CHICAGO, November 21 (Fitch) Fitch Ratings has affirmed Energy XXI’s (NYSE: EXXI) Issuer Default Rating (IDR) at ‘B’. The company’s Rating Outlook is Stable. See the full list of affirmations at the end of this release.
Approximately $1.05 billion in debt is affected by this rating. All 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).
Energy XXI’s ratings are supported by the company’s high exposure to liquids (68% of 2011 production, most of it linked to higher priced global crudes); reasonable operational metrics; willingness to issue equity and equity-equivalent instruments to fund growth; operator status on a majority of its properties; trend of recent debt reductions; and the short-term cash flow protections of its hedging position. Ratings issues for bondholders include the company’s high leverage; small size and lack of basin diversification; vulnerability to hurricane risks; higher risk ultra-deep shelf exploration program; and ongoing acquisition risk.
EXXI’s recent operational metrics are solid. As calculated by Fitch, for the company’s 2011 fiscal year (which ends June 30 and includes the Exxon property acquisition), the company had three-year finding, development, and acquisition (FD&A) costs of $20.03 per barrel of oil equivalent (boe), an all-in Reserve Replacement Ratio (RRR) of 486%, and an organic RRR of 64%. The company’s reserve life stood at 9.2 years. In addition to the growth opportunities created by the Exxon acquisition, Fitch expects that organic reserve replacement will begin to rise in 2012 as the company begins to book reserves from its ultra-deep shelf drilling programs. On a pro forma basis, at Sept. 30, 2011, EXXI had total debt/boe of proven (1p) reserves of $10.13/boe and total debt/boe proven developed reserves of $14.48/boe versus levels of $10.95/boe and $15.75/boe at year end 2010, respectively.
EXXI’s recent financial performance has been very good, driven by higher production and very robust oil pricing. The company generated record latest 12-month (LTM) EBITDA of $647.5 billion at Sept. 30, 2011, versus $374.1 billion in 2010. Given recent debt repayments, total debt with equity (as calculated by Fitch) fell to $1.18 billion versus $1.46 billion at year end 2010. As a result, debt with equity credit/EBITDA leverage declined to just 1.82 times (x) (versus 3.91x at year end 2010), while EBITDA/gross interest coverage rose to 5.8x. EXXI’s LTM free cash flow (FCF) was a very robust $100.8 million, comprising cash flow from operations of $447.2 million minus capex of $330.5 million and dividends of $16 million. Looking forward, Fitch believes the company will continue to be FCF positive over the next two years. The 2012 capex budget is set at $450 million, and Fitch believes the company has significant capex flexibility within that number. Only about $102 million (23%) of the 2012 budget is earmarked for the ultra-deep activity.
EXXI’s liquidity is good, and included cash and equivalents of $18.5 million, and availability on its main revolver of approximately $519 million at Oct. 25, 2011. The revolver, which expires in 2014, is secured by a borrowing base linked to the value of total company reserves. Similar to other borrowing-based revolvers, the base periodically resizes in line with the underlying value of the collateral. The current size of the borrowing base is $750 million. Key revolver covenants include maximum leverage of 3.5x; maximum secured debt ratio of 2.5x; minimum interest coverage of 3.0x; and a minimum current ratio of 1.0x. The company had ample headroom on all covenants at Sept.30. 2011. Near-term maturities are light.
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.
Catalysts for an upgrade to the rating include a sustained reduction in debt/boe metrics and accompanying shift in managerial philosophy on use of the balance sheet. Catalysts for a downgrade include a major hurricane or other operational problem leading to extensive downtime; a sustained collapse in oil prices without other adjustments to capex; or unfavorable regulatory changes in the Gulf of Mexico (GoM) which negatively impact operations.
Energy XXI is a small independent E&P producer with operations located in the offshore U.S. GoM and onshore GoM. The parent company, Energy XXI, was incorporated in Bermuda in 2005 as an E&P acquisition vehicle. The company’s main business subsidiary is Energy XXI Gulf Coast, which is a Delaware Corp. For the fiscal year ending June 30, 2011, the company’s total reserves were 117 million boe, of which 70% were proven developed.
Fitch affirms the following ratings:
Energy XXI (Bermuda)
—IDR) at ‘B’;
—Convertible perpetual preferred at ‘CCC’/RR6.
Energy XXI Gulf Coast (Delaware)
—Senior secured revolver at ‘BB’/RR1;
—Senior unsecured notes at ‘B’/RR4.