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AS CRUDE OIL

tops $130 a barrel,

W&T Offshore

Houston-based W&T is the largest independent driller focused solely on the Gulf of Mexico. It produces slightly more natural gas than oil, and divides its operations between risky but lucrative exploration and safe, lower-margin development. When poking around for new oil W&T has built a stellar success rate of 78%; it's 91% successful when squeezing more energy out of already-found reserves.

Analysts expect that W&T, valued at $4.2 billion, will produce more than $1 billion in operating cash a year through 2012. Good thing: Management is undertaking a bold drilling program. It wants 50 new wells by year's end. That includes 44 exploration wells costing an estimated $330 million and six development wells costing $450 million. (Naturally, it costs much more to exploit a reserve than to merely find one.) Add $20 million in spending for the company's ongoing seismic mapping effort and you have total capital expenditures for the year of $800 million. Last year capex came to just $361 million.

The spending tear is perhaps fueled as much by W&T's ho-hum production outlook as by costly oil. Since 2000 the company has grown production at a compounded yearly rate of 27%, but for 2008 management is guiding toward 115 to 140 "bcfe," or billion cubic feet equivalent, an industry standard used to combine oil and gas into a single unit of measurement. That's either a modest increase of none at all; last year W&T produced 126.5 bcfe. The company has increased its reserves by an average of 23% a year since 2000, but folded into that figure is a 13% drawdown last year.

A flood of spending followed by a long wait for the payoff does not tend to entice Wall Street analysts. Four of the 14 who cover W&T have downgraded their recommendations this year (including one who reversed an earlier upgrade, the stock's only one this year). W&T has trumped earnings forecasts by an average of 36% over its past four quarters, but surprisingly profitable drillers are in plentiful supply right now. Analysts are favoring the ones whose production growth seems more assured.

Investors are sweeter on W&T. They have bid the stock to triple its January 2005 debut price, and have sent it 83% higher this year alone. Remarkably, the company turned up on a recent screen for companies whose stock prices appear modest relative to the free cash they've generated over the past year. W&T's price/free-cash-flow ratio of 13 is lower than the S&P 500 median of 17 and the 25 median for the 20 or so oil and gas explorers in our database that produce free cash.

If you're more comfortable tallying earnings than free cash, note that the doubling in profit W&T is expected to produce this year gives the stock a 2008 price/earnings ratio of 12. But consider, too, that longer-term growth likely won't be so exciting. While this number is as much a bet on crude prices as on W&T's success, Wall Street foresees the company growing its profit just 3% next year.

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Data as of May 20, 2008.

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