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W&T Offshore Sees Buying Opportunities

The CEO of Houston-based W&T Offshore Inc. said the company has turned a corner to profitability and will be building its cash position in anticipation of bargains to come. Targets for acquisition will need to contribute to cash flow, he said.

"As a result of the continuing strength in oil prices, the successful cost reduction efforts put in place by the company, increased production due to our drilling program and pipelines returning to production post-Hurricane Ike, the company returned to profitability in June. I am extremely optimistic that our cash flows from operations will be increasing for the remainder of the year," said CEO Tracy W. Krohn.

"As we have now completed most of our drilling projects for the year and continue to look at our best use of capital in the second half of 2009, we will focus on building cash for strategic opportunities, including acquisitions and attractive third-party projects. We believe that over the next 12 to 18 months, sellers and buyers will be increasingly more willing to complete transactions at valuations that are attractive to us."

W&T is looking for opportunities now, W. Reid Lea, W&T manager of corporate development, told financial analysts during a conference call to discuss earnings last Tuesday. Three areas are being considered: the Gulf of Mexico (GOM), elsewhere offshore and the U.S. onshore, he said.

Lea said W&T is "a logical consolidator" of assets in the GOM, where it's been active for 28 years. "We're continuing to evaluate and make offers for certain assets or companies and have been very selective..." he said. "We've increased our efforts to acquire reserves in the deepwater Gulf of Mexico. But we're currently limiting our bids to those packages supported by current production. We do not plan to bid on the deepwater exploration packages currently available in the market."

With the right opportunity, Lea said W&T would expand into other offshore areas outside the GOM. "Our goal is to leverage our extensive operational expertise in other offshore areas, both domestic and foreign," he said. Target areas could include U.S. waters other than the GOM, as well as offshore Trinidad, the Mediterranean Sea and the UK sector of the North Sea, Lea said, noting that the company is not likely to get into Africa, Southeast Asia or China.

"As with our basic acquisition strategy, cash flow is the single most important criteria for this type of acquisition," Lea said.

Onshore in the United States W&T would only be interested in unconventional resource plays in cases where existing production and cash flow could be acquired simultaneously, Lea said. "Furthermore, our goal is to seek a joint venture or a corporate acquisition to gain technical expertise. In the optimal situation we'd acquire production for the seller's capital needs [that] could be met by a combination of the sale of production and a joint venture with W&T to provide development drilling funds."

Krohn said more opportunities should arise as companies see their hedges roll off. In anticipation, W&T is building up cash.

The company's cash balance on June 30 was $100.7 million and it had $262.4 million of undrawn capacity under a revolving credit facility, W&T said. "In the second half of 2009, we expect to rebuild our cash position since the vast majority of our capital expenditures were front-end loaded for the year and only approximately $30 million still remains."

Net loss for the second quarter of 2009 was $6 million, or minus 8 cents/share on revenues of $150.4 million, compared to net income for the same quarter of 2008 of $134.6 million, or $1.76/share on revenues of $461 million. Without the effect of an unrealized derivative gain and a loss from extinguishment of debt, net loss for the second quarter of 2009 would have been $5.3 million, or minus 7 cents/share. Without the effect of an unrealized derivative loss, net income for the second quarter of 2008 would have been $141.3 million, or $1.86/share. The net loss in the second quarter is due mainly to a lower average realized price of $6.06/Mcfe, versus $14.89/Mcfe (unhedged) in 2008, decreased sales volumes for oil and natural gas related to the deferral of production caused by Hurricanes Gustav and Ike, and natural reservoir declines, W&T said.

W&T sold 13.4 Bcf of natural gas at an average price of $3.89/Mcf in the second quarter and also sold 1.9 million bbl of oil and natural gas liquids (NGL) at an average price of $51.61/bbl. For the second quarter of 2008, the company sold 17 Bcf of gas at an average price of $11.53/Mcf and 2.3 million bbl of oil and NGLs at an average price of $113.74/bbl. On a natural gas equivalent basis W&T sold 24.8 Bcfe at an average realized price of $6.06/Mcfe in the second quarter compared to 31 Bcfe sold at an average realized price of $14.89/Mcfe in the year-ago period.

Lease operating expense for the second quarter of 2009 decreased to $54.1 million, or $2.18/Mcfe, from $54.3 million, or $1.75/Mcfe, in the second quarter of 2008. Included in the 2009 figure are $5 million of remediation costs related to Hurricanes Ike and Gustav.

Second quarter capital expenditures for oil and gas properties of $111.3 million included $44.4 million for exploration, $56 million for development and $10.9 million for seismic, capitalized interest and other leasehold costs. Development and exploration spending consisted of $14 million in the deepwater, $0.2 million on the deep shelf and $86.2 million on the conventional shelf and other projects.

In the second quarter W&T drilled or participated in the drilling of six wells. Of these, five were exploratory shelf wells and one was a deep shelf development well.

W&T shares closed up 0.52% last Tuesday at $11.69 following the earnings release.

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