Here's Why Energy XXI Ltd Has a Lot More Value

Energy XXI Ltd provides a prime example of how the market doesn't like a company in transition or involved in a high-premium merger. Even with the backdrop of a strong market for energy exploration and production stocks, Energy XXI trades at multi-year lows.

The upcoming merger with EPL Oil & Gas provides the opportunity to exploit several large offshore fields while taking advantage of the seismic capabilities of that company.

The stock now provides interesting value and is probably the best way to play the potential growth in Gulf of Mexico production. The company is working with Freeport-McMoRan Copper & Gold in several promising wells in the Gulf of Mexico, providing for more upside potential in 2015.

Disappointing results 
Energy XXI spent most of the last quarter transitioning rigs to new platforms. With the limited drilling activity, the company maintained production at 42.3 Mboe/d with oil production at 67%. Oil revenues were even higher at around 90%, providing the company with substantial operating cash flows. Revenues at $285.2 million and earnings of $0.19 were below analyst estimates and declined from the prior year. Adjusted EBITDA was a solid $178.8 million, but the number was down roughly $15 million from the prior-year period. The results mark the second straight quarter that the company has failed to meet analyst expectations.

The merger target of EPL actually handily beat estimates though analysts continue to expect reductions from prior-year periods. The company saw revenue decline over 12% year over year, dropping down to $159.5 million. Production was down 6% due partially to weather-related downtime with the majority of the revenue declines caused by lower realized prices.

Freeport-McMoRan saw solid production increases for the first quarter. The oil and gas segment saw revenue increase to $1.25 million on volumes of 179 Mboe/d. Within those totals, Gulf of Mexico volumes were only 70 Mboe/d. The company has very attractive Deepwater Gulf of Mexico projects and assets, making a nice addition to a diversified portfolio focused on copper.

EPL uplift
Despite the premium price paid for EPL over the prior stock price, the acquisition provides a highly accretive addition. The combined entity will have proved reserves of 261 MMboe and probable reserves of 64 MMboe. The current production is around 63Mboe/d and has averaged around 67 Mboe/d over the last year.

In past deals, the company has added an 80% uplift on the proved reserves of the assets purchased. With expected cost savings of around $80 million in the first two years, Energy XXI can add further to the net asset value discount as in the past few years. The slide below from the recent presentation highlights the vast difference between proved reserves valuations and the current stock price.

Source: Energy XXI

Bottom line
Energy XXI's and Freeport-McMoRan's Gulf of Mexico plays provide opportunities to invest in oil exploration mostly overlooked with the market focusing on land-based shale plays. These offshore operations offer better access to higher commodity prices and infrastructure, making for ideal long-term investments. With the ability of Energy XXI to acquire assets and grow reserves, the stock provides an interesting value, especially considering the company bought shares at higher prices during the prior quarter.

Investors can use the dip in the stock price to buy attractive oil assets on the cheap. It also provides more of a pure-play on Gulf of Mexico oil production compared to Freeport-McMoRan.

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