Energy XXI is a busy little independent oil and gas E&P living well off Gulf of Mexico (GOM) shelf assets that others dismissed as table scraps. Some readers may be familiar with EXXI as a minority partner in the shelf Ultradeep natural gas play operated by McMoRan . More recently, the two were joined by Chevron in a new Ultradeep project On-Shore Louisiana. Chevron’s interest is noteworthy, providing legitimacy to a project that many viewed as a longshot a couple of years ago. Now that the pay has been logged and the trend verified, the primary question is can the discovery be economically produced? Davy Jones’ test production is that proof-of-concept. We’re told that McMoRan is still cleaning out the wellbore in preparation for a production test that should come this month, but we’ve heard that before. This is a complex project at these temperatures and pressures, and the going’s been slow with plenty of delays. Patience is warranted. Yet, with several TCF (trillion cubic feet) of gas on the line in Davy Jones alone, the captivation of investors by Davy Jones is understandable.
The focus on the Ultradeep obscures a simpler —and perhaps more significant— story that’s really driving Energy XXI at the moment. Over the years they’ve built themselves into the third largest producer on the GOM shelf through acquisition, collecting legacy assets from POGO, Mitsui and Exxon. The Exxon acquisition was by far their biggest and left Energy XXI with a large drill-ready inventory. That acquisition seemed like a game changer, providing Energy XXI an opportunity for organic growth they haven’t seen before. Energy XXI is more than just the low risk way to play the Ultradeep, and Schiller might be ready to remind everyone of that fact.
The November 2010 purchase of ExxonMobil’s shelf production assets left a lot on their plate. Since taking control of the Exxon properties, the company reports 12 new wells completed with not a single dry hole. Production is up and so is the cash. Cash flow from operations exceeded $785 million in 2012, and cash & equivalents reached $117 million at fiscal year end. The drilling inventory is extensive, with over 100 identified targets. Most are relatively easy, shallow targets with low cost and rapid payout, and XXI’s cash flow easily covers all planned capital expenditures. EXXI is primed for growth. With the Ultradeep’s potential looming on the horizon, it’s easy to lose track of the fact that Energy XXI is a profitable company with a fully-funded organic growth plan. This is a strong company that warrants its valuation even without the Ultradeep.
Given the prospects, most would expect XXI to continue working through that new Exxon acquisition inventory. And most of Schiller’s post-Exxon acquisition presentations have in fact focused on that newfound opportunity for organic growth. Despite all that potential, Schiller’s still got an itch that needs scratching. I hadn’t listened to a presentation in a while and was surprised by the content of the more recent presentations. That organic-growth message changed noticeably at the August EnerCom meeting. Schiller also made a point of communicating their interest in additional acquisitions. With their abundant positive cash flow and relatively low debt levels, they’re apparently back on the hunt.
That context made a more recent announcement all the more interesting. Energy XXI announced a new hire, Antonio de Pinho. De Pinho has twenty years of experience in the industry. His latest position was as VP of El Paso’s western division, with additional responsibilities for their international E&P program. Prior to that position he served at Devon, Texaco, Partex Oil & Gas, Western Atlas International, and Ocean Energy. In the release, Schiller commented on De Pinho’s role:
"Adding Antonio to the senior management team allows Energy XXI to pursue joint venture opportunities both within the company's core operating areas and, eventually, internationally," Chairman and Chief Executive Officer John Schiller said. "In a competitive acquisition market, Antonio has the experience and contacts to help capture deals that can add immediate value and future growth potential to the company."
The emphasis added is mine. Note the word, “international”. This is really the first time that I’ve noticed Schiller use the word international as a prominent theme and it’s interesting.
One of Energy XXI’s primary strengths is that they don’t scatter their resources. All of their significant properties are located Off-shore Louisiana in the general proximity of Main Pass at the mouth of the Mississippi. That disciplined focus on exploiting mature assets in their own backyard has made them what they are. There are a lot of operating synergies between their properties that companies with more widespread portfolios can’t exploit. Even in that EnerCom presentation referenced above, Schiller made clear that they wouldn’t even pursue assets Off-shore Texas; instead preferring to maintain their focus Off-shore Louisiana. However, he did make it clear that they were pursuing other acquisitions and the message buried within the PR associated with de Pinho’s hiring suggests that Energy XXI is at least considering a bite at the apple overseas.
While it would be a departure that some shareholders might view skeptically, international expansion done properly would ultimately improve the risk profile for shareholders. Strangely enough, the concentrated focus on Main Pass and its adjoining areas is also a weakness. EXXI holders saw that firsthand as Isaac bore down on virtually the entirety of XXI’s holdings. One bad hurricane could be the Black Swan that brings the whole thing down with their degree of geographical concentration. Even Isaac, a relatively tame hurricane, drove EXXI shares down 4% as it took aim. We now know that there was limited damage from Isaac, but it could have been different. A big one could be a serious event for a company that right now is poised to make a big step. Schiller certainly knows this.
That’s why that word “international” interests me. Energy XXI’s Achille’s heel is its geographical risk. With this hire, Schiller seems ready to reduce that risk and to be honest, I hope he does. It’s possible that he’s preparing the market for some upcoming acquisitions that could otherwise be viewed as a departure for the company. However, he elaborated in greater depth on their plans at a more recent Barclay’s conference than he did at EnerCom. He was clearer that they’d be looking for more of the top 20 GOM Shelf fields and assets in their operational area. Maybe I’m reading too much into that single word, “international”. Yet, it intrigues me because I think a move overseas to a second area of operations would be a good move for shareholders. The next year’s events may be interesting to watch; Schiller seems to be shifting the focus back toward Energy XXI and away from the Ultradeep. We’ll have to wait and see, but Schiller and Energy XXI appear to be back on the prowl and ready to make some news of their own.
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