This week, we look at an oil and gas producer focused in the Gulf of Mexico. W&T Offshore Inc (NYSE:WTI) was reviewed on several occasions by Durig Capital - recently in “Drill into 25%+ YTM with W&T Offshore..” in August, 2017.
W&T continues to post solid quarterly results as evidenced by its fourth quarter (Q4) and full year 2017 results.
- Operating income for Q4 increased 55.6% year-over-year.
- For the full year 2017, cash flow from operating activities was $159.4 million, an increase of $145.2 million over 2016.
- Adjusted EBITDA margin was 55%, up from 45% in 2016.
- For Q4, the company boasted interest coverage of nearly 3x.
W&T effectively weathered the the storm of low oil prices over the past few years and emerged a leaner, more efficient oil and gas producer. With a new joint venture agreement signed, the company is ready to increase production of its high return inventory at a fraction of normal cost. W&T has ample liquidity to pay off these June 2019 bonds and has indicated its ability to do so or to combine cash payment with refinancing. Given these developments, the bond’s yield-to-maturity of 9.5% make these ideal for additional weighting in both our Distressed Debt 1 Hedge Fund and Fixed Income 2 (FX2) Managed Income Portfolio.
Interest Coverage
For its most recent quarter, W&T had operating income of $33.2 million and interest expense of $11.6 million. This gives the company interest coverage of nearly 3x (2.9x).
Risks
Tracy Krohn, W&T’s CEO mentioned on several occasions that the company will be in good position to either cash out these bonds at maturity or do a combination of cash payment and refinancing. Cash payment of these bonds at maturity seems the probable course of action for WTI considering the company increased cash on hand in 2017 by 28.8 million for a balance of 99.1 million as of December 31, 2017.
Conclusion
With low decline assets, W&T has been kept production stable over the past few years with a reduced capital expenditure budget, and has taken a brilliant financial step in its latest joint venture agreement, enabling it to increase production for less capital outlay. For bondholders, interest coverage is a solid 2.9x and the company has healthy cash and liquidity levels. These short-term 13 month bonds are already part of our Distressed Debt 1 Hedge Fund and with the recent outstanding quarterly results, we intend to increase weighting in both the Distressed Debt 1 Hedge Fund and FX2 managed income portfolio.
Issuer: W & T Offshore, Inc.
Ticker: NYSE:WTI
CUSIP: 92922PAC0
Coupon: 8.50%
Maturity: 06/15/2019
Ratings: Ca / CC
Pays: Semiannually
Price: 99.00
Yield to Maturity: ~9.5%
Disclosure: Durig Capital and certain clients may hold positions in W&T Offshore June 2019 Bonds.