W&T Offshore: Very High Leverage With An Ominous Filing Delay
Summary
- W&T Offshore has delayed filing their routine SEC filings for the first quarter of 2020, which is rather ominous and leaves shareholders largely in the dark.
- They entered this downturn producing ample free cash flow, which set the scene well, and their forecast massive capital expenditure reductions will also help in the short-term.
- Unfortunately, this positive was completely negated by their very high leverage.
- Since their liquidity is also rather lacking, they are vulnerable to any missteps or an extended recovery timeline.
- When all of these factors are combined, I believe that a neutral rating is appropriate.
Introduction
It is seldom a positive development when a company delays their routine SEC filings during a severe downturn, such as W&T Offshore (NYSE:WTI). Whilst they have attributed this to the impacts of the coronavirus, it still remains rather ominous since this has not stopped the majority of other oil and gas companies from completing their filings on time. This has left investors largely in the dark for the last month, which further increases the associated investment risks and thus it seems worthwhile to analyze how well prepared they were heading into this downturn.
Cash Flows & Debt
Thankfully the graphs largely speak for themselves, with the first two graphs included below summarizing their cash flows and debt from the last quarter and previous seven years.
Image Source: Author
The first aspect to consider is their historical cash flow performance, and whilst this downturn has created immense uncertainties regarding this going forward, analyzing their performance during normal operating conditions allows for judgments of whether they are fundamentally viable. If this were not the case outside of a downturn, then their ability to survive a downturn is very questionable. If an established oil and gas company has displayed no ability to generate free cash flow, then I deem them unlikely to be fundamentally viable since continuous negative free cash flow will eventually result in bankruptcy due to their very high capital intensity and field decline.
Thankfully they were able to produce free cash flow each year during 2017-2019 that averaged $119m, which set the scene well heading into this downturn. When looking ahead, it seems likely that they can at least remain cash flow neutral during 2020, given their guidance for massive capital expenditure reductions to only $20m at the midpoint, which compares to $126m from 2019. Even though this helps in the short-term, they cannot continue indefinitely into the medium- and long-term without causing severe damage to their production due to the very high capital intensity of their industry.
Image Source: Author
Following their free cash flow, it is also positive to observe their net debt steadily decreasing, having declined by 48.28% since peaking at the end of 2014. This indicates that their financial position has likely been improving, although admittedly their moderately low cash balance is not particularly desirable, as subsequently discussed, it indicates that their liquidity is likely lacking.
Financial Position
Even though they have not provided the financial results for the end of the first quarter of 2020, by analyzing their results from the end of 2019, it nonetheless is still possible to infer whether they were adequately prepared for this downturn. The two graphs included below summarizes their financial position from the last quarter and previous three to seven years.
Image Source: Author
Whilst they have made considerable progress lowering their leverage since the end of 2017, unfortunately it has still been inadequate to prepare them for this severe downturn. A gearing ratio above 100% is extremely high and results from them carrying negative equity on the balance sheet, which means that liabilities are higher than their assets. Admittedly the accounting value of assets can sometimes not reflect their true economic value; however, even if their gearing ratio is ignored, the situation does not materially improve.
They ended 2019 with a net debt-to-EBITDA of 2.78 and interest coverage of only 1.99, both of which indicate that net debt is approximately twice as high as could be considered safe for a relatively small oil and gas company. Thankfully given their history of producing free cash flow, once operating conditions recover, they should be capable of resuming deleveraging, provided they survive long enough. Based on net debt at the end of 2019 of $687m, it would only take approximately three years based on the average free cash flow from 2017 to 2019 to halve their net debt.
Image Source: Author
The risks surrounding their very high leverage are further amplified by the company entering this downturn with liquidity that was rather lacking, which has also been deteriorating since the end of 2017. Even though the current ratio of 0.75 was not quite at crisis level, when combined with the moderately low cash balance, it increases the company's reliance on their credit facility. The remaining undrawn balance at the end of 2019 was $139.2m, and whilst this provides a degree of flexibility, it would only be sufficient in the short-term.
This situation is even less desirable considering their forecast massive capital expenditure reductions can also only last for the short-term too, which means that if operating conditions fail to continue recovering, they could be hit with a double problem simultaneously in one to two years. They were also due to have their semi-annual credit facility determination on the 15th of May 2020, and since there have been no announcements by the company following this data, the outcome remains uncertain. Given the already very high leverage, it would be very risky to assume that debt markets would allow the company to materially increase their debt. The remainder of their debt matures in November 2023, which thankfully provides them several years to either refinance or repay the principal. Overall their ability to remain a going concern throughout this downturn is quite questionable if operating conditions fail to recover within the next year.
Conclusion
On one hand, they were well prepared from a cash flow perspective; however, the very high leverage leaves the company very vulnerable to any missteps or an extended recovery timeline. Even though operating conditions feel calmer now versus a couple of months ago when oil prices turned negative, it should be remembered that we are certainly not out of the woods yet. When all of these factors are combined, I believe that a neutral rating is appropriate.
Notes: Unless specified otherwise, all figures in this article were taken from W&T Offshore's SEC filings, all calculated figures were performed by the author.
This article was written by
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Comments (9)
"Reports Q1 production increase 61% Y/Y of 53,553 Boe/day (48% liquids), near the high end of W&T’s guidance range"
