Growing WTI Could Be a Real Find

I think there is still quite a bit of run left in the energy bull market. That belief has led me to some good picks, such as Patterson Uti (PTEN - commentary - Cramer's Take) and Flowserve (FLS - commentary - Cramer's Take), as well as one bad one, Frontier Oil (FTO - commentary - Cramer's Take). My models recently brought W&T Offshore (WTI - commentary - Cramer's Take) into focus, and I'm thinking it is more likely one of the former than the latter.

W&T is an independent oil and natural gas producer, active in the acquisition, exploitation, exploration and development of oil and natural gas properties in the Gulf of Mexico. It has begun extending its traditional expertise in the conventional shelf (less than 500 feet deep) to exploring deepwater and deep-shelf sites up to 15,000 feet deep. Since becoming a public company in 2005, its revenues have more than doubled, driven by rising prices and increased sales volume.

The company has recently enjoyed a successful exploration streak. In 2007, it drilled seven exploratory wells and two development wells. Both of the development wells were successful, as were six of the exploratory wells. Since that time, the company has announced that it is 6-for-6 so far this year. It is also growing through acquisitions of small projects from larger oil producers that want to focus on more capital-intensive projects.

The growth will ultimately be needed. By management's own estimate, the discounted future cash flows from its proven reserves amount to just $2.1 billion, well below the current market capitalization. To that end, the company is dramatically expanding its exploration activities. During 2008, it plans to drill 44 exploratory wells and six development wells and projects capital expenditures of about $800 million, $450 million of which is expected to be spent for development activities, $330 million for exploration and $20 million for seismic.

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At the time of publication, Trent had no positions in the stocks mentioned, although positions may change at any time.

William A. Trent, CFA, is a freelance equity analyst based in the New York metro area. He has been an equity analyst since 1996 and is co-author of Understanding and Evaluating Prospectuses, Offering Documents, and Proxy Statements. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Trent appreciates your feedback; click here to send him an email.