Energy XXI

[dan_s]

EXXI is the only Sweet 16 stock that is down for the year. Recently they issued an operations update and it looks like fiscal Q3 production will be about 2,000 boepd below my forecast.

Production Update from the company:

"Current production approximates 46,000 BOE/d net, including about 30,000 barrels per day (Bbl/d) of oil, with approximately 5,000 BOE/d temporarily offline due to various unrelated issues, bringing total capacity to approximately 51,000 BOE/d. Production for the fiscal third quarter ended March 31, 2013 is expected to average 44,000 BOE/d, of which approximately 29,000 Bbl/d is oil."
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My take is that this is "mildly disappointing" news BUT increasing natural gas prices and the new joint venture with Apache offset this short-term blip in the production growth. I will take a hard look at my forecast model tomorrow. - Dan

[bearcatbob]

Dan, EXXI is becoming one continuing disappointment. Their geological assets may be great - but their engineering and management assets seem to simply stink - and I mean stink - in terms of their ability to execute the basic blocking and tackling.

Me thinks Mr. Schiller should receive a bit of crap in place of adulation. EXXI execution is one failure after another.

I think Schiller owes the share holders a huge mea culpa for absolutely horrible execution of the basic nuts and bolts of the industry.

Schiller is simply failing big time in execution.

Bob

[setliff]

right on, bob. i got out some time ago and put the money into things that were working, like crzo and gpor. another sector i think is about to take off is osx land.

[dan_s]

You may be a bit to harsh on Schiller. You can't really blame him for Davy Jones (although I do think that was more risk than a company this size should take). Energy XXI did a very good job increasing production on the properties they got from Exxon. I also think their horizontal development well program will result in increase production and proven reserves.

[bearcatbob]

You may be a bit to harsh on Schiller. You can't really blame him for Davy Jones (although I do think that was more risk than a company this size should take). Energy XXI did a very good job increasing production on the properties they got from Exxon. I also think their horizontal development well program will result in increase production and proven reserves.

My commentary has nothing to do with DJ. It seems ever since a BP test trashed a well - Murphy has become a resident at EXXI. All the deals are nice - I wonder if the deal making is distracting from execution.

I half expected your review to result in removing EXXI from the Sweet 16. I am glad that did not happen - at least yet.

Bob

[dan_s]

I would rate EXXI as "on probation" at this time as far as the Sweet 16 is concerned. I do want some exposure to the Gulf of Mexico in the portfolio.

Keep in mind that Energy XXI does have a strong balance sheet and very strong cash flows. Their oil and gas sell at premium prices to NYMEX. The stock price is less than 4X my cash flow per share estimate for fiscal year ending 6-30-2013, so it is very cheap.

However, the Sweet 16 is for companies with double digit production and proven reserve growth locked in. EXXI needs to report some strong production growth soon or I will be forced to drop it from the S-16.

[ghrcap]

A six multiple of cash flow is surely reserved for the high growth E and P darlings of the Street, a wreath Schiller forfeited six quarters or more ago. From EnerCom's historic analysis, the E and P companies trade in a band of from 3.5 to 5.5 times cash flow and move within that band based on the company's trailing quarterly performance, forward expectations and the Street's preference for oil or gas and reserve location at any point in the cycle. Should EXXI trade for 3.7X current year's cash flow estimate as it does now? Probably not, but the penalty box has slammed shut on Schiller's fingers until he can show that CAPEX won't be larger than he has suggested and that the entire infrastructure acquired with the EXXON properties won't have to be replaced, for example. Schiller will have to stand on a stack of bibles this year at his Analyst Day when he gives forward guidance.