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W&T Offshore (WTI) Jumps 25% QTD: More Room for Growth?

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W&T Offshore, Inc.’s (WTI - Free Report) stock has rallied 25% in the quarter-to-date (QTD) period, wherein the overall energy sector has been grappling with a volatile scenario due to the coronavirus pandemic. Headquartered in Houston, TX, this upstream company — with a market cap of $326.1 million — operates primarily off the coast of Gulf of Mexico (GoM).

The company beat the Zacks Consensus Estimate for earnings in the trailing four quarters, delivering a surprise of 441.4%, on average.

W&T Offshore, Inc. Price and EPS Surprise

Can It Retain Momentum?

The answer is yes and here’s why we think so:

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 deepwater GoM 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 deepwater GoM. Notably, it claimed to be the highest bidder on two blocks in the U.S. GoM lease sale 256. The two apparent bids were on Eugene Island South Addition block 389 and Ewing Banks block. These two shallow-water blocks are spread across 8,800 acres. Moreover, 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 its 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.

Notably, the Zacks Rank #3 (Hold) company brought back significant amount of production online well before time that was paused due to storms in the GoM region. Moreover, output from its Magnolia field has been restored. As such, the company’s fourth-quarter production volumes are expected to increase from the prior projection in the range of 34,700-36,900 barrels of oil equivalent per day (Boe/d). Of the total volumes, 34% is expected to be oil, while 11% and 55% are likely to be natural gas liquids and natural gas, respectively. Sequential rise in production and improving prices will likely help the company generate higher profits for the December quarter.

However, there are a few factors that are holding back the stock from reaching its complete potential.

As of Sep 30, 2020, W&T Offshore had a total debt of $625 million and a cash balance of only $57 million, reflecting balance sheet weakness. This can restrict the company’s financial flexibility. Moreover, the coronavirus pandemic has dented global energy demand, causing oil prices to decline significantly from the price of more than $60 at the beginning of 2020. With liquids contributing significantly to total production volumes, the weak commodity pricing scenario is holding back the firm from reaching its true potential.

In 2019, the company’s free cash outflow was $82 million. In comparison, it generated free cash flow of $255 million in 2018. Even in the trailing 12-month period, the company reported a negative free cash flow of $102 million. As commodity prices are not expected to rise to pre-pandemic level anytime soon, the cash flow situation will likely be under pressure.

Key Picks

Some better-ranked players in the energy space include Covanta Holding Corporation (CVA - Free Report) , Ameresco, Inc. (AMRC - Free Report) and Ring Energy, Inc. (REI - Free Report) , each holding a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Covanta Holding’s bottom line for 2021 is expected to rise 93% year over year.

Ameresco’s bottom line for 2020 is expected to rise 21.7% year over year.

Ring Energy’s sales for 2021 are expected to rise 2.5% year over year.

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