In a previous article, I spoke about the intriguing growth prospects of the relatively new Energy XXI
A small concern
Earnings at Energy XXI have been quite steady, except in 2009 when a drastic fall in oil prices weighed heavily on results. No substantial growth in those earnings has been recorded since 2007. But some of this has more to do with accounting standards than anything else.
Due to depreciation and amortization of its assets, the real potential of its earnings have yet to be reflected. Energy XXI's cash income, or EBITDA, margin has been impressive at 61.5%. That margin has actually shown a decline over the past three years -- from 71.8% to the current value in December 2010 -- but we're still looking at a high number on an absolute basis.
As far as debt goes, the company maintains a considerable amount of leverage on its balance sheet. Total debt is $1.3 billion, with debt-to-equity at 142%. That's considerably more than I'm typically comfortable with. Yet, one must consider that Energy XXI only started operations in 2005 and has swallowed several new assets since. Given this, I'm not avoiding the stock, but I certainly would be paying attention.
What it holds for the future
The forward P/E ratio stands at 13.5, while for Denbury Resources
The consensus estimated three-year PEG ratio is 2.7, while for Denbury and Newfield it is 1.1 and 1.4, respectively. This is a potential problem. As I mentioned above, after adjusting for its growth expectations, investors are actually paying quite a premium for this stock.
A Foolish bottom line
In short, there is much to look forward to. However, patience is the catchword here. For the billion-dollar acquisitions to bear fruit, Fools must be willing to hold this stock a long period of time. However, consistency in performance will be the key in its quest for long-term growth.
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Isac Simon does not own shares of any of the companies mentioned in this article. The Fool owns shares of Denbury Resources. 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.