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Jelly Roll Capital Equity Research |
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W&T Offshore (WTI) |
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Selected Analyst Coverage (Target):
Natexis Bleichroder — ($42) RBC Capital Markets — Sector Perform ($36) |
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WTI Closed at $27.40 on 3-23-07 |
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Released 3-25-07 |
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· W&T Offshore (ticker: WTI) is a company that explores and drills for natural gas and oil, with operations in the Gulf of Mexico. At year end 2006, total proven reserves were 735 billion cubic feet (bcfe), and the company has another 9 trillion cubic feet (tcfe) in possible reserves from a recent acquisition and other drilling prospects. · W&T Offshore was founded with $12,000 in capital by current Chairman and CEO Tracy Krohn in 1983. Since then, W&T has become a multi-billion dollar company under his guidance and leadership. Krohn is still the majority shareholder of the company, owning over 50% of the shares. · Last year, W&T acquired significant assets from Kerr-McGee. Kerr-McGee’s reserves hold approximately 246.7 bcfe of proven reserves, for which the company paid $1.1 billion. This transaction allowed the company to acquire proven reserves for below-average costs compared to other Gulf of Mexico competitors, and CEO Tracy Krohn believes that W&T can add significant value to the transaction through the exploration and development of underutilized fields, which may contain an addition 1 tcfe of reserves. The potential for a large discovery gives WTI huge upside potential, which we believe the market is currently not factoring in. · To hedge against often-volatile oil and natural gas prices, W&T has hedged 15-20% of its production on the futures market. Assuming pricing for Henry Hub spot natural gas prices stays above $6/mmBtu, W&T should be able to generate upwards of $800 million in operating cash flow, which should give the company flexibility to repay its debt incurred from the Kerr-McGee property acquisitions, and begin to look for other accretive transactions to increase shareholder value. · Capital Expenditures for FY2006 were, in our opinion, artificially high due to costs from the Kerr-McGee acquisition as well as repair work necessitated by hurricane damage in 2005. For FY2007, we believe CAPEX will be in the $400-450 million range; this estimate combined with our operating cash flow assumption should leave W&T with enough free cash flow to repay nearly all of its Kerr-McGee related debt. Further, the infrastructure investments should continue to reap dividends for shareholders in years to come, allowing W&T the flexibility to make additional acquisitions or undertake greater exploration and drilling ventures. · Given W&T Offshore’s anticipated earnings growth, its balance sheet position, cash flows, and business risk, our fair value target for WTI is $47.05, putting WTI shares as being undervalued by approximately 71.70% based of Friday’s closing price of $27.40. · · Disclosure: The analyst has no position in WTI or its derivatives. |
