{"id":74324,"date":"2023-10-19T05:43:25","date_gmt":"2023-10-19T09:43:25","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/wt-offshore-a-q3-beat-could-be-a-catalyst-for-this-undervalued-stock-nysewti\/"},"modified":"2023-10-19T05:43:32","modified_gmt":"2023-10-19T09:43:32","slug":"wt-offshore-a-q3-beat-could-be-a-catalyst-for-this-undervalued-stock-nysewti","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=74324","title":{"rendered":"W&T Offshore: A Q3 Beat Could Be A Catalyst For This Undervalued Stock (NYSE:WTI)"},"content":{"rendered":"
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Investment thesis<\/h2>\n

W&T Offshore (NYSE:WTI<\/span>) is small and undervalued offshore oil and gas producer in the U.S. Gulf of Mexico. Based on a recent precedent transaction, the implied value of W&T’s hydrocarbon reserves could be at least $1.5 billion which significantly exceeds the enterprise value of $845 million. For the valuation gap to close, the share price would need to appreciate from the current $4 to about $8-$9, reflecting a 200% gain.<\/span><\/p>\n

While W&T has struggled this year due to unexpected operational problems and weaker oil and gas prices, the stock seems to have found a bottom in April and has since been hovering in this support region:<\/p>\n

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\"TradingView<\/picture>
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TradingView via Seeking Alpha<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

With the “Holy Grail” drilling prospect out of the picture until 2024, WTI is still in search of a catalyst. In the meantime, the renewed strength in oil prices (CL1:COM), on the back of the Saudi\/OPEC+ cuts and the geopolitical risk premium, has created a favorable setup for a Q3 earnings beat and that may also spark some upward movement. The Q3 <\/span>revenue estimate is $129 million, but with oil prices having topped analysts’ projections, I expect actual revenue to come at $137 million at the mid-point production guidance. W&T will likely beat the EPS estimate of $0 too.<\/span><\/p>\n

In the medium term, rising natural gas prices and oil prices proving they are able to hold their current levels will provide further tailwinds going into 2024.<\/p>\n

Note: I have previously covered WTI on Seeking Alpha. For additional context, readers can reference my prior articles.<\/em><\/p>\n

Is W&T Offshore a value stock?<\/h2>\n

“Value” can mean different things to different people but it is usually associated with low pricing multiples. Seeking Alpha scores the company “A-” on valuation based on how W&T’s ratios compare to the peer sector:<\/p>\n

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\"W&T<\/span><\/picture>
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Seeking Alpha<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

However, while “A-” looks pretty good, it doesn’t capture W&T’s full potential. These ratios are based on flow measures (EBITDA, EBIT, Sales) and W&T is currently underperforming on these dimensions due to temporary factors:<\/p>\n

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  1. Weak Q1 production due to planned and unplanned downtime; this is impacting the production numbers for the whole year too;<\/li>\n
  2. Unfavorable gas hedges which W&T had to enter to be able to refinance its debt not so long ago; this caused the company to miss out on the natural gas windfalls in 2022. Currently, about 2\/3 of W&T’s gas production remains hedged;<\/li>\n
  3. Falling legacy production as W&T has had to manage cash tightly and has deferred its probably most promising drilling prospect (namely, the Holy Grail well at Garden Banks 783 in the Magnolia Field).<\/li>\n<\/ol>\n

    Yet, while investors value current profits, an oil and gas company is also a claim on the underlying reserves. Therefore, a company can also be a value stock if it trades at a discount to its net asset value (or NAV). In my view, this has indeed been the case and W&T’s discount to its NAV is significant.<\/p>\n

    The company reports its “PV-10”, a standardized NAV measure commonly used in the industry:<\/p>\n

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    \"W&T<\/span><\/picture>
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    W&T Offshore Presentation<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

    Proved reserves or “1P” was estimated at $2 billion. Adding probable reserves increases this figure to $3.4 billion. This compares to an enterprise value of $845 million. Even focusing conservatively only on the “producing” portion of the 1P reserves suggests a PV-10 of $1.4 billion.<\/p>\n

    The PV-10 though follows a standardized methodology that uses backward-looking pricing so it isn’t the same as a market value. However, W&T’s acquisition last month of producing assets in the U.S. GoM provides another angle from which we can look at this.<\/p>\n

    The valuation implications of W&T’s recent acquisition<\/h2>\n

    Part of the reason W&T delayed drilling its Holy Grail prospect was to conserve cash that could be used for opportunistic acquisitions. It seems the company was indeed able to find suitable assets to acquire:<\/p>\n