Gas production of Houston-based W&T Offshore Inc. was still impacted by the effects of Hurricane Katrina in the second quarter with volumes down from the year-ago period. Realized gas prices also were down in the second quarter from a year ago, but W&T made up for some of the gas weakness with increased oil production and much stronger realized prices for the liquid hydrocarbon.

The company is sorting out hurricane repairs and related insurance matters while it pushes ahead with drilling. W&T’s estimate of repair costs associated with Hurricanes Katrina and Rita has increased to between $90 and $100 million. As of June 30, the company has incurred $7.8 million of development costs and $41.1 million of production costs, net to its interest, to remediate damage caused by Hurricanes Katrina and Rita and the company believes these costs are reimbursable under its insurance policies. In July 2006, W&T received an initial payment for its first claim related to Hurricane Rita for $4.9 million.

Total production in the second quarter of 2006 was 11.2 Bcf of natural gas at an average price of $6.98/Mcf and 1.4 million bbl of oil at an average price of $61.13/bbl. This compares to second quarter 2005 production of 13.3 Bcf of natural gas at an average price of $7.08/Mcf and 1.2 million bbl of oil at an average price of $45.22/bbl. The natural gas volume decrease is primarily attributable to the deferral of production caused by Hurricanes Katrina and Rita and natural reservoir declines. The oil volume increase is primarily the result of successful drilling efforts. At the end of the second quarter the company was producing at 90% of pre-Katrina levels. Even with the hurricanes, last year set records for W&T (see NGI, March 20).

Currently, W&T has about 16 MMcfe/d of production still shut in due to last year’s hurricanes. About 12 MMcfe/d of that is related to field infrastructure in eight fields. More than half of the shut-in volumes are expected to be on stream next month with the remainder back in the first quarter of 2007.

To prepare for future hurricane seasons, W&T has taken out insurance policies worth $100 million, CEO Tracy Krohn told analysts during a conference call. The coverage will cost the company about $19 million a year and has a $10 million deductible. “We seriously considered self-insuring but knew we could put the $100 million escrowed amount to better use than keeping it locked up in a bank. We’ve also negotiated a policy for KMG [Kerr-McGee assets to be acquired], and we will release those details after we close the transaction.”

For the six months ended June 30, total production was 22.1 Bcf of natural gas at an average price of $7.88/Mcf and 2.5 million bbl of oil at an average price of $59.32/bbl. This compares to 25.6 Bcf of natural gas at an average price of $6.72/Mcf and 2.4 million bbl of oil at an average price of $44.47/bbl for the same period in 2005.

Average prices exclude the settlement of derivative contracts that do not qualify for hedge accounting. Had the settlement of these derivatives been included, average sales price for natural gas would have been $7.22 per Mcf for the second quarter of 2006 and $8.01/Mcf for the six months ended June 30. Average sales price for oil would have been $60.78/bbl for the second quarter of 2006 and $59.13/bbl for the six months ended June 30. The company did not have any derivative contracts in place during the periods ended in 2005.

Second-quarter net income was $38.5 million, 58 cents/diluted share, on revenue of $165.8 million. Net income reflects the impact of $12.8 million of unrealized loss ($8.4 million after- tax), 13 cents/diluted share, associated with the change in fair market value of W&T’s open derivative contracts. Without the effect of the unrealized derivative loss, net income for the quarter would have been $46.8 million, 71 cents/diluted share. This compares to net income of $45.8 million, 69 cents/diluted share, on revenues of $149.8 million for the second quarter of 2005. Net income for the six months ended June 30 was $94.3 million, $1.43/diluted share ($1.50/diluted share without the effect of the unrealized derivative loss), on revenues of $322.7 million, compared to net income of $85.1 million, $1.29/diluted share, on revenues of $278.9 million for 2005.

During the second quarter, W&T participated in the drilling of nine exploration wells (gross) in the Gulf of Mexico of which six were successful. The company also successfully drilled three development wells during the period. One of the wells was in deepwater, two were on the deep Shelf, and nine were on the conventional Shelf. Two Shelf wells and one deepwater well were considered noncommercial. After the close of the second quarter, three additional exploration discoveries were made, along with one development well. In the remainder of the year, the company anticipates drilling three exploration wells on the conventional shelf, one in the deep shelf and up to two in the deepwater. Additionally, two development wells are scheduled for the second half of 2006.

“The conventional wisdom has been that the Shelf is dead. Well, our drilling program on the conventional Shelf so far this year does not support that hypothesis,” Jeffrey Durrant, senior vice president of exploration, said during an analyst conference call.

W&T’s acquisition of Kerr-McGee Gulf of Mexico properties (see NGI, Jan. 30) is expected to close during the third quarter. Daily production from the properties being acquired is 186 MMcfe/ as of July 16. Excluding the Kerr-McGee assets, W&T projects that third-quarter production will be 21.1-21.6 Bcfe, of which 11.9-12.2 Bcf will be gas. For the full year, production is estimated at 83-87.7 Bcfe, of which 48.2-51.1 Bcf will be gas.

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