4 Reasons This Gulf Oil and Gas Producer Might Be a Good Buy

Energy XXI shares plummeted recently after its acquisition of EPL Oil & Gas was announced. But the stock drop may have been overdone. Here are four reasons why Energy XXI might be a good buying opportunity.

Mar 25, 2014 at 9:10AM

While shares of Energy XXI (NASDAQ:EXXI) plummeted after its purchase of EPL Oil & Gas (NYSE:EPL) was announced, the selling might have been overdone. Factors related to the merger and a compelling valuation when compared to Freeport-McMoRan Copper & Gold's (NYSE:FCX) recently acquired oil-exploration unit suggest the stock price retreat might be an excellent buying opportunity. Here are four reasons why.

Making a good acquisition
Energy XXI's buyout of EPL Oil & Gas looks like an acquisition that could provide many benefits. For around $2.3 billion, including the assumption of debt, Energy XXI acquires an additional 7.3 million barrels of oil equivalent (BOE) of annualized production. That production is located mainly in the Gulf of Mexico, where the company already has most of its properties.

The centralized location of these oil and gas fields should deliver meaningful cost savings. Overall operating costs can be pruned as duplicate expenses are eliminated. Developmental expenditures will also be more effective, producing more oil per dollar spent via a focus on developing only the best of the combined fields.

The transaction also brings more than cost savings. EPL's seismic data and field study abilities should fit nicely with Energy XXI's production expertise. EPL recently committed to $45 million worth of new 3D seismic mapping projects, a critical tool for finding oil and gas under the sea floor. The resulting data should assist in determining the amount of reserves available and which are the most advantageous to develop.

While paying a reasonable price
The fact that Energy XXI didn't overpay for these benefits enhances the deal significantly. At an estimated enterprise value, or stock market worth plus total debt, cost of around $2.3 billion, the purchase came to roughly $315 per BOE of EPL production based on the latest quarterly figures annualized. On an annualized sales basis, the transaction was worth about 4 times revenue.

These valuations aren't a bargain but seem fair. They are very close to what Freeport-McMoRan Copper & Gold paid for Plains Exploration & Production and McMoRan Exploration in 2013. Freeport, trying to diversify away from its core mining business, obtained an entire oil and gas division with the buys, receiving substantial oil and gas assets in regions such as the Eagle Ford shale in Texas, onshore and offshore California, and the Gulf of Mexico.

Paying about $6.6 billion for Plains and $3.1 billion for McMoRan, with the assumption of around $11.2 billion in total debt, Freeport's total cost came to near $316 per BOE of annualized production; that's approximately 4.3 times yearly revenue on an enterprise value basis.

Good prospects in the Gulf of Mexico
Besides undertaking a good merger at a decent price, Energy XXI's exploration prospects are encouraging. One area of focus is Gulf of Mexico salt domes. Salt domes are large, thick mineral beds that can hold oil and gas reservoirs. Though discovering these reserves can be difficult, they have been known to contain world-class resource amounts. In partnership with Freeport-McMoRan's oil and gas operations, Energy XXI is involved in two promising salt-related plays.

The first is called the Davy Jones field, where two wells have already been drilled. The Davy Jones No. 1, drilled to a depth of more than 28,000 feet, logged 200 net feet of pay. That's a hopeful sign since pay is the thickness of a potentially viable reserve base. The Davy Jones No. 2, located 2.5 miles away from the first well, seemed to confirm the field's potential when it found 120 net feet of potential pay in one area and 192 net feet of pay in another section.

The Blackbeard East ultra-deep field is another discovery. An exploration well drilled to a depth of more than 33,000 feet indicated the presence of hydrocarbons below the find's salt weld. Still in early days, further testing in the field's upper area is planned for 2014, and actual development of the shallowest zones could happen later this year.

The EPL purchase might add another potentially lucrative find. Investigation into EPL's Ship Shoal 208 field began in late 2013 with an exploratory well making a possible oil sand discovery. A currently running test well is expected to provide additional information by mid-2014, and further developmental steps are anticipated once new seismic data has been received.

Trading at an attractive valuation
Energy XXI's attractive valuation may be the company's most appealing feature, however. On a combined pro forma, or post-merger, basis, the company currently trades at an enterprise value of around 3.3 times its $1.7 billion in expected revenue. On an oil-deliveries comparison, Energy XXI is valued at around $243 per BOE from an anticipated 23.7 million BOE in annualized production.

Pricing is noticeably lower than Freeport-McMoRan's 4.3 times revenue and $316 per BOE acquisitions price tag from last year. While some discount may be justified, the current cut appears excessive. Given potential merger benefits, plus meaningful oil and gas discovery possibilities, Energy XXI looks like it could deliver considerable share price appreciation on any sort of unexpected good news.

Bottom line
The recent sell-off in Energy XXI shares may have been overdone. The company's acquisition of EPL Oil & Gas looks a good one, and its market valuation seems significantly discounted when compared to Freeport-McMoRan's recently acquired energy business. Of course, an energy company's worth will ultimately depend on how much oil and gas it can find. If Energy XXI can deliver -- even slightly -- on its exploration potential, the stock price may react with a substantial rise.

OPEC is absolutely terrified of this game-changer
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!

Bob Chandler owns shares of Energy XXI Ltd.. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers