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What: Shares of Energy XXI Ltd. (NASDAQ:EXXI) dropped as much as 10% in early trading today, continuing a slide after Sunday's earnings report and fueled by the drop in oil prices today.
So what: One of the big drivers of the sell-off in energy today is a 4% drop in the price of crude oil, which has fallen below $51 per barrel. This lowers the potential profits for oil drillers but is problematic for Energy XXI because management sold hedges twice in the past few months for a profit and entered into new hedge agreements. Twenty-eight percent of 2015's production is unhedged and 61% of 2016 is unhedged, so earnings could fall significantly as oil falls.
On top of this, the company reported a $0.52 loss per share in the fiscal second quarter, meaning they didn't make money at prices where they are, and costs of $64.45 per barrel last quarter implies that losses will continue in the future.
Now what: It's a volatile time to be in the oil business, particularly for oil producers. What has me concerned is the relatively high cost structure of the oil Energy XXI is extracting, and the resulting quarterly losses. I don't think we're in for a big recovery in oil prices in the near future, and that will keep me out of this stock, despite today's discount.
Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.