Source: Offshore Energy

The Houston-based W&T Offshore, Inc. (NYSE:WTI) released its second quarter of 2020 on August 5, 2020.

The company managed to report a narrower-than-expected adjusted loss of $0.02, but it has been brutal nonetheless. Revenues were cut by more than half sequentially.

In terms of production, it isn't easy to compare in the second quarter of 2019 and this quarter. In the fourth quarter of 2019, it was a significant rise in production due to the companys Mobile Bay area assets acquisition from Exxon Mobil (NYSE:XOM).

CEO Tracy Krohn said in the conference call:

We all know this is a cyclical business. Our success has always been based on maximizing free cash flow generation, operating efficiently and striving to constantly improve the profitability of our assets at any commodity price, this time has been no different.

The company produced oil, NGL, and natural gas and had a revenue of $55.24 million in the second quarter of 2020, mostly generated from oil, representing 55.5% of the revenues, as the graph below is indicating:

The investment thesis is relatively straightforward. I do not recommend investing long term in small or medium domestic E&P companies like W&T Offshore.

Oil and gas prices are too volatile and unpredictable, and the risk of a bust like we had this quarter is too high. However, the same volatility can be rewarding short term, and trading WTI based on oil and gas prices makes sense.

I often compare WTI to Chevron (NYSE:CVX), which is the poster child in the oil-producing business in the US, and we can see that the stock has underperformed Chevron quite significantly.

Data by YCharts

Source: Company PR and Morningstar

1 - Total Revenues of $55.24 million in 2Q'20

Revenues decreased by 59% to $55.24 million in the second quarter from $134.70 million a year ago and down 55.5% sequentially. The company had a net loss in the second quarter of 2020 of $5.90 million or $0.04 per share. Second-quarter 2020 adjusted earnings (excluding one-time items) were $2.2 million or $0.02 per share.

2 - Free cash flow was a profit of $4.3 million in 2Q'20

W&T Offshore free cash flow annually ttm is now a loss of $61.74 million, with a profit of $4.33 million for 2Q '20.

3 - Oil-equivalent production and other consideration

Total oil equivalent production averaged 42,037 Boepd in the second quarter of 2020. It was up 20.1% from 35,045 Boepd in the year-ago quarter. Liquids (oil and NGL) represented 48% of the total production in the quarter. Lease operating expenses shrunk to $7.40 per Boe in the second quarter from $12.65 a year ago.

For the second quarter of 2020, the average realized crude oil sales price was $21.67 per barrel. The Companys realized NGL sales price was $4.67 per barrel, and the realized natural gas sales price was $1.78 per Mcf.

The Companys mixed average realized sales price for the quarter was $14.10 per Boe (a new record low), which represents a 66% decrease from $41.83 per Boe the same quarter a year ago.

W&T Offshore projects 2020 production at 43.8-46.5K Boepd, implying a small rise from 40.6K Boepd in 2019. For the third quarter, the company expects production in the range of 40.9-45.1K Boepd.

For 2020, W&T Offshore is e lease operating expenses between $158 and $165 million.

4 - Net debt is now $587.71 million in 2Q'20. The net debt is about $587.71 million, with a net debt-to-EBITDA ratio of 2.01x as of June 30, 2020.

As of June 30, 2020, borrowings outstanding under the Credit Agreement were $80.0 million and letters of credit issued under the Credit Agreement were $6.1 million. Availability under our Credit Agreement as of June 30, 2020 was $128.9 million. The Credit Agreement matures on October 18, 2022.

Total liquidity on June 30, 2020, was $165.4 million, including $128.9 million of availability under W&Ts revolving bank credit facility. The revolver has been reduced from $250 million to $215 million, with an increase of the margin by 25 points.

Note: In the 10Q, W&T indicated that it "complied with all applicable covenants of the Credit Agreement and the Senior Second Lien Notes indenture as of June 30, 2020."

The second-quarter results have been overly severe for this small US offshore E&P. The combined price per Boe has never been so low, and revenue was cut by more than half sequentially, as I said earlier. However, on a positive note, I believe the second quarter will set the rock bottom in terms of production and revenues.

The COVID-19 pandemic disruptions will probably fade away with the discovery of a vaccine, which is expected at the end of 2020. The economy will recover slowly from this catastrophe, and the demand for oil and gas will be substantial again.

Already, oil prices have managed to stay above $40 a barrel, and we are now around $45-$44 a barrel. Some analysts are talking about higher prices with a significant breakout.

WTI is forming a descending triangle pattern (bullish) with resistance and support very close, indicating a potential resistance breakout.

I expect WTI to re test the 50MA and, potentially, the 200MA around $3, at which point it would be wise to take the profit off your position. However, if oil prices can hold above $40, WTI may eventually breakout support instead and drop as low as $1.20.

Watch oil prices like a hawk.

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Disclosure: I am/we are long CVX, XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I trade WTI short term occasionally

Excerpt from:

W&T Offshore: Volatility Is A Curse And A Blessing - Seeking Alpha