Beauty Really Is Skin-Deep for This Driller

Energy XXI (NASDAQ: EXXI  ) , 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 (NYSE: XOM  ) , 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.

Bad news for OPEC could be good news for investors
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2839865, ~/Articles/ArticleHandler.aspx, 8/28/2015 5:30:32 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

John Licata

John Licata is the Founder & Chief Energy Strategist of Blue Phoenix Inc. You can follow John on Twitter @bluephoenixinc

Today's Market

updated 8 hours ago Sponsored by:
DOW 16,654.77 369.26 2.27%
S&P 500 1,987.66 47.15 2.43%
NASD 4,812.71 115.17 2.45%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/27/2015 4:00 PM
EXXI $1.71 Up +0.25 +17.12%
Energy XXI Ltd. CAPS Rating: **
XOM $74.85 Up +2.35 +3.24%
ExxonMobil Corp CAPS Rating: ****