Energy XXI: This Heavily-Hit Oil Stock Can Make a Comeback

Energy XXI (EXXI) is one of the worst-hit companies in the energy industry, with the oil stock down 90% in the past year. Considering the weakness in energy and gas pricing over the past year, this might not seem surprising at first. However, relative to the drop in oil and gas prices, Energy XXI's performance has not been that bad in the past year. This is because of 42% growth in the company's production last quarter. Additionally, the company has been able to reduce its costs at an impressive pace, as discussed later.
Moreover, Energy XXI's hedges have also played an important part in the company's resilient performance last quarter.

For instance, in the previous quarter, Energy XXI saw a hedge gain of $55.6 million as compared to a derivatives loss of $7 million in the prior-year period. This cushioned the drop in its crude oil and natural gas sales to a great extent. If we exclude the impact of hedges, Energy XXI's revenue would have dropped almost 30% year-over-year as compared to the 9% drop including the impact of hedging.

An improving cost and production profile bodes well for the long run

But, despite record production of 60,000 BOE/day during the previous quarter, as compared to 42,300 net BOE/day in the same period last year, Energy XXI's bottom line has suffered due to weak oil and gas pricing. But, on the bright side, the company is adopting measures to enhance liquidity and reduce costs.

Its lease operating expenses declined to $108 million during the quarter from last year's $119 million. Going forward, Energy XXI will see further reduction in its lease operating expenses and capital expenditure by focusing on projects that carry a lower risk.

Apart from reducing costs, Energy XXI is strengthening its asset base with the development of new rigs. Energy XXI currently operates two rigs -- one workover rig at the South Pass and the other rig drilling development wells at West Delta 73. Under this program, the company has completed eight wells to date in the South Pass 78 field workover program.

Consequently, its production has more than doubled to 5,100 BOE/day as compared to 2,500 BOE/day when the program was initiated earlier this year. For 2016, Energy XXI plans to drill up to 14 development wells, seven of which will be drilled at West Delta 73.

Optimizing the asset base will lead to more efficiency and ease pressure on the balance sheet

Along with cost reductions and production increases, Energy XXI is also focused on streamlining its business by selling its noncore assets. As a result, the company recently divested the East Bay field, which was carrying a P&A (plugging and abandonment) liability of more than $150 million on its balance sheet. Energy XXI sold East Bay field for a sum of $21 million, and the buyer will assume the P&A liability.

However, Energy XXI will retain a 5% overriding royalty interest on the asset for approximately five years. Additionally, it will also retain 50% of the deep rights associated with the East Bay Field. More importantly, by divesting this asset, the company will now be able to focus on its other growth areas.

According to CEO John Schiller, “The sale of East Bay allows the company to focus on activities in fields with higher profitability, while significantly reducing our plugging and abandonment liability in the Gulf of Mexico. We continue to evaluate additional opportunities to sell non-core assets in the Gulf of Mexico."

The sale of the East Bay field comes on the heels of Energy XXI's divestment of the Grand Isle Gathering System, for which it received $245 million. Eventually, these divestments will strengthen its balance sheet, which is not in good shape at the moment. Energy XXI carries a debt of $4.62 billion, which is way higher than its cash position of $602 million and market cap of $222 million. As a result, the company has a very high debt-equity ratio.

The company's earnings before interest and taxes have also declined rapidly in the past year and currently stand at a negative $1.04 billion. This figure also includes a $740 million impairment of oil and gas properties on account of weak energy prices. Hence, despite the weakness in energy pricing hurting the value of Energy XXI's assets, the company has taken on more leverage, and this is not a good sign.

This is because the company is effectively not making money as the negative EBIT shows, which is why its interest coverage has also declined. As a result, in order to service its high level of debt, Energy XXI will need to tap into its cash flow. The company seems to be following this path as its cash flow has also dropped rapidly in the past year. As such, by divesting non-core assets, the company should be able to bring down its debt and interest burden, and gradually improve its fundamentals.


Despite the fundamental challenges, Energy XXI seems to be ticking all the right boxes in order to improve its financial performance. The company is reducing costs, improving production, and is trying to rectify the balance sheet by reducing non-core holdings. Thus, investors should consider capitalizing on the company's steep drop in the past one year as it might be able to improve going forward on the back of its operational improvements.
Published on Aug 4, 2015
By Harsh Singh Chauhan

Copyrighted 2016. Content published with author's permission.

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