CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'B/RR4' rating to Energy XXI Gulf Coast (Delaware) proposed issuance of $250 million in senior unsecured private placement notes due 2019. The notes will be guaranteed by the parent company (Energy XXI Bermuda), as well as existing and future material subsidiaries, and rank pari passu with existing unsecured indebtedness. Proceeds will be used to refinance the company's 10% 2013 notes, which had a balance outstanding of $228.9 million at Feb. 9, 2011. Fitch would note that failure to refinance the 10% notes by the first quarter of 2013 would have caused the maturity date of the company's $925 million senior secured revolver to spring forward to March 2013 from 2014.
Fitch currently rates Energy XXI as follows:
Energy XXI (Bermuda)
--Issuer Default Rating (IDR) 'B';
--Convertible perpetual preferred 'CCC/RR6'.
Energy XXI Gulf Coast (Delaware)
--IDR 'B';
--Senior secured first lien revolver 'BB/RR1';
--Senior unsecured notes 'B/RR4'.
The Rating Outlook is Stable. All debt, including the proposed $250 million notes, is issued at the Energy XXI Gulf Coast subsidiary level with the exception of the convertible perpetual preferreds, which are issued by Energy XXI (Bermuda).
Ratings Rationale:
Energy XXI Oil Corporation's (Energy XXI) ratings are supported by the company's high exposure to liquids; reasonable operational metrics; willingness to issue equity and equity-equivalent instruments to fund growth; operator status on a majority of properties; recent trend of debt reductions (prior to the Exxon property acquisition); and the short-term cash flow protections of its hedging position. Ratings issues for bondholders include the company's high leverage; small size and lack of basin diversification; vulnerability to hurricane risks; higher risk ultra-deep shelf exploration program; ongoing acquisition risk; and liquidity risk.
Exxon Property Acquisition:
In December, Energy XXI closed on its $1.012 billion acquisition of GoM properties from ExxonMobil, which added 49.5 million barrels of oil equivalent (boe) of 1p reserves, and approximately 19,000 boepd of production to its core shallow water program. Of the acquired reserves, 61% are oil and 68% proved developed. As these are similar to Energy XXI's current portfolio, the acquisition should not meaningfully dilute Energy XXI's liquids-heavy profile and the higher cash generation associated with that profile. The proximity of the acquired fields to existing Energy XXI properties and the lack of need for major infrastructure tie-ins also means the acquired properties are candidates for meaningful G&A synergies. In addition, the acquisition provides modest portfolio diversification, with 50% of expected pro forma output coming from the company's top four fields versus top two fields previously. Near term free cash flow (FCF) generation at Energy XXI is expected to remain constrained until production from the company's ultra-deep shelf wells begins to ramp up.
Energy XXI has among the highest oil exposure among peers, with approximately two-thirds of reserves and production comprised of liquids (pre- acquisition). Of this, a minimal amount is comprised of lower-priced natural gas liquids (NGLs). Given the wide disparity between oil and natural gas pricing (btu equivalence of 6.0 times [x] versus recent price equivalence in excess of 20x), Energy XXI's high exposure has enhanced near-term cash generation. To support its drilling budget, the company maintains an active hedging program and added approximately 10,000 boepd of liquids hedges to lock in a portion of the acquisition economics. A smaller amount of hedges remain on the natural gas side following recent hedge monetizations. Given the relative weakness of the gas forward curve, Fitch anticipates Energy XXI's gas hedge position will remain relatively small over the next few quarters; however, oil hedging opportunities remain robust.
Energy XXI's operational metrics are respectable. As calculated by Fitch, for fiscal year 2010 (June 30) which excludes the Exxon acquisition, the company had one- and three-year FD&A costs of $14.35/boe and $18.35/boe. The company's all-in one-year Reserve Replacement Ratio (RRR) was 383%, while its organic RRR was 82%. In addition to the large future reserves adds expected from the Exxon acquisition, Fitch expects that organic RRR will begin to rise in 2011 and beyond as the company begins to book reserves from its ultra-deep shelf discoveries.
Energy XXI's recent financial performance has been good. At Dec. 31, 2010, the company generated quarterly EBITDA of $107.5 million, versus $66.3 million for the year ago-quarter (the latest quarter includes just 14 days of contribution from the acquired Exxon properties). Production volumes in January 2011 averaged approximately 43,300 boepd, reflecting the full impact of the Exxon acquisition, but offset modestly by weather-related stoppages and third party pipeline outages. At Dec. 31, 2010, Energy XXI's cash and equivalents were approximately $40 million, and total debt was approximately $1.31 billion. Headroom on all financial covenants was adequate. Near term maturities are limited, with the next major issuance due the 2013 10% notes, which are expected to be retired from proceeds from the current issuance. Fitch anticipates that the company's FCF generation will remain constrained until production from the ultra-deep shelf begins to ramp up.
Catalysts for an upgrade to the rating include a sustained reduction in debt/boe metrics and accompanying shift in managerial philosophy on use of the balance sheet. Catalysts for a downgrade include a major hurricane or other operational problem leading to extensive downtime; a sustained collapse in oil prices; or unfavorable regulatory changes in the GoM which negatively impact operations (inability to obtain drilling permits, much higher bonding or insurance requirements, etc).
Energy XXI is a small independent E&P producer with operations located in the offshore US Gulf of Mexico (GoM) and onshore GoM. The parent company, Energy XXI (Bermuda), was incorporated in Bermuda in 2005 as an E&P acquisition vehicle. The company's main business subsidiary is Energy XXI Gulf Coast, which is a Delaware Corp. On a pro forma basis following the announced Exxon property acquisition, the company's total reserves were 125.1 million boe, proved and probable reserves of 158.1 million boe, and pro forma production of 45,000 boepd.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 16, 2010);
--'US Exploration & Production-Recovery Rating Methodology' (March 20, 2008);
--'Parent and Subsidiary Rating Linkage' (July 14, 2010);
--'Asset Retirement Obligations: Short-Term Relief, Longer Term Pressure?' (Feb. 1, 2011);
--'U.S. Oil & Gas Stats Quarterly-Third Quarter 2010' (Jan. 13, 2011);
--'Deepwater Drilling Halt: Upstream Impacts' (June 11, 2010);
--'Fitch Oil & Gas Price Deck-2010 Update' (Oct. 11, 2010);
--'Rating Oil and Gas Exploration and Production Companies' (April 6, 2010).
Applicable Criteria and Related Research:
US Exploration and Production -- Recovery Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=379282
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
Rating Oil and Gas Exploration and Production Companies: Sector Credit Factors
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=509845
Deepwater Drilling Halt: Upstream Impacts
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=532009
U.S. Oil & Gas Stats Quarterly -- Third Quarter 2010
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=593337
Asset Retirement Obligations: Short-Term Relief, Longer-Term Pressure?
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=600105
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