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WTI oil prices cut much of their earlier losses Tuesday to finish just a few cents lower, holding ground at a three-week low.
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State-run Bharat Petroleum Corp has bought 1 million barrels of low sulphur WTI Midland grade, the first purchase of the U.S. grade by an Indian company, through a tender, an industry source with knowledge of the deal said.
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Oil price The oil market was fast and furious yesterday and in heavy trading both WTI and the new ...
Forbes  Jul 31  Comment 
With WTI currently sitting just shy of $50/bbl, it’s time to ask, why Hall and I got the oil-price bounce-back right, but were too bullish on the trajectory of prices? To answer the question, I recently re-ran (read: re-calibrated) my oil-gold...




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W&T Offshore is an independent petroleum company with net proved reserves of 638.8 Bcfe and an almost-even reserve split between oil and natural gas. It operates exclusively in the Gulf of Mexico. Since 2003, annual production from shallow Gulf Shelf has been declining, bad news for W&T because eight of its ten properties are in that region. But rising oil prices have buoyed the company's revenues, and are giving it the financial incentive to enter the expensive and risky deepwater oil exploration sector. Though this may, in the future, let the company move off the maturing Shelf, thus far the company has had little success, as deepwater operations have generated only 3% of its production. W&T competes with the oil majors, as well as with Apache, Devon Energy, and Bois D'Arc Energy.

Business and Financials

W&T Offshore is an independent oil and gas exploration and production company that drills for hydrocarbons in the Gulf of Mexico. Its reserves are 52% natural gas and 48% oil and natural gas liquids.[1] The company operates mainly on the shallow Gulf Shelf, though it has one field on both the shallow and deep shelf and two fields in the deepwater region of the Gulf.

The company sells its oil and gas to petroleum marketing companies. In 2007 Shell made up 31% of the company's revenues, while ConocoPhillips made up 17% and Chevron made up 11%.[2]

W&T Offshore Operating Data [3]
2007 2006 2005
Total Sales (MMcfe) 126.5 99.2 71.1
Average Sales Price ($/Mcfe) 8.80 8.07 8.23
Oil Sales (MMBbls) 8.3 6.5 4.1
Average Sales Price ($/Bbl) 67.85 57.70 48.85
Natural Gas Sales (Bcf) 76.7 60.4 46.5
Average Sales Price Price ($/Bbl) 7.20 7.08 8.27
Net Proved Reserves(Bcfe) 638.8 735.2 491.5
Net Proved Oil Reserves (MMBbls) 51.0 55.7 45.9
Net Proved Natural Gas Reserves (Bcf) 332.8 401.2 215.9
Net Reserve Additions (Bcfe) 31.1 342.8 95.1

Note: Prices are before hedging

In 2007, W&T saw revenues of $1.1 billion, up from 2006's $800 million. Operating income fell from $318 million to $249 million, but EBITDA actually rose 19% thanks to higher oil prices.[4]

Trends and Forces

A Maturing Gulf Shelf Threatens W&T's Long-Term Viability

Eight of W&T's ten properties are located on the shallow shelf of the Gulf of Mexico, accounting for 97% of the company's daily production.[5] W&T is not alone in being dependent on the Gulf Shelf; as of June 2007, 4,000 platforms were actively drilling on the shelf, representing about half the leases handed out for the entire Gulf of Mexico. The Gulf Shelf has produced consistently since the 1960s. In 2007 it was responsible for 7.6% of U.S. oil production and 10.2% of U.S. gas production - but these production numbers are part of an overall decline in production rates since 2003. The Minerals Management Service (MMS) estimates that production in the region will fall from 329,000 barrels per day to 182,000 barrels per day in the next nine years - a decline of 55%, and a big reason why many of the oil majors are leaving the shallow shelf for deeper waters.[6] 62% of W&T's reserves are proved developed, while the rest are proved undeveloped. This gives the company a bit of a cushion from future decline of the shallow shelf's production, but given the company's 2007 production rate and the size of these undeveloped reserves, the cushion will only last for two years.[7]

Rising Oil Prices Mean W&T's Revenue Grows Even Faster than Production

Oil and gas prices have fluctuated heavily over the past few years, though since mid-2007, the trend has been up. Oil traded on international markets for $120/bbl in early May, a record high, while natural gas traded at over $10/Mcf.[8] W&T's average sales price for one Mcf of natural gas equivalent rose from $8.07 in 2006 to $8.80 in 2007, an increase of 9%; in the same period, production grew by 28%. Total revenues, however, grew by 39%, and EBITDA grew by 19%.[9] Rising prices caused revenue to increase by more than production increased. EBITDA would have increased by more, except that the company's involvement in deepwater oil exploration caused costs to increase disproportionately.

High Oil Prices Have Lead W&T to Invest in Deepwater Oil Exploration

With prices so high, oil exploration and production companies have seen revenues and margins grow, and are keen on taking advantage by expanding production. Conventional reserves, like those on the Gulf Shelf, are maturing, however, so these E&P companies are turning to new, more expensive technologies to extract oil and gas from previously impossible locations. One of these new technologies, in which W&T in invested, is deepwater oil exploration. At the end of 2007, the company was operating two deepwater fields; the Green Canyon 19 Field is operated by Exxon Mobil but W&T has a 25% working interest in it, while the Green Canyon 82 Field is owned in entirety by W&T, but had no production as of December 31st 2007, despite the company drilling three wells during the year. Only 3% of W&T's production comes from these deepwater reserves.[10] Deepwater exploration is risky; deepwater rig contracts can cost upwards of $800,000 per day[11], while the average success rate for striking hydrocarbons in the deepwater Gulf was just 45% in 2007. Furthermore, deepwater exploration of the Gulf in 2007 yielded results that were much weaker than those of 2006; discovered deepwater reserves in 2007 were less than half of the 1.4 billion boe discovered in 2006.[12] The rewards of deepwater drilling, however, can be great; in April of 2008, for example, Brazilian oil major Petrobras discovered a deepwater oilfield reputedly containing 33 billion barrels of oil equivalent (though more research will be needed to fully assess the field's worth).[13]

Legislation Supporting the Development of Renewable Energy Threatens the Long-Term Strength of Hydrocarbons in the U.S.

Whether it’s because of the desire for energy independence, the rising price of oil, or fears of climate change, people are becoming more and more disillusioned with petroleum. Environmentalists have been calling for a shift to renewable energy for years, and though the river of change is running slow, it is running deep. The Energy Independence and Security Act of 2007 is the first step towards a grander series of changes. By forcing automakers to achieve 35 mpg by 2020 and setting a Renewable Fuel Standard of 36 billion gallons of biofuels in 2022[14], the Act has potential to get the ball rolling to greatly reduce American dependence on hydrocarbons - and environmentalists, who have deemed climate change to be "Our Generation’s Defining Moral Challenge", will continue to push for greater change. Already, 26 states across the country have adopted Renewable Energy Standards to increase the share of renewables in their energy mixes, while both Democratic candidates for President have pledged to reduce carbon emissions by 80% below 1990 levels by 2050.[15][16] While the Republican candidate isn't so tough on emissions, he still supports a strong cap-and-trade system. In emerging markets like China and India, the drive for economic growth supersedes environmental concerns, but since W&T's major customers are in the U.S., a changing American environmental and energy paradigm will be disastrous to its business without the development of some effective carbon sequestration technology.

Competition

Many E&P companies operate in the Gulf of Mexico, as it has been yielding oil and gas for over 40 years, though the number has fallen as the smaller players have been absorbed by larger companies over the last few years (M&T acquired Kerr-McGee for $1.1 billion in 2006, for example). Aside from the oil majors, who are far too large to really be considered as fair competition for W&T, other companies that operate in the Gulf include:

  • Devon Energy - Devon Energy operates both onshore and offshore, with reserves of 8,356 Bcf of natural gas and 983 MMBbls of liquids. The company plans to start drilling in the Lower Tertiary of the Gulf, which is an ultra-deepwater location.
  • Apache - Apache's unique expansion strategy involves buying depleted reserves from other E&P companies and then extracting every last bit of hydrocarbon. The company has operations around the world, with total reserves reaching 2,446 MMBoe.[17]
  • Bois D'Arc Energy - Bois D'Arc has reserves of 344 Bcfe, and is controlled by Comstock Resources.[18] The company is focusing on its shallow Shelf operations, though it has begun deepwater exploratory projects.




References

  1. WTI 2007 10-K, Page 1
  2. WTI 2007 10-K, Page 60
  3. WTI 2007 10-K, Page 35
  4. WTI 2007 10-K, Page 33
  5. WTI 2007 10-K
  6. Access My Library: "The Gulf of Mexico shelf: still a cash flow machine: majors out, independents in.(GULF OF MEXICO)(Cover story)"
  7. WTI 2007 10-K Calculated by dividing undeveloped reserve size by 2007 annual production
  8. Energy Prices Data, Accessed May 7th, 2008
  9. WTI 2007 10-K
  10. WTI 2007 10-K, Page 23
  11. Energy Current: "Deepwater rig day rates hit new high", November 9th, 2007
  12. Oil Savvy
  13. MarketWatch: "Petrobras cautions more data needed on oil find"
  14. WhiteHouse.gov, Fact Sheet: Energy Independence and Security Act of 2007
  15. CNN Election Center: Issues: Environment
  16. Washington Post: "A Green(er) Obama"
  17. Apache Summary Annual Report: Financial Highlights"
  18. Bois D'Arc Operations Page
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