W&T Offshore, Inc. WTI holds tremendous upside potential due to its growing presence in the deep-water and shelf of Gulf of Mexico (GoM), wherein production grew more than 500% and proved reserves surged nearly 900% over the past eight years. The company’s increasing reserve base in the GoM, the second-largest basin in the United States in terms of production, will boost output in the coming quarters.
Let’s delve deeper to analyse the factors that make W&T Offshore an attractive investment option at the moment.
Offshore Resurgence: We would like to remind investors that the steadiness in oil prices at the current levels of above $60 per barrel is driving operators to make longer-term plans, as deepwater projects become cost effective. Producers like Royal Dutch Shell plc RDS.A, which holds huge potential in the U.S. GoM, recently put up an interesting picture for investors at the Scotia Howard Weil Energy Conference in New Orleans. These companies expect offshore production to come out of the shadows of shale drilling, reflecting a resurgence.
GoM Strength: The company’s extensive presence in the GoM is commendable. Its operations are spread across roughly 48 oil and gas offshore fields, covering around 650,000 gross acres. It covers roughly 440,000 gross acres in the GoM shelf, while the company operates across 210,000 gross acres in the deepwater. Notably, W&T Offshore created a joint venture with a group of investors to drill 14 pre-defined projects in the GoM over more than three years.
The GoM provides unique advantages, including low decline rates, world class permeability and significant potential reserves that are untapped. The company recorded 60.4 million barrels of oil equivalent (MMBoe) of proven or 1P reserves in the GoM shelf. In the deepwater GoM, it has 21.7 MMBoe of 1P reserves. Significant proved reserve bases in both the shelf and deepwater resources will contribute to the upstream energy player’s cash flows.
Surging Cashflow: Through 2018, the company generated $321.8 million of operating cash flows, which more than doubled from the 2017 level of $159.4 million. We expect this momentum to continue in the coming quarters as well, backed by higher realized crude and natural gas liquids prices, and lower expenditure on plugging and abandonment activities.
Liquidity: By the end of 2018, W&T Offshore reduced its long-term debt by 34.6% from the year-ago level to $634 million. This visible downward trend can be noticed in the company’s balance sheet for the last few years, as shown in the figure below. Moreover, total liquidity of $252.7 million, as of Dec 31, 2018, for this small cap company is remarkable. Overall, the financial flexibility enables the company to support its growth projects.
Upbeat Production Guidance: For full-year 2019, W&T Offshore expects production in the band of 12.9-14.3 MMBoe. The upper limit of the band is much higher than the 2018 level of 13.3 MMBoe.
As you can see, the company’s strong fundamentals and strategic positioning makes it well poised to outperform the market in the coming days. The analysts also believe so and consequently hiked its guidance in the last few weeks. Over the past month, earnings estimates for the current year have risen from 43 cents per share to 73 cents.
Price Movement: The Zacks Rank #1 (Strong Buy) company’s upside potential has also been reflected in the stock movement. Its shares significantly outperformed the industry in the past year. During the said period, the upstream company gained 58.7% against the 18.9% decline of its industry.
Moreover, on the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, the industry is currently trading at 5.3X, significantly lower than one-year high mark of 7.2X. This also confirms the stock’s strong upside potential. Since oil and gas companies are debt-laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. This is because the valuation metric takes into account not just equity but also the level of debt.
Other Stocks to Consider
Investors interested in the energy sector can opt for other top-ranked stock as given below:
Denver, CO-based Antero Resources Corp. AR is an upstream energy company. In 2019, the company’s top line is expected to increase nearly 5% year over year. The stock currently has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Houston, TX-based Cabot Oil & Gas Corp. COG is an exploration and production company. In 2019, the company’s bottom line is expected to surge nearly 65% year over year. The stock currently has a Zacks Rank #1.
Zacks' Top 10 Stocks for 2019
In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-holds for the year?
Who wouldn't? Our annual Top 10s have beaten the market with amazing regularity. In 2018, while the market dropped -5.2%, the portfolio scored well into double-digits overall with individual stocks rising as high as +61.5%. And from 2012-2017, while the market boomed +126.3, Zacks' Top 10s reached an even more sensational +181.9%.
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Royal Dutch Shell PLC (RDS.A) : Free Stock Analysis Report
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