Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Did Jim Cramer Get This Oil Stock Pick All Wrong?

Photo credit: Flickr user Tulane Public Relations

It can't be easy being Jim Cramer. Every single stock call he makes is tracked and analyzed. That's what happens when a lot of people are counting on him for good advice. While he has made some very good calls, his constant buying and selling hasn't always won him fans. It also doesn't help when stocks he calls "a bargain" fall 30%, as Energy XXI Limited (NASDAQ: EXXI  ) has done since he pointed it out on March 12. That plunge certainly makes investors wonder if he was simply wrong about that oil stock.

What happened?
On a segment of his Mad Money show that day, Cramer had Energy XXI CEO John Schiller on to talk about an acquisition the company just made. Schiller said that the company viewed that deal as having the potential to be "the greatest acquisition for shareholders" as the "properties fit together like gloves." Investors doubted this as they sold off the stock, sending Energy XXI's stock down 8% on the announcement. In response to the sell-off Cramer said, "to me, that smells like it might be a bargain."

Fast forward a few months and the stock price of Energy XXI is down more than 30% from Cramer's bargain price. The reason behind the plunge was weak fourth-quarter results where the company lost $0.06 per share and also announced the resignation of its Chief Operating Officer. Investors don't like losses and really don't like to see C-Suite executives resign, especially with no real reason given other than he was "retiring."

Was Cramer simply wrong, or is it still early?
One of the things that Cramer pointed out on his show was that Energy XXI has a history of making acquisitions and then using science and technology to get more oil out of the oil fields than anyone thought it could. What the company does is slowly add probable and possible reserves to proved reserves by drilling new wells. The following diagram shows the certainty of each resource estimate.

Source: EIA.

Investors put a lot of value on proved reserves because of the certainty that these can be produced. This is good news for Energy XXI investors as it does have a long history of moving economically and technically recoverable reserves into the proved category, as the following slide shows.

Source: Energy XXI Investor Presentation. 

What we see here is a company that has nearly doubled the proved reserves it acquired by finding new reservoirs in old oil fields. This has enabled the company to turn $5 billion in acquired assets into proved oil and gas in the ground worth $7.6 billion.

However, Energy XXI believes that it is sitting on a whole lot more oil than investors give it credit for holding. The company sees substantial future recoveries from probable, or 2P, and possible, or 3P, resources as well as simply figuring out a way to extract more oil that stubbornly refuses to come out of the ground. As this next slide shows, the company's top ten oil fields originally held over 6.1 billion barrels of oil.

Source: Energy XXI Investor Presentation.

If the company's use of new technology, such as bringing horizontal drilling into these fields, can extract more oil then Energy XXI is sitting on an incredible amount of value. As the above slide notes, if it can extract just 5% of the oil it knows is down there, then it's sitting on more than $13 billion in oil. That's a massive resource for a company with a $1.5 billion market cap.

Investor takeaway
Energy XXI doesn't need to extract all of the oil it thinks it can reach to make investors money. The proved value of its reserves alone is $7.6 billion. That's substantially more than the company's $5.1 billion enterprise value. So, Jim Cramer might not have been wrong in saying this company is a bargain -- it's just that this oil stock has apparently become even more of a bargain since he made those comments. 

Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Read/Post Comments (1) | Recommend This Article (5)

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.

  • Report this Comment On September 22, 2014, at 2:05 PM, srockaz wrote:

    Hi Matt,

    EXXI has gone down even further now. Is there any new information? Is it simply getting punished along with other stocks, but more so because it was already showing weakness?

    Thanks, srockaz

Add your comment.

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: 3086793, ~/Articles/ArticleHandler.aspx, 8/28/2015 11:33:19 PM

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...

Matt DiLallo

Matthew is a Senior Energy and Materials Specialist with The Motley Fool. He graduated from the Liberty University with a degree in Biblical Studies and a Masters of Business Administration. You can follow him on Twitter for the latest news and analysis of the energy and materials industries:

Today's Market

updated 2 hours ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

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

8/28/2015 4:00 PM
EXXI $1.81 Up +0.10 +5.85%
Energy XXI Ltd. CAPS Rating: **