For a relatively new company, Energy XXI
The company's share price (which hit a 52-week high on Monday) has witnessed a steady rise during the last 18 months. Much of this strong performance is likely to be a reflection of the company's operational success based on an astute business strategy that includes acquisitions as well as organic growth. The company has managed to cut down on risk by acquiring mature oil-producing assets in the Gulf of Mexico -- a move that has been largely reflected in the quality of its earnings.
While revenues for the past 12 months ending Dec. 31, 2010, stood at $607 million, reflecting 45% growth, Foolish investors should be more interested with the free cash flow generated. During the period, FCF stood at $133.9 million, showing a 22% increase. The cash flow from operations came from components that are high in quality -- in other words components (like net cash income and depreciation) that would be reflected on the cash flow statements for years to come.
Yet there are things going against the stock. Since the company came into being, the net profit margin has looked unimpressive, recording only single-digit growth -- barring a loss in 2009. However, this should not be held against an E&P company which has yet to strengthen its footing in the industry. W&T Offshore
A little cause for worry
The path will be bumpy. The long-term debt has gone up 69% to $1.3 billion, mainly on account of acquisitions. A debt-to-equity ratio of 142% does not bode well for a $2.4 billion company. Other larger E&P's have less debt, such as Brigham Exploration
A Foolish afterthought
It pays to be Foolish by being aware of all aspects of a company's business. While FCF has a major role to play, it is not the only factor to be considered. Nevertheless, backed by a sound business model, there is much to look forward to. Seldom do new companies make $2.5 billion acquisitions within five years of commencing operations. As the company matures, so will its production and its ability to generate profit.
What are your thoughts? Feel free to comment below.
Isac Simon does not own shares of any of the companies mentioned in this article. W&T Offshore is a Motley Fool Hidden Gems pick. 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.