ENERGY XXI (BERMUDA) EXXI
September 25, 2011 - 5:27pm EST by
msdonut940
2011 2012
Price: 21.51 EPS $0.00 $0.00
Shares Out. (in M): 77 P/E 0.0x 0.0x
Market Cap (in $M): 1,650 P/FCF 0.0x 0.0x
Net Debt (in $M): 1,198 EBIT 0 0
TEV ($): 2,848 TEV/EBIT 0.0x 0.0x

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Description

Overview

Energy XXI (the "Company" or "EXXI") is an independent oil and natural gas exploration and production (E&P) company. The Company is primarily focused on mature producing assets in the shallow waters of the Gulf of Mexico ("GoM"). EXXI has exhibited a very strong track record of exploiting mature-oil producing assets and is currently partnered with McMoran ("MMR") in exploring the deep gas resources of the shelf.

While the Company has a potentially high-impact exploration program (multiple upcoming catalysts), positive free cash flow, and one of the heaviest oil weightings, EXXI trades at a 30% discount to the group on EV/EBITDA. The Company should at lease trade in line with the peer group and could have material upside with exploration success.

Investment Thesis

While the Majors have focuses on the deepwater and onshore US, EXXI has thrived on an acquire and exploit strategy of focusing on mature oil producing assets in the shallow water. Production is approximately 60% oil and almost half is hedged through 2013. The crude prices off of Light Louisiana Sweet ("LLS") which trades at roughly a $20 premium to West Texas Intermediate ("WTI"). Based on current futures prices the Company can be expected to generate ~1.0bn of free cash through 2014 and could pay down its entire debt balance. One of the main market concerns with EXXI was their balance sheet in 2008. They were overlevered when the crisis hit and ran into liquidity issues. The Company has since learned from their mistake and substantially delevered.

Mid & Small-Cap   Production % Production Current EV/ 1P Current EV/ EBITDA Debt / Total % Reserves 3-Yr FD&A 3-Yr Recycle Ratio
Name EV ($mm) 2011E MBOE/day Natural Gas 6:1 ($/Mcfe) 2011E 2012E Capitalization (EV) PUD ($/Mcfe) (Netback/FD&A)
ATP Oil & Gas Corp/United States 2,677 27.4 42% $3.53 5.4x 3.3x 70% 81% $9.24 0.7x
Cimarex Energy Co 5,290 106.8 61% $2.83 4.2x 3.6x 6% 23% $3.11 1.9x
Concho Resources Inc 9,562 63.3 34% $4.93 7.7x 5.7x 18% 43% $2.60 3.3x
EXCO Resources Inc 3,914 86.5 97% $2.61 6.0x 4.4x 39% 45% $3.22 1.5x
Forest Oil Corp 3,462 78.3 75% $1.56 5.5x 4.8x 48% 40% $2.85 1.7x
Plains Exploration & Production Co 6,875 98.7 49% $2.72 5.4x 4.0x 53% 43% $3.77 1.3x
Quicksilver Resources Inc 3,376 71.0 78% $1.12 7.2x 6.3x 59% 32% $1.87 2.1x
SM Energy Co 4,567 60.2 65% $4.64 5.1x 3.5x 12% 30% $5.03 1.2x
Swift Energy Co 1,533 30.2 37% $1.92 4.0x 3.4x 29% 55% $7.19 1.0x
Venoco Inc 1,209 19.5 58% $2.37 5.5x 4.7x 53% 50% $5.05 1.1x
Whiting Petroleum Corp 5,304 71.2 19% $2.90 4.0x 3.3x 20% 29% $3.92 1.9x
                     
MEAN 4,343 64.8 56% $2.83 5.4x 4.3x 37% 43% $4.35 1.6x
MEDIAN 3,914 71.0 58% $2.72 5.4x 4.0x 39% 43% $3.77 1.5x
                     
Energy XXI Bermuda Ltd 2,755 38.8 36% $3.66 3.5x 2.7x 42% 30% $4.06 1.8x

Net Debt stands at $1,198, Operating Cash Flow for 2012 at ~$650mm and CapEx needs at ~$500mm. EXXI is among the few E&P names that grows production within cash flow. Much of the growth in 2012 being shown above includes substantial capital raises for most of the group as they are free cash flow negative. It is also important to note that EXXI has an above average recycle ratio, above average oil production, and below average proved undeveloped reserve bookings. All of these points should leave to a premium valuation and yet EXXI trades at a discount both to the group mid-small cap group as well as other offshore independent E&Ps (e.g., ATP, Whiting, etc.).

EXXIs Ultra Deep Shelf Project could hold as much as 100Tcf in gas resource. The exploration program consists of several properties: Davy Jones, Blackbeard, and Lafitte. EXXI holds various interests in each of these wells ranging from ~15-20%. The Company provides operational and well data updates throughout the year that could serve as catalysts for the stock. The Davy Jones #1 well is expected to start production by the end of the year and could give the stock a big boost once flow data starts coming out.

Conclusion

The market is not properly pricing both EXXI's production franchise and their ultra deep water exploration program. The stock has 30% upside to be in line with comps and should trade at a premium given their exploration optionality. With strong free cash flow, potential for buybacks/debt paydown, and ultra deep exploration, EXXI is an attractive long or relative value trade.

Catalyst

  • Exploration announcements
  • Debt paydown
  • Share buybacks
  • Operations updates around earnings
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