Executive Summary / Key Takeaways

• WT Offshore has significantly de-risked its balance sheet through a successful debt refinancing in early 2025, reducing total debt by $39 million and enhancing liquidity by eliminating substantial near-term principal payments.
• The company is poised for production growth in 2025, driven primarily by the successful integration and ramp-up of previously shut-in fields acquired in the January 2024 Cox transaction, with Q2 2025 production guided to increase 13% sequentially.
• A recent positive regulatory development from the Department of Interior regarding supplemental financial assurance in the Gulf of America is expected to alleviate uncertainty, reduce costs, and improve the credit environment for WTI.
• WTI maintains a strategic focus on accretive, low-risk acquisitions of producing properties in the Gulf of America, leveraging its long track record of successful integration and operational optimization to drive future value creation.
• Despite facing volatility in commodity prices and ongoing litigation risks related to surety bonding and contingent abandonment obligations, the company's improved financial flexibility and operational execution position it for potential upside.

Setting the Scene: A Gulf of America Stalwart Adapts and Evolves

WT Offshore, Inc. (NYSE: WTI) stands as an independent oil and natural gas producer with a history spanning over four decades, deeply rooted in the challenging yet prolific waters of the Gulf of America. The company's strategic blueprint has long been centered on generating free cash flow, diligently maintaining and optimizing its portfolio of high-quality conventional assets, and capitalizing on opportunistic, accretive acquisitions of producing properties. This methodical approach, honed over years of operating in the Gulf, forms the bedrock of WTI's business model and its place within the broader energy landscape.

Within the competitive arena, WTI operates as a focused, niche player compared to the scale and diversification of larger independents and supermajors like Occidental Petroleum (OXY), APA Corporation (APA), Devon Energy (DVN), and EOG Resources (EOG). While these larger peers often boast superior financial metrics – for instance, OXY and EOG typically exhibit higher net profit margins (OXY around 17-18%, EOG near 27-29% TTM based on available data) compared to WTI's recent TTM net loss margin of -20.66% – WTI's competitive edge lies in its specialized operational expertise and deep understanding of the Gulf of Mexico's complex geology and infrastructure.

WTI's operational moat is built not on groundbreaking new drilling technology, but on the practical application of seasoned expertise in asset management, efficient integration of acquired properties, and a persistent focus on cost control and optimization techniques like workovers and recompletions. Management emphasizes their "proven and successful strategy" and "ability to integrate accretive property acquisitions" as key differentiators. This operational execution allows them to identify value in mature or distressed assets, bring them back online efficiently, and manage production with a focus on maximizing cash flow, even if their overall scale and financial margins may trail larger, more diversified competitors. Their ability to achieve a low employee Total Recordable Incident Rate (TRIR) of 0.09 in 2024 also underscores a commitment to operational safety, a critical factor in the offshore environment.

The company's history is marked by strategic responses to market cycles and opportunities. The January 2024 acquisition of six shallow water fields from Cox, for $77 million, exemplifies this strategy. These assets, adjacent to existing operations, offered significant proved reserves (initially 21.7 MMboe, later revised up to 21.8 MMboe) at an attractive price point (approximately $3.38/Boe booked). While the integration presented challenges, partly due to the seller's bankruptcy and the need for facility upgrades, bringing these fields online has become a central driver for WTI's near-term production outlook.

Financial Transformation and Operational Momentum

The first quarter of 2025 marked a pivotal period for WTI's financial structure. The company successfully executed a comprehensive debt refinancing, issuing $350 million in new 10.75% Senior Second Lien Notes due 2029. The proceeds, combined with existing cash, were strategically deployed to redeem the outstanding $275 million of 11.75% Senior Second Lien Notes and repay the $114 million Term Loan. This series of transactions resulted in a $39 million reduction in total debt and, importantly, eliminated significant principal payments scheduled under the old Term Loan ($28 million in 2025, $25 million in 2026, $23 million in 2027, and $38 million in 2028). While this refinancing resulted in a $15.0 million loss on extinguishment of debt in Q1 2025, the long-term benefit of reduced interest expense and enhanced financial flexibility is substantial.

Complementing the debt restructuring, WTI also secured a new $50 million revolving credit facility, undrawn as of March 31, 2025, further bolstering its liquidity profile. The company ended Q1 2025 with $105.9 million in unrestricted cash and $50.0 million available under the new facility, totaling approximately $156 million in liquidity. This improved cash position was also aided by the early 2025 receipt of $11.9 million from a non-core asset sale (at a compelling $60,000+ per flowing barrel) and a $58.5 million insurance settlement.

Operationally, the first quarter of 2025 saw total revenues decrease to $129.9 million from $140.8 million in Q1 2024. This decline was primarily driven by lower oil and NGL revenues, despite a significant increase in natural gas revenue (up 62.4% to $35.1 million) fueled by higher realized prices ($4.45/Mcf in Q1 2025 vs. $2.48/Mcf in Q1 2024). Production volumes decreased by 0.5 MMBoe, impacted by temporary factors like freezing weather and shut-ins at acquired fields.

Operating expenses saw shifts. While total LOE remained relatively flat, the decrease in production volumes led to an increase on a per Boe basis ($25.88/Boe in Q1 2025 vs. $22.14/Boe in Q1 2024). Management noted decreases in base LOE due to processing credits and lower production-related costs, offset by increased facilities maintenance. Gathering, transportation, and production taxes decreased due to lower volumes and reduced prior-year processing fees. DDA per Boe increased, influenced by changes in future development costs and capitalized ARO, partially offset by a lower depreciable base from recent asset sale and insurance proceeds.

Despite the Q1 net loss of $30.6 million, WTI generated $32.2 million in Adjusted EBITDA and $10.5 million in free cash flow, demonstrating the underlying cash-generating capability of the asset base.

Outlook and Strategic Trajectory

WTI's outlook for 2025 is marked by anticipated production growth and continued strategic execution. The company provided Q2 2025 production guidance with a midpoint of 34,500 Boe/d, representing a significant 13% sequential increase from Q1 2025. Full-year 2025 production is guided to a midpoint of 34,000 Boe/d, a 6% increase over Q4 2024 production. This growth is expected to be driven by the successful ramp-up of the West Delta 73 and Main Pass 98/108 fields acquired from Cox, which were brought back online in late Q1 and early Q2 2025.

Capital expenditures for 2025 (excluding acquisitions) are projected to be modest, between $34 million and $42 million, focused primarily on workovers, recompletions, and facility upgrades to optimize existing and acquired production. This low CapEx approach, coupled with expected production increases from acquired assets, underpins the company's free cash flow generation strategy.

Cost guidance for Q2 2025 indicates slightly higher total LOE, G&T, and production taxes due to increased production, but management anticipates potential decreases on a per Boe basis as volumes rise. Full-year 2025 cost guidance is expected to be in line with 2024 levels, with ongoing efforts to find synergies and reduce costs.

A significant positive development for WTI's outlook is the recent shift in the regulatory environment. Following directives from the Trump administration, the Department of Interior indicated in April 2025 that it will not seek supplemental financial assurance in the Gulf of America, except in specific cases. This is viewed by management as a "very positive development" that should reduce financial assurance costs and alleviate uncertainty that has potentially weighed on the stock and credit facilities. While the timing and substance of future regulatory actions remain uncertain, this initial step is seen as favorable for offshore operators like WTI.

Commodity price forecasts from the EIA suggest potential headwinds for oil, with WTI spot prices expected to decline from a Q1 2025 average of $71.84/bbl to $61.33/bbl for the remainder of 2025 and $57.50/bbl in 2026. Conversely, natural gas prices are forecast to strengthen, averaging over $3.93/MMBtu in Q2 2025 and rising to $4.27/MMBtu in 2025 and $4.60/MMBtu in 2026, driven by demand growth. WTI has strategically added natural gas hedges to lock in favorable prices for a portion of its production, mitigating some price risk.

The company remains focused on accretive acquisitions, viewing the market as potentially offering attractive opportunities. Management explicitly favors acquisitions over higher-risk drilling in the current environment, citing their proven ability to integrate assets and generate value. The improved balance sheet and liquidity position WTI to pursue such opportunities. While a drilling joint venture is still being pursued, potential acquisitions could influence the timing of new drilling projects.

Risks and Challenges

Despite the positive developments, WTI faces notable risks. The most immediate is the ongoing surety litigation, where multiple surety companies are demanding approximately $254.7 million in aggregate cash collateral related to decommissioning obligations. WTI is challenging these demands in court, arguing they are unreasonable and inconsistent. The potential requirement to provide some or all of this collateral could significantly impact liquidity.

Relatedly, the company has contingent decommissioning obligations for previously divested interests or those held by bankrupt third parties, with an accrual of $21.4 million as of March 31, 2025. There is uncertainty regarding future orders or notices of default, and actual expenditures could differ substantially from estimates, potentially impacting results and cash flows.

Commodity price volatility remains a fundamental risk, directly impacting revenues, cash flow, and the value of reserves. While natural gas prices are forecast to rise, the projected decline in oil prices could offset some of this benefit. WTI's realized prices also differ from benchmarks due to differentials.

Regulatory risks, while showing a recent positive turn regarding financial assurance, persist. Past issues like the Rice's whale lawsuit highlight the potential for regulations to impact operations and costs. Changes in U.S. trade policy and tariffs could also negatively affect the business by impacting demand, prices, or operating costs.

Conclusion

WT Offshore has entered 2025 having executed a significant financial de-risking, substantially improving its balance sheet and liquidity through debt reduction and refinancing. This enhanced financial flexibility, coupled with a more favorable regulatory environment regarding financial assurance, provides a stronger foundation for future operations and strategic initiatives. The company is positioned for production growth in the near term, driven by the successful integration and ramp-up of acquired assets, demonstrating the value of its core operational expertise and acquisition strategy in the Gulf of America niche.

While challenges remain, including potential liabilities from surety litigation and the inherent volatility of commodity prices, WTI's proven ability to generate free cash flow, control costs, and identify and integrate accretive acquisitions positions it to navigate these risks. The focus on low-risk production optimization and opportunistic M&A, supported by a strengthened balance sheet, underscores the investment thesis: WTI is leveraging its deep Gulf of Mexico experience and improved financial standing to drive value creation, aiming to capitalize on its unique position in the basin amidst evolving market and regulatory dynamics.