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TEXT-Fitch raises Energy XXI's IDR, snr unsecured Ratings to 'B+'
September 6, 2012 / 8:10 PM / 5 years ago

TEXT-Fitch raises Energy XXI's IDR, snr unsecured Ratings to 'B+'

Sept 6 - Fitch Ratings has upgraded Energy XXI (NYSE: EXXI)'s
Issuer Default Rating (IDR) and senior unsecured ratings to 'B+' from 'B. The
company's Ratings Outlook is Stable. Energy XXI's ratings are as follows:

Energy XXI (Bermuda)
--Issuer Default Rating (IDR) to 'B+' from 'B';
--Convertible perpetual preferred to 'B-'/RR6 from 'CCC'/RR6.

Energy XXI Gulf Coast (Delaware)
--IDR to 'B+' from 'B';
--Senior secured revolver to 'BB+'/RR1 from 'BB'/RR1;
--Senior unsecured notes to 'B+/RR4 from 'B'/RR4

Approximately $1.04 billion in balance sheet debt is affected by this rating.
All rated debt is issued at the Energy XXI Gulf Coast subsidiary level, with the
exception of the convertible perpetual preferreds, which are issued by Energy
XXI Bermuda.

Ratings Rationale
Energy XXI's ratings are supported by the trend of recent deleveraging;
increased size and scale following the Exxon property acquisition; EXXI's high
exposure to liquids (69% of production, 71% of reserves, mostly crude oil which
is linked to higher-priced waterborne grades); good operational metrics;
balanced acquisition funding; operator status on a majority of its properties;
and the short-term cash flow protections of its hedging position. Ratings issues
for bondholders include the company's small size; high leverage; lack of basin
diversification; vulnerability to hurricane risks; higher risk ultra-deep shelf
exploration program; and ongoing acquisition risk.

Improving Debt Metrics
EXXI's recent operational metrics are good. As calculated by Fitch, total debt
with equity credit declined from a post-acquisition high of $1.47 billion at YE
2010 to $1.14 billion at June 30, 2012, resulting in debt/boe 1p reserves of
$9.54/boe, debt/boe proven developed reserves of $13.97/boe, and debt/flowing
barrel of production of less than $26,000 on a 6:1 basis. Looking forward, Fitch
anticipates that additional near-term improvements in credit ratios are likely
to come through EBITDA growth and reserve additions.

Operational Metrics
EXXI's latest operational metrics were good. For the fiscal year ending June 30
2012, EXXI reported total proved reserves of 119.6 million boe. One year organic
reserve replacement was 119% (249% on an all-in 3-year basis). One year finding,
development, and acquisition (FD&A) costs rose to $29.90 ($20.71/boe on a
three-year basis). Fiscal year production increased by 27% from 34,600 boepd to
44,100 boepd, and the company's reserve life declined from 9.2 years to 7.4
years. It is important to note that the company's 2012 reserve and production
figures exclude the impacts of the ultra-deep shelf program, which Fitch
anticipates should begin to accelerate in 2013 despite recent delays experienced
at the Davy Jones #1 well. Investments in ultra-deep shelf wells at June 30,
2012 include Davy Jones #1 and #2 ($111 million), Blackbeard East ($50 million),
Lafitte ($40 million), Blackbeard West #1 and #2 ($43 million), and Lineham
Creek ($8 million).

EXXI's cash generation continues to be robust. As calculated by Fitch,
full-cycle netbacks (defined as price realizations minus cash costs minus
three-year FD&A costs) were $25.63/boe, significantly higher than its small
group peers. The company generated record EBITDA of $890.7 billion at June 30,
2012, driven by higher production and robust oil prices. Given recent debt
repayments, debt/EBITDA leverage declined to just 1.28x (versus 2.4x the year
prior), while EBITDA/gross interest coverage rose to 8.2x from 5.0x the year
prior. LTM free cash flow rose to approximately $190 million, comprised of cash
flow from operations of $766.4 million minus capex of $570.7 million and
dividends of $5.7 million. 2013 capex has been set at $700 million and Fitch
believes the company has reasonable capex flexibility within that number. Only
$94 million (13.4%) of the 2013 budget is earmarked for the ultra-deep shelf.
Fitch expects the company will be FCF neutral to modestly FCF positive over the
next two years.

Liquidity
EXXI gulf coast's liquidity was good at June 30, 2012, and included cash and
equivalents of $117.1 million, and availability on its main revolver of
approximately $525 million after letters of credit (LoC) usage. The revolver,
which expires in December 2014, is secured by a borrowing base linked to at
least 85% of the company's proven properties. Similar to other borrowing-based
revolvers, the base periodically resizes in line with the underlying value of
the collateral and was recently reaffirmed. Its current size is $750 million.

Key revolver covenants include maximum leverage of 3.5x; minimum interest
coverage of 3.0x; and a minimum current ratio of 1.0x, as well as change of
control provisions and restricted payments. The company had ample headroom on
all covenants at June 30, 2012. Restrictions on dividends from EXXI gulf coast
to its Bermuda parent were recently loosened to include $150 million to allow
the parent to fund jv investments. EXXI's other maturities are light, with the
no major bonds maturities due over the next three years.

Recovery Rating
Fitch's Recovery Rating (RR) of '1' on EXXI's secured revolving credit facility
indicates outstanding recovery prospects (91%-100%) for holders of this debt.
The revolver is secured by at least 85% of the total value of proven reserves of
the company and its subsidiaries. The RR for EXXI's senior unsecured notes of
'4' indicates average recovery prospects (31% - 50%) for holders of these
issues.

WHAT COULD TRIGGER A RATING ACTION
Positive: Future developments that may lead to positive rating actions include:
--Increased size, scale and portfolio diversification, accompanied by a trend of
continued improvement in debt/boe metrics and a managerial commitment to lower
debt levels.
Negative: Future developments that could lead to negative rating action include:
--A major operational issue such as a well blowout or extensive facility damage
not covered by existing insurance
--A change in philosophy on use of balance sheet, which could include debt
funded financing of a large acquisition, capex or share buybacks; or a sustained
collapse in oil prices without other adjustments to capex

Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

Applicable Criteria and Relevant Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 08, 2012)
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis' (December 15, 2011);
---'Updating Fitch's Oil & Gas Price Deck' (Aug 15, 2012)
---'Statistical Review of U.S. E&P Companies' (May 10, 2012)

Applicable Criteria and Related Research:
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis
Statistical Review of U.S. E&P Companies

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