1 Promising Energy Stock in the Gulf

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Some companies are worth investing in simply because of outstanding business models. Such companies can sustain a steady growth in cash inflows, and at the same time afford to invest in relatively riskier ventures that promise huge returns. This is why I like Energy XXI (NAS: EXXI) . Here is a stock that could qualify as a winner in the long term.

Solid growth
Keeping its healthy margins somewhat intact, Energy XXI has powered itself into a fantastic growth engine. Thanks to acquisitions worth $2.5 billion since the company went public in 2005, growth has been phenomenal. Check out these numbers: Revenues grew at a compounded annual growth rate of 76% in the last five years, while gross profits grew 72% annually during the same period. Earnings before interests, taxes, depreciation and amortization saw a similar 72% growth.

Solid operations
From an operational standpoint, the last 12 months have seen a very healthy 54% growth in proved reserves -- to 117 million barrels of oil equivalent (MMBoe). The Gulf of Mexico hasn't let management down. Acquisition of the South Timbalier 54 field from ExxonMobil (NYS: XOM) last December should go a long way in increasing future cash flows.

Production rose 59%, averaging 34,600 barrels of oil equivalent. This constituted 68% oil. The company has taken full advantage of the oil market's bull run earlier this year. This is exactly why I'd applaud management's strategy to develop low-risk, oil-rich properties in the Gulf shelf.

Great management
Within the first six months of closing the deal, the company has managed to bring down net debt by $200 million. Debt-to-equity, at 120%, is currently at its lowest since the company went public. While this is not exactly an enviable figure, it's positively encouraging to see management slowly working on reducing debt. Expect this figure to fall further as operational earnings shoot up.

How is the stock valued?
This is how Energy XXI stacks up compared with its peers:

Company

TEV/EBITDA

(TTM)

P/E

(TTM)

P/B

(TTM)

Energy XXI5.759.72.02
McMoRan Exploration (NYS: MMR) 13.9NM2.05
Swift Energy (NYS: SFY) 5.018.21.31
Gulfport Energy (NAS: GPOR) 11.216.63.73
Plains Exploration & Production   (NYS: PXP) 8.019.81.07

Source: Capital IQ, a Standard & Poor's company. TTM = trailing 12 months. NM = not meaningful.

Energy XXI looks the cheapest in terms of total enterprise value compared with core operational earnings. The stock is still undervalued. Growth in operational earnings looks highly promising given future production capabilities.

The company's ultra-deep shelf project is gaining momentum, with the Davy Jones well #1 expected to demonstrate successful flow tests. While this is still by far the riskiest project undertaken, management aims to limit expenses here to less than 15% of cash flows; their calculated approach is impressive.

Foolish bottom line
There is a long way to go in terms of growth. As the company matures, so will its ability to generate profits. That's why its trailing P/E doesn't bother me much. Energy XXI's management seems to know exactly how its future would shape up. Foolish investors, watch out.

At the time this article was published Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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