W&T Offshore’s free cash flow trend
FCF (free cash flow) helps a company to enhance shareholder value and can be used to pay dividends, buy back stock, or repay debt. FCF is calculated by subtracting capex from OCF (operating cash flow). As seen in the below chart, W&T Offshore (WTI) has reported negative free cash flows in 2Q16 and 3Q16. In 3Q16, WTI reported FCF (free cash flow) of -$4.3 million.
In this part, we’ll analyze why W&T Offshore is reporting negative free cash flow despite a huge reduction in capital expenditure.
Operating cash flow
For 3Q16, W&T Offshore’s total operating revenue was ~$107 million, ~15% lower than in 3Q15. The lower operating revenue in 3Q16 was the direct result of lower production volumes and lower realized prices for crude oil production.
In 3Q16, WTI reported OCF (operating cash flow) of ~$2.1 million, which was ~98% lower than its OCF of ~$104 million in 3Q15. The decrease in 3Q16 OCF was primarily due to lower operating revenue and lower margins for crude oil production. In addition to these factors, WTI is incurring expenses for plug and abandonment, which is also reducing its cash flow.
In 3Q16, WTI spent ~$6.4 million in capital expenditure, which was ~85% lower than in 3Q15. Despite such a big reduction in capital expenditure, WTI failed to stay free cash flow positive because of an even bigger decline in OCF.
For 2016, W&T Offshore expects capital expenditure of $60 million, which is ~74% lower than 2015 capital expenditure of ~$230 million. W&T Offshore’s capital expenditure guidance excludes any plug and abandonment expenses, capitalized expenses, and interest.
For 2016, W&T Offshore expects plug and abandonment expenses of $74 million. WTI expects to fund these expenses from cash on hand and cash flow from operating activities.