office lease, we have reduced future cash outflows by the lease incentive to be received.~~
~~The term of each pipeline right-of-way contract is 10 years with various effective dates, and each has an option to renew for up to another~~ ~~ten~~ ~~years. It is expected renewals beyond~~ 10 ~~years can be obtained as renewals were granted to the previous lessees. The land lease has an option to renew every~~ ~~five~~ ~~years extending to~~ ~~2085.~~ ~~The expected term of the rights-of way and land leases was estimated to approximate the life of the related reserves.~~
~~We recorded ROU assets and lease liabilities using a discount rate of 9.75% for the office leases and 10.75% for the other leases due to their longer expected term.~~
~~Amounts related to leases recorded within our Condensed Consolidated Balance Sheet are as follows (in thousands):~~

June 30, 2020

December 31, 2019

ROU assets
$ 12,546 $ 7,936

Lease liability:

Accrued liabilities
$ 2,130 $ 2,716
Other liabilities
9,834 4,419
Total lease liability
$ 11,964 $ 7,135
15

~~Table of Contents~~
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)8.        Share-Based Awards and Cash-Based Awards
8.
Share-Based ~~Compensation and Cash-Based Incentive Compensation~~
Awards to ~~Employees.~~ In ~~2010,~~ ~~the~~Employees
The W&T Offshore, Inc. Amended and Restated Incentive Compensation Plan (as amended from time to time, the “Plan”) was approved by our ~~shareholders. During~~ ~~2019,~~~~2018~~ ~~and~~ ~~2017,~~shareholders in 2010. Under the Plan, the Company ~~granted~~may issue, subject to the approval of the Board of Directors, stock options, stock appreciation rights, restricted stock, restricted stock units, ~~(“RSUs”) under the Plan to certain of its employees. RSUs are a long-term compensation component, and are subject to satisfaction of certain predetermined~~stock awards, dividend equivalents, other stock-based awards, performance ~~criteria and adjustments at the end~~units or shares, cash awards, substitute awards or any combination of the ~~applicable performance period based on the results achieved. In addition~~foregoing to ~~share-based awards, the Company~~ ~~may~~ ~~grant to its~~ employees, ~~cash-based incentive awards under the Plan, which~~ ~~may~~ ~~be used as short-term~~directors and ~~long-term compensation components of the awards, and are subject to satisfaction of certain predetermined performance criteria.~~
consultants.
As of June 30,~~2020,~~ 2021, there were ~~10,874,043~~10,347,591 shares of common stock available for issuance in satisfaction of awards under the Plan. The shares available for issuance are reduced on a ~~one~~~~-for-~~~~one~~1-for-one basis when ~~RSUs~~awards are settled in shares of common stock, which shares of common stock are issued net of withholding tax through the withholding of shares. The Company has the option following vesting to settle ~~RSUs~~awards in stock or cash, or a combination of stock and cash. The Company expects to settle ~~RSUs~~outstanding awards, discussed below, that vest in the future using shares of common stock.
15
Table of Contents
Restricted Stock Units (“RSUs”).RSUs currently outstanding relate to the ~~2019~~2021 and ~~2018~~2019 grants. During the six months ended June 30, 2021, the Company granted RSUs under the plan to certain employees. NaN RSUs were granted in 2020. The ~~2019~~2021 RSUs granted are a long-term compensation component, subject to service conditions, with one-third of the award vesting each year on January 1, 2022, 2023, and ~~2018~~2024, respectively.
The 2019 grants were subject to predetermined performance criteria applied against the applicable performance period. All of the 2019 RSUs currently outstanding are also subject to employment-based criteria and, ~~vesting generally occurs in~~ ~~December~~ subject to the satisfaction of the ~~second~~ ~~year after~~service conditions, vesting of the ~~grant. See~~outstanding 2019 RSUs will occur in December 2021.
A summary of activity related to RSUs during the ~~table below for anticipated~~three months ended June 30, 2021 is as follows:

Restricted Stock Units

Weighted




Average

Grant Date Fair

Units

Value Per Unit
Nonvested, December 31, 2020

763,688

$
4.51
Granted

698,301

4.72
Vested

—

—
Forfeited

(19,880)

4.51
Nonvested, June 30, 2021

1,442,109

4.61

For the outstanding RSUs issued to the eligible employees as of June 30, 2021, vesting ~~by year.~~is expected to occur as follows (subject to forfeitures):


Restricted

Shares
2021

743,808
2022

232,767
2023

232,767
2024

232,767
Total

1,442,109

We recognize compensation cost for share-based payments to employees over the period during which the recipient is required to provide service in exchange for the award. Compensation cost is based on the fair value of the equity instrument on the date of grant. The fair values for the RSUs granted ~~during~~ ~~2019,~~~~2018~~ ~~and~~ ~~2017~~were determined using the Company’s closing price on the grant date. We also estimate forfeitures, resulting in the recognition of compensation cost only for those awards that are expected to actually vest.
All RSUs awarded are subject to forfeiture until vested and cannot be sold, transferred or otherwise disposed of during the restricted period.
Performance Share Units (“PSUs”). During the six months ended June 30, 2021, the Company granted PSUs under the plan to certain employees. The PSUs are RSU awards granted subject to performance criteria. The performance criteria relates to the evaluation of the Company’s total shareholder return (“TSR”) ranking against peer companies’ TSR for the applicable performance period (2021) and service-based criteria. TSR is determined based on the change in the entity’s stock price plus dividends for the applicable performance period. Subsequent to the performance period, the PSUs will continue to be subject to service-based criteria with vesting occurring on October 1, 2023.
16
Table of Contents
A summary of activity related to ~~RSUs~~PSUs during the ~~six~~three months ended June 30,~~2020~~ 2021 is as follows:

Restricted Stock Units

Weighted Average

Grant Date Fair

Units

Value Per Unit

Nonvested, December 31, 2019
1,614,722 $ 5.73
Forfeited
(37,753 ) 6.21
Nonvested, June 30, 2020
1,576,969 5.71

Performance Share Units

Weighted




Average

Grant Date Fair

Units

Value Per Unit
Nonvested, December 31, 2020

—

$
—
Granted

388,908

5.57
Vested

—

—
Forfeited

—

—
Nonvested, June 30, 2021

388,908

5.57

We recognize compensation cost for share-based payments to employees over the period during which the recipient is required to provide service in exchange for the award. Compensation cost is based on the fair value of the equity instrument on the date of grant. All PSUs awarded are subject to forfeiture until vested and cannot be sold, transferred or otherwise disposed of during the restricted period. The grant date fair value of the PSUs was determined through the use of the Monte Carlo simulation method. This method requires the use of highly subjective assumptions. Our key assumptions in the method include the price and the expected volatility of our stock and our self-determined Peer Group companies’ stock, risk free rate of return and cross-correlations between the Company and our Peer Group companies. The valuation model assumes dividends, if any, are immediately reinvested. The grant date fair value of the PSUs granted during the six months ended June 30 2021, is $2.2 million. The following table summarizes the assumptions used to calculate the grant date fair value of the PSUs granted:
~~For the outstanding RSUs issued to the eligible employees as of~~ ~~June~~ ~~30,~~~~2020,~~ ~~vesting is expected to occur as follows (subject to forfeitures):~~

2021 Grant Date

June 28
Expected term for performance period (in years)

0.5

Expected volatility

67.9
%
Risk-free interest rate

0.1
%

Restricted Stock Units

2020
794,814
2021
782,155
Total
1,576,969
16

~~Table of Contents~~
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Share-Based Awards to Non-Employee Directors.
Under the W&T Offshore, Inc. 2004 Directors Compensation Plan (as amended from time to time, the “Director Compensation Plan”), shares of restricted stock (“Restricted Shares”) have been granted to the Company’s non-employee directors. Grants to non-employee directors were made during ~~2019,~~~~2018~~the six months ended June 30, 2021, and ~~2017.~~during the year ended December 31, 2020. During the second quarter of 2020, our shareholders ap~~proved~~approved increasing the shares available under the Director Compensation Plan by 500,000 shares. As of June 30, ~~2020,~~ 2021, there were ~~582,620~~ 410,742 shares of common s~~tock~~stock available for issuance in satisfaction of awards under the Director Compensation Plan. The shares available are reduced on a ~~one~~~~-to-~~~~one~~1-to-one basis when Restricted Shares are granted.
We recognize compensation cost for share-based payments to non-employee directors over the period during which the recipient is required to provide service in exchange for the award. Compensation cost is based on the fair value of the equity instrument on the date of grant. The fair values for the Restricted Shares granted were determined using the Company’s closing price on the grant date. NoNaN forfeitures were estimated for the non-employee directors’ awards.
The Restricted Shares are subject to service conditions and vesting occurs at the end of specified service periods unless otherwise approved by the Board of Directors. Restricted Shares cannot be sold, transferred or disposed of during the restricted period. The holders of Restricted Shares generally have the same rights as a shareholder of the Company with respect to such Restricted Shares, including the right to vote and receive dividends or other distributions paid with respect to the Restricted Shares.
17
Table of Contents
A summary of activity related to Restricted Shares during the sixmonths ended June 30,~~2020~~2021 is as follows:

Restricted Shares

Weighted Average

Grant Date Fair

Shares

Value Per Share
Nonvested, December 31, 2019
123,180

$ 4.55
Vested
(78,428)

3.57
Nonvested, June 30, 2020
44,752

6.27

Restricted Shares

Weighted




Average

Grant Date Fair

Units

Value Per Unit
Nonvested, December 31, 2020

154,128

$
3.64
Granted

62,502

3.36
Vested

(146,404)

3.51
Nonvested, June 30, 2021

70,226

3.67

~~For~~Subject to the satisfaction of the service conditions, the outstanding Restricted Shares issued to the non-employee directors as of June 30,~~2020,~~ ~~vesting is expected~~ 2021 are eligible to ~~occur as follows (subject to any forfeitures):~~vest in 2022.

Restricted Shares

2021
29,300
2022
15,452
Total
44,752

Share-Based ~~Compensation.~~  Compensation Expense
Share-based compensation expense is recorded in the line General and administrative expenses in the Condensed Consolidated Statements of Operations. ~~NaN share-based awards have been granted to date in~~ ~~2020~~ ~~under the Plan, and therefore, 0 share-based compensation expense for~~ ~~2020~~ ~~has been recorded. The Compensation Committee has deferred its decision regarding the potential awarding of incentive compensation, including by the exercise of discretion.~~ The tax benefit related to compensation expense recognized under share-based payment arrangements was not meaningful and was minimal due to our income tax situation. A summary of incentive compensation expense under share-based payment arrangements is as follows (in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

2020

2019

2020

2019

Three Months Ended June 30,

Six Months Ended June 30,


2021

2020

2021

2020
Share-based compensation expense from:








Restricted stock units ⁽¹⁾
$ 949 $ 1,189 $ 1,927 $ 1,041
Restricted stock units

$
339

$
949

$
676

$
1,927
Restricted Shares
70 70 140 140

128

70

245

140
Total
$ 1,019 $ 1,259 $ 2,067 $ 1,181

$
467

$
1,019

$
921

$
2,067
(1)
~~For the~~ ~~six~~ ~~months ended~~ ~~June 30, 2019,~~ ~~share-based compensation expense includes adjustments for a former executive's forfeitures.~~

Unrecognized Share-Based ~~Compensation.~~Compensation Expense
As of June 30,~~2020,~~ 2021, unrecognized share-based compensation expense related to our awards of RSUs, PSUs, and Restricted Shares wa~~s $3.0~~was $3.9 million, $2.2 million, and $0.2 million, respectively. Unrecognized share-based compensation expense will be recognized through ~~November 2021~~ December 2023 for RSUs, September 2023 for PSUs, and April 2022 for Restricted Shares.
17

~~Table of Contents~~
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Cash-Based Incentive ~~Compensation.~~  Compensation
In addition to share-based compensation, both short-term and long-term cash-based incentive awards were granted under the Plan to ~~substantially~~ all eligible employees in ~~2019~~ ~~and~~ ~~2018.~~ ~~The~~2021.
18
Table of Contents
Short-term Cash-Based Incentive Compensation.There are two components of the short-term cash-based ~~awards, which are generally a short-term component of~~incentive award granted during the ~~Plan, are performance-based awards consisting of~~ ~~one~~ or more business criteria or individual performance criteria and a targeted level or levels of performance with respect to each of such criteria. In addition, these cash-based awards included an additional financial condition requiring Adjusted EBITDA less reported Interest Expense Incurred (terms as defined in the awards) for any fiscal quarter plus the ~~three~~ ~~preceding quarters to exceed defined levels measured over defined time periods for each cash-based award.~~ six months ended June 30, 2021.
● The first short-term, cash-based award granted in February 2021 was discretionary and subject only to continued employment on the payment dates. The 2021 discretionary bonus award was paid in equal installments on March 15, 2021 and April 15, 2021, to substantially all employees subject to employment on those dates. Incentive compensation expense of $3.8 million and $7.6 million was recognized during the three and six months ended June 30, 2021, respectively, related to these awards.
● The second short-term, cash-based award granted in June 2021 is subject to Company performance-based criteria and individual performance criteria. Incentive compensation expense is based on estimates of Company metrics for full-year 2021 and is being recognized during the 2021 service period. Incentive compensation expense for this award was not material during the six months ended June 30, 2021.
NaN cash-based incentive awards ~~have been~~were granted ~~to date~~ in 2020, ~~under the Plan,~~ and therefore, 0 cash-based incentive compensation expense for 2020 ~~has been~~ was recorded.

Long-term Cash-Based Incentive Compensation.
The ~~Compensation Committee has deferred its decision regarding the potential awarding of incentive compensation, including by the exercise of discretion. During~~ ~~2018,~~2021 long-term, ~~cash~~cash-based awards (“Cash Awards”) were granted ~~to certain employees~~in June 2021 and are subject to ~~pre-defined~~the same performance-based criteria as the PSU’s noted above. The Company’s TSR ranking against peer companies will be evaluated for the performance ~~criteria. Expense is recognized~~period of 2021. Subsequent to the performance period, the Cash Awards will continue to be subject to service-based criteria with vesting occurring on October 1, 2023.
These Cash Awards are accounted for as liability awards and are measured at fair value each reporting date. We recognize compensation cost for share-based payments to employees over the service period ~~once~~from June 28, 2021 through October 1, 2023. The reporting date fair value of the ~~business criteria, individual performance criteria~~awards was determined through the use of the Monte Carlo simulation method. This method requires the use of highly subjective assumptions. Our key assumptions in the method include the price and ~~financial condition~~the expected volatility of our stock and our self-determined peer group companies’ stock, risk-free rate of return, cross-correlations between the Company and our peer group companies, and an appropriate discount rate. The valuation model assumes dividends are ~~met.~~immediately reinvested. The fair value of the awards as of June 30, 2021, is $2.2 million. As of June 30, 2021, unrecognized compensation expense related to these awards was $2.2 million. The following table summarizes the assumptions used to calculate the fair value of the outstanding long-term Cash Awards as of June 30, 2021:

•

~~For the~~ ~~2019~~ ~~cash-based awards, a portion of the business criteria and individual~~2021 Grant Date

June 28
Expected term for performance ~~criteria were achieved. The financial condition requirement of Adjusted EBITDA less reported Interest Expense Incurred exceeding $200 million over~~ ~~four~~ ~~consecutive quarters was achieved; therefore, incentive compensation expense was recognized over the~~ ~~January 2019~~ to ~~February 2020~~ period ~~(the service period of the award). Payments were made in~~ ~~March 2020~~ ~~and are subject to all the terms of the~~ ~~2019~~ ~~Annual Incentive Award Agreement.~~(in years)

0.5

Expected volatility
•

In ~~2018,~~ ~~the Company, as part of its long-term incentive program, granted~~67.9
%
Risk-free interest rate

0.1
%
Expected term for cash ~~awards~~payment (in years)

2.3

Discount rate used to ~~certain employees that will vest over a~~ ~~three~~~~-year service period.~~
discount expected cash payment
•

~~For the~~ ~~2018~~ ~~long-term, cash-based awards, incentive compensation expense was determined based on the Company achieving certain performance metrics for~~ ~~2018~~ ~~and is being recognized over the~~ ~~September 2018~~ to ~~November 2020~~ ~~period (the service period of the award). The~~ ~~2018~~ ~~long-term, cash-based awards will be eligible for payment on~~ ~~December 14, 2020~~ ~~subject to participants meeting certain employment-based criteria.~~
12.1
•
~~For the~~ ~~2018~~ ~~short-term, cash-based awards, incentive compensation expense was determined based on the Company achieving certain performance metrics for~~ ~~2018~~ ~~combined with individual performance criteria for~~ ~~2018~~ ~~and was recognized over the~~ ~~January 2018~~ to ~~February 2019~~ ~~period. The~~ ~~2018~~ ~~short-term, cash-based awards were paid during~~ ~~March 2019.~~%

19
Table of Contents
A summary of compensation expense related to share-based awards and cash-based awards is as follows (in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

2020

2019

2020

2019

Share-based compensation included in:

General and administrative expenses
$ 1,019 $ 1,259 $ 2,067 $ 1,181
Cash-based incentive compensation included in:

Lease operating expense ⁽¹⁾
— 402 849 279
General and administrative expenses ⁽¹⁾
159 1,243 3,790 3,338
Total charged to operating income
$ 1,178 $ 2,904 $ 6,706 $ 4,798

Three Months Ended June 30,

Six Months Ended June 30,


2021

2020

2021

2020
Share-based compensation included in:








General and administrative expenses

$
467

$
1,019

$
921

$
2,067
Cash-based incentive compensation included in:








Lease operating expense (1)

816

—

1,655

849
General and administrative expenses (1)

2,676

159

5,359

3,790
Total charged to operating (loss) income

$
3,959

$
1,178

$
7,935

$
6,706
(1)
(1)
Includes adjustments of accruals to actual payments.

18

~~Table of Contents~~

W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)9.        Income Taxes
9.
~~Income Taxes~~
Tax Benefit and Tax Rate. Income tax benefit for the three ~~months and~~ ~~six~~ months ended June 30, 2021 and 2020 was $12.7 and $8.7million, respectively. For the six months ended June 30, 2021 and 2020, income tax benefit was $12.9 million and $2.2 million, respectively. ~~Income tax benefit for~~For the three and six months ended June 30,~~2019,~~ ~~was $11.7 million and $11.5 million, respectively.~~ 2021, our effective tax rate differed from the statutory Federal tax rate primarily by the impact of state income taxes. For the three and six months ended June 30,2020, our effective tax rate primarily differed from the statutory Federal tax rate for adjustments recorded ~~related~~as a result of to the enactment of the ~~Coronavirus Aid, Relief and Economic Security~~CARES Act ~~(“CARES Act”)~~ on March 27, 2020. The CARES Act modified certain income tax statutes, including changes related to the business interest expense limitation under ~~Internal Revenue Service ("IRS")~~ Code Section ~~163~~~~(j)~~163(j). ~~During the~~ ~~three~~ ~~months ended~~ ~~June 30, 2019,~~ ~~we reversed a liability related to an uncertain tax position that was effectively settled with the IRS, which resulted in a net tax benefit for the~~ ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ ~~June 30, 2019.~~ Our effective tax rate was ~~not~~ ~~meaningful~~19.8% for ~~any~~both the three and six months ended June 30, 2021 and 59.7% and (3.9%) for the three and six months ended June 30, 2020, respectively.
Calculation of Interim Provision for Income Tax. Historically, we have calculated the provision for income taxes during interim reporting periods by applying an estimate of the ~~periods presented.~~  annual effective tax rate for the full year to income (loss) for the interim period. In the second quarter of 2021, we concluded that we could not calculate a reliable estimate of our annual effective tax rate. Accordingly, we computed the effective tax rate for the six-month period ending June 30, 2021 using actual results.

Valuation Allowance. Deferred tax assets are recorded related to net operating losses and temporary differences between the book and tax basis of assets and liabilities expected to produce tax deductions in future periods. The realization of these assets depends on recognition of sufficient future taxable income in specific tax jurisdictions in which those temporary differences or net operating losses are deductible. In assessing the need for a valuation allowance on our deferred tax assets, we consider whether it is more likely than not that some portion or all of them will not be realized.
As of June 30,~~2020~~ 2021 and December 31, ~~2019,~~ 2020, our valuation allowance was ~~$45.9~~$22.8 million and ~~$54.4~~$22.4 million, respectively, and relates primarily to state net operating losses and the disallowed interest expense limitation carryover.
20
Table of Contents
Income Taxes ~~Receivable.~~ Receivable, Refunds and Payments. As of June 30, 2021 and December 31, ~~2019,~~ 2020, we ~~had~~did 0t have any outstanding current income taxes receivable. During the three and six months ended June 30, 2021, we did 0t receive any income tax refunds or make any income tax payments of significance. During the three and six months ended June 30, 2020 we received an income tax refund of $1.9 ~~million, which was received during the~~ ~~six~~ ~~months ended~~ ~~June 30, 2020.~~ million. The refund related primarily to a net operating loss (“NOL”) carryback claim for 2017 that was carried back to prior years.
~~During the~~ ~~six~~ ~~months ended~~ ~~June 30,~~ ~~2020,~~ ~~we did~~ ~~not~~ ~~make any income tax payments of significance. During the~~ ~~six~~ ~~months ended~~ ~~June 30,~~ ~~2019,~~ ~~we did~~ ~~not~~ ~~receive any income tax claims or make any income tax payments of significance.~~
The tax years ~~2016~~2017 through ~~2019~~2020 remain open to examination by the tax jurisdictions to which we are subject.

~~10.~~10.        Earnings Per Share
~~Earnings Per Share~~
The following table presents the calculation of basic and diluted (loss) earnings per common share (in thousands, except per share amounts):

Three Months Ended June 30,

Six Months Ended June 30,

2020

2019

2020

2019

Net (loss) income
$ (5,904 ) $ 36,389 $ 60,076 $ (11,372 )
Less portion allocated to nonvested shares
— 666 707 —
Net (loss) income allocated to common shares
$ (5,904 ) $ 35,723 $ 59,369 $ (11,372 )
Weighted average common shares outstanding
141,597 140,567 141,571 140,507

Basic and diluted (loss) earnings per common share
$ (0.04 ) $ 0.25 $ 0.42 $ (0.08 )

Shares excluded due to being anti-dilutive (weighted-average)
1,665 — — 2,978

Three Months Ended June 30,

Six Months Ended June 30,


2021

2020

2021

2020
Net (loss) income

$
(51,672)

$
(5,904)

$
(52,418)

$
60,076
Less portion allocated to nonvested shares

—

—

0

707
Net (loss) income allocated to common shares

$
(51,672)

$
(5,904)

$
(52,418)

$
59,369
Weighted average common shares outstanding

142,244

141,597

142,197

141,571
Basic and diluted (loss) earnings per common share

$
(0.36)

$
(0.04)

$
(0.37)

$
0.42
Shares excluded due to being anti-dilutive (weighted-average)

880

1,665

899

0

19

~~Table of Contents~~

W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)11.        Contingencies
~~11.~~
~~Contingencies~~
Appeal with the Office of Natural Resources Revenue (“ONRR”). In 2009, we recognized allowable reductions of cash payments for royalties owed to the ONRR for transportation of their deepwater production through our subsea pipeline systems. In 2010, the ONRR audited our calculations and support related to this usage fee, and in 2010, we were notified that the ONRR had disallowed approximately $4.7 million of the reductions taken. We recorded a reduction to other revenue in 2010 to reflect this disallowance with the offset to a liability reserve; however, we disagree with the position taken by the ONRR. We filed an appeal with the ONRR, which ~~was denied in~~ ~~May 2014.~~ On ~~June 17, 2014,~~ ~~we filed an appeal with the IBLA under the Department of the Interior. On~~ ~~January 27, 2017,~~ ~~the IBLA affirmed the decision of the ONRR requiring W&T~~ultimately led to ~~pay approximately $4.7 million in additional royalties. We filed a motion for reconsideration of the IBLA decision on~~ ~~March 27, 2017.~~ ~~Based on a statutory deadline, we filed an appeal of the IBLA decision on~~ ~~July 25, 2017~~ ~~in the U.S. District Court for the Eastern District of Louisiana. We were required to post~~our posting a bond in the amount of $7.2 million and cash collateral of $6.9 million with the surety in order to appeal the IBLA decision, of which the cash collateral held by the surety was subsequently returned during the first quarter of ~~2020.~~ On ~~December 4, 2018,~~ 2020. We have continued to pursue our legal rights and, at present, the ~~IBLA denied our motion~~case is in front of the U.S. District Court for ~~reconsideration. On~~ ~~February 4, 2019,~~ wethe Eastern District of Louisiana where both parties have filed ~~our~~ ~~first~~ ~~amended complaint,~~cross-motions for summary judgment and ~~the government~~opposition briefs. W&T has filed ~~its Answer~~a Reply in ~~the Administrative Record. On~~ ~~July 9, 2019,~~ we filed an Objection to the Administrative Record and Motion to Supplement the Administrative Record, asking the court to order the government to file a complete privilege log with the record. Following a hearing on ~~July 31, 2019,~~ ~~the Court ordered the government to file a complete privilege log. In an Order dated~~ ~~December 18, 2019,~~ ~~the court ordered the government to produce certain contracts subject to a protective order and to produce the remaining documents in dispute to the court for~~ ~~in camera~~ ~~review. Following~~ ~~in camera~~ ~~review, the Court upheld the government’s assertion~~support of ~~privilege, and the parties are proceeding with drafting Cross-Motions for Summary Judgment, which will be the basis for the court’s ruling. We filed our Motion for Summary Judgment on~~ ~~June 22, 2020,~~ ~~and we expect the government’s Cross~~its Motion for Summary Judgment and ~~Opposition~~the government has in turn filed its Reply brief. With briefing now completed, we are waiting for the district court’s ruling on the merits. In compliance with the ONRR’s request for W&T to ~~W&T’s Motion for Summary Judgment~~periodically increase the surety posted in the appeal to ~~be filed by~~ ~~August 26, 2020.~~cover pre-and post judgement interest, the penal sum of the bond posted is currently $8.2 million.
21
Table of Contents
Royalties – “Unbundling” Initiative. ~~The~~In 2016, the ONRR ~~has~~ publicly announced an “unbundling” initiative to revise the methodology employed by producers in determining the appropriate allowances for transportation and processing costs that are permitted to be deducted in determining royalties under Federal oil and gas leases. The ONRR’s initiative requires re-computing allowable transportation and processing costs using revised guidance from the ONRR going back 84 months for every gas processing plant that processed our gas. In the second quarter of 2015, pursuant to the initiative, we received requests from the ONRR for additional data regarding our transportation and processing allowances on natural gas production related to a specific processing plant. We also received a preliminary determination notice from the ONRR asserting that our allocation of certain processing costs and plant fuel use at another processing plant was not allowed as deductions in the determination of royalties owed under Federal oil and gas leases. We have submitted revised calculations covering certain plants and time periods to the ONRR. As of the filing date of this Form 10~~-Q,~~10-Q, we have not received a response from the ONRR related to our submissions. These open ONRR unbundling reviews, and any further similar reviews, could ultimately result in an order for payment of additional royalties under our Federal oil and gas leases for current and prior periods. While the amounts paid for the three and six months ended June 30, ~~2020~~ 2021 and ~~2019~~2020 were immaterial, we are not able to determine the range of any additional royalties or, if and when assessed, whether such amounts would be material.
Notices of Proposed Civil Penalty Assessment. ~~During the~~ ~~six~~ ~~months ended~~ ~~June 30, 2020~~ ~~and~~ ~~2019,~~In January 2021, we ~~did~~ ~~not~~ ~~pay any civil penalties to~~executed a Settlement Agreement with the Bureau of Safety and Environmental Enforcement ~~("BSEE"~~(“BSEE”) ~~related~~which resolved 9 pending civil penalties issued by BSEE. The civil penalties pertained to Incidents of Noncompliance (“INCs”) ~~at various offshore locations. We currently have~~ ~~nine~~ ~~open civil penalties~~ issued by ~~the~~ BSEE ~~from INCs, which have~~ ~~not~~ ~~been settled as of the filing date of this Form~~ 10~~-Q. The INCs underlying these open civil penalties cite alleged~~alleging regulatory non-compliance ~~with various safety-related requirements and procedures occurring~~ at separate offshore locations on various dates ~~ranging from~~ between July 2012 to and January ~~2018.~~ ~~The proposed civil penalties for these INCs total $7.7 million. As of~~ ~~June 30, 2020~~ ~~and~~ ~~December~~ ~~31,~~~~2019,~~ ~~we have accrued approximately $3.5 million, which is our best estimate of the final settlements once all appeals have been exhausted. Our position is that~~2018, with the proposed civil penalty amounts totaling $7.7 million. Under the Settlement Agreement, W&T will pay a total of $720,000 in three annual installments. The first installment was paid in March 2021. In addition, W&T committed to implement a Safety Improvement Plan with various deliverables due over a period ending in 2022. During the three months ended June 30, 2021, we did 0t pay any civil penalties ~~are excessive given the specific facts and circumstances~~to BSEE related to ~~these~~newly issued INCs. ~~We are exploring the possibility of settling these civil penalties with the BSEE.~~
Other Claims. We are a party to various pending or threatened claims and complaints seeking damages or other remedies concerning our commercial operations and other matters in the ordinary course of our business. In addition, claims or contingencies may arise related to matters occurring prior to our acquisition of properties or related to matters occurring subsequent to our sale of properties. In certain cases, we have indemnified the sellers of properties we have acquired, and in other cases, we have indemnified the buyers of properties we have sold. We are also subject to federal and state administrative proceedings conducted in the ordinary course of business including matters related to alleged royalty underpayments on certain federal-owned properties. Although we can give no assurance about the outcome of pending legal and federal or state administrative proceedings and the effect such an outcome may have on us, we believe that any ultimate liability resulting from the outcome of such proceedings, to the extent not otherwise provided for or covered by insurance, will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.

12. Subsequent Events
As described in more detail in Note 2 – Debt, on July 15, 2021, the Company entered into a Waiver and Seventh Amendment to Sixth Amended and Restated Credit Agreement dated effective June 30, 2021, which further amended the Company Credit Agreement and waived certain hedging transaction requirements.

22
20

Table of Contents
W&T OFFSHORE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
~~12.~~
~~Subsequent Events~~
~~COVID-~~19 ~~Impacts on Economic Environment.~~ On ~~January 30, 2020,~~ ~~the World Health Organization (“WHO”) announced a global health emergency because of COVID-~~19 ~~and the risks to the international community as the virus spread globally beyond its point of origin. In~~ ~~March 2020,~~ ~~the WHO classified the COVID-~~19 ~~as a pandemic based on the rapid increase in exposure globally.  During the~~ ~~second~~ ~~quarter of~~ ~~2020~~ ~~and thus far during the~~ ~~third~~ ~~quarter of~~ ~~2020,~~ ~~there have been continued and, in some cases, increasing outbreaks of COVID-~~19 ~~in the United States, particularly in Houston, Texas, where our corporate office is located, Louisiana and Alabama, where we conduct substantially all of our operations.~~
~~The COVID-~~19 ~~pandemic and resulting government restrictions, along with decisions by the Russian and Saudi governments to increase supply in~~ ~~March 2020,~~ created a significant decrease in global crude oil demand causing a substantial decrease in crude oil prices and increasing the volatility of the market. Additionally, prices for NGLs and natural gas decreased in the ~~three~~ ~~months ended~~ ~~June 30, 2020~~ ~~compared to the prior quarter and prior year levels, all of which have impacted revenues for the~~ ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ ~~June 30, 2020.~~ ~~This economic environment has caused oil and gas operators to reduce their capital expenditure budgets, reduce activity and shut-in significant production. The full impact of the COVID-~~19 pandemic and the volatility in crude oil prices continue to evolve as of the date of this Quarterly Report. However, the scope and length of this economic downturn and the ultimate effect on the prices of crude oil and natural gas cannot be determined and we could be adversely affected in future periods.
~~We are actively monitoring the impact on our results of operations, financial position, and liquidity for the remainder of~~ ~~2020.~~  ~~In response to the market changes, we have reduced our capital expenditure budget for the remainder of~~ ~~2020,~~ ~~experienced production shut-ins from non-operated oil and gas properties and shut-in a limited number of our operated oil and gas properties.~~
21

~~Table of Contents~~
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
~~Forward-Looking Statements~~
The following discussion and analysis should be read in conjunction with our ~~accompanying~~ unaudited ~~condensed consolidated financial statements~~Condensed Consolidated Financial Statements and the notes to those financial statements included in Part I, Item 1 of this Quarterly Report on Form ~~10-Q.~~ 10-Q (this “Quarterly Report”), as well as our audited Consolidated Financial Statements and the notes thereto in our 2020 Annual Report and the Related Management’s Discussion and Analysis of Financial Condition and the Results of Operations included in Part II, Item 7 of our 2020 Annual Report on Form 10-K (the “2020 Annual Report”).
Forward-Looking Statements
The ~~following discussion contains forward-looking statements~~information in this report includes “forward-looking statements” within the meaning of ~~the Private Securities Litigation Reform Act of 1995,~~ Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact included in this report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “forecast,” “may,” “objective,” “plan,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements ~~involve~~are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events.
These forward-looking statements are subject risks, uncertainties and ~~assumptions.~~assumptions, most of which are difficult to predict and many of which are beyond our control. If the risks or uncertainties materialize or the assumptions prove incorrect, our results may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, such as those statements that address activities, events or developments that we expect, believe or anticipate will or may occur in the future. These statements are based on certain assumptions and analyses made by us in light of our experience and perception of historical trends, current conditions, estimates, expected future developments and other factors we believe are appropriate in the circumstances. Known material risks that may affect our financial condition and results of operations are discussed in Item 1A, Risk Factors, and market risks are discussed in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of our 2020 Annual Report, ~~on Form 10-K for the year ended December 31, 2019 and this Quarterly Report on Form 10-Q, Part II, Item 1A,~~ ~~Risk Factors~~, and may be discussed or updated from time to time in subsequent reports filed with the Securities and Exchange Commission.
Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. ~~We assume no obligation, nor do~~Should one or more of the risks or uncertainties described herein occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. All forward-looking statements, expressed or implied, included in this report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we ~~intend~~or persons acting on our behalf may issue. Except as otherwise required by applicable law, we disclaim any duty to update ~~these~~any forward-looking ~~statements. Unless~~statements, all of which are expressly qualified by the ~~context requires otherwise, references~~statements in this section, to reflect events or circumstances after the date of this Quarterly ~~Report on Form 10-Q to “W&T,” “we,” “us,” “our” and the “Company” refer to W&T Offshore, Inc. and its consolidated subsidiaries.~~
Report.
Overview
We are an independent oil and natural gas producer, active in the exploration, development and acquisition of oil and natural gas properties in the Gulf of Mexico. As of June ~~2020,~~2021, we hold working interests in 4841 offshore fields in federal and state waters ~~(39~~(40 fields producing and ~~nine fields~~1 field capable of ~~producing)~~producing, with 33 fields in federal waters and 8 in state waters). We currently have under lease approximately ~~772,000~~621,700 gross acres ~~(523,000~~(424,400 net acres) spanning across the ~~OCS~~outer continental shelf (“OCS”) off the coasts of Louisiana, Texas, Mississippi and Alabama, with approximately ~~557,000~~8,000 gross acres in Alabama State waters, 426,800 gross acres on the conventional shelf and approximately ~~215,000~~186,900 gross acres in the deepwater. A majority of our daily production is derived from wells we operate. Our ~~interest~~interests in fields, leases, structures and equipment are primarily owned by W&T Offshore, Inc. and our wholly-owned ~~subsidiary,~~subsidiaries, Aquasition LLC, Aquasition II LLC, W & T Energy VI, LLC, a Delaware limited liability ~~company~~companies, and through our proportionately consolidated interest in Monza, as described in more detail in Financial Statements ~~and Supplementary Data~~ – Note ~~4 –~~5 Joint Venture Drilling Program under Part I, Item 1 in this ~~Form 10-Q.~~Quarterly Report.
23
Table of Contents
Recent Events
~~Due to circumstances related to the outbreak of~~As COVID-19 ~~various measures~~vaccines have been ~~taken by federal, state and local governments to reduce the rate of spread of COVID-19. These measures and other factors have resulted in a decrease of general~~more widely distributed, global economic activity is improving and ~~a corresponding decrease~~commodity prices are currently at pre-pandemic levels. However, the energy markets remain subject to heightened levels of uncertainty as responses to COVID-19 and COVID-19 variants continue to evolve. We will continue to monitor the effects of the pandemic on the energy markets in ~~global and domestic energy demand impacting commodity pricing. In addition, actions~~the future.
Under the Consolidated Appropriations Act, 2021 passed by the ~~Organization of Petroleum Exporting Countries~~United States Congress and other high oil exporting countries like Russia (“OPEC+”) have negatively impacted crude oil prices. These rapid and unprecedented events have pushed crude oil storage near capacity and driven prices down significantly. These events have beensigned by the ~~primary cause~~President on December 27, 2020, provisions of the ~~significant supply-and-demand imbalance~~CARES Act were extended and modified making the Company eligible for ~~oil, significantly lowering oil pricing. Further, during~~a refundable employee retention credit subject to meeting certain criteria. See Financial Statements – Note 1 – Basis of Presentation under Part 1, Item 1, and Liquidity and Capital Resources in this Item 2 of this Quarterly Report for additional information.
During the second quarter of ~~2020~~2021, the Company’s wholly-owned special purpose vehicles, A-I LLC and ~~thus far during~~A-II LLC or the ~~third quarter of 2020, there have been continued and, in some cases, increasing outbreaks of COVID-19 in~~Borrowers, entered into the United States, particularly in Houston, Texas, where our corporate offices are located, and Louisiana and Alabama, where we conduct substantially all of our operations. These conditions may continue to exist in future periods, constraining our ability to store and move production to downstream markets, or affecting future decisions to delay or curtail development activity or temporarily shut-in production which could further reduce cash flow.
22

~~Table of Contents~~
~~The Company has responded to COVID-19 events and current economic conditions as follows:~~
•
Our capital expenditure forecast for 2020 has been reduced significantly from our initial budget in response to the unprecedented decrease in crude oil prices experienced in the first quarter of 2020.  Excluding acquisitions and plugging and abandonment expenditures, we are currently estimating capital expenditures to range from $15 million to $25 million for 2020 and ARO spending to be in the range of $2 million to $4 million. We continue to closely monitor current and forecasted commodity prices to assess what changes, if any, should be made to our 2020 plans and are unable to predict the duration or impact of COVID-19 and OPEC+ actions have on our business. Additionally, primarily as a result of substantially lower oil prices, the borrowing base under the Credit Agreement was reduced from $250.0 million to $215.0 million during the second quarter of 2020.
•
During the second quarter, we shut-in production in selected oil-weighted properties operated by the Company and experienced production shut-ins at certain non-operated properties due to the decline in oil prices. The Company has restored the majority of such non-operated production that was previously shut-in. Additionally, the Company was also able to restore some of its operated production that was shut-in due to low oil prices, but continues to monitor commodity prices to determine the appropriate time to return the remaining fields online.
•
We have taken proactive steps in our field operations and corporate offices to protect the health and safety of our employees and contractors. At W&T’s corporate offices, the Company mandated a work-from-home policy on March 23, 2020 and ensured that all employees had the ability to continue performing their work duties remotely. W&T reopened its corporate office and has implemented actions to protect its employees working in its offices. In our field operations, the Company instituted screening of all personnel prior to entry to heliports, shore-based facilities and Alabama gas treatment plants, which includes a questionnaire and temperature check. The Company conducts daily temperature screenings at all onshore offices and offshore facilities and implemented procedures for distancing and hygiene at its onshore offices and field locations. We continue to monitor national, state and local government directives to continually assess our health and safety protocol.
~~See the~~ ~~Liquidity and Capital Resources~~ ~~section in this Part II~~Subsidiary Credit Agreement providing for a ~~discussion of our liquidity and other aspects as a result~~secured term loan (“Term Loan”) in an aggregate principal amount equal to $215.0 million. Proceeds of the ~~decrease~~Term Loan were used by the Borrowers to (i) fund the acquisition of the Mobile Bay Properties and the Midstream Assets from the Company and (ii) pay fees, commissions and expenses in ~~commodity prices. See Item 1A,~~connection with the transactions contemplated by the Subsidiary Credit Agreement and the other related loan documents, including to enter into certain swap and put derivative contracts.
This transaction is described in more detail underFinancial Statements ~~Risk Factors~~–Note 4 – Mobile Bay Transaction, under Part 1, Item II1, of this ~~Form 10-Q.~~ Quarterly Report.
Oil and Natural Gas Production and Commodity Pricing
OurOur financial condition, cashcash flow and results of operations are significantly affected by the volume of our crude oil, NGLs and natural gas production and the prices that we receive for such production. Our production volumes for the six months ended June 30, ~~2020~~2021 were comprised of ~~37.3%~~37.4% crude oil and condensate, ~~10.4%~~10.0% NGLs and ~~52.3%~~52.6% natural gas, determined on a barrel of oil equivalent (“Boe”) using the energy equivalency ratio of six thousand cubic feet (“Mcf”) of natural gas to one barrel of crude oil, condensate or NGLs. The conversion ratio does not assume price equivalency, and the price per one Boe for crude oil, NGLs and natural gas has differed significantly in the past. For the six months ended June 30, ~~2020, revenues from the sale of crude oil and NGLs made up 68.9% of~~2021, our total revenues ~~compared to 82.5% for the six months ended June 30, 2019. For~~were 44.1% higher than the six months ended June 30, 2020 ~~our combined total production expressed in equivalent volumes on a daily basis was 39.7% higher than for the six months ended June 30, 2019, primarily~~ due to ~~the acquisition of the Mobile Bay properties described below. For the six months ended June 30, 2020, our total revenues were 28.5% lower than the six months ended June 30, 2019 due to lower~~higher realized prices for crude oil, NGLs and natural gas, ~~and~~which were partially offset ~~the higher~~by lower volumes. See Results of Operations – Six Months Ended June 30, ~~2020~~2021, Compared to the Six Months Ended June 30, ~~2019~~2020 in this Item 2 for additional information.
In August 2019, we completed the purchase of Exxon Mobil Corporation's (“Exxon”) interests in and operatorship of oil and gas producing properties in the eastern region of the Gulf of Mexico offshore Alabama and related onshore and offshore facilities and pipelines (the “Mobile Bay Properties”). For the six months ended June 30, 2020, the average net production of the Mobile Bay Properties was approximately 17,100 net Boe per day.
23

~~Table of Contents~~
Our operating results are strongly influenced by the price of the commodities that we produce and sell. The price of those commodities is affected by both domestic and international factors, including domestic production. During the six months ended June 30, ~~2020,~~2021, our average realized crude oil price was ~~$35.57~~$60.88 per barrel. This is ~~a decrease~~an increase of 71.2% from our average realized crude oil price of ~~$61.96~~$35.57 per barrel ~~or 42.6%, for~~during the six months ended June 30, ~~2019.~~2020. Per the Energy Information Administration ("EIA"), crude oil prices using average West Texas Intermediate ~~("WTI"~~(“WTI”) daily spot pricing ~~decreased~~increased to $62.21 per barrel during the six months ended June 30, 2021 compared to $36.58 per barrel during the six months ended June 30, 2020 ~~compared to $57.39 during the six months ended June 30, 2019~~ representing ~~a decrease~~an increase of ~~36.3% for the six months ended June 30, 2020.~~70.1%. Crude oil prices have ~~partially~~ recovered to pre-pandemic levels from their April 2020 lows ~~with an average WTI spot price of $38.31 per barrel for~~caused by the ~~month of June 2020,~~ongoing COVID-19 pandemic as the vaccines have been more widely distributed and ~~$40.34 per barrel for the first two weeks of July 2020, but still remain depressed compared to the same periods in 2019.~~
economic activity has increased.
24
Table of Contents
Our average realized crude oil sales price differs from the WTI benchmark average crude price primarily due to premiums or discounts, crude oil quality adjustments, volume weighting (collectively referred to as differentials) and other factors. Crude oil quality adjustments can vary significantly by field. All of our crude oil is produced offshore in the Gulf of Mexico and is characterized as Poseidon, Light Louisiana Sweet (“LLS”), Heavy Louisiana Sweet (“HLS”) and others. WTI is frequently used to value domestically produced crude oil, and the majority of our crude oil production is priced using the spot price for WTI as a base price, then adjusted for the type and quality of crude oil and other factors. Similar to crude oil prices, the differentials for our offshore crude oil have also experienced volatility in the past. The monthly average differentials of ~~WTI versus~~ Poseidon, LLS and HLS to WTI for the six months ended June 30, ~~2020~~2021 averaged ($0.23), $2.06, and $1.60 per barrel, respectively, and each average differential has changed ($0.13), $0.75, and $0.58 per barrel, respectively compared to the six months ended June 30, ~~2019 decreased approximately $4.00 to $5.00~~2020.
Our average realized price of natural gas of $2.99 per ~~barrel and averaged ($0.36), $2.80, and $2.17 per barrel, respectively, for these three types of crude oil~~Mcf for the six months ended June 30, ~~2020.~~
~~Our~~2021 was 61.5% higher than the average realized price ~~of natural gas~~ of $1.85 per Mcf for the six months ended June 30, ~~2020 was lower than the~~2020. The average ~~realized~~Henry Hub ("HH") daily natural gas spot price of ~~$2.81~~$3.27 per Mcf for the six months ended June 30, ~~2019 by 34.2%. The~~2021 was 74.7% higher than the average ~~Henry Hub ("HH")~~HH natural gas price of $1.87 per Mcf for the six months ended June 30, ~~2020~~2020. Per the EIA, this increase was ~~lower than~~caused by increased demand related to the increase in economic activity and is somewhat elevated by the much higher average ~~HH natural gas~~price in February 2021 caused by much colder-than-normal temperatures across the country.
Our average realized price of ~~$2.84~~NGLs of $24.94 per ~~Mcf~~barrel for the six months ended June 30, ~~2019 by 34.2%. Per the EIA, this decrease~~2021 was ~~due to lower demand. Working inventories of natural gas as of June 30, 2020 were 37%~~169.6% higher than the ~~comparable year ago period.~~
~~Our~~ average realized price of ~~NGLs~~$9.25 per barrel for the six months ended June 30, ~~2020 was 52.2% lower than the average realized price for the six months ended June 30, 2019.~~2020. Two major components of our NGLs, ethane and propane, typically make up over 70% of an average NGL barrel. For the six months ended June 30, ~~2020~~2021 compared to the six months ended June 30, ~~2019,~~2020, average prices for domestic ethane ~~decreased~~increased by ~~32%~~81.4% and average domestic propane prices ~~decreased~~increased by ~~35%~~189.0% as measured using a price index for Mount Belvieu. The average prices for other domestic NGLs components ~~decreased 28%~~increased from 87.5% to ~~43%~~107.3% for the six months ended June 30, ~~2020~~2021 compared to the same period in ~~2019. Due to the acquisition of the Mobile Bay Properties, our volumes of NGLs have increased, but at lower realized prices than experienced for the Company's overall realized prices.~~2020. We believe the change in prices for NGLs is mostly a function of the change in crude oil prices combined with changes in propane supply and demand.
According to Baker Hughes, the number of working rigs drilling for oil and natural gas on land in the U.S. as reported in their July ~~17, 2020~~23, 2021 report was ~~significantly lower~~higher than a year ago, ~~decreasing~~increasing to ~~253~~491 rigs compared to ~~954~~253 rigs a year ago. The oil rig count ~~decreased~~increased to ~~180~~387 rigs compared to ~~779~~180 rigs a year ago and the gas and miscellaneous rigs ~~decreased~~increased to 73104 rigs from ~~175~~73 a year ago. In the Gulf of Mexico, the number of working rigs was 1217 rigs ~~(all oil)~~ compared to ~~25 (23 oil and two natural gas)~~12 a year ago.
25
24

Table of Contents
Results of Operations
The following tables set forth selected financial and operating data for the periods indicated (all values are net to our interest unless indicated otherwise):

Three Months Ended June 30,

Six Months Ended June 30,


2021

2020


Change

2021

2020


Change

(In thousands, except percentages and per share data)
Financial:

Revenues:

Oil

$
88,013

$
30,645

$
57,368

$
166,153

$
115,295

$
50,858
NGLs

8,833

1,917

6,916

18,193

8,369

9,824
Natural gas

32,470

21,364

11,106

68,679

50,664

18,015
Other

3,512

1,315

2,197

5,451

5,041

410
Total revenues

132,828

55,241

77,587

258,476

179,369

79,107
Operating costs and expenses:












Lease operating expenses

47,552

28,313

19,239

89,909

83,088

6,821
Production taxes

1,956

1,143

813

3,952

2,059

1,893
Gathering and transportation

4,824

3,301

1,523

9,143

8,750

393
Depreciation, depletion, amortization and accretion

30,952

29,483

1,469

57,589

68,609

(11,020)
General and administrative expenses

13,986

5,628

8,358

24,698

19,591

5,107
Derivative loss (gain)

81,440

15,414

66,026

106,020

(46,498)

152,518
Total costs and expenses

180,710

83,282

97,428

291,311

135,599

155,712
Operating (loss) income

(47,882)

(28,041)

(19,841)

(32,835)

43,770

(76,605)
Interest expense, net

16,530

14,816

1,714

31,564

31,926

(362)
Gain on debt transactions

—

(28,968)

28,968

—

(47,469)

47,469
Other expense, net

—

751

(751)

963

1,474

(511)
(Loss) income before income tax (benefit) expense

(64,412)

(14,640)

(49,772)

(65,362)

57,839

(123,201)
Income tax (benefit) expense

(12,740)

(8,736)

(4,004)

(12,944)

(2,237)

(10,707)
Net (loss) income

$
(51,672)

$
(5,904)

$
(45,768)

$
(52,418)

$
60,076

$
(112,494)
Basic and diluted (loss) earnings per common share

$
(0.36)

$
(0.04)

$
(0.32)

$
(0.37)

$
0.42

$
(0.79)

Three Months Ended June 30,

Six Months Ended June 30,

2020

2019

Change

%

2020

2019

Change

%

(In thousands, except percentages and per share data)

Financial:

Revenues:

Oil
$ 30,645 $ 109,195 $ (78,550 ) (71.9 )% $ 115,295 $ 195,898 $ (80,603 ) (41.1 )%
NGLs
1,917 4,640 (2,723 ) (58.7 )% 8,369 11,088 (2,719 ) (24.5 )%
Natural gas
21,364 19,567 1,797 9.2 % 50,664 41,405 9,259 22.4 %
Other
1,315 1,299 16 1.2 % 5,041 2,390 2,651 110.9 %
Total revenues
55,241 134,701 (79,460 ) (59.0 )% 179,369 250,781 (71,412 ) (28.5 )%
Operating costs and expenses:

Lease operating expenses
28,313 40,341 (12,028 ) (29.8 )% 83,088 83,797 (709 ) (0.8 )%
Production taxes
1,143 317 826 260.6 % 2,059 733 1,326 180.9 %
Gathering and transportation
3,301 7,068 (3,767 ) (53.3 )% 8,750 13,491 (4,741 ) (35.1 )%
Depreciation, depletion, amortization and accretion
29,483 38,073 (8,590 ) (22.6 )% 68,609 71,839 (3,230 ) (4.5 )%
General and administrative expenses
5,628 13,328 (7,700 ) (57.8 )% 19,591 27,437 (7,846 ) (28.6 )%
Derivative loss (gain)
15,414 (1,805 ) 17,219 NM (46,498 ) 47,081 (93,579 ) NM
Total costs and expenses
83,282 97,322 (14,040 ) (14.4 )% 135,599 244,378 (108,779 ) (44.5 )%
Operating (loss) income
(28,041 ) 37,379 (65,420 ) NM 43,770 6,403 37,367 583.6 %
Interest expense, net
14,816 12,207 2,609 21.4 % 31,926 28,489 3,437 12.1 %
Gain on purchase of debt
(28,968 ) — (28,968 ) NM (47,469 ) — (47,469 ) NM
Other expense, net 751 478 273 57.1 % 1,474 809 665 82.2 %
(Loss) income before income tax benefit
(14,640 ) 24,694 (39,334 ) NM 57,839 (22,895 ) 80,734 NM
Income tax benefit
(8,736 ) (11,695 ) 2,959 NM (2,237 ) (11,523 ) 9,286 NM
Net (loss) income $ (5,904 ) $ 36,389 $ (42,293 ) NM $ 60,076 $ (11,372 ) $ 71,448 NM
Basic and diluted (loss) earnings per common share $ (0.04 ) $ 0.25 $ (0.29 ) NM $ 0.42 $ (0.08 ) $ 0.50 NM
26
~~NM – not meaningful~~
25

Table of Contents

Three Months Ended June 30,

Six Months Ended June 30,


2021

2020


Change

2021

2020


Change
Operating: (1) (2)

Net sales:

Oil (MBbls)

1,352

1,414

(62)

2,729

3,241

(512)
NGLs (MBbls)

337

410

(73)

729

905

(176)
Natural gas (MMcf)

12,189

12,006

183

22,988

27,313

(4,325)
Total oil equivalent (MBoe)

3,721

3,826

(106)

7,290

8,699

(1,409)

Average daily equivalent sales (Boe/day)

40,888

42,047

(1,159)

40,278

47,795

(7,517)
Average realized sales prices:












Oil ($/Bbl)

$
65.11

$
21.67

$
43.44

$
60.88

$
35.57

$
25.31
NGLs ($/Bbl)

26.18

4.67

21.51

24.94

9.25

15.69
Natural gas ($/Mcf)

2.66

1.78

0.88

2.99

1.85

1.14
Oil equivalent ($/Boe)

34.75

14.09

20.66

34.71

20.04

14.67
Oil equivalent ($/Boe), including realized commodity derivatives)

38.89

8.19

30.69

37.94

16.36

21.58

Average per Boe ($/Boe):












Lease operating expenses

$
12.78

$
7.40

$
5.38

$
12.33

$
9.55

$
2.78
Gathering and transportation

1.30

0.86

0.44

1.25

1.01

0.24
Production costs

14.08

8.26

5.82

13.58

10.56

3.02
Production taxes

0.52

0.30

0.22

0.54

0.24

0.30
DD&A

8.32

7.71

0.61

7.90

7.89

0.01
G&A expenses

3.76

1.47

2.29

3.39

2.25

1.14
Operating costs

$
26.68

$
17.74

$
8.94

$
25.41

$
20.94

$
4.47

Three Months Ended June 30,

Six Months Ended June 30,

2020

2019

Change

%

2020

2019

Change

%

Operating: ⁽¹⁾

Net sales:

Oil (MBbls)
1,414 1,683 (269 ) (16.0 )% 3,241 3,161 80 2.5 %
NGLs (MBbls)
410 264 146 55.3 % 905 573 332 57.9 %
Natural gas (MMcf)
12,006 7,450 4,556 61.2 % 27,313 14,738 12,575 85.3 %
Total oil equivalent (MBoe)
3,826 3,189 637 20.0 % 8,699 6,190 2,509 40.5 %

Average daily equivalent sales (Boe/day)
42,037 35,045 6,992 20.0 % 47,795 34,201 13,594 39.7 %
Average realized sales prices:

Oil ($/Bbl)
$ 21.67 $ 64.86 $ (43.19 ) (66.6 )% $ 35.57 $ 61.96 $ (26.39 ) (42.6 )%
NGLs ($/Bbl)
4.67 17.59 (12.92 ) (73.5 )% 9.25 19.36 (10.11 ) (52.2 )%
Natural gas ($/Mcf)
1.78 2.63 (0.85 ) (32.3 )% 1.85 2.81 (0.96 ) (34.2 )%
Oil equivalent ($/Boe)
14.10 41.83 (27.73 ) (66.3 )% 20.04 40.13 (20.09 ) (50.1 )%

Average per Boe ($/Boe):

Lease operating expenses
$ 7.40 $ 12.65 $ (5.25 ) (41.5 )% $ 9.55 $ 13.54 $ (3.99 ) (29.5 )%
Gathering and transportation
0.86 2.22 (1.36 ) (61.3 )% 1.01 2.18 (1.17 ) (53.7 )%
Production costs
8.26 14.87 (6.61 ) (44.5 )% 10.56 15.72 (5.16 ) (32.8 )%
Production taxes
0.30 0.10 0.20 200.0 % 0.24 0.12 0.12 —
DD&A
7.71 11.94 (4.23 ) (35.4 )% 7.89 11.61 (3.72 ) (32.0 )%
G&A expenses
1.47 4.18 (2.71 ) (64.8 )% 2.25 4.43 (2.18 ) (49.2 )%
$ 17.74 $ 31.09 $ (13.35 ) (42.9 )% $ 20.94 $ 31.88 $ (10.94 ) (34.3 )%
(1)
The conversion to barrels of oil equivalent and cubic feet equivalent were determined using the energy equivalency ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or NGLs (totals may not compute due to rounding). The conversion ratio does not assume price equivalency, and the price on an equivalent basis for oil, NGLs and natural gas may differ significantly.
(2)
Some average figures and variance percentages in this table may not compute due to rounding.

Volume measurements not previously defined:
MBbls — thousand barrels for crude oil, condensate or NGLs
Mcf — thousand cubic feet
MBoe — thousand barrels of oil equivalent

~~Mcf~~MMcf — ~~thousand~~million cubic feet
~~MBoe — thousand barrels of oil equivalent~~
~~MMcf — million cubic feet~~

27
26

Table of Contents
Three Months Ended June 30, ~~2020~~2021 Compared to the Three Months Ended June 30, ~~2019~~2020
~~Due~~Revenues. The increase in oil revenues was attributable to ~~the decrease and volatility~~an increase in ~~crude oil prices and~~average realized sales price per Bbl to ~~a lesser extent, decreases and volatility in natural gas and prices~~$65.11 from $21.67 for ~~NGLs, the results of~~ the three months ended June 30, 2021 and 2020, ~~may not be indicative~~respectively. This was partially offset by a decrease in oil sales volumes of ~~future periods. See “Liquidity and Capital Resources – Liquidity Overview” below for additional information.~~
~~Revenues~~~~. Total revenues decreased $79.5 million, or 59.0%, to $55.2 million~~4.4% for the three months ended June 30, ~~2020~~2021 as compared to the ~~three months ended June 30, 2019. Oil revenues decreased $78.6 million, or 71.9%,~~same period in the prior year. The increase in NGLs ~~revenues decreased $2.7 million, or 58.7%, natural gas revenues increased $1.8 million, or 9.2%, and other revenues were basically flat. The decrease in oil~~ revenues was attributable to ~~a 66.6% decrease~~an increase in the average realized sales price per Bbl to ~~$21.67 per barrel~~$26.18 from $4.67 for the three months ended June 30, 2021 and 2020, ~~from $64.86 per barrel for~~respectively. This was partially offset by a 17.8% decrease in NGL sales volumes during the three months ended June 30, ~~2019 and a decrease in sales volumes of 16.0%. The decrease in NGLs revenues was attributable~~2021 as compared to ~~a 73.5% decrease~~the same period in the average realized sales price to $4.67 per barrel for the three months ended June 30, 2020 from $17.59 per barrel for the three months ended June 30, 2019 and was partially offset by an increase in sales volumes of 55.3%.prior year. The increase in natural gas revenues was attributable to an increase in ~~sales volumes of 61.2%, and partially offset by a 32.3% decrease in~~ the average realized price to $2.66 per Mcf from $1.78 per Mcf for the three months ended June 30, 2021 and 2020, ~~from $2.63~~respectively, and a 1.5% increase in volumes.
Overall, sales volumes decreased 2.7% on a Boe per ~~Mcf~~day basis primarily due to shut-ins related to well maintenance at the Mahogany field and (to a lesser extent) the Mobile Bay area. We estimate that these shut-ins reduced the produced volumes for the three months ended June 30, 2019. Overall, production volumes increased 20.0% on a Boe/day basis. The largest production increases for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was related to our acquisition of the interests in the Mobile Bay Properties in August 2019, which produced a net average of 15,700 Boe per day during the three months ended June 30, 2020 (impacting NGLs and natural gas volumes), and the acquisition of Garden Banks 783 field (Magnolia) assets in December 2019. These increases were partially offset2021 by production decreases primarily from natural production declines and shutting in certain operated and non-operated fields.  Our estimate of deferred production for the three months ended June 30, 2020 was approximately ~~4,100~~3,198 Boe per day as compared to ~~4,900~~4,100 Boe per day for the three months ended June 30, ~~2019.~~
2020.
Revenues from oil and NGLs as a percent of our total revenues were 72.9% for the three months ended June 30, 2021 compared to 58.9% for the three months ended June 30, ~~2020 compared to 84.5% for the three months ended June 30, 2019.~~2020. Our average realized NGLs sales price as a percent of our average realized crude oil sales price ~~decreased~~increased to 40.2% for the three months ended June 30, 2021 compared to 21.6% for the three months ended June 30, ~~2020 compared to 27.1% for the three months ended June 30, 2019.~~
2020.
Lease operating expenses.Lease operating expenses, which include base lease operating expenses, workovers, and facilities maintenance ~~decreased $12.0~~expense, increased $19.2 million, or ~~29.8%~~68.0%, for the three months ended June 30, 2021 compared to ~~$28.3~~the three months ended June 30, 2020. On a component basis, base lease operating expenses increased $14.6 million, workover expenses increased $2.0 million, facilities maintenance expense increased $1.4 million, and hurricane repairs increased $1.2 million.
Base lease operating expenses increased primarily due to (i) higher contract labor, equipment rental, and transportation costs of $3.1 million at various fields; (ii) increased incentive compensation costs related to field employees of $2.2 million; (iii) a reduction in credits to expense from prior period royalty adjustments of $2.4 million as compared to the prior period; (iv) a reduction in credits to expense of $2.3 million received in prior period from the PPP funds; and (v) a reduction in credits to expense in the prior year associated with the finalization of the Mobile Bay acquisition. The increases in workover expenses and facilities maintenance expense were due to an increase in projects undertaken. Lastly, we incurred $1.2 million in expenses related to hurricane repairs at various fields during the three months ended June 30, 2021 that we did not incur during the comparable prior year period.
Production taxes. Production taxes increased $0.8 million in the three months ended June 30, ~~2020~~2021 compared to the three months ended June 30, 2019. On a component basis, base lease operating expenses decreased $7.9 million, workover expenses decreased $1.0 million, and facilities maintenance expense decreased $3.1 million. Base lease operating expenses decreased primarily2020 due to ~~shutting~~the increase in ~~certain fields, other cost reductions measures, credits~~realized natural gas prices, increased NGL prices, and to ~~expense due to prior period royalty adjustments of $3.2 million,~~a lesser extent increased natural gas production volumes.
Gathering and ~~credits to expense related to the PPP of $2.3 million~~transportation. Gathering and ~~were partially offset by the acquisition of the Mobile Bay Properties in August 2019, which had base lease operating~~transportation expenses ~~of $5.1~~increased $1.5 million for the three months ended June 30, 2020. In addition, the acquisition of the Magnolia field in December 2019 increased base lease operating expenses by $2.1 million. The decreases in workover expense and facility maintenance were due to fewer projects undertaken.
~~Production taxes.~~ ~~Production taxes increased $0.8 million to $1.1 million in the three months ended June 30, 2020~~2021 compared to the three months ended June 30, ~~2019~~2020 primarily due to lower costs in the ~~acquisition~~comparable prior year period that were impacted by credits to expense associated with the finalization of the Mobile Bay ~~Properties, which has operations in state waters.~~
~~Gathering and transportation.~~ Gathering and transportation expenses decreased $3.8 million to $3.3 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 primarily due to lower transportation rates at certain fields and due to shutting in certain fields.
acquisition.
Depreciation, depletion, amortization and accretion (“DD&A”).  DD&A, which includes accretion for ARO, ~~decreased~~increased to $8.32 per Boe for the three months ended June 30, 2021 from $7.71 per Boe for the three months ended June 30, ~~2020 from $11.94 per Boe for the three months ended June 30, 2019.~~2020. On a nominal basis, DD&A ~~decreased to $29.5 million ,or 22.6%~~increased 5.0%, ~~for the three months ended June 30, 2020 from $38.1~~or $1.5 million for the three months ended June 30, ~~2019. DD&A on a nominal basis decreased largely due~~2021 as compared to ~~lower DD&A rate per Boe.~~ the three months ended June 30, 2020. The rate per ~~BOE decreased~~Boe increased year-over-year mostly as a result of increases in the future development costs included in the depreciable base compared to the relatively smaller increase in proved reserves ~~from~~over the acquisition of the Mobile Bay Properties. Partially offsetting was higher costs from increased production.  Other factors affecting the DD&A rate are capital expenditures and revisions to proved reserves volumes.comparable prior year period.
28
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Table of Contents
General and administrative expenses (“G&A”). G&A ~~was $5.6~~increased $8.4 million, or 148.5%, for the three months ended June 30, ~~2020, decreasing 57.8% from $13.3 million for~~2021 as compared to the three months ended June 30, ~~2019.~~2020. The ~~decrease~~increase was primarily due to (i) increased incentive compensation expenses and payroll expenses of $1.8 million; (ii) a decrease of $5.0 million in G&A credits ~~to expense~~ related to the PPP funds received in the prior period; (iii) an increase in legal costs of ~~$5.0~~$0.4 million; (iv) a reduction in overhead allocations to partners (credits to expense) of $0.6 million, and ~~lower incentive compensation expenses. 2020 incentive compensation awards have not been granted to date,~~(v) increases of $0.6 million in other miscellaneous G&A expense items such as software licensing and ~~therefore, no incentive compensation expense for 2020 has been recorded.~~ surety bond costs.
Derivative loss (gain). The Compensation Committee has deferred its decision regarding the potential awarding of incentive compensation, including by the exercise of discretion. G&A on a per Boe basis was $1.47 per Boe for the three months ended June 30, ~~2020~~2021 includes an $81.4 million derivative loss primarily due to increased crude oil and natural gas prices during June 2021 compared to ~~$4.18 per Boe for~~prices during March 2021, which decreased the ~~three months ended June 30, 2019.~~
~~Derivative loss (gain).~~ estimated fair value of open contracts between the two measurement dates. The three months ended June 30, 2020 reflects a $15.4 million derivative loss primarily due to increased crude oil prices during June 2020 compared to oil prices during March 2020, which decreased the estimated fair value of open crude oil contracts between the two measurement dates. Partially offsetting were realized gains from oil swap contracts where the price was below the contract strike price. The three months ended June 30, 2019 reflects a $1.8 million derivative gain primarily due to decreased crude oil prices during June 2019 as compared to oil prices during March 2019, which increased the estimated fair value of open crude oil contracts between the two measurement dates, partially offset by losses from oil swap contracts.
Interest expense, net. Interest expense, net, was ~~$14.8~~$16.5 million and ~~$12.2~~$14.8 million for the three months ended June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. The increase of $1.7 million in 2021 is primarily due to ~~lower~~ interest ~~income between~~expense on the ~~two periods. During~~principal balance of the ~~three months ended June 30, 2019, we accrued~~Term Loan, and a reduction in credits to interest income of $4.0 million related to income tax refunds as we received confirmation from the IRS that our refund filings have been approved for payment and was subsequently received during the third quarter of 2019. In addition borrowings increased under the Credit Agreementexpense related to the ~~acquisition of~~PPP funds received in the ~~Mobile Bay Properties between the two periods and were~~prior period; partially offset by reductions to outstanding borrowings (lower interest ~~expense from~~expense) under the ~~PPP of $1.1 million recorded~~Company Credit Agreement during ~~the three months ended June 30, 2020.~~
2021.
Gain on purchase of debt. A gain of $29.0 million was recorded related to the purchase of $45.1 million of principal of our outstanding Senior Second Lien Notes during the three months ended June 30, 2020.
No such transactions occurred during the three months ended June 30, 2021.
Income tax benefit. Our income tax benefit was ~~$8.7~~$12.7 million and ~~$11.7~~$8.7 million for the three months ended June 30, 2021 and 2020, ~~and 2019,~~ respectively. For the three months ended June 30, 2021, our income tax benefit differed from the statutory Federal tax rate primarily by the impact of state income taxes. For the three months ended June 30, 2020, our ~~income~~effective tax ~~benefit was impacted by~~rate primarily differed from the statutory Federal tax rate for adjustments recorded related to the enactment of the CARES Act on March 27, 2020. The CARES Act modified certain income tax statutes, including changes related to the business interest expense limitation under ~~IRS~~ Code Section 163(j). ~~During the three months ended June 30, 2019, we reversed a liability related to an uncertain~~Our effective tax ~~position that~~rate was ~~resolved resulted in a net tax benefit~~19.8% for the three months ended June 30, ~~2019. Our effective tax rate was not meaningful~~2021 and 59.7% for the three months ended June 30, ~~2020 or 2019.~~
2020.
As of June 30, ~~2020, our~~2021, the valuation allowance wa~~s $45.9~~on our deferred tax assets was $22.8 million. WeWe continually evaluate the need to maintain a valuation allowance on our deferred tax assets. Any future reduction of a portion or all of the valuation allowance would result in a non-cash income tax benefit in the period the decision occurs. See Financial Statements – Note 9 –Income Taxes under Part I, Item 1 of this ~~Form 10-Q~~Quarterly Report for additional information.

28

~~Table of Contents~~

Six Months Ended June 30, ~~2020~~2021 Compared to the Six Months Ended June 30, ~~2019~~
~~Due to the decrease and volatility in crude oil prices and to a lesser extent, decreases and volatility in natural gas and prices for NGLs, the results of the six months ended June 30,~~ 2020 ~~may not be indicative of future periods. See “Liquidity and Capital Resources – Liquidity Overview” below for additional information.~~

Revenues. ~~Total~~The increase in oil revenues ~~decreased $71.4 million, or 28.5%,~~was attributable to ~~$179.4 million~~an increase in the average realized sales price per Bbl to $60.88 from $35.57 for the six months ended June 30, 2021 and 2020, respectively. This was partially offset by a decrease in oil sales volumes of 15.8%. The increase in NGLs revenues was attributable to a 169.6% increase in the average realized sales price for the six months ended June 30, ~~2020 as~~2021 compared to the six months ended June 30, 2019. Oil revenues decreased $80.6 million, or 41.1%, NGLs revenues decreased $2.7 million, or 24.5%, natural gas revenues increased $9.3 million, or 22.4%, and other revenues increased $2.7 million due to prior period royalty adjustments recorded during the six months ended June 30, 2020. ~~The decrease in oil revenues~~This was ~~attributable to a 42.6% decrease in the average realized sales price to $35.57 per barrel for the six months ended June 30, 2020 from $61.96 per barrel for the six months ended June 30, 2019,~~ partially offset by ~~an increase~~a decrease in NGL sales volumes of ~~2.5%. The decrease in NGLs revenues was attributable to a 52.2% decrease in the average realized sales price to $9.25 per barrel~~19.4% for the ~~six months ended June 30, 2020 from $19.36 per barrel for the six months ended June 30, 2019, partially offset by an increase in sales volumes of 57.9%.~~same period. The increase in natural gas revenues was attributable to ana 61.5% increase ~~in sales volumes of 85.3%, and partially offset by a 34.2% decrease~~ in the average realized sales price ~~to $1.85 per Mcf~~ for the six months ended June 30, ~~2020 from $2.81~~2021 compared to 2020. This was partially offset by a 15.8% decrease in natural gas sales volumes for the same period.

Overall, sales volumes decreased 15.7% on a Boe per ~~Mcf~~day basis primarily due to shut-ins related to adverse weather events and well maintenance at various fields during the six months ended June 30, 2021. We estimate that these shut-ins reduced the produced volumes for the six months ended June 30, 2019. Overall, production volumes increased 39.7% on a Boe/day basis. The largest production increases for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was related to our acquisition of the interests in the Mobile Bay Properties in August 2019, which produced a net average of 17,100 Boe per day during the six months ended June 30 , 2020 (impacting NGLs and natural gas volumes), increases in production at our Ship Shoal 349 (Mahogany) field and the acquisition of the Magnolia field assets in December 2019. These increases were partially offset2021 by production decreases primarily from natural production declines and shutting in certain operated and non-operated fields.  Our estimate of deferred production for the six months ended June 30, 2020 was approximately ~~3,800~~4,200 Boe per day as compared to ~~6,000~~3,800 Boe per day for the six months ended June 30, ~~2019.~~2020.
29
Table of Contents
Revenues from oil and NGLs as a percent of our total revenues were 71.3% for the six months ended June 30, 2021 compared to 68.9% for the six months ended June 30, ~~2020 compared to 82.5% for the six months ended June 30, 2019.~~2020. Our average realized NGLs sales price as a percent of our average realized crude oil sales price ~~decreased~~increased to 41.0% for the six months ended June 30, 2021 compared to 26.0% for the six months ended June 30, ~~2020 compared to 31.2% for the six months ended June 30, 2019.~~2020.

Lease operating expenses. Lease operating expenses, which include base lease operating expenses, workovers, and facilities maintenance, ~~decreased $0.7~~increased $6.8 million, or ~~0.8%~~8.2%, ~~to $83.1 million~~ in the six months ended June 30, ~~2020~~2021 compared to the six months ended June 30, ~~2019.~~2020. On a component basis, base lease operating expenses increased ~~$8.0~~$1.5 million, workover expenses ~~decreased $4.5~~increased $1.0 million, ~~and~~ facilities maintenance expense ~~decreased $4.2~~increased $0.5 million, and hurricane repairs increased $3.8 million.

Base lease operating expenses ~~decreased~~increased during the six months ended June 30, 2021 primarily ~~from shutting~~due to (i) higher contract labor, equipment rental, and transportation costs of $1.3 million at various fields; (ii) increased incentive compensation costs related to field employees of $2.2 million; (iii) a reduction in ~~certain fields, cost reduction measures,~~ credits to expense ~~due to~~from prior period royalty adjustments of ~~$6.7~~$1.1 million ~~and~~as compared to the prior period; (iv) a reduction in credits to expense ~~related to the PPP~~ of $2.3 million received in prior period from the PPP funds; and ~~were partially offset by increases due~~(v) a reduction in credits to expense in the ~~acquisition~~prior year associated with the finalization of the Mobile Bay ~~Properties~~acquisition; partially offset by (vi) $5.7 million of reduced expenses during the first quarter of 2021 related to successful cost reduction efforts at various fields and other reduced expenses; and (vii) $4.3 million of reduced expenses related to fields that were no longer producing during the six months ended June 30, 2021. The increases in ~~August 2019, which had base lease operating~~workover expenses ~~of $16.5~~and facilities maintenance expense were due to an increase in projects undertaken. Lastly, we incurred $3.8 million in expenses related to hurricane repairs at various fields during the six months ended June 30, 2021 that we did not incur during the prior year period.

Production taxes. Production taxes increased $1.9 million during the six months ended June 30, 2021 compared to the three months ended June 30, 2020 due to the increase in realized natural gas prices, partially offset by decreased natural gas production volumes.
Gathering and transportation. Gathering and transportation expenses increased $0.4 million for the six months ended June 30, 2020. In addition, the acquisition of the Magnolia field in December 2019 increased base lease operating expenses by $5.3 million. The decreases in workover expense and facility maintenance were due to fewer projects undertaken.
~~Production taxes.~~ ~~Production taxes increased $1.3 million to $2.1 million in the six months ended June 30, 2020~~2021 compared to the six months ended June 30, ~~2019~~2020 primarily due to lower costs in the ~~acquisition~~comparable prior year period that were impacted by credits to expense associated with the finalization of the Mobile Bay ~~Properties, which has operations in state waters.~~
~~Gathering and transportation.~~ Gathering and transportation expenses decreased $4.7 million to $8.8 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily due to lower transportation rates at certain fields and due to shutting in certain fields.
acquisition.
Depreciation, depletion, amortization and accretion.  DD&A, which includes accretion for ARO, ~~decreased~~increased to $7.90 per Boe for the six months ended June 30, 2021 from $7.89 per Boe for the six months ended June 30, ~~2020 from $11.61 per Boe~~2020. On a nominal basis, DD&A decreased 16.1%, or $11.0 million for the six months ended June 30, ~~2019. On~~2021 as compared to the six months ended June 30, 2020. The rate per BOE increased year-over-year mostly as a ~~nominal basis, DD~~result of increases in future development costs included in the depreciable base compared to the relatively smaller increase in proved reserves and the decrease in production volumes over the same period.

General and administrative expenses. G&A ~~decreased to $68.6~~increased $5.1 million, or ~~4.5%~~26.1%, for the six months ended June 30, ~~2020 from $71.8 million for~~2021 as compared to the six months ended June 30, ~~2019. DD&A on a nominal basis decreased largely~~2020. The increase was primarily due to (i) a decrease of $5.0 million in G&A credits related to the ~~lower rate per Boe. The rate per BOE decreased mostly as~~PPP funds received in the prior period; (ii) a ~~result~~reduction in overhead allocations to partners (credits to expense) of ~~increases~~$1.6 million; and (iii) an increase in ~~proved reserves from~~legal costs of $1.2 million; partially offset by (i) the ~~acquisition~~$2.1 million employee retention credit recognized during the three months ended March 31, 2021, and (ii) a net decrease of $0.6 million in payroll and incentive compensation expenses. See Financial Statements – Note 1 – Basis of Presentation under Part 1, Item 1, and Liquidity and Capital Resources in this Item 2 of this Form 10-Q for additional information on the ~~Mobile Bay Properties. Partially offsetting was higher costs from increased production.  Other factors affecting the DD&A rate are capital expenditures and revisions to proved reserves volumes.~~   employee retention credit.
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~~Table of Contents~~

~~General and administrative expenses~~Derivative loss (gain). ~~G&A was $19.6 million for the~~ The six months ended June 30, ~~2020, decreasing 28.6% from $27.4~~2021 reflects a $106.0 million ~~for the six months ended June 30, 2019. The decrease was~~derivative loss primarily due to ~~credits to expense related to the PPP of $5.0 million~~increased crude oil prices and increased fees for overhead charged to partners (credits to expense).  2020 incentive compensation awards have not been granted to date, and therefore, no incentive compensation expense for 2020 has been recorded. The Compensation Committee has deferred its decision regarding the potential awarding of incentive compensation, including by the exercise of discretion. G&A on a per Boe basis was $2.25 per Boe for the six months endednatural gas prices during June ~~30, 2020~~2021 compared to ~~$4.43 per Boe for~~prices during December 2020, which decreased the ~~six months ended June 30, 2019.~~
~~Derivative (gain) loss.~~ estimated fair value of open contracts between the two measurement dates. The six months ended June 30, 2020 reflects a $46.5 million derivative gain primarily due to realized gains on oil swap contracts where the price was below the strike price and due to decreased crude oil prices during June 2020 as compared to oil prices during December 2019, which increased the estimated fair value of open crude oil contracts between the two measurement dates. ~~The six months ended June~~
30 ~~2019 reflects a $47.1 million derivative loss primarily due to increased crude oil prices during June 2019 as compared to oil prices during December 2018, which decreased the estimated fair value~~
Table of ~~open crude oil contracts between the two measurement dates.~~Contents
Interest expense, net. Interest expense, net, was ~~$31.9~~$31.6 million and ~~$28.5~~$31.9 million for the six months ended June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. The ~~increase~~decrease is primarily due to ~~lower~~reductions to outstanding borrowings (lower interest income between the two periods. During the six months ended June 30, 2019, we accrued interest income of $4.0 million related to income tax refunds as we received confirmation from the IRS that our refund filings had been approved for payment and was subsequently received during the third quarter of 2019. In addition, borrowings increasedexpense) under the Company Credit Agreement during 2021; partially offset by interest expense on the principal balance of the Term Loan, and a reduction in credits to interest expense related to the ~~acquisition of~~PPP funds received in the ~~Mobile Bay Properties between the two periods, which were partially offset by reductions to interest expense from the PPP of $1.1 million recorded during the six months ended June 30, 2020.~~  prior period.

Gain on purchase of debt. A gain of $47.5 million was recorded related to the purchase of $72.5 million of principal of our outstanding Senior Second Lien Notes during the six months ended June 30, 2020. No such transactions occurred during the six months ended June 30, 2021.

Income tax ~~expense.~~benefit. Our income tax benefit was ~~$2.2~~$12.9 million and ~~$11.5~~$2.2 million for the six months ended June 30, 2021 and 2020, ~~and 2019,~~ respectively. For the six months ended June 30, 2021, our income tax benefit differed from the statutory Federal tax rate primarily by the impact of state income taxes. For the six months ended June 30, 2020, our ~~income~~effective tax ~~benefit was impacted by~~rate primarily differed from the statutory Federal tax rate for adjustments recorded ~~related~~as a result to the enactment of the CARES Act on March 27, 2020. The CARES Act modified certain income tax statutes, including changes related to the business interest expense limitation under ~~IRS~~ Code Section 163(j). ~~During the six months ended June 30, 2019, we reversed a liability related to an uncertain~~Our effective tax ~~position that~~rate was ~~resolved and resulted in a net tax benefit~~19.8% for the six months ended June 30, ~~2019. Our effective tax rate was not meaningful~~2021 and (3.9)% for the six months ended June 30, ~~2020 or 2019. See~~ ~~Financial Statements – Note 9 –Income Taxes~~ ~~under Part I, Item 1 of this Form 10-Q for additional information.~~2020.
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~~Table of Contents~~

Liquidity and Capital Resources
Liquidity Overview
Our primary liquidity needs are to fund capital and operating expenditures and strategic acquisitions to allow us to replace our oil and natural gas reserves, repay and service outstanding borrowings, operate our properties and satisfy our ~~AROs.~~ARO obligations. We have funded such activities in the past with cash on hand, net cash provided by operating activities, sales of property, securities offerings and bank and other borrowings and expect to continue to do so in the future.
As COVID-19 and other world events impact crude oil prices, and to a lesser degree, natural gas prices, we are actively monitoring the impact on our results of operations, financial position, and liquidity.
As of June 30, ~~2020,~~2021, we had ~~$36.5~~$209.1 million cash on hand, ~~availability of $128.9 million~~no borrowings under ~~the~~our Company Credit Agreement and no maturities of long-term debt until ~~2022. Nonetheless,~~October 2023, other than scheduled quarterly amortization payments under the ~~impact~~Term Loan (see Financial Statements – Note 2 – Debt, under Part I, Item 1 of unprecedented decline in oil prices during March and April of 2020 were severe and so dramatic as to threaten the entire oil and gas industry, including the Company, should the decline persisted. Oil prices began recovering in May 2020 and continued to improve through mid-July 2020, but not to the levels experienced in 2019. Natural gas prices have remained at 2nd quarter levels through July 2020. In reaction to these events, we moved quickly to preserve resources and protect the health of our employees and contractors. Furthermore, we have taken certain actions to address the current economic environment as follows:
•
this Quarterly Report for additional information). We ~~have reduced our capital expenditure budget for the remainder o~~f 2020. Excluding acquisitions and plugging and abandonment expenditures, we are estimating capital expenditures to be approximately $15 million to $25 million for 2020. ARO (plugging and abandonment) spending is estimated to be between of $2 million to $4 million.
•
Since December 31, 2019, we have reduced the amount outstanding of our Senior Second Lien Notes by $72.5 million to $552.5 million as of June 30, 2020 through purchases in the open market for $23.9 million, resulting in annualized interest savings of $7.1 million.
•
On June 17, 2020, we entered into the Third Amendment and Waiver to the Credit Agreement, which, among other things, waived the requirement to comply with the Leverage Ratio (as defined in the Credit Agreement) covenant and replaced it with a first lien leverage covenant of 2.00 to 1.00 through year-end 2021. We expected these revised requirements will allow us to utilize the full availability under the Credit Agreement, if needed, during the Waiver Period.
~~While we~~ currently expect our cash on hand, net cash provided by operating activities and ~~our~~other available sources of liquidity ~~are~~to be sufficient to meet our cash requirements over the next 12 months. We have recently agreed by amendment to our Company Credit Agreement to refrain from borrowing under our bank credit facility unless and until the next redetermination of our borrowing base, which is scheduled to occur on or about October 1, 2021, and the Company complies with certain revised hedging requirements. We expect that our borrowing base under our Company Credit Agreement will be adjusted in the next scheduled redetermination, including adjustments as a result of the elimination of the Mobile Bay assets as collateral under the Company Credit Agreement.

We are actively monitoring the debt capital markets, and we intend to seek financing with longer tenors and market based covenants to continue to ~~monitor the evolving situation. In the event~~provide working and potential acquisition capital. The terms of ~~long-term market deterioration, the~~such financing, which may replace or augment our current Company Credit Agreement, may ~~need additional liquidity, which would require us to evaluate alternatives and take appropriate actions.~~vary significantly from those under our current Company Credit Agreement.

31
31

Table of Contents
Sources and Uses of Cash
Cash Flow Overview

Sources (Uses) of Cash
(in thousands)

Six Months Ended June 30,


2021

2020


Change
Operating activities

$
46,194

$
93,478

$
(47,284)
Investing activities

(8,932)

(40,475)

31,543
Financing activities

128,160

(48,930)

177,090

~~Cash Flow and Working Capital.~~Operating activities. Net cash provided by operating activities decreased $47.3 million for the six months ended June 30, ~~2020 and 2019~~2021 compared to the corresponding period in 2020. This was ~~$93.5~~primarily due to (i) cash derivative payments, the net of which decreased operating cash flows $41.1 million and $106.3 million, respectively. Production volumes increased by 39.7% measured on a Boe per day basis, which caused revenues to increase by $46.7 million. Our combined average realized sales price per Boe decreased by 50.1% for the six months ended June 30, ~~2020~~2021 compared to cash derivative receipts, net, which increased operating cash flows $37.6 million for the six months ended June 30, ~~2019,~~2020; and (ii) asset retirement obligation settlements which ~~caused total revenues to decrease $120.8 million.~~
~~Other items affecting operating cash flows were lower receivable balances, which increased~~decreased operating cash flows by ~~$39.7~~$11.2 million for the six months ended June 30, 2020 compared to ~~a decrease of $18.2~~$2.2 million for the six months ended June 30, ~~2019;~~2020.
Our combined average realized sales price per Boe increased by 73.2% for the six months ended June 30, 2021 compared to the six months ended June 30, 2020, which caused total revenues to increase $106.6 million. The increase to revenues was offset by a 16.2% decrease in total sales volumes during the six months ended June 30, 2021 as compared to the six months ended June 30, 2020, which cause revenues to decrease $27.9 million. Other items affecting operating cash flows were (i) higher receivable balances due to increases in realized prices, which decreased operating cash flows by $12.3 million for the six months ended June 30, 2021 compared to an increase of $39.7 million for the six months ended June 30, 2020; and (ii) decreased cash advance balances from joint venture partners, which ~~increased~~decreased operating cash flows by ~~$5.9~~$3.9 million for the six months ended June 30, ~~2020~~2021 compared to an increase of ~~$18.5~~$5.9 million for the six months ended June 30, 2019; higher cash derivative receipts, net, which increased operating cash flows by $37.6 million for the six months ended June 30, 2020 compared to an increase of $12.8 million for the six months ended June 30, 2019; and a return of collateral related to a bond of $6.9 million which occurred during the six months ended June 30, 2020. Other working capital items and share based compensation expense accounted for the remaining changes in net cash provided by operating ~~activities~~activities.
Investing activities. Net cash used in investing activities ~~primarily represents our acquisition~~decreased $31.5 million for the six months ended June 30, 2021 compared to the corresponding period in 2020. Our current year capital budget is weighted toward the second half of ~~and investments~~2021, therefore, investing activities have been lower in ~~oil and gas properties and equipment partially offset by sales of such assets.~~the six months ended June 30, 2021 compared to the same period in 2020. Net cash used in investing activities for the six months ended June 30, ~~2020 and 2019 was $40.5~~2021 included $3.1 million ~~and $73.1 million, respectively. Our~~in working capital changes associated with capital expenditures ~~on an occurrence basis~~incurred in 2020 but paid during the six months ended June 30, 2021.
Financing activities. Net cash provided by financing activities increased $177.1 million for the six months ended June 30, 2020 were split approximately 25% for investments in the deep waters of the Gulf of Mexico and approximately 75% for investments on the conventional shelf of the Gulf of Mexico. During the six months ended June 30, 2019, a deposit was made related2021 compared to the ~~acquisition of the Mobile Bay Properties.~~
corresponding period in 2020. Net cash ~~used~~provided by financing activities for the six months ended June 30, ~~2020 and 2019~~2021 was $128.2 million compared to net cash used in financing activities of $48.9 million ~~and $0.8~~for the six months ended June 30, 2020. The net cash provided for the six months ended June 30, 2021 included the proceeds from the term loan of $208.2 million, ~~respectively. During~~offset by repayment of $80.0 million of borrowings under the Company Credit Agreement. The net cash used for the six months ended June 30, 2020 ~~the~~included repayment of $25.0 million of borrowings under the Credit Agreement ~~were paid down by $25.0 million, net,~~ and $23.9 million ~~was used~~ to purchase $72.5 million principal of Senior Second Lien Notes on the open market. ~~Net cash used by financing activities for the six months ended June 30, 2019 was related to debt issuance costs.~~

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Table of Contents
Derivative Financial Instruments. From time to time, we use various derivative instruments to manage a portion of our exposure to commodity price risk from sales of oil and natural gas. During the six months ended June 30, ~~2020,~~2021 we entered into derivative contracts for crude oil and natural gas for a portion of our future production. See Financial Statements – Note 67 – Derivative Financial Instruments under Part I, Item 1 of this ~~Form 10-Q~~Quarterly Report for additional information. The following table summarizes the historical results of our hedging activities:


Three Months Ended

Six Months Ended

June 30,

June 30,

June 30,

June 30,

2021

2020

2021

2020
Crude Oil ($/Bbl):








Average realized sales price, before the effects of derivative settlements

$
65.11

$
21.67

$
60.88

$
35.57
Effects of realized commodity derivatives

(8.86)

15.82

(7.20)

9.87
Average realized sales price, including realized commodity derivative

$
56.25

$
37.49

$
53.68

$
45.44
Natural Gas ($/Mcf)








Average realized sales price, before the effects of derivative settlements

$
2.66

$
1.78

$
2.99

$
1.85
Effects of realized commodity derivatives

(0.28)

0.02

(0.17)

—
Average realized sales price, including realized commodity derivative

$
2.38

$
1.80

$
2.82

$
1.85

Asset Retirement Obligations. Each quarter, we review and revise our ARO estimates. Our ARO estimates as of June 30, ~~2020~~2021 and December 31, ~~2019~~2020 were ~~$374.8~~$404.0 million and ~~$355.6~~$392.7 million, respectively. As our ARO estimates are for work to be performed in the future, and in the case of our non-current ARO, extend from one to many years in the future, actual expenditures could be substantially different than our estimates. See Risk Factors, under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 for additional information.
Income Taxes. We do not expect to make any significant income tax payments during ~~2020~~2021, and we ~~collected the~~did not have any outstanding current income ~~tax~~taxes receivable as of ~~$1.9 million during the six months ended~~ June 30, ~~2020.~~2021. See Financial Statements – Note 9 –Income Taxes under Part I, Item 1 of this ~~Form 10-Q~~Quarterly Report 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 CARES 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 six months ended June 30, 2021 which is included as a credit to General and administrative expenses in the Condensed Consolidated Statement of Operations.
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Capital Expenditures
The level of our investment in oil and natural gas properties changes from time to time depending on numerous factors, including the prices of crude oil, NGLs and natural gas, acquisition opportunities, available liquidity and the results of our exploration and development activities. ~~During the first half of 2020, we significantly reduced our 2020 capital expenditure budget in response to the uncertain commodity price outlook in light of the COVID-19 pandemic.~~ The following table presents our capital expenditures for exploration, development and other leasehold costs (in thousands):

Six Months Ended June 30,


2021

2020

(In thousands)
Exploration (1)

$
1,309

$
1,686
Development (1)

902

10,274
Magnolia and Mobile Bay acquisitions

471

456
Seismic and other

3,174

2,177
Investments in oil and gas property/equipment – accrual basis

$
5,856

$
14,593

Six Months Ended June 30,

2020

2019

Exploration ⁽¹⁾
$ 1,686 $ 10,018
Development ⁽¹⁾
10,274 43,996
Magnolia/Mobile Bay acquisition
456 10,000
Seismic and other
2,177 12,884
Investments in oil and gas property/equipment
$ 14,593 $ 76,898

(1)
Reported geographically in the subsequent table.
The following table presents our exploration and development capital expenditures geographically in the Gulf of Mexico (in thousands):

Six Months Ended June 30,


2021

2020

(In thousands)

Conventional shelf

$
101

$
9,391
Deepwater

2,110

2,569
Exploration and development capital expenditures – accrual basis

$
2,211

$
11,960

Six Months Ended June 30,

2020

2019

Conventional shelf
$ 9,391 $ 25,204
Deepwater
2,569 28,810
Exploration and development capital expenditures
$ 11,960 $ 54,014
Our exploration and development spending decreased $9.7 million compared to prior year, primarily in the conventional shelf area, which includes Alabama state waters, due to the fact that our current year capital budget is weighted toward the second half of 2021. Excluding acquisitions and plugging and abandonment expenditures, we are currently estimating capital expenditures to range from $30.0 million to $60.0 million for 2021 and ARO spending to range from $25.0 million to $35.0 million.
The capital expenditures ~~reported in the above two tables~~ are included within Oil and natural gas properties and other, net on the Condensed Consolidated Balance ~~Sheets.~~Sheets and recorded on an incurred basis. The capital expenditures reported within the Investing section of the Condensed Consolidated Statements of Cash Flows include adjustments to report cash payments related to capital expenditures.
Net cash used in investing activities for the six months ended June 30, 2021 included $3.1 million in working capital changes associated with capital expenditures incurred in 2020 but paid during the six months ended June 30, 2021. Our capital expenditures for the six months ended June 30, ~~2020~~2021 were financed by cash flow from operations and cash on hand.
Drilling Activity
We did not drill any wells in the six months ended June 30, 2021. During the six months ended June 30, 2020, we drilled the East Cameron 349 B-1 well (Cota) to target depth. We expect initial production to commence in the ~~first half~~fourth quarter of 2021, subject to completion of certain infrastructure and the level of commodity prices. The Cota well is in the Monza Joint Venture Drilling Program. ~~We did not drill any dry holes during the six months ended June 30, 2020.~~
~~Offshore Lease Awards~~
~~During the six months ended June 30, 2020, we were the apparent high bidder on two blocks in the Gulf~~See Financial Statements – Note 5 –Joint Venture Drilling Program under Part I, Item 1 of Mexico Lease Sale 254 held by the BOEM on March 18, 2020. We are the apparent high bidder on one deepwater block, Garden Bank 782, and one shallow water block, Eugene Island Area South block 345.  The two blocks cover a total of approximately 10,760 acres (gross) and we will pay $0.7 million combinedthis Form 10-Q for ~~a 100% working interest once documentation is completed.~~additional information.
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Debt
~~Credit Agreement~~Term Loan. . As of June 30, ~~2020, borrowings outstanding under the Credit Agreement were $80.0~~2021, we had $215.0 million of Term Loan principal outstanding. The Term Loan requires quarterly amortization payments commencing September 30, 2021, bears interest at a fixed rate of 7% per annum and ~~letters of credit issued under the Credit Agreement were $6.1 million.  Availability under our Credit Agreement as of June 30, 2020 was $128.9 million.~~will mature on May 19, 2028. The ~~Credit Agreement matures on October 18, 2022.~~
~~On June 17, 2020,the lenders under the Credit Agreement completed their semi-annual borrowing base redetermination and entered into the Third Amendment and Waiver (the “Third Amendment”)~~Term Loan is non-recourse to the ~~Credit Agreement. Although~~Company and its subsidiaries other than Borrowers and the ~~Company had~~subsidiary that owns the equity of Borrowers, and is not ~~violated~~secured by any ~~covenants, the Third Amendment provides less stringent covenant requirements given the recent changes~~assets other than first lien security interests in the ~~oil and gas markets. The Third Amendment includes the following changes, among other things, to the Credit Agreement:~~
•
~~The borrowing base under the Credit Agreement was reduced from $250.0 million to $215.0 million.~~
•
~~Increased the interest rate margin by 25 basis points.~~
•
~~Amended the financial covenants as follows:~~
•
~~During the Waiver Period, the Company will not be required to comply with the Leverage Ratio covenant.~~
•
During the Waiver Period, the Company will be required to maintain a 2.00 to 1.00 ratio limit of first lien debt outstanding under the Credit Agreement on the last day of the most recent quarter to EBITDAX for the trailing four quarters.
•
Increase the requirement to provide first priority liens on properties constituting at least 85% to 90% of total proved reserves of the Company as set forth on reserve reports required to be delivered under the Credit Agreement.
~~The next redetermination will occur~~equity in the ~~fall~~Borrowers and a first lien mortgage security interest and mortgages on certain assets of ~~2020.  Generally, we must be in compliance with the covenants in our Credit Agreement in order to access borrowings under the Credit Agreement.~~
We currently have six lenders under our Credit Agreement. While we do not anticipate any difficulties in obtaining funding from any of these lenders as of the date of the filing of this Quarterly Report, any difficulties in obtaining funding from any of these lenders at this time, any lack of or delay in funding by members of our banking group could negatively impact our liquidity position. Borrowers (the Mobile Bay Properties). See Financial Statements – Note 2 ~~–Long-Term Debt~~–Debt under Part I, Item 1 of this Form 10-Q for additional information.
Company Credit Agreement. As of June 30, 2021, we had no borrowings outstanding under the Company Credit Agreement and letters of credit issued under the Company Credit Agreement were $4.4 million. During the six months ended June 30, 2021, we repaid $80.0 million of borrowings. The Company Credit Agreement matures on October 18, 2022.
Availability under our Company Credit Agreement is subject to semi-annual redeterminations of our borrowing base, which was lowered from $215.0 million to $190.0 million following redetermination on January 6, 2021. As of June 30, 2021, we had no borrowings under our Company Credit Agreement and, in light of our expected near term capital needs and our current cash position, we have agreed not to make borrowings under the Company Credit Agreement unless and until the next scheduled redetermination of our borrowing base on or about October 1, 2021 and the Company complies with certain revised hedging requirements (pursuant to the Seventh Amendment executed on July 15, 2021). Generally, we must be in compliance with the covenants in our Company Credit Agreement in order to access borrowings under the Company Credit Agreement.
We anticipate an adjustment to our borrowing base under the Company Credit Agreement in the next scheduled redetermination primarily as a result of the elimination of the Mobile Bay assets as collateral under the Company Credit Agreement and pledge of such assets under the Subsidiary Credit Agreement.
Senior Second Lien Notes.As of June 30, ~~2020,~~2021, we had outstanding $552.5 million principal of Senior Second Lien Notes with an interest rate of 9.75% per annum that ~~matures~~mature on November 1, 2023. ~~During the six months ended June 30, 2020, we purchased $72.5 million in principal of our outstanding~~The Senior Second Lien Notes inare secured by a second-priority lien on all of our assets that are secured under the ~~open market for $23.9 million.~~Company Credit Agreement. See Financial Statements – Note 2 – ~~Long-Term~~ Debt under Part I, Item 1 of this ~~Form 10-Q~~Quarterly Report for additional information.
Debt Covenants.The Term Loan, Company Credit Agreement, and Senior Second Lien Notes contain financial covenants calculated as of the last day of each fiscal quarter, which include thresholds on financial ratios, as defined in the respective Subsidiary Credit Agreement, Company Credit Agreement and the indenture related to the Senior Second Lien Notes. We were in compliance with all applicable covenants of the Term Loan, Company Credit Agreement and the Senior Second Lien Notes indenture as of and for the period ended June 30, ~~2020.~~2021. See Financial Statements – Note 2 – ~~Long-Term~~ Debt under Part I, Item 1 of this ~~Form 10-Q~~Quarterly Report for additional information.
~~PPP.~~Paycheck Protection Program. On April 15, 2020, the Company received $8.4 million under the PPP. During the eligible period, the Company incurred eligible expenses in excess of the amount received. The PPP funds are structured as a loan, but ~~management of~~ the funds can be forgiven by the SBA. The Company ~~believes~~submitted an application for forgiveness to the ~~Company has met all the requirements under~~SBA on August 20, 2020, requesting that the PPP funds received be applied to ~~apply for~~specific covered and non-covered payroll costs. On June 11, 2021, we received notification that the SBA accepted our application and approved forgiveness of ~~such loan, and management's assessment is it is probable the Company~~our PPP funds; therefore, we will not be required to repay ~~any of~~ the funds received. Accordingly, no debt was recorded on the Condensed Consolidated Balance Sheet as of June 30, 2020. Should the SBA reject the Company's application on the utilization of the funds, the Company may be required to repay all or a portion of the funds received under the PPP under an amortization schedule through April 2025 with an annual interest rate of 1%.grant.

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Uncertainties
Bureau of Ocean Energy Management (“BOEM”) Matters.In order to cover the various decommissioning obligations of lessees on the OCS, the BOEM generally requires that lessees post some form of acceptable financial assurance that such obligations will be met, such as surety bonds. The cost of such bonds or other financial assurance can be substantial, and we can provide no assurance that we can continue to obtain bonds or other surety in all cases. As many BOEM regulations are being reviewed by the agency, we may be subject to additional financial assurance requirements in the future. As of the filing date of this Form 10-Q, we are in compliance with our financial assurance obligations to the BOEM and have no outstanding BOEM orders related to financial assurance obligations. We and other offshore Gulf of Mexico producers may, in the ordinary course of business, receive requests or demands in the future for financial assurances from the BOEM.
Surety Bond Collateral.Some of the sureties that provide us surety bonds used for supplemental financial assurance purposes have historically requested and received collateral from us, and may request additional collateral from us in the future, which could be significant and materially impact our liquidity. In addition, pursuant to the terms of our agreements with various sureties under our existing bonds or under any additional bonds we may obtain, we are required to post collateral at any time, on demand, at the surety’s discretion. No additional demands were made to us by sureties during ~~2020~~2021 as of the filing date of this Form 10-Q and we currently do not have surety bond collateral outstanding.
The issuance of any additional surety bonds or other security to satisfy future BOEM orders, collateral requests from surety bond providers, and collateral requests from other third parties may require the posting of cash collateral, which may be significant, and may require the creation of escrow accounts.
Insurance Coverage
Insurance Coverage.We currently carry multiple layers of insurance coverage in our Energy Package (defined as certain insurance policies relating to our oil and gas properties which include named windstorm coverage) covering our operating activities, with higher limits of coverage for higher valued properties and wells. The current policy limits for well control range from $30.0 million to $500.0 million depending on the risk profile and contractual requirements. With respect to coverage for named windstorms, we have a $162.5 million aggregate limit covering all of our higher valued properties, and $150 million for all other properties subject to a retention of ~~$30.0 million.~~$17.5 million on the conventional shelf properties and $12.5 million on the deepwater properties. Included within the $162.5 million aggregate limit is total loss only ~~(“TLO”)~~ coverage on our Mahogany platform, which has no retention. The operational and named windstorm coverages are effective for one year beginning June 1, ~~2020.~~2021. Coverage for pollution causing a negative environmental impact is provided under the well control and other sections within the policy.
Our general and excess liability policies are effective for one year beginning May 1, ~~2020~~2021 and provide for $300.0 million of coverage for bodily injury and property damage liability, including coverage for liability claims resulting from seepage, pollution or contamination. With respect to the Oil Spill Financial Responsibility requirement under the Oil Pollution Act of 1990, we are required to evidence ~~$150.0~~$35.0 million of financial responsibility to the BSEE and we have insurance coverage of such amount.
Although we were able to renew our general and excess liability policies effective on May 1, ~~2020,~~2021, and our Energy Package ~~effective~~ on June 1, ~~2020,~~2021, our insurers may not continue to offer this type and level of coverage to us in the future, or our costs may increase substantially as a result of increased premiums and there could be an increased risk of uninsured losses that may have been previously insured, all of which could have a material adverse effect on our financial condition and results of operations. We are also exposed to the possibility that in the future we will be unable to buy insurance at any price or that if we do have claims, the insurers will not pay our claims. We do not carry business interruption insurance.
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~~Table of Contents~~
Contractual Obligations
~~Updated information on certain contractual obligations is provided in~~As of June 30, 2021, there were no long-term drilling rig commitments. Except for scheduled utilization and our quarterly amortization payments under the Term Loan (see Financial Statements – Note 2 – ~~Long-Term~~ Debt ~~Note 5 – Asset Retirement Obligations~~ ~~and~~ ~~Note 12, Subsequent Events~~ underPart ~~I, Item~~ 1 of this ~~Form 10-Q. As~~
36
Table of ~~June 30, 2020, there were no drilling rig commitments. Except for scheduled utilization,~~Contents
Quarterly Report), other contractual obligations as of June 30, ~~2020~~2021 did not change materially from the disclosures in Management’s Discussion and Analysis of Financial Condition and Results of Operations, under Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, ~~2019.~~
2020.
Critical Accounting Policies and Estimates
~~Our significant~~We consider accounting policies related to oil and natural gas properties, proved reserve estimates, fair value measure of financial instruments, asset retirement obligations, revenue recognition and income taxes as critical accounting policies. These policies include significant estimates made by management using information available at the time the estimates are made. However, these estimates could change materially if different information or assumptions were used.
There have been no changes to our critical accounting policies which are summarized in Financial Statements and Supplementary Data under Part II, Item 8 of our 2020 Annual ~~Report on Form 10-K for the year ended December 31, 2019.~~Report. See Financial Statements – Note 1 – Basis of Presentation under Part 1, Item 1of this ~~Form 10-Q~~Quarterly Report for additional information.
Recent Accounting Pronouncements
See Financial Statements – Note 1 – Basis of PresentationunderPart 1, Item 1,of this Form 10-Q.

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~~Table of Contents~~
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information about the types of market risks for the six months ended June 30, ~~2020~~2021 did not change materially from the disclosures in Quantitative and Qualitative Disclosures About Market Risk under Part II, Item 7A of our 2020 Annual Report on Form 10-K for the year ended December 31, 2019. However, the declines in crude oil and natural gas prices have caused, and could continue to cause significant financial impacts to us. See the Liquidity section in Item II above for a discussion on the possible effects.Report. In addition, the information contained herein should be read in conjunction with the related disclosures in our 2020 Annual ~~Report on Form 10-K for the year ended December 31, 2019.~~Report.

~~Commodity Price Risk.~~  Our revenues, profitability and future rate of growth substantially depend upon market prices of crude oil, NGLs and natural gas, which fluctuate widely. Crude oil, NGLs and natural gas price declines have adversely affected our revenues, net cash provided by operating activities and profitability in the past and sustained current prices would have significant impacts on our business in the future. During the first half of 2020, we entered into derivative crude oil and natural gas contracts related to a portion of our estimated future production. We historically have not designated our commodity derivatives as hedging instruments and any future derivative commodity contracts are not expected to be designated as hedging instruments. Use of these contracts may reduce the effects of volatile crude oil and natural gas prices, but they also may limit future income from favorable price movements. See ~~Financial Statements – Note 6 – Derivative Financial Instruments~~ ~~under Part I, Item 1 of this Form 10-Q for additional information.~~
~~Interest Rate Risk.~~ As of June 30, 2020, we had $80.0 million borrowings outstanding under our Credit Agreement and were subject to the variable London Interbank Offered Rate and the Applicable Margin. We did not have any derivative instruments related to interest rates.
Item 4. Controls and Procedures
We have established disclosure controls and procedures designed to ensure that material information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC and that any material information relating to us is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate to allow timely decisions regarding required disclosures. In designing and evaluating our disclosure controls and procedures, our management recognizes that controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving desired control objectives. In reaching a reasonable level of assurance, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by Exchange Act Rule 13a-15(b), we performed an evaluation, under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based on that evaluation, our CEO and CFO have each concluded that as of June 30, ~~2020,~~2021, our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that our controls and procedures are designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
During the quarter ended June 30, ~~2020,~~2021, there was no change in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Table of Contents
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
See Financial Statements – Note 11 –Contingencies under Part I Item 1 of this Form 10-Q for information on various legal proceedings to which we are a party or our properties are subject.

Item 1A. Risk Factors
~~The COVID-19 pandemic has affected, and may continue to materially adversely affect, our industry, business, financial condition or results of operations.~~
The COVID-19 pandemic and related economic repercussions have created significant volatility, uncertainty, and turmoil in the oil and gas industry. The COVID-19 outbreak and the responsive actions to limit the spread of the virus have significantly reduced global economic activity, resulting in a decline in the demand for oil, natural gas, and other commodities. These economic consequences have been a primary cause of the significant supply-and-demand imbalance for oil. The current supply-and-demand imbalance and significantly lower oil pricing may continue to affect us, constraining our ability to store and move production to downstream markets, or affecting future decisions to delay or curtail development activity or temporarily shut-in production which could further reduce cash flow.
The extent of the impact of the COVID-19 pandemic and any other future pandemic on our business will depend on the nature, spread and duration of the disease, the responsive actions to contain its spread or address its effects, its effect on the demand for oil and natural gas, the timing and severity of the related consequences on commodity prices and the economy more generally, including any recession resulting from the pandemic, among other things. Any extended period of depressed commodity prices or general economic disruption as a result of the pandemic would adversely affect our business, financial conditions and results of operations. In addition to the ~~COVID-19 pandemic has heightened the other risks and uncertainties~~information set forth in ~~the “Risk Factors” section of our Annual~~this Quarterly Report, ~~on Form 10-K for the year 2019.~~
~~We will likely incur greater costs to bring production associated with our shut-in wells back online, and are unable to predict the production levels of such wells once brought back online.~~
The significant supply/demand balance for oil materially decreased global crude oil prices in the first half of 2020 and generated a surplus of oil. This significant surplus created a saturation of storage and crude storage constraints, which led us to shut-in production in some of our oil-weighted properties due to the lack of availability and capacity of processing, gathering, storing and transportation systems. We will likely incur greater costs to bring the associated production back online. Cost increases necessary to bring the associated wells back online may be significant enough that such wells would become uneconomic at low commodity price levels, which may lead to decreases in our proved reserve estimates and potential impairments and associated charges to our earnings. If we are able to bring wells back online, there is no assurance that such wells will be as productive following recommencement as they were prior to being shut in. Such factors could adversely affect our financial condition and results of operations.
~~Investors~~investors should carefully consider ~~these~~the risk factors and other cautionary statements included under Part I, Item 1A, Risk Factors, in our 2020 Annual Report, together with all of the other information included in this ~~document, in our Annual~~Quarterly Report, ~~on Form 10-K for the year 2019,~~ and in our other public filings, ~~press releases~~which could materially affect our business, financial condition or future results. Additional risks and ~~discussions with~~uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our ~~management.~~business, financial condition or future results.
Notwithstanding the matters discussed herein, there have been no material changes in our risk factors as previously disclosed in Part I, Item 1A, Risk Factors, in our 2020 Annual Report.

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Table of Contents
Item 6. Exhibits
Exhibit
Number
Description
3.1
Amended and Restated Articles of Incorporation of W&T Offshore, Inc. (Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K, filed February 24, 2006 (File No. 001-32414).)
3.2
Second Amended and Restated Bylaws of W&T Offshore, Inc. (Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K, filed March 22, 2019 (File No. 001-32414))
3.3
Certificate of Amendment to the Amended and Restated Articles of Incorporation of W&T Offshore, Inc. (Incorporated by reference to Exhibit 3.3 of the Company’s Quarterly Report on Form 10-Q, filed July 31, 2012 (File No. 001-32414))
3.4
Certificate of Amendment to the Amended and Restated Articles of Incorporation of W&T Offshore, Inc., dated as of September 6, 2016. (Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K, filed September 6, 2016 (File No. 001-32414))
10.1
~~Third~~Waiver, Consent and Sixth Amendment to Sixth Amended and Restated Credit Agreement, dated May 19, 2021, by and among W&T Offshore, Inc., the guarantor subsidiaries party thereto, the lenders party thereto, the issuers of letters of credit party thereto and Toronto Dominion (Texas) LLC, individually and as agent. (Incorporated by reference to exhibit 10.1 of the Company’s Current Report on Form 8-K, filed on May 25, 2021 (File No. 001-32414).)
10.2*

Waiver and Seventh Amendment to Sixth Amended and Restated Credit Agreement, dated June ~~17, 2020, by~~30, 2021by and among W&T Offshore, Inc., the guarantor subsidiaries party thereto, the lenders party thereto, the issuers of letters of credit party thereto and Toronto Dominion (Texas) LLC, individually and as ~~agent~~agent.

10.3*

Credit Agreement, dated May 19, 2021, by and among Aquasition LLC, as Borrower, Aquasition II LLC, as Co-Borrower, and Munich Re Reserve Risk Financing, as the ~~various agents and~~ lenders party thereto. ~~(Incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q, filed on June 23, 2020 (File No. 001-32414))~~

10.4*

Management Services Agreement, dated May 19, 2021, by and among A-I, LLC, A-II LLC, and W&T Offshore, Inc.

10.5*

Restricted Stock Unit Agreement (Service-based Vesting), pursuant to the W&T Offshore, Inc. Amended and Restated Incentive Compensation Plan.

10.6*

Restricted Stock Unit Agreement (Performance Vesting), pursuant to the W&T Offshore, Inc. Amended and Restated Incentive Compensation Plan.

31.1*
Section 302 Certification of Chief Executive ~~Officer.~~Officer
31.2*
Section 302 Certification of Chief Financial ~~Officer.~~Officer
32.1*
Section 906 Certification of Chief Executive Officer and Chief Financial ~~Officer.~~Officer
101.INS*
Inline XBRL Instance ~~Document.~~Document
101.SCH*
Inline XBRL Schema ~~Document.~~Document
101.CAL*
Inline XBRL Calculation Linkbase ~~Document.~~Document
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Table of Contents
101.DEF*
Inline XBRL Definition Linkbase ~~Document.~~Document
101.LAB*
Inline XBRL Label Linkbase ~~Document.~~Document
101.PRE*
Inline XBRL Presentation Linkbase ~~Document.~~Document
~~104~~*
104*
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*
*Filed or furnished herewith.
~~Filed or furnished herewith.~~

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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August ~~6, 2020.~~
4, 2021.

W&T OFFSHORE, INC.

By:
/s/  Janet Yang

Janet Yang

Executive Vice President and Chief Financial Officer

(Principal Financial Officer), duly authorized to sign on behalf of the registrant

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