Quantitative Tests of W&T Offshore

WTI’s operating margin is at 37%, which is slightly lower than the 49% it had last year and 47% in 2004. But it did rise substantially from 2002 till 2004. Relative to the industry the margins are high. WTI only report a one time extraordinary loss only once for a small amount back in 2002 which is insignificant. Operating income rose every year so far, beginning with 50 million USD in 2002 and rising to approximately 300 million in 2006.

Assets and Liability

WTI’s total asset to liability ratio is 1.66 to one. Its current asset to liability ratio is 0.51, much lower than its 2005 value of 1.23 to one, and its 2004 value of 0.94 to one. Its quick ratio is also low at 0.21 in 2006 and 1.0 in 2005. This is not so worrying, however, because the company’s interest expense coverage is 11 times, (i.e., its revenues are 11 times the size of its interest expense.)

WTI’s total debt to common equity gyrated from 10% in 2004 down to 7% in 2005, to 65% currently. The industry average is 95%.

 Return on capital is at 18%, above the industry average, but it has dropped considerably from 38% last year and 44% in 2004. Return on assets is currently at 10% which is half of what it was in 2005, but still better than the industry average.

WTI is trading at a price to book ratio of 2.1 times, the same value as its price to tangible book ratio. This figure is much better than the industry average of 4 times and 16 times respectively. The intangibles asset ratio – (Goodwill + other intangibles)/Total assets – is 0% which is good news.

WTI has US$1,230,900 worth of stock based compensation in 2006. Net income in 2006 was $199,104,000. Stock based compensation as a proportion of net income is only 0.62%, which is very low, and much lower than Heisermann’s 15% maximum.

Other Ratios

Currently the P/E is at 13 – half the industry average of 27.4. The next year’s estimated P/E is 10.9x which is lower than the industry average expected P/E of 18x. Price to sales ratio is 2.2x, again much lower than the industry average of 5x. Price to cash flow is 3.5x; the industry average is 9.6x.

Revenue Potential

The first question we asked in “Hazard Check for Stocks: Quantitative Factors” was whether or not the company could raise prices. WTI’s oil and gas prices are driven by general global prices. The market is very competitive and there is little to no variation amongst the oil and gas produced by the different exploration companies. For this reason the price that WTI receive for its oil is very closely determined by market demand and supply, which are driven mainly by political situations and macroeconomic factors.

If WTI wants to increase profitability it needs to increase revenues and reduce costs. Revenues are increased by pumping out more oil and gas and seeking out new fields. WTI’s proved oil and gas reserves grew by 346% to 735 Bcfe. This was accomplished by the addition of reserves from the Kerr-McGee transaction as well as through the company’s own exploration efforts.  Between 2001 and 2006 WTI drilled 50 successful shelf wells out of 64, which resulted in a 78% success rate. In 2006, 9 of 12 exploration shelf wells were successful. The company anticipates shelf volumes increasing even more this year from deployment of new assets, resumption of production shut down by hurricanes and start ups of several new major projects.

WTI is making technological investments in 3-D seismic data to optimize production and support exploration efforts. Furthermore, they have hired 36 former operations personnel this year as well as additional geoscientists and engineers.

Costs

Operating costs are difficult to objectively analyze because they vary by the type of commodity being produced as well as the level of activity. The main costs come with operating the wells, platform and other infrastructure, as well as transporting the products to the point of sales.

WTI’s exploration track record is a 79% drilling success rate on exploratory and development wells, which exceeds the industry average. Furthermore they have proven their ability to acquire exploratory wells at attractive prices.

WTI’s operating margin rose from 31% in 2002 to 49% in 2005 and dropped down to 37% in 2006.

Growth Prospects

WTI grows its reserves through acquisitions and drilling programs. Although it doesn’t seem to indicate organic growth, acquisitions in the oil industry are different to ones in others like airlines. This is because the acquisitions are made with the purpose of increasing reserves and not just acquiring the company (which often includes a lot of goodwill in the price). WTI generates a high return on invested capital by reinvesting excess cash into new exploratory opportunities.