Shares of W&T Offshore (NYSE: WTI) have appreciated an spectacular operate lately. The stock was up an additional ten.5% this week, which pushed its calendar year-to-day rebound to extra than 45% (and we are only two weeks into the calendar year). In point, due to the fact previous September, shares are up extra than a hundred and fifty%.

That stated, even with those gains, the stock is nonetheless down extra than 70% more than the previous five several years, suggesting it could have extra place to operate. Having said that, when that upside likely might be tempting, this oil stock will come with a boatload of danger.

A natural gas flare from an offshore drilling rig.

Image supply: Getty Pictures.

Drilling down into why this oil stock has been so hot

Two elements have pushed W&T Offshore’s rebound. First, crude oil has been on fireplace and was lately in the $60’s, which is its most effective amount in 3 several years . In point, oil has risen extra than 40% due to the fact just previous summer season. Fueling that rebound has been a sizeable enhancement in oil market fundamentals, thanks in element to OPEC’s endeavours to drain materials. Individuals higher oil selling prices , if they keep up, would enable W&T Offshore to create extra income circulation from its production, which it could use to spend down credit card debt or drill additional wells.

Meanwhile, extra unique to W&T Offshore was its most the latest operations update from late December. The offshore-focused oil driller observed that two of its 3 most the latest exploration wells struck spend dust. A single properly achieved an original production level of one,100 barrels of oil equal for each day, which outperformed the company’s pre-drill anticipations. Meanwhile, a 2nd properly also encountered oil and ought to start out producing in the subsequent 12 to 15 months. These wells hinted that the business nonetheless has the likely to uncover a significant total of oil.

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

Image supply: Getty Pictures.

Of danger and reward

W&T Offshore could unearth extra of that oil in the coming calendar year due to the fact the business has “number of large-high-quality, minimal-danger exploration chances beneath way or prepared for the around potential that offer significant likely,” in accordance to comments by CEO Tracy Krohn in the 3rd-quarter press release. Assuming achievement, these wells will come on-line more than the subsequent calendar year, including incremental production and income circulation. In addition to that, the business estimates that its drilling software could unlock as a great deal as $2.2 billion of new oil reserves in the coming several years, which is a significant payday for the $one.5 billion business.

That stated, what stands concerning W&T Offshore and those incremental materials is its confined monetary means. The business stated that it would have to have to commit about $317 million in drilling wells to unlock these underwater oil means. That’s a ton of money for a business that could only manage to devote $a hundred twenty five million on drilling previous calendar year mainly because of reduce oil selling prices and its limited monetary condition. A single of the factors holding the business back again is nearly $900 million of large-expense credit card debt on its balance sheet, the bulk of which it took on to remain afloat during the oil market downturn. Simply because of that, it would make extra perception for the business to divert any extra income it pulls in from higher selling prices to paying out down credit card debt alternatively of drilling extra wells.

Right until the business shores up its balance sheet, it continues to be a great deal also risky for the common trader, specially when when compared to other oil shares with more robust balance sheets and extra obvious progress prospective buyers. For example, at $fifty oil, Encana (NYSE: ECA) would have the money to develop income circulation at a 25% compound once-a-year level by way of 2022. Furthermore, Encana’s strategy would create a whopping $one.5 billion in extra income more than that time frame, supplying it money to spend down credit card debt, maximize its dividend, or purchase back again shares.

This oil stock is also hot to touch

W&T Offshore’s stock has been scorching hot this calendar year mainly because investors are gambling that growing oil selling prices will give the business the income it requires to repair its balance sheet and drill profitable offshore wells. Having said that, that is a large-danger wager mainly because crude is not back again on solid floor just still, with lots of analysts expecting oil to tumble back again into the $50’s this calendar year . Simply because of that, investors shouldn’t touch this oil stock As a substitute, investors are better off looking at a business like Encana, which can thrive even if crude usually takes a tumble.

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