Beauty Really Is Skin-Deep for This Driller

Energy XXI , which is one of the larger offshore drillers in the Gulf of Mexico, has been making smart acquisitions for nearly eight years with a precise eye for finding the right oil field. The problem, at least "recent" problem I should say, as evidenced by its latest earnings call, has been operational issues. The company's drilling program has been held up due to slower than expected access to rigs, poor hedging of crude oil, and communications the company agrees need better improvement. So despite the shortfalls seen in recent months, is this company worth adding to your portfolio? The answer may come down to your time-table.

Management will be presenting at the Credit Suisse Energy Summit in Colorado on Feb 11 and the Enercom Oil & Services Conference in San Francisco on February 18 so momentum players may find this name of interest. However, the aforementioned issues remain, albeit showing signs of improvement. Therefore from a valuation perspective, Energy XXI may be too attractive to pass up. It's this last point I'd like to focus on, since the deterioration in market cap since last October may have some rival companies (including existing partners) inquiring about an outright acquisition of the company, something management may be open to for a number of reasons.

Buying production
The company just announced last Friday it boosted oil volumes for the third straight quarter. This could be intriguing to a number of potential suitors, even current JV partners like Freeport and ExxonMobil , a company that needs to reverse its own declining production levels. Energy XXI's "acquire and exploit" mentality has served it well in recent years, but with other E&P players having fewer opportunities to add production, buying new assets could get expensive. This has me thinking acquiring Energy XXI may actually be a cheaper way to boost production for a larger player. Energy XXI has been buying back its own shares at an average price of $25.80, over 10% higher than the price at the close of trading on February 6 and nearly 20% above levels seen after the company's FY2014 Q2 earnings.

Energy XXI still has ~$100 million left in its current buyback program, so downside in share prices could be limited. However, if it doesn't buy back its own stock and instead continues to buy production, does management risk losing whatever investor confidence remains? There may be a need to defend their share price to show would-be suitors the company is undervalued -- that is unless of course they were thinking of taking the company private, something I really don't is likely.

Bottom line
Down-time on rigs needs to reverse quickly. Additionally, the company will need a phenomenal back-end year performance in rig activity to remotely come close to its 10% production growth goals for 2014. The company has over $300 million in cash (over $1 billion in liquidity) which further makes the valuation look awfully cheap, something that may be a good long opportunity for patient investors.

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The article Beauty Really Is Skin-Deep for This Driller originally appeared on Fool.com.

John Licata has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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