Energy XXI: Strengths, Weaknesses, Opportunities, Threats
Energy XXI's (NAS: EXXI) second-quarter earnings beat estimates again. Today, we'll see how this oil and gas exploration and production company fares on a SWOT test. This should help investors develop a more complete picture about the company.
- Energy XXI has an extensive and diverse footprint in the Gulf of Mexico with a presence in 41 producing fields. Since its inception in 2005, the company has operated 419 gross wells spread over 250,000 net developed acres.
- It has a well-balanced mix of exploration as well as development prospects. The business strategy includes acquiring mature and producing oil and gas properties, ensuring organic growth by enhancing production of existing reserves, and exploring the more uncertain ultra-deep Gulf of Mexico shelf.
- The Heavy Louisiana Sweet (HLS) variant constitutes a major proportion of the crude oil produced. Taking advantage of this since last September, the company began pricing its production against the Inter Continental Exchange's Brent benchmark, which trades at a premium to the WTI benchmark.
- Earnings before interests, taxes, depreciation and amortization -- which represent core operational earnings -- grew at a healthy 31% annually in the last five years.
- Short-term liquidity issues exist. Current ratio stands at only 0.9 times.
- Debt-to-equity is toward the higher end of the spectrum at 85%.
- No major production hike in the last 12 months. Total production has remained relatively flat since the acquisition of properties in the Gulf in December 2010.
- Looks well-positioned to exploit higher crude oil prices. Proven reserves contain 66% oil, while second-quarter production saw oil representing 72%.
- Potential natural gas reserves in the ultra-deep Gulf of Mexico shelf are predicted to be in excess of 1 trillion cubic feet. These projects have the potential to change market dynamics. If successful, the cost of natural gas production could fall considerably, thus altering market conditions.
- The ground-breaking ultra-deep Gulf of Mexico project, being jointly developed with McMoRan Exploration (NYS: MMR) , is yet to add to production. A considerable amount of capital has already been sunk. Failure here could pose problems.
- Percentage of liquids production could fall once the ultra-deep projects start contributing to production. This could negatively impact operating cash flows in the immediate future because of the lousy natural gas market.
Foolish bottom line
The pros seemingly outweigh the cons. The company appears to be doing well. Investors must dig deeper. To stay up to speed on the top news and analysis on Energy XXI, you can start here by adding it to your watchlist.
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 services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.