Cox Acquisition Bolsters Free Cash Flow Profile
W&T Offshore closed an acquisition of six operated oil & gas fields in the Gulf of Mexico on January 22, 2024, for $72 million. The acquisition, which was funded with cash on hand, fits management’s philosophy of investing capital in short-cycle opportunities capable of generating free cash flow. The acquired assets include 100% working interests (82% net revenue interests) in six producing fields adjacent to W&T’s existing asset footprint. Estimated production ranged from 3,700-5,700 BOE/d (68% liquids) during the first half of January 2024. As of January 1, 2024, the assets contained 18.7 million BOE of estimated proved reserves, having an estimated pretax PV-10 of $250.4 million based on estimates prepared by W&T’s independent third-party engineering consultants. The assets bring material upside potential, with 60.6 million BOE of proved plus probable estimated reserves having an estimated PV-10 $629.2 million based on year-end 2023 SEC pricing. For comparison, W&T’s current enterprise value is $665 million. W&T believes significant production can be added through workovers, recompletions, and repairs to the existing wells and facilities. April 2023 average production from the six fields was ~8,300 BOE/d (48% liquids) before the owners’ May 2023 bankruptcy filing. Neglect during the bankruptcy process likely leaves some low-hanging fruit W&T can pick to restore some of the production. Management indicated that the FY24 capital program will concentrate on increasing production and reducing costs in the acquired assets to add incremental value. Management now plans to postpone drilling the Holy Grail well in the Magnolia field and is exploring the formation of a drilling joint venture structure to bring partners in to participate in several deepwater wells, including Holy Grail, and at least one shelf exploratory well. W&T intends to provide its FY24 operating outlook and an update to the drilling venture process in conjunction with its 4Q23 earnings release in early March. We have updated our 4Q23 adjusted EBITDA estimate to reflect actual NYMEX pricing, which averaged $78.32/bbl for oil and $2.92/MMBtu for natural gas. Our prior estimates were based on $85.00/bbl and $3.00/MMBtu. We have updated our FY24 estimates to incorporate the preliminary estimated impact from the recently closed acquisition. We expect management’s capital allocation preference for restoring production and lowering costs on existing assets could position W&T to continue to generate meaningful free cash flow in FY24. Free cash flow supports W&T’s common stock dividend and could provide the capacity to take advantage of incremental accretive acquisition opportunities to build the asset base.
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