EXXI – Underappreciated Core Assets and Substantial Growth Prospects
Energy XXI (TKR: EXXI) is an attractively valued shallow water operator that is trading at a substantial discount to its asset value. The stock is currently trading at $20.75 per share. We think the stock is worth $34 per share, which represents a total return of 65%. As we head into the second half of 2014 and 2015, we think the company will be able to generate the production growth to convert this asset value into cash generation.
©2014
Serengeti Asset Management LP
. All Rights Reserved.
Authored by Vivian Lau and MayC Huang.
Information contained herein does not constitute an offer to purchase or
sell securities or a recommendation to purchase or sell securities.
1
S e r e n g e t i A s s e t M a n a g e m e n t
E
nergy
XXI
Update
Vivian Lau and MayC Huang
Ju
ly
2014
©2014
Serengeti Asset Management LP
. All Rights Reserved.
Authored by Vivian Lau and MayC Huang.
Information contained herein does not constitute an offer to purchase or
sell securities or a recommendation to purchase or sell securities.
2
D
ISCLAIMER
The presentation is provided for informational and educational purposes only. The information is based on publicly available
information. Nothing contained herein should constitute an offer to purchase or sell securities or a recommendation to purch
ase o
r sell
securities. Serengeti Asset Management
LP
makes no express or implied warranty as to the completeness or accuracy of this
presentation, nor can it accept responsibility for errors appearing herein. Any projections, market outlooks or estimates in
th
is
presentation are forward
-
looking statements and are based upon certain assumptions. These assumptions may change at any time and
have a significant effect on the information provided. Other events, which were not taken into account, may occur and may
s
ignificantly affect the conclusions outlined in this presentation. Any projections, outlooks or assumptions should not be con
strued to
be indications of actual events that will occur. Serengeti does not have any obligation to update correct an
y information
contained
herein.
The information herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice or inve
stment
recommendations. You should consult with your tax, legal, accounting or other advisors abou
t the matters
discussed herein.
Serengeti will not accept any liability for any loss or damage including without limitation loss of profit which may arise di
rectly or
indirectly from use of the information. Investing in financial markets involves a substantial degree o
f risk and you cou
ld lose all of your
principal.
Funds managed by Serengeti hold positions in EXXI. None of the employees, principals or partners have a direct interest in E
XXI.
Neither Serengeti, the funds it manages, its employees, partners or principa
ls receives any compensation in exchange for expressing its
views on EXXI.
©2014
Serengeti Asset Management LP
. All Rights Reserved.
Authored by Vivian Lau and MayC Huang.
Information contained herein does not constitute an offer to purchase or
sell securities or a recommendation to purchase or sell securities.
3
T
HESIS
Energy XXI ha
s an underappreciated asset base with substantial growth potential.
We be
lieve core assets are worth $34
per
share, a
65
% IRR fr
om current levels (using $85
WTI
and $4 gas) and opportunities for further appreciation.
■
EXXI t
rades at a discount to its peers and proved reserves
PV10
value
.
Current trading value is
$
19
/
boe
adjusted proved reserves
(by Serengeti estimates)
versus comps at $22
/
boe
.
On a
cash
flow
basis, it is trading at 4.
3
x of
FY 2014
EBITDA
and 7.
2
x FY 2014 EBITDA
less
maintenance capex
.
■
EXXI has s
ignificant potential in their core shal
low water Gulf of Mexico fields
.
Sizable opportuni
ty to grow reserves through low
risk drilling
opportunities in their core Gulf of Mexico shelf fields
:
ability
to increase proved reserves by ~
2
3
% or
5
9
MM
boe
.
Significant portion of this growth is derived from the application of
now
-
proven
horizo
ntal drilling
.
In our base case NAV
of $3
4
,
we are valuing these barrels at $20
/ boe
.
At
$22 / boe
,
NAV is
$41
per
share
.
■
EXXI has a
sset potential beyond
Serengeti
’s
base case in the core assets
:
T
hree
potential
opportunities may yield
an
additional
56
MM
boe
of potential reserves
.
If these opportunities come to fruition, assuming
the same commodity price deck,
our
target
price
increase
s
to
$4
6
per
share
,
more than
double
today
’s
stock price
.
©2014
Serengeti Asset Management LP
. All Rights Reserved.
Authored by Vivian Lau and MayC Huang.
Information contained herein does not constitute an offer to purchase or
sell securities or a recommendation to purchase or sell securities.
4
T
HESIS
–
C
ONTINUED
■
Energy XXI
has lost
market
favor
due to poor operating performance
, disappointing flow test results in
the ultradeep,
and the
announcement of the acquisition of EPL.
T
hough
the stock is
disfavored
, we believe management is
a strong
operator in the
shallow water Gulf of Mexico with a history of success
.
EXXI
is
refocusing on exploiting shallow water Gulf of Mexico fields. They are directing capital to their core assets
,
and
converting them
into cash
flow and
production growth
.
Since 2006, we estimate th
at the company has generated an
unlevered r
eturn on investm
ent CAGR of 12%
.
■
Every $5 move in WTI increases our base case NAV by about $4 per share.
■
Additional upside from
their ul
tradeep JV with Freeport McMoran: ~11 tcfe of resource potential which could be worth $5
per
share
. We continued to believe in the ultr
adeep and anticipate good results from the Lomond North later this year.
©2014
Serengeti Asset Management LP
. All Rights Reserved.
Authored by Vivian Lau and MayC Huang.
Information contained herein does not constitute an offer to purchase or
sell securities or a recommendation to purchase or sell securities.
5
S
UMMARY OF
POTENTIAL
OUTCOMES
$/share
% from current
Current stock price
$2
0
.
75
Base case NAV
$34.24
65
%
Core assets upside NAV
$46.43
124
%
Risked resource NAV
$51.24
1
4
7%
©2014
Serengeti Asset Management LP
. All Rights Reserved.
Authored by Vivian Lau and MayC Huang.
Information contained herein does not constitute an offer to purchase or
sell securities or a recommendation to purchase or sell securities.
6
R
ISKS
■
Management execution:
EXXI must focus on converting asset value into producing cash flow
.
Successful implementation of expanded horizontal drilling program
.
■
Oil prices:
Considering
current trading levels, the risk is mitigated given our base case price deck of $85 WTI.
Using
commodity
future
s
strip prices, our price targets would be meaningfully higher.
The Gulf of Mexico is
one of the lowest cost basins in the US with cash costs
of
~
$50
/ boe
, high ROIC in wells drilled, and
access to logistics.
We
model
a conservative downside price for oil is $75 WTI. At this price, many of the tight oil plays in the US,
a significant
source of supply growth for the global oil market, would be u
neconomic.
At $75 WTI, EXXI’s share price would be $23 per share,
10
% above current stock price.
©2014
Serengeti Asset Management LP
. All Rights Reserved.
Authored by Vivian Lau and MayC Huang.
Information contained herein does not constitute an offer to purchase or
sell securities or a recommendation to purchase or sell securities.
7
■
Largest shallow water producer in the Gulf of Mexico:
Owns
10
fields
in the top 50 GoM shelf fields of all time
6
7
M
boe/d of
production
(7
0
% oil)
261
MM
boe of proved reserves
■
C
ash
cost
breakevens
are around
$
50
/
boe
C
OMPANY
D
ESCRIPTION
Source: Company presentations, company filings
EXXI
EPL
PF
EV / boe
1P (mmboe)
179
82
261
$19.88
% oil
75%
64%
71%
2P (mmboe)
218
125
343
$15.10
3P (mmboe)
310
111
421
$12.30
Production (Mboe/d)
45.0
22.4
67.4
$76,805
% oil
66%
77%
70%
1P R/P (yrs)
11
10
11
PV10 ($mm)
EXXI
EPL
PF
Equity
value / sh
SEC PV10 post G&A and taxes ($mm)
(a)
4,482
1,716
6,198
$31.66
Current trading value ($mm)
(a)
5,178
$20.75
(a) SEC PV10 per FY2013 10-K. Deducts $3.2bn of net debt to get to equity value.
©2014
Serengeti Asset Management LP
. All Rights Reserved.
Authored by Vivian Lau and MayC Huang.
Information contained herein does not constitute an offer to purchase or
sell securities or a recommendation to purchase or sell securities.
8
■
EXXI has a
successful
h
istory
acquiring big oil fields near the end of
their
life and finding more oil than
previously booked
.
■
Prior to their recent EPL acquisition, EXXI a
cquired assets for PV10
of $2.4bn; today, that PV10 is $6.2bn
.
Additionally,
EXXI has spent
$2bn on development capex since 2006
and generated $3.4bn of
unlevered FCF
. This strategy in their core asset base has yielded
an attractive
116% return on investment (12% annualized)
.
(
1)
■
Reasons for success:
Acquiring under
-
invested assets from major oil companies
Improved se
ismic technol
ogy at lower costs
Improved recovery techniques
Leaner and more focused management effort
C
OMPANY
S
TRATEGY
(1)
Return on investment for acquisitions calculated as (PV10 today + cumulative CFO + interest
expense
since 2006) / (PV10 at acquisition + cumulative development capex)
–
1
Source: Company presentations, company filings
146
179
232
310
0
50
100
150
200
250
300
350
Proved reserves acquired
FY2013
1P (mmboe)
2P (mmboe)
3P (mmboe)
115 mmboe added
organically
74
74
74
Total
prod.
since '05
8
Asset
sales
8
8
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
April '06:
Acquired Marlin
Energy
for
$448mm
June '06: Acquired
South Louisiana
properties
for
$311mm
April '07:
Acquired
POGO's
GoM
assets for
$415mm
Nov '09:
Acquired Mit
Energy
assets for
$276mm
Dec' 10: Acquired
XOM's GoM Shelf
properties for $1bn
Jan '13:
Acquired Bayou
Carlin
Onshore
S. Louisiana for
$80mm
June '14:
Closed
EPL
acquisition
Sept
'12:
Secured GoM
exploration JV
with XOM
Mar '13:
Signed
GoM JV
with APA
©2014
Serengeti Asset Management LP
. All Rights Reserved.
Authored by Vivian Lau and MayC Huang.
Information contained herein does not constitute an offer to purchase or
sell securities or a recommendation to purchase or sell securities.
9
Horizontal uplift to SEC 1P proved reserves
■
Their
new
horizontal drilling program is yielding a higher recovery per well.
■
Uplift of recoveries is estimated based on recoveries of ~1MMboe+ / well versus proved reserves, which we estimate were
booked assuming ~700
-
900 Mboe / well
.
Total 1P proved
location uplift
MM
boe
West Delta 73
9
West Delta 30
6
Total PUD uplift value
15
% increase in proved reserves
6%
Source: Investor Day Presentation from October 2013, 2013 10
-
K
And if this is correct, there will likely be reserve adds
from their 2P and 3P estimates
Management ID’ed inventory beyond 1P
Unrisked
mmboe
%
success
Risked
mmboe
West Delta 73
19
75%
14
West Delta 30
29
75%
22
Main Pass 61
10
75%
8
Management identified additional inventory
58
75%
44
% increase in
proved reserves
17%
■
Main fields with this potential are:
o
West Delta 73
: Horizontal drilling has been
successful in this structure
–
39 well locations identified
, of which a portion is
in 2P and 3P reserve bookings and is likely to
be converted into 1P reserves.
(1)
o
West Delta 30
: One of the largest oil f
ields in the Gulf of Mexico
–
49
drillable locations
identified
in a
field study
that
only
mapped 20% of the field
.
(1)
o
Main Pass 61
: Repeatable, predictable oil program with
significant reserves that are currently not booked. Reprocessed
seismic data that better defines the salt structure and found additional locations, i
.
e. “big oil fields get bigger.”
C
ORE ASSET POTENTIAL
S
IZABLE OPPORTUNITY T
O GROW VIA LOW RISK
DRILLING OPPORTUNITI
ES
(1)
Source: Investor Day Presentation from October 2013
©2014
Serengeti Asset Management LP
. All Rights Reserved.
Authored by Vivian Lau and MayC Huang.
Information contained herein does not constitute an offer to purchase or
sell securities or a recommendation to purchase or sell securities.
10
C
ORE ASSE
T POTENTIAL
A
DDITIONAL ASSET VALU
E
Three potential opportunities could
cumulatively
account for ~30% of their stated probable and possible inventory and
has the potential to increase proved reserves by 20% on a risked basis
.
O
pportunities include
:
■
Additional horizontal drilling opportunities at West Delta 73
: We assume they find
20% more
locations on a
n already large
Gulf of Mexico
field.
■
D
ump floods (mostly in the EPL asset base)
:
W
ith the EPL acquisition,
there are now an
estimated
47 MM
boe
(1)
of
potential
reserves in known reservoirs.
Dump floods
is
a proven secondary oil recovery tec
hnique
.
■
West Delta 30
:
A
large oil field
that
was abandoned by XOM in the 1990s when oil prices were below $40/bbl.
EXXI
has
conducted a three
-
year field st
udy, mapping 20% of the field.
W
e assume they double the number of
well
locations
as they
map the
remaining 80% of the field.
Additional asset potential
Unrisked
MM
boe
%
success
Risked
MM
boe
West Delta 73
additional inventory
10
75%
7
Dump floods
47
50%
24
West Delta 30 unmapped inventory
50
50%
25
Additional asset potential
107
52%
56
%
increase in proved reserves
21%
(1)
Source: EPL acquisition presentation dat
ed 3/12/14
©2014
Serengeti Asset Management LP
. All Rights Reserved.
Authored by Vivian Lau and MayC Huang.
Information contained herein does not constitute an offer to purchase or
sell securities or a recommendation to purchase or sell securities.
11
■
Serengeti’s base case NAV assumes:
1.
PV10 of booked proved reserves
2.
Adjusting proved reserves for higher well EURs from
horizontal drilling
–
increases reserves by 6%
3.
Assuming
a 75% probability of success in their identified
backlog
–
increases reserves by 17%
■
Core assets upside NAV: assuming a 50% success rate on
identified, highly probable drilling opportunities in known
reservoirs
–
increases proved reserves by 45%
■
L
astly, the company retains their exploration asset in the ultra
-
deep exploration joint venture with Freeport McMoran
–
11
tcfe of resource
potential
,
which we value at $0.90 / Mcfe
A
SSET
V
ALUATION
Source: Company presentations, company filings
PV10 valuation
SAM price deck
case $/share
(1)
Strip price deck
case $/share
(2)
PDP
$35.94
$39.58
PUD
$17.82
$19.19
Less: Net debt
-$34.63
-$34.63
SEC proved NAV
$19.14
$24.14
Plus: West Delta 73 PUD uplift
$2.95
$3.22
Plus: West Delta 30 PUD uplift
$1.23
$1.34
Adjusted proved NAV
$23.31
$28.71
Plus: West Delta 73 unproved mgmt inventory
$3.82
$4.18
Plus: West Delta 30 unproved mgmt inventory
$5.98
$6.54
Plus: Main Pass risked 2P reserves
$1.13
$1.23
Base Case NAV
$34.24
$40.65
Current share price
$20.75
$20.75
Estimated gross return %
65%
96%
Upside values
Plus: West Delta 73 additional inventory
$1.99
$2.17
Plus: Dump floods
$4.52
$4.95
Plus: West Delta 30 remaining mapping
$5.68
$6.21
Core assets upside NAV
$46.43
$53.97
Estimated gross return
124%
160%
Plus: Ultra deep JV exploration upside
$4.81
$4.81
Risked resource NAV
$51.24
$58.79
Estimated gross return
147%
183%
(1)
Assumes flat price deck of WTI oil at $85 and gas at $4/Mcf
(2)
Strip WTI oil prices used are '14: $105.77, '15: $96.56, '16: $90.88,
17: $88.37, '18: $87.32, '19+: $85
©2014
Serengeti Asset Management LP
. All Rights Reserved.
Authored by Vivian Lau and MayC Huang.
Information contained herein does not constitute an offer to purchase or
sell securities or a recommendation to purchase or sell securities.
12
60.0
70.0
80.0
90.0
100.0
110.0
2013
2014
2015
2016
Estimated EoP production with 8 rig program (Mboe/d)
Estimated EoP with 9 rig program (Mboe/d)
0
200
400
600
800
1,000
1,200
2013
2014
2015
2016
2017
Cash flow for capex
Exploration and development capex
F
REE CASH FLOW GENERA
TION AFTER
SELF
-
FUNDING GROWTH
■
Serengeti
’s
b
ase case uses management guidance of 8 rigs: 4 rigs on EXXI’s assets and 4 rigs on EPL’s assets.
This guidance was
provided pre
-
consummation of the EPL acquisition, and could be revised.
■
Given the inventory profile (11+ years of 1P alone), the p
roduction chart
below
shows
the potential for increased asset
value
with the deployment of
additional rigs
.
Source: Company presentations, company filings
FYE 6/30
LTM
3/31/14
2013
2014
2015
2016
2017
Wells drilled
32
42
42
42
Production add/well (boe/d)
517
572
572
572
BoP production (Mboe/d)
64.1
74.6
83.1
Less: Base production decline (Mboe/d)
(13.6)
(15.6)
(17.2)
Plus: Production adds from new wells (Mboe/d)
24.1
24.1
24.1
Estimated EoP production with 8 rig program (Mboe/d)
67.1
62.0
64.1
74.6
83.1
90.1
Production growth (Mboe/d)
10.5
8.5
6.9
EXXI average production (Mboe/d)
45.2
43.1
EPL average production (Mboe/d)
22.0
18.9
PF average production (Mboe/d)
67.1
62.0
65.5
70.9
80.1
87.6
% YoY growth
6%
8%
13%
9%
% oil
68%
69%
73%
76%
77%
77%
Average LLS spot price
(1)
$100.00
$100.00
$90.00
$90.00
Average gas spot price
$4.00
$4.00
$4.00
$4.00
Average blended realized oil sales price
$100.86
$104.81
$95.31
$99.77
$91.70
$90.00
% of oil production hedged
40%
53%
0%
Average blended realized gas sales price
$4.19
$3.88
$4.50
$4.01
$4.01
$4.00
% of gas production hedged
29%
8%
0%
PF EBITDA
1,228
1,179
1,201
1,475
1,510
1,623
Less: P&A costs
(80)
(95)
(80)
(80)
(80)
(80)
Less: Interest expense
(191)
(153)
(236)
(236)
(236)
(236)
Less: Cash taxes
(72)
(87)
(133)
(195)
(181)
(198)
Cash flow for capex
885
844
752
964
1,014
1,109
Exploration capex
215
198
150
150
150
Development drilling
797
596
633
633
633
Exploration and development capex
1,012
794
783
783
783
FCF after exploration and development capex
(168)
(42)
181
231
327
FCF/share
-$1.80
-$0.45
$1.94
$2.47
$3.49
(1)
Assumes LLS trades at a $5/bbl premium to WTI oil. We are using an avg discount to the WTI oil strip by 6% in '14-'17
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