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Hold on to W&T Offshore, Here's Why We Think It'll Grow

W&T Offshore, Inc. WTI is likely to gain from its huge acreage position in the Gulf of Mexico. However, levered balance sheet and weak commodity prices are concerns.

Headquartered in Houston, TX, W&T Offshore is a leading oil and natural gas explorer, with operations primarily focused on resources located off the coast of Gulf of Mexico (GoM). This has enabled the company to develop significant technical expertise in the major prolific oceanic rift basin. As of Dec 31, 2019, it reported proved reserves of 157.4 million barrels of oil equivalent (MMBoe), up 87% from 2018-end reserves of 84 MMBoe. Total proved reserves of the firm comprise roughly 40% liquid.

Let’s take a closer look at the factors that substantiate its Zacks Rank #3 (Hold).

Favoring Traits to Consider

The prolific oil and gas offshore fields in the GoM shelf have been primarily boosting the company’s production since inception. Discoveries in those fields, located at a water depth of 500 feet, will likely boost W&T Offshore’s production further. The GoM provides unique advantages, including low decline rates, world-class permeability and significant potential reserves that are untapped.

W&T Offshore is growing its presence in the deep-water Gulf of Mexico fields, wherein production has increased more than 500% and proved reserves have surged nearly 900% over the past eight years. The company acquired interests in the prospective Heidelberg field in the deep-water Gulf of Mexico. Notably, it was the highest bidder on two blocks in the Gulf of Mexico Lease Sale 254. The lease sale incorporated deepwater Garden Banks block 782 and shallow water Eugene Island Area South Addition block 345. Moreover, the deep-water discoveries made in recent years have enhanced the company’s prospects.

W&T Offshore closed the Mobile Bay acquisition from ExxonMobil last year. The assets, located in the eastern region of the GoM, include some onshore processing facilities adjacent to W&T Offshore’s existing properties. The move added net proved reserves of 74 MMBoe to the company’s portfolio. Of the total reserves, the vast majority is proved developed and producing. Moreover, it closed the remaining 25% stake acquisition in the Magnolia Field during the first quarter. These acquisitions are expected to deliver significant synergies and cost savings to the company.

Despite an adverse operating environment, W&T Offshore is managing to keep investors happy with positive adjusted EBITDA. In fact, it delivered positive earnings surprises in all the last four quarters, with an average of 731%. Moreover, the company decreased spending in early-2020 to ensure free cash flow generation.

W&T Offshore, Inc. Price and EPS Surprise

W&T Offshore, Inc. price-eps-surprise | W&T Offshore, Inc. Quote

However, there are some factors holding back the stock.

Risks

As of Jun 30, 2020, W&T Offshore had a total debt of $624.2 million, with a cash balance of only $36.5 million, reflecting a weak balance sheet. This can hurt the company's financial flexibility.

The coronavirus pandemic has dented global energy demand, which has caused the shift of oil prices to the bearish territory. With liquids comprising 48% of total production volumes, the weak commodity pricing scenario might hurt the upstream business.

In the trailing 12-month period, it reported a negative free cash flow of $61 million. As commodity prices are not expected to improve anytime soon, the cash flow situation will be under pressure. We have to wait and watch how the company’s actions will counter the situation.

To Sum Up

Despite significant prospects, W&T Offshore’s balance sheet weakness and weak commodity price scenario are concerning. Nevertheless, we believe that systematic and strategic plan of action will drive its long-term growth.

Stocks to Consider

Some better-ranked players in the energy space include DCP Midstream, LP DCP, Apache Corporation APA and Matador Resources Company MTDR. While DCP Midstream has a Zacks Rank #1 (Strong Buy), Apache and Matador Resources hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

DCP Midstream’s bottom line for 2021 is expected to skyrocket 156.4% year over year.

Apache’s bottom line for 2021 is expected to surge 84.3% year over year.

Matador Resources’ sales for 2021 are expected to rise 12.2% year over year.

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Apache Corporation (APA): Free Stock Analysis Report
 
WT Offshore, Inc. (WTI): Free Stock Analysis Report
 
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DCP Midstream Partners, LP (DCP): Free Stock Analysis Report
 
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