Shares of W&T Offshore (NYSE: WTI) have loved an remarkable operate currently. The stock was up yet another ten.5% this 7 days, which pushed its calendar year-to-day rebound to much more than 45% (and we’re only two months into the calendar year). In truth, considering that very last September, shares are up much more than a hundred and fifty%.

That reported, even with those people gains, the stock is nevertheless down much more than 70% around the earlier five several years, suggesting it could have much more place to operate. However, although that upside potential may possibly be tempting, this oil stock arrives with a boatload of danger.

A natural gas flare from an offshore drilling rig.

Picture source: Getty Photographs.

Drilling down into why this oil stock has been so very hot

Two elements have driven W&T Offshore’s rebound. First, crude oil has been on fireplace and was not long ago in the $60’s, which is its best degree in a few several years . In truth, oil has risen much more than forty% considering that just very last summer time. Fueling that rebound has been a important enhancement in oil sector fundamentals, thanks in aspect to OPEC’s attempts to drain provides. Individuals better oil prices , if they maintain up, would enable W&T Offshore to produce much more dollars move from its manufacturing, which it could use to fork out down personal debt or drill supplemental wells.

In the meantime, much more certain to W&T Offshore was its most latest functions update from late December. The offshore-centered oil driller famous that two of its a few most latest exploration wells struck fork out dust. 1 nicely realized an first manufacturing price of 1,one hundred barrels of oil equivalent per working day, which outperformed the company’s pre-drill anticipations. In the meantime, a next nicely also encountered oil and ought to start out generating in the subsequent 12 to 15 months. These wells hinted that the firm nevertheless has the potential to uncover a significant sum of oil.

An offshore oil platform with the sun rising in the background.

Picture source: Getty Photographs.

Of danger and reward

W&T Offshore could unearth much more of that oil in the coming calendar year considering that the firm has “quantity of significant-high quality, lower-danger exploration chances beneath way or prepared for the near potential that give significant potential,” in accordance to opinions by CEO Tracy Krohn in the 3rd-quarter press release. Assuming good results, these wells will occur on the internet around the subsequent calendar year, incorporating incremental manufacturing and dollars move. In addition to that, the firm estimates that its drilling method could unlock as substantially as $two.two billion of new oil reserves in the coming several years, which is a significant payday for the $1.5 billion firm.

That reported, what stands among W&T Offshore and those people incremental provides is its confined economical methods. The firm reported that it would will need to invest about $317 million in drilling wells to unlock these underwater oil methods. That is a good deal of revenue for a firm that could only find the money for to commit $a hundred twenty five million on drilling very last calendar year simply because of decrease oil prices and its tight economical problem. 1 of the issues holding the firm back again is approximately $900 million of significant-expense personal debt on its stability sheet, the bulk of which it took on to stay afloat for the duration of the oil sector downturn. For the reason that of that, it would make much more sense for the firm to divert any excess dollars it pulls in from better prices to paying out down personal debt as a substitute of drilling much more wells.

Till the firm shores up its stability sheet, it remains substantially much too dangerous for the regular investor, primarily when as opposed to other oil stocks with more powerful stability sheets and much more seen expansion potential clients. For illustration, at $50 oil, Encana (NYSE: ECA) would have the revenue to improve dollars move at a twenty five% compound once-a-year price by means of 2022. Also, Encana’s approach would produce a whopping $1.5 billion in excess dollars around that time frame, giving it revenue to fork out down personal debt, increase its dividend, or invest in back again shares.

This oil stock is much too very hot to touch

W&T Offshore’s stock has been scorching very hot this calendar year simply because investors are gambling that climbing oil prices will give the firm the dollars it needs to fix its stability sheet and drill valuable offshore wells. However, that is a significant-danger guess simply because crude is not back again on stable floor just still, with lots of analysts anticipating oil to tumble back again into the $50’s this calendar year . For the reason that of that, investors shouldn’t touch this oil stock As a substitute, investors are improved off taking into consideration a firm like Encana, which can thrive even if crude normally takes a tumble.

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Matthew DiLallo has no situation in any of the stocks mentioned. The Motley Fool has no situation in any of the stocks mentioned. The Motley Fool has a disclosure plan .

The views and viewpoints expressed herein are the views and viewpoints of the creator and do not essentially replicate those people of Nasdaq, Inc.

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