WTI - W&T Offshore Offers Steady Production At Minimal CapEx But Not Much Else

2023-04-18 14:39:35 ET

Summary

• WTI has steady production but doesn't offer a dividend or have a buyback in place like many of its onshore peers.
• The company looks like it prefers to buy production versus drill wells at present.
• The company has solid nat gas hedges in place, but is unhedged on oil, making it a good play on oil prices.

W&T Offshore ( WTI ) is a company with a steady production profile, but the stock doesn’t have the same sizzle as some other energy names.

Company Profile

WTI is an offshore driller that operates in the Gulf of Mexico. The company has about 458,000 gross acres (~384,000 net) in the Gulf of Mexico Shelf and approximately ~159,000 gross acres (~68,000 net) in the Gulf of Mexico Deepwater.

It had year-end 1P proved reserves of 165.3 MMBoe, of which 138.1 MMBoe were in the Gulf of Mexico Shelf and 27.2 MMBoe were in the Gulf of Mexico Deepwater. For 2P reserves, it had 195.9 MMBoe in the Gulf of Mexico Shelf and 49.9 MMBoe were in the Gulf of Mexico Deepwater, good for a total of 245.8 MMBoe combined.

For 2022, the WTI averaged 40.1 Mboe/d of production, with Q4 production of 38.6 Mboe/d. Forty-nine percent of its production for both periods was liquids.

Opportunities and Risks

While primarily an oil company, WTI does have a lot of natural gas production. With high natural gas prices in 2022, about 35% of its revenue came from natural gas. Thus, both liquids and natural gas prices can play a role in its results. Oil, while off its 2022 highs, has remained strong, while natural gas prices have plunged.

For deepwater drilling, initial costs are meaningfully higher than onshore drilling. However, decline rates are much lower, creating a strong revenue stream for up to decades. For its part, WTI has been much more focused on its balance sheet or acquiring wells via acquisition than actually drilling new wells. As such, energy prices can play a particularly big role in its results. The company is unhedged on oil, while it has smartly hedged 60% of its natural gas in 2023. It is also well hedged in 2024 as well.

The company only plans to spend between $90-110 million in CapEx this year. However, that is actually the most since 2019, as it's been under $100 million in total the past 3 years. The bulk of the CapEx will go towards recompletions, while it will spend money on one deepwater and three shelf wells, as well as on facilities and seismic.

The company has been willing to spend money on bolt-on acquisitions, however. Last year, it acquired over 50 producing wells from Ankor Energy and another undisclosed party for around $50 million in two transactions. The acreage had 3.4 MBoe/d of production of which 74% was oil, as well as 2P reserves of 7.6 million Boe. The company has made 10 bolt-on acquisitions since 2010.

The Ankor acquisitions helped WTI replace its reserves at very low costs. The company had a reserve life ratio of 11.3 years at the end of 2022.

On its Q4 call , CEO Tracy Krohn said:

“So turning to our year-end reserve results. I'd like to point out that we continue to see positive well performance in technical revisions, which demonstrates the strength of our world-class conventional Gulf of Mexico assets. This also directly points to our ability to enhance production and our reserve base through operational excellence. For year-end 2022, we reported SEC proved reserves of 165.3 million barrels of oil equivalent, which included 7.3 million barrels of oil of equivalent -- of positive performance revisions and an increase of 6 million barrels of oil equivalent due to the 2 acquisitions we made early in 2022.

“We also had strong positive pricing revisions of 9 million barrels of oil equivalent. So in total, we added 22.3 million barrels of oil of new reserves, which replaced 153% of our 2022 production of 14.6 million barrels of oil equivalent. So our all-in reserve replacement cost for 2022 were $4.10 per barrel oil equivalent and have averaged a very reasonable $2.85 per barrel of oil equivalent over the last 3 years. We say that again, $2.85 per BOE over the last 3 years. So we're particularly pleased with these results since last year, we focused on reducing net debt while completing bolt-on acquisitions and less on drilling.”

The reserve replacement costs for both 2022 and the past three years is extremely impressive, although also speaks to some of the cost to extract those reserves.

WTI’s main focus recently, though, has been to pay down debt and improve its balance sheet. Since 2017, the company has taken its net debt down from $893 million to $232 million at the end of 2022. Its leverage, meanwhile, has been reduced from 3.3x to 0.4x. That’s a good thing, because the company’s debt has some pretty high interest rates attached it. In January, it issued $275 million new senior notes due in February 2026 at an 11.75% interest rate, taking out $550 million in 9.75% notes due in November in the process.

When looking for risks outside of energy prices, eventually WTI will have to drill its acreage again. And on that front, the day rates for contract drilling has been going up strongly. According to Westwood Global Energy , day rates for new drillship fixture jumped 55% from $232,555 in 2021 to $359,852 in 2022 and the firm thinks day rates can possibly hit $500,000 this year.

While drilling new wells during a period of oil weakness may have been counterintuitive, it could have proved to been much cheaper in the long run. Notably, success rates in the Gulf have been around 75-80%, so there is also some dry hole risk as well. However, the company does have a strong opportunity with its Holy Grail well (which is proved reserves), but the company seems to want to wait a year or two before drilling, with Krohn saying on the Q4 call that "those reserves have been there for a few million years. They can wait another year or so."

It's also notable that WTI will see production dip in Q1 due to several planned periodic facility and pipeline maintenance projects as well as downtime at several non-operated fields.

Valuation

WTI trades at 1.9x EBITDA based on 2023 analyst estimates of $502.5 million. Based on the 2024 consensus of $291 million, the stock trades at a 3.3x multiple. Of course, the price of oil and natural gas can change the actual results immensely.

WTI is valued in the low-end of the pack compared to other independent E&P. This could be because of its off-shore focus, but Kosmos Energy ( KOS ) is towards the high-end, and it also focuses on off-shore drilling. More likely, the company is not getting credit for its strong natural gas hedge book.

Conclusion

With a strong natural gas hedge book and no oil hedges, along with pretty steady production, WTI is a good play on the price of oil. I’d expect the company to use its cash flow to try to acquire some more properties in the Gulf to boost production and its reserves.

That said, the company doesn’t currently pay a dividend, nor is it buying back stock like some of its onshore peers. It’s also not growing production. As such, I'd consider the stock a "Hold."

I like other E&P better at this time, such as Chord ( CHRD ), which I wrote about here , or Crescent Point Energy ( CPG ), which I wrote about here.

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