We recently compiled a list of the 14 Best American Energy Stocks To Buy According to Analysts. In this article, we are going to take a look at where W&T Offshore, Inc. (NYSE:WTI) stands against the other American energy stocks.
Energy, primarily oil, drives the economy. This makes it one of the most important sectors for global and American economic prosperity. This importance has changed the US economic landscape quite a bit over the past couple of years. According to the Energy Information Administration (EIA), 2020 was a historic year for the US energy industry as it was the first time since 1949 that America became a net petroleum exporter. In 2020, the US imported 7.86 million barrels of oil per day, which was 640,000 barrels lower than its 8.50 million barrels per day of exports. Since then, US energy exports have continued to grow, and the oil surplus jumped to a record of 1.26 million barrels per day in 2022.
At the heart of this historic shift is the American energy industry which produced a historic 20.08 million barrels per day in 2022. This was nearly enough to theoretically meet America’s oil consumption of 20.28 million barrels, but despite this, the US continued to import oil. On the surface, this sounds counterintuitive since a net energy exporter should be sufficient to meet all of its requirements through its own production. However, as America has historically depended on sour oil imports from the Middle East, US shale, which is sweet oil with low sulfur content, cannot be processed in similar volumes due to its different chemical characteristics.
Building on this, even though the US might be unable to use all the oil it produces, on the surface, it would also appear that fewer regulations on the oil industry and more drilling would be great for the sector. Well, the reality, as is in most cases, is slightly different. This is because low regulations lead to high drilling and end up benefiting firms with high production capacity in the short term. In the long term, as output rises and more companies invest in drilling, the price of oil falls. This appears to be great, after all, who doesn’t like cheap gas prices? However, the US aims to have at least half of all new cars on the roads by 2030 be electric vehicles according to new rules by the Biden Administration. This goal will be fueled by initiatives such as the Inflation Reduction Act (IRA) which has earmarked $500 billion in spending and tax breaks for clean energy technologies and other areas.
So, if half of all new cars by 2030 are EVs and American oil producers end up expanding their production capacity to meet current demand, then they could end up sitting on excess capacity. Oil exploration is one of the most capital intensive industries in the world (upstream capital expenditure sat at $490 billion in 2022 according to the International Energy Forum) and recovering these costs requires steady demand. As a result, if regulations are strict, as opposed to lax, then oil producers will be forced to generate higher margins which carry the chance of improving production efficiency and lead to profit maximization that moves in line with the lower EV costs (and higher proliferation) of the future.
Shifting gears to focus on energy stocks, their performance depends quite a bit on energy prices. This was the case in 2022 when the Russian invasion of Ukraine disrupted the global energy supply chain and led to crude oil prices shooting to as high as $134 per barrel. During the same year, State Street’s energy ETF shot up by 54% as oil companies all over benefited from record revenue and profits. However, the outlook for the energy industry in 2024 isn’t as optimistic.
While the same ETF has gained 9.5% year to date, Brent crude opened 2024 at roughly $78 per barrel and is trading at $78.5 right now. For the second half of 2024, the EIA estimates that it will trade at $89 per barrel – higher than the first half average of $84. This is despite the fact that the world’s largest oil user, China, is facing an uncertain economy that has led some to believe that its oil consumption could drop by 3.8% in the year’s second half with diesel usage dropping by 5.6% annually. In fact, as FactSet notes, this “lower-than-forecast” global demand growth coupled with production increases might lead to an oversupplied oil market. If this is true, then the subsequent downward oil price adjustments could also lead oil stocks lower – and make current valuations overvalued.
Our Methodology
To make our list of the best American energy stocks to buy according to analysts, we ranked US based energy stocks with a market cap greater than $300 million by their average analyst share price target upside and picked out the stocks with the highest upside.
We also mentioned the number of hedge funds that had bought these stocks during the same filing period. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A drill cutting into the Earth, amidst a backdrop of oil rigs in the Gulf of Mexico.
W&T Offshore, Inc. (NYSE:WTI)
Number of Hedge Fund Investors in Q1 2024: 22
Average Analyst Share Price Target Upside: 329%
Average Analyst Share Price Target: $10
W&T Offshore, Inc. (NYSE:WTI) is a Texas based oil and gas producer with operations in the Gulf of Mexico. Like other US oil production firms, it is also growing through acquisition despite being limited to offshore drilling due to its presence in the Gulf of Mexico. W&T Offshore, Inc. (NYSE:WTI) closed a $72 million deal to expand its operations in the region in January 2024, and it contributed to a 30% growth in its production during the first quarter of 2024. The move also led to W&T Offshore, Inc. (NYSE:WTI)’s operating income growing by 10% over the previous quarter, to sit at $49.4 million. However, at the same time, the firm has to ensure that its growing production base does not suffer from any production shutdowns and also ensure that the new wells that it has acquired are able to profitably produce.
During the Q4 2023 earnings call, W&T Offshore, Inc. (NYSE:WTI)’s management shed light on its efficiency improvements when it shared:
“So while we were very busy from a financial acquisition standpoint, we also executed operationally. So for the first, well, for the full year 2023, we generated $15.6 million in net income, $183.2 million in adjusted EBITDA and $63.3 million in free cash flow. We delivered strong production of 34,900 barrels of oil equivalent per day. And we continue to pay down debt with net debt falling to $217.3 million. We adopted a quarterly cash dividend policy paying an initial dividend in December 2023 and announced the first quarter 2024 payment will occur later this month. So we continue to execute at a high level generating strong adjusted EBITDA and free cash flow despite decreases in pricing because it’s such an integral part of our strategy, I’d like to reiterate one more time.
The fourth quarter of 2023 marked the 24th consecutive quarter we have generated free cash flow. So coupled with our ability to pay down debt and improve our balance sheet, we’re in a strong financial position in 2024 and we remain focused on operational execution to build on these solid results.”
Overall WTI ranks 1st on our list of the best American energy stocks to buy according to analysts. You can visit 14 Best American Energy Stocks To Buy According to Analysts to see the other American energy stocks that are on hedge funds’ radar. While we acknowledge the potential of WTI as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than WTI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.