Energy XXI (Bermuda) Ltd BUY

EXXI : NASDAQ : US$21.09
Target: US$36.00

Energy XXI (Bermuda) Limited is an independent oil and
natural gas exploration and production company with
operations focused in the U.S. Gulf Coast and the Gulf of

All amounts in US$ unless otherwise noted.

Energy — Oil and Gas, Exploration and Production
Investment recommendation
We like EXXI for its oil-weighted asset base, the horizontal (Hz) drilling
program in the Gulf of Mexico (GOM), a history of generating free cash,
and potential upside from its exploration program. The accretive
acquisition of its competitor EPL will make EXXI the largest public
independent producer on the GOM Shelf. A “hard” NAV of ~$30 pro
forma for the acquisition underpins solid value in our view.
Investment highlights
 We are reducing estimates mostly due to higher interest expense
following the company’s successful offering of $650M of 6.875%
senior notes due 2024, upsized from $300M due to strong demand.
 The acquisition of EPL is expected to close in early June. Following
an integration period, we look for EXXI to start reaping the benefits
of the merger later this calendar year and beyond, with the
opportunity to make one plus one equal three via cost synergies and
added resource potential. We expect EXXI will be able to delever its
balance sheet relatively quickly post acquisition.
 We believe expectations for exploration success have been totally
washed out of the stock. Several catalysts could emerge on that front
over the coming months, including flow tests at Davy Jones 2 and
Lomond North. Wide Azimuth (WAZ) Seismic that is being shot
and/or processed in several parts of the GOM Shelf should help open
up deeper frontiers for exploration with its sharper imaging. Having
higher-quality seismic imaging at greatly reduced costs (including
reprocessed 3D) gives EXXI the opportunity to go after numerous
previously bypassed shallow pay zones as well.
Our $36 price target represents a 20% discount to a ~$45 NAV


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