W&T Offshore, Inc. WTI is likely to gain from the huge acreage position in the Gulf of Mexico. However, low energy demand and commodity prices are concerns.
This $364-million exploration and production company currently has a Zacks Rank #3 (Hold). Headquartered in Houston, TX, W&T Offshore is a leading oil and natural gas explorer, with operations primarily focused on the resources located in the major prolific oceanic rift basin in the Gulf of Mexico.
Shares of the company have gained 73.6% since the beginning of the second quarter compared with 66.4% rally of the industry it belongs to, which further proves the ongoing improvement in the upstream energy market.
Let’s take a closer look at the factors working in favor of the company right now.
What’s Favoring the Stock?
The prolific oil and gas offshore fields in the Gulf of Mexico shelf have been primarily boosting the company’s production since inception. New 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.
Oil producers with significant offshore exposure are expected to gain a lot from wells under the sea beds that have a longer life span and low decline rates than shale wells. Due to their long reserve lives, offshore producers like W&T Offshore will be able to maintain production levels without incurring the cost of digging new wells. As such, with demand expected to improve with the withdrawal of lockdowns, W&T Offshore is expected to gain further.
W&T Offshore is expanding 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 had acquired interests in the prospective Heidelberg field in the deep-water Gulf of Mexico. Also, the deep-water discoveries made in recent years have enhanced the company’s prospects.
W&T Offshore closed the Mobile Bay acquisition from ExxonMobil in the second half of the 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 acquisition is expected to deliver significant synergies and cost savings to the company. Also, the move added net proved reserves of 74 MMBoe to its portfolio. Of the total reserves, a vast majority is proved developed and producing. Moreover, it closed the remaining 25% stake acquisition in the Magnolia Field during first-quarter 2020. Also, the company was the highest bidder on two blocks in the Gulf of Mexico Lease Sale 254 on Mar 18. The lease sale incorporated deepwater Garden Banks block 782 and shallow water Eugene Island Area South Addition block 345.
Its revised capital budget for this year is projected in the range of $15-$25 million. In comparison, W&T Offshore’s earlier guidance for capital and exploratory spending in 2020 was considerably higher at $50-$100 million. This move will enable the company to navigate through the current market volatility.
Also, the company’s cost-cutting efforts are expected to boost its bottom line. Lease operating expenses contracted to $11.24 per Boe in the first quarter from $14.48 a year ago. General and administrative expenses fell to $2.87 per Boe from $4.70 in the year-ago period. Overall, total costs and expenses significantly fell to $52.3 million from the year-ago level of $147.1 million.
As of Mar 31, 2020, its cash and cash equivalents rose to $47.6 million from $32.4 million in the fourth quarter. It had $164.2 million remaining under the revolving bank credit facility. The company’s long-term debt reduced to $668.1 million from $719.5 million in the fourth quarter. The balance sheet improvement is commendable.
There are some negative factors that are holding back the company from attaining its growth potential.
Oil prices are trading in the bearish territory as the coronavirus pandemic has dented global energy demand. As such, the company has temporarily paused 3,300 Boe/d production in selected fields. With liquids comprising 48% of total production volumes, a weak commodity pricing scenario is hurting the company’s upstream business and will keep free cash flow generation under pressure.
To Sum Up
Despite significant production growth opportunities, low energy demand and commodity prices are concerns. 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 Chaparral Energy, Inc. CHAP, CNX Resources Corporation CNX and Concho Resources Inc. CXO, each holding a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Chaparral Energy’s bottom line for 2020 is expected to rise 57.8% year over year.
CNX Resources beat earnings estimates thrice and met once in the last four quarters, with average positive surprise of 111.5%.
Concho Resources has a positive earnings surprise of 4.9% in the last four quarters.
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