This Energy Stock Will Go Places

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You cannot ignore the Gulf of Mexico. Exploration and production companies operating in this region are slowly increasing their reserves. The Gulf is shedding the bad publicity it had acquired since BP's (NYS: BP) Macondo well blowout that led to a freeze on certain drilling activities. As the situation in the region returns to normal, one company seemingly out to exploit these resources is W&T Offshore (NYS: WTI) .

Decent returns
The Houston-based company has been posting decent returns over the past couple of years, thanks to a combination of high price realizations and increased production and sales. The growth in earnings before interests, taxes, depreciation and amortization averaged 15% in the last two years. This is encouraging, and I'm expecting this trend to continue for the next few years.

In expansion mode
The company is further expanding its hold in the offshore Gulf. It has acquired a 64.3% interest in the Fairway field from Royal Dutch Shell's (NYS: RDS.B) offshore division along with the associated Yellowhammer gas processing plant for $36.7 million. Mid-year estimated proved reserves increased by 41% to 114.3 million barrels of oil equivalent (MMBoe).

However, offshore properties are not the ones on management's radar. Its strategy to acquire and develop onshore properties is well placed. It eases the overall risk involved in solely managing offshore properties.

Strategy
As a result, capital expenditures have been pretty substantial in the first six months of the year. Total acquisition and investments in this period stood at $483 million, which included a $397 million acquisition in the Permian Basin.

Cash flow from operations in the past 12 months stood at $450 million. Management has leveraged to meet capex requirements. I don't think this strategy is too bad given the huge potential in these investments. Debt-to-equity currently stands at 146%.

How is the stock valued?
This is how W&T Offshore stacks up compared with its peers:

Company

TEV/EBITDA

(TTM)

P/E

(TTM)

P/B

(TTM)

W&T Offshore4.111.72.85

Quicksilver Resources

(NYS: KWK)

7.34.21.44

Gulfport Energy

(NAS: GPOR)

11.617.13.84

McMoRan Exploration

(NYS: MMR)

14.1NM2.09

Stone Energy

(NYS: SGY)

3.28.42.18

Source: Capital IQ, a Standard & Poor's company. TTM = Trailing 12 months. NM = Not meaningful.

The stock does not look too expensive. Rather, I should say it looks pretty attractive from an operational earnings point of view. However, a reduction in debt is imperative for balanced growth. That's why I'm not too impressed with its return on equity at 26%.

Foolish bottom line
I believe W&T Offshore will go a long way. The Gulf provides compelling opportunities with much more to be discovered. While the risk factor is slightly high, I believe that the company's potential returns are worth the risk.  

At the time this article was published Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article.Motley Fool newsletter serviceshave recommended buying shares of W&T Offshore. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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