Description
Company: W&T Offshore, Inc.
Security: WTI 9 ¾ 11/01/23 Corp at 96 (10.9% YTM)
Company Overview
Founded in 1983, W&T (WTI or the company) is an independent offshore conventional oil company, with a focus in the Gulf of Mexico. The company has 2x 2019 E leverage, is free cash flow positive down to $35/bbl of oil and has a CEO who owns 32.7% of the $655MM market cap.
Investment Thesis / Trade Summary
Recommendation
WTI is an offshore oil company in the Gulf of Mexico (GOM) with a CEO who owns 1/3rd of the market cap. The company’s strategy is conventional drilling, conservative balance sheet, and grow by acquisitions of assets that are either in bankruptcy or small and unwanted by the major oil companies. Leverage will be 2.0x by 2019, a slight increase from 1.5x in 2019 but WTI is free cash flow positive at $35/oil and has an equity cushion larger than it’s debt load with a high motivate owner/manager/investor.
Buy at 96 (10.9% YTM) and collect a 9 ¾ coupon. WTI is an off the run company with no sell side coverage. Net debt of $583MM is cushioned by $655MM market cap on this free cash flow positive E&P company, where the CEO owns nearly 1/3rd of the company’s stock.
Valuation & Structure
Capital Structure
This year, WTI expects to produce $300MM of EBITDA and generate over $100MM of FCF. The model summary above is a bit more conservative, but not far off from the company. The company has used its free cash flow to buy small conventional offshore assets in the Gulf of Mexico that the large oil majors are exiting as they are insignificant for them to operate.
W&T has been opportunistic and acquisitive, adding to $606MM of M&A acquisitions. The value of the below combined nearly equates the bonds. W&T is expected to use FCF in 2019 to add to its asset base.
Covenants (financial, springing liens, etc…)
Bonds are protected by a pretty tight leverage requirement as shown below:
· Leverage Ratio,
o 3.50 to 1.00 December 31, 2018 to March 31, 2019;
o 3.25 to 1.00 for quarters ending June 30, 2019 and September 30, 2019;
o 3.00 to 1.00 for quarters ending December 31, 2019 and thereafter.
o In the event of a Material Acquisition, as defined in the Credit Agreement, the Leverage Ratio limit is 3.50 to 1.00 for the two quarters following a Material Acquisition.
· PV-10 Value
o As noted below, independent reserve experts valued WTI’s reserves at $1.1bn as of 12/31/18.
Relative Value: Compared to better covered peers, WTI (B3/B-) has less leverage and trades wider:
Company Details
History
WTI has a long history of buying assets based on 1) assets the majors are exiting (Total, Shell) and 2) assets form bankrupt companies (Callon, Cobalt) as noted below.
Joint Venture
WTI has a Gulf of Mexico (GOM) Drilling Joint Venture with Baker Hughes & HarbourVest Partners and:
Management / Insider transactions
1. Mgnt owns more than 33% of shares outstanding
Risk Factors
Oil Price
· WTI’s key risk is the price oil, the company is FCF positive to at least $35/bbl, but the bonds will trade down on any weakness in oil.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
Accreative M&A, oil price stabilizes