Energy XXI (EXXI): An updated Net Income & Cash Flow Forecast model has been posted under the Watch List Tab.
Their production for the quarter was right in-line with my forecast model. The earnings per share miss, which caused the big selloff, was due to the following.
> Lower realized oil price caused by the big dip in LLS index prices. LLS was trading close to Brent but it dropped back to just above WTI. Analysts should have known this. Granted this is bad, but higher natural gas and NGL prices going forward should help.
> Higher DD&A rate (non-cash)
> Loss on derivatives (most of it was non-cash mark-to-market adjustment)
> Correction to their Deferred Income Tax Liability (non-cash). Some accountant screwed up the computation in prior periods.
My Fair Value Estimate just dropped $2.00 to $48.00/share. I know this seems crazy to most of you, but I am just using a 6X CFPS multiple and I am making some conservative assumptions for the forecast. EXXI is now on-track to generate close to $8.00/share in cash flow this year and that includes the pfd stock dividends. First Call's CFPS estimate is $7.93 for this fiscal year.
I do think First Call's EPS forecast for next fiscal year is too high, but their CFPS forecast is $8.74 compared to my CFPS forecast of $8.21.
The dip in production from 46,563 boepd in Q1 to 45,100 boepd in Q2 must have caught some analysts by surprise, but they should have seen this coming. The company was up-front about this in previous presentations. I am expecting 45,800 boepd in Q3 and an exit rate near 49,000 boepd by 6-30-2014.
For now, EXXI will stay in our Small-Cap Growth Portfolio.
Energy XXI: Not as bad as it looks
Energy XXI: Not as bad as it looks
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Energy XXI: Not as bad as it looks
<< I know this seems crazy to most of you, but I am just using a 6X CFPS multiple and I am making some conservative assumptions for the forecast.>>
What I don't understand given the EXXI chart from $40 to $20 and the ill will it has engendered, why EXXI would merit a 6 X cash flow multiple going forward while CRK which you also just reviewed and posted merits only a 4 X multiple?
What I don't understand given the EXXI chart from $40 to $20 and the ill will it has engendered, why EXXI would merit a 6 X cash flow multiple going forward while CRK which you also just reviewed and posted merits only a 4 X multiple?
Re: Energy XXI: Not as bad as it looks
I agree, that CRK probably deserves a 6X CFPS multiple. That would take my valuation to over $40/share. I really do like the company and think it has a lot of upside for us.
CRK had some weather related delays in in the Eagle Ford during Q4 and they will report another loss for the quarter, although cash flow per share will be around $1.50 for the quarter. Successful Efforts accounting rules don't help.
When CRK reports positive earnings for a quarter I will consider raising the multiple. Higher natural gas and NGL prices should get CRK over the hump in Q1.
If I lower EXXI to 4X CFPS the valuation is $32/share, which ain't bad from where it trades today. I think EXXI is a prime example of Wall Street being in love with the shale plays. They put much higher risk on an offshore company like Energy XXI.
CRK had some weather related delays in in the Eagle Ford during Q4 and they will report another loss for the quarter, although cash flow per share will be around $1.50 for the quarter. Successful Efforts accounting rules don't help.
When CRK reports positive earnings for a quarter I will consider raising the multiple. Higher natural gas and NGL prices should get CRK over the hump in Q1.
If I lower EXXI to 4X CFPS the valuation is $32/share, which ain't bad from where it trades today. I think EXXI is a prime example of Wall Street being in love with the shale plays. They put much higher risk on an offshore company like Energy XXI.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
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bearcatbob
Re: Energy XXI: Not as bad as it looks
Below is a link to a very positive post on SI regarding EXXI.
http://www.siliconinvestor.com/readmsg. ... d=29377855
Below is my response.
Risky, I totally get the valuation argument and have put my money on it. What is missing from your analysis is the failure of the company to execute and grow production meaningfully. My perspective is that they seem to be operating without an extended plan that would enable the creation of accurate production expectations. It seems like every Q we find there are going to be more delays to platform or other infrastructure issues. If one like me perceives this as an issue the idea of going to Malaysia for growth is terrifying. What I see is a company that cannot execute at home expanding half way around the world. How will they ever control operations there.
http://www.siliconinvestor.com/readmsg. ... d=29377855
Below is my response.
Risky, I totally get the valuation argument and have put my money on it. What is missing from your analysis is the failure of the company to execute and grow production meaningfully. My perspective is that they seem to be operating without an extended plan that would enable the creation of accurate production expectations. It seems like every Q we find there are going to be more delays to platform or other infrastructure issues. If one like me perceives this as an issue the idea of going to Malaysia for growth is terrifying. What I see is a company that cannot execute at home expanding half way around the world. How will they ever control operations there.
Re: Energy XXI: Not as bad as it looks
well put, bob.
Re: Energy XXI: Not as bad as it looks
The VP of Production just left EXXI. Was he at fault or the canary?
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bearcatbob
Re: Energy XXI: Not as bad as it looks
IMO the share price bottom is not yet in. Of course my dumb opinion may be why it is. IMO if new management took over the price would soar.
Re: Energy XXI: Not as bad as it looks
Needham maintained its Buy today but dropped its price target to $34 from $42 and Canaccord dropped to $36 from $38, keeping its Buy also. Schiller is getting a pass from these guys.
Re: Energy XXI: Not as bad as it looks
If EXXI makes you nervous you should definitely sell it. I don't see the stock moving up until they start ramping up production next quarter (April-June). Davy Jones #2 s/b completed by 6/30, which might get a reaction from the market. - Dan
Here is something to keep in mind (from their CC):
"Touching base on our share repurchases, to date, we have bought back $243 million of stock in an average price of $25.80 per share. From the beginning of the program, shares outstanding have been reduced about 12%. We've been repurchasing the shares at a cost far below our implied NAV per share on a proved reserve basis. With our expected increase in oil production and EBITDA, our shareholders will benefit from a reduced share count."
The fully diluted share count has dropped from 86.6 million at 6/30/2013 to 74.1 million at 12/31/2014.
If they keep reducing the share count like this the market will eventually figure out that NAV per share is going up.
Also, note that the increase in effective tax rate to 50% for Q2 included a one-time correction of the prior period. Going forward EXXI has very little current tax liability (probably zero for next two quarters). They will continue to expense an increase in their Deferred Tax Liability but that is a non-cash expense that won't be paid for a very long time.
I am going through the CC notes carefully this morning and I will make some adjustments to my EXXI forecast model.
Here is something to keep in mind (from their CC):
"Touching base on our share repurchases, to date, we have bought back $243 million of stock in an average price of $25.80 per share. From the beginning of the program, shares outstanding have been reduced about 12%. We've been repurchasing the shares at a cost far below our implied NAV per share on a proved reserve basis. With our expected increase in oil production and EBITDA, our shareholders will benefit from a reduced share count."
The fully diluted share count has dropped from 86.6 million at 6/30/2013 to 74.1 million at 12/31/2014.
If they keep reducing the share count like this the market will eventually figure out that NAV per share is going up.
Also, note that the increase in effective tax rate to 50% for Q2 included a one-time correction of the prior period. Going forward EXXI has very little current tax liability (probably zero for next two quarters). They will continue to expense an increase in their Deferred Tax Liability but that is a non-cash expense that won't be paid for a very long time.
I am going through the CC notes carefully this morning and I will make some adjustments to my EXXI forecast model.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Energy XXI: Not as bad as it looks
Schiller had a Come To Jesus session at the Credit Suisse conference courtesy of Mark Lear. I think your production assumptions for the March quarter and possibly the June quarter will prove too high based on what I heard. The summer will get them back to growth but it is unclear from what kind of a June 30 base. The VP of production who departed was clearly sacked over communications and scheduling issues, so make him the fall guy, not the canary.