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Energy XXI (Bermuda) Limited (NASDAQ:EXXI)

F3Q09 (Qtr End 03/31/09) Earnings Call

May 6, 2009 10:00 am ET

Executives

Stewart Lawrence - VP of IR and Communications

John Schiller - Chairman and CEO

West Griffin - CFO

Steve Weyel - President and COO

Analysts

Duane Grubert - CRT Capital Group LLC

Rick Holderfield - Sterne Agee

Richard Tullis - Capital One Southcoast

Evan Templeton - Jefferies & Company

Robert Murray - Credit Capital Investment.

Operator

Welcome to Energy XXI, Third Quarter 2009 Earnings Call. During the presentation, all participants will be in a listen-only mode. A question-and-answer session will follow the company's formal remarks. (Operator Instructions)

And now, I would like to turn the conference over to Mr. Stewart Lawrence, Vice President of Investor Relations. Please go ahead, sir.

Stewart Lawrence - Vice President of Investor Relations

Welcome to the call today everybody, presenting today is John Schiller, Chairman and CEO; Steve Weyel, President and Chief Operating Officer; and West Griffin, Chief Financial Officer who will be available to answer your questions at the end of the call.

Before we get started, I need to remind everyone that our remarks today, including answers to your questions, include statements that we believe to be forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently anticipated.

Those risks include, among others, matters that we've described in our earnings release issued today and in our public filings. We disclaim any obligation to update these forward-looking statements. While the company believes these forward-looking statements are reasonable, they are subject to factors such as commodity prices, competition, technology and environmental and regulatory compliance. Our drilling schedules, capital plans and other factors may cause our results to differ materially. I urge you to read our 10-K filed and 10-Q to be become better familiar with these risks and our company.

Now I'll turn the call over to John.

John Schiller, Jr

Thanks, Stewart. Welcome everyone to our fiscal third quarter conference call. Oil and gas price volatility has remained at extraordinary levels. Energy XXI has continued executing the plan we have put emplace in response to those difficult environment.

Clearly with debt and equity markets tight, leeway within cash flows critical, towards that end we ramped down our capital program from a monthly run rate of $39 million in December to about $9 million in April.

We expect to spend significantly less in cash flow through the coming years, so we can maintain our liquidity and continue paying down bank debt and building cash, which currently exceeds $90 million. The capital spending has been impacting both lower activity levels and lower cost that were seen industry wide for services.

Also, we have begun to achieve significant costs savings in direct LOE, from lower transportation rates, chemical costs, general services and other items. And on the G&A side we have cut a number of contractor positions, we reduced our offshore contract labor by about approximately 15% and tightened our belts across the board.

Operationally, we have implemented a capital program designed to keep fiscal 2010 volumes flat to higher than the current year average, while spending less than $100 million. Most of the focus is on low risk exploration, while we fall through on our current high impact efforts with Ammazzo and the ultra-deep type Blackbeard wells.

During the quarter we successfully drilled the Cote de Mer well to TD and have since flow tested the well at a constrained rate of 15 million cubic feet of gas a day with 14,500 pounds of flowing tubing pressure and a shut-in pressure of approximately 16,000 pounds. We expect this well to eventually produce even higher volumes after it comes online in the next four to six months, that time it depends on how long it takes to get out of our pipelines [parameter].

West and Steve will provide more detail on the quarter's results, important take-away which are that, we expect to be able to replace production in the coming year and to continue pursuing exploration projects that could have very meaningful upside for the future, all the while maintaining a healthy cash balance and working to further reduce our bank debt. Now I will turn it over to West for a financial overview.

David West Griffin

Thanks John. The financial details is in the earnings release, so we will do just quick review of the numhers.

Steve will talk more about the factors volumes and the oil mix but I will note here that we were able to grow volumes in the March quarter primarily due to the strong flush production from our development efforts at South Tim 21, which offsets the fact that Rabbit Island Field was shut-in due to pipeline replacement for virtually the entire quarter.

Workover and maintenance expenses were way down this quarter especially compared with the second quarter. As we explained on the last call, we expensed $2.2 million of our hurricane insurances deductible in the second quarter, which is what grows the number above the normal level.

Now, in the third quarter because we had already met the insurance deductibles, not only did we not repeat that expense but a lot of our maintenance expenses went through receivables because they were reimbursable through insurance. On a more fundamental level, we also reduced our expense workover activity. Going forward, we expect maintenance and workover expense to be in the $2 per BOE range.

Direct LOE cost also trended down. This is primarily the result of significant reductions in actual services, as well as lower working expenses during this quarter. Based on what we are seeing in the industry today, we are hopeful that this number will continue to decrease during our fourth quarter.

Production taxes and others jumped due to losses on derivatives, tight hedging effectiveness. You may recall that the prior quarter actually included $5.69 per BOE gain on derivatives. Excluding the derivatives impact over the last couple of quarters, production taxes and assert retirement obligations that remained in the normal range.

Keep in mind that the impact of derivatives is separate from a standard hedge protection on our volumes. You can see in the data that our hedges added more than $21 per BOE to our average realized price. That’s nearly a 59% increase over the market price received. As a result, we delivered EBITDA of over $35 per BOE for the third quarter.

Still just like previous quarter, the price drop had an impact on the indicated future cash flows, which showed in the ceiling tax impairment, we reported in our results yesterday. While natural gas prices particularly, had move against us, guidance that are within our control and moving in the right direction and our risk management program is protecting our cash flow, as it was intended to.

Now to update on liquidity position, this numbers will be different from what you will see in the 10-Q, since we have updated them as of yesterday. As of May 5th, we had over nine million of cash, comprised of $8.5 million of cash in Bermuda and $82 million at the operating subsidiary.

Looking at our debt, this slide makes a few points. We have now five no sizeable maturities to worry about near term. The revolver is in place until June 2011, and the high yield bonds don’t mature until June 2013. For the bonds, we show $624 million of the $750 million issued amounts, because we hold the 126 million face amount in treasury. Adding in the revolver and miscellaneous items like [book] financing, total debt is $885 million, upon the cash on hand net debt as March 31, was down to $810 million.

Moving on, we add this slide to show why our current liquidity should be [special]. On our last call we outlined our plans to reduce capital spending to get back within the cash flow. This slideshows we’ve been very successful in that effort. Note, that March included a benefit from our controlled insurance, without which, we are still down significantly at about $13 million.

We feel comfortable we can get to a run rate that keeps us below 100 million from the full 2010 fiscal year.

With I’ll turn it over to Steve.

Steve Weyel, Jr.

Thanks, West. Let us start with a look at our volumes. The 20,700 barrels of oils a day, equivalent of production reported for the third quarter was 8% above the second quarter even without the full restoration of hurricane volumes, and the shut-in of Rabbit Island.. Our recompletion in South Tim performed to their expectations, largely offsetting production delays.

Those recompletions brought on flush volumes, which went into decline fairly quickly as a result recent volumes have been averaging about 18,000 barrels per day.

The weather offshore has delayed third party pipeline repairs compounded by the discovery of additional damage. So the return of those shut-in volumes remains uncertain but likely to be closer to September.

Bottom-line with that return of hurricane volumes we expected the fiscal fourth quarter to average 18,000 barrels a day, which would put the full average to somewhere around 19,000 barrels per day. We still expect fiscal 2010 volumes to average more than 20,000 barrels per day, even with the capital budget of less than 100 million.

The fiscal 2010 volumes, will see the benefit of several [pinning] events. First inline, we’ve successfully sidetracked and our currently recompleting the new well, one of our largest historical producers of South Tim 2010, and expect initial production of about 1500 barrels per day within a few weeks.

Then in September we should see the return of hurricane volumes from South Pass, Eugene Island and East Cameron totaling around 2000 barrels per day. By the October time frame we should see the startup for production from Cote de Mer, as well as the Fastball discovery, which is a deep water project in Viosca Knoll operated by Newfield.

Together those two should add another 2000 barrels per day. All together between them thus far we have projects totaling above 5000 barrels per day scheduled to come online. These wells will need to offset natural declines so they won't be a 100% incremental to the 18,000 barrels per day we are producing a day, but they certainly give us confidence that we are going to average more than 20,000 barrels a day in 2010.

Let me show you graphically why we have confidence in the longer term outlook as well. This is an illustration of how we expect to produce our existing resource base over time. It highlights the nature of our core or focused properties. These properties tend to have multiple pay zones behind pipe, classified as proved, developed, non-producing or PDNT shown in the red wedge on this slide.

With relatively little capital we can put these reserves on production, offsetting a large portion of base decline. [Gouda] is the perfect example of reserves we will begin producing shortly have been waiting behind a pipe while it produced in the original lower zone.

The hurricane volumes also are currently classified as PDNT and shown in the red wedge, since they’ve been offline since last summer. Similarly Fastball is in PDNP category, because it has been drilled and is only waiting tieback in its production platform.

The South Tim re-completions we referenced earlier were also great examples of low cost, low risk production additions in this category. For less than a $1 million we were able to add nearly 3,000 barrels a day of cost production.

These are the type of opportunities we are focusing on the upcoming year’s program. We have a good number of rigorous workover and inventory at South Tim 21 and we expect to find more there as well as at Main Pass 73, South Pass 49, East Cameron 335 and elsewhere.

So those are key examples of proved well, non-producing reserves that we can put on production with relatively normal cost. The key of these opportunities is having ownership of large mature oil fields to set up these projects.

The green wedge on this slide represents volumes from drilling our proved undeveloped locations or [passed]. You will note that there is low or no contributions expected from present fiscal 2010, as we conserve capital.

And finally, as we show progress in the purple we show volumes from the problem category. While these might seem risky because they are not even in the proved reserves category, they are a reflection of the conventional nature of our properties. Nearly half of those probables are associated with currently producing well-bores. In fact, a lot of our probables were actually low risk and more valuable than our Pass. So this is how we expect to maintain strong volumes even with a well reduced budget.

Keep in mind, the budget still includes continued exploration of Blackbeard or similar ultra-deep targets. On that note, let's look at current exploration effort. We have a 20% working interest in Ammazzo. McMoRan has drilled a well to more than 23,000 feet and is drilling ahead towards close to a depth of 24,500. After some initial delays we've been able to make good progress and are actually on track, coming pretty close to the original cost estimate. We would expect to have this well TDed shortly.

Ammazzo is targeting the same sands, McMoRan's tested Flatrock and other big discoveries nearby. If successful, this well will be very meaningful to our reserves working in the current fiscal year. We are very enthusiastic about our continued strategic alignment and joint efforts with McMoRan. These joint efforts include the ultra-deep Blackbeard prospect nearby where we are moving toward towards the future completion and testing phase on this potentially game changing discovery.

Now before wrap up the call, let’s review the strength of our current hedge position. In the midst of falling commodity prices, our risk management strategy remains heavily hedged has proved to be one of company's biggest asset. The current value of our hedge portfolio stands at nearly $80 million mark-to-market

In addition in the past quarter, we realized $39 million from monthly settlement and we amortized an additional $67 million of our core positions using the proceeds to reduce our debt.

Since the inception of the company, we have utilized commodity risk management practices to protect our cash flows. We have hedges in place till 2011, will continue to look for opportunities in market to lock in incremental value.

With that, let me turn it back to John briefly before we open it up for questions.

John Schiller, Jr

Thanks Steve. I just want to quickly summarize the key points. Today, while we are in a hunker-down mode due to the market turmoil that doesn’t mean we are standing still, from it. Even with a greatly reduced activity and the spending levels, we continue to deliver good operating results. We continue to pursue the key hi-fi exploration efforts such as Cote de Mer and Ammazzo.

Meanwhile we are making good on our goal of preserving our financial position, we retained significant liquidity with our recent bank debt re-determination, and making great progress at both, the reducing both the capital program and operating overhead cost to help increase our cash cushion.

I will take a moment as we take an eye of the M&A market and other opportunities to improve the overall asset base and capital structure. We won't be rushed into any kind of transaction but will certainly examine the options.

With that operator, lets go ahead and open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And we'll have our first question from Duane Grubert with CRT Capital.

Duane Grubert - CRT Capital Group LLC

At the IPAA you had shown a slide showing some projects specific stuff at South Tim and workovers and I think it would be useful if you just walk through your philosophy about how fast you would want to pursue workovers. Whether you want to use that as a source of growth or kind of hold it back a little bit and use it as a source of maintaining rate?

John Schiller, Jr

Good morning Duane. I think the key thing there is that, what we are doing, we are continuing as we've lowered our capital. Put our asset teams together, identifying those opportunities across all of our old mature field. So we are not only at South Tim 21 we are at South Pass 49, Main Pass 73, East Cameron 334, all those big old types fields are getting hard works and identifying opportunities that you are talking about.

In some cases the well is on production, we have to wait for the volumes to fall off and other cases we got where all that are making 40, 50 barrels of oil a day and with the MMS these days we are able to adjust the pipe closing. That one ending, go one to another zone that will give us 400, 500 barrels of oil a day. So a little bit of is the time and where the zone is the well the currently producing and some of its identifying opportunity going.

Duane Grubert - CRT Capital Group LLC

Okay. And kind of a similar question on Cote de Mer you've got that nice data point you gave us about the 15 million a day through the 1260 before they choke. In passing you said, jeez, we expect maybe higher rates. Can you talk about the philosophy of how much you want to pull on a well like that when you bring it on?

John Schiller, Jr

We floated for 20 days at a first constraint but solid rates so we could see what we had. I think it’s a little early to change. Its so hard we’ll pull that well, we’ve got to get a good margin al though we didn’t put any bottom, or pressure gauges in the well this time just because of the temperature and depth and kind of the history of the well, to be honest. I think we will see this problem my guess ism you will get 25 million out it, I don’t know that will go lot harder than on that n it, but we will see.

Operator

We will go next to [Rick Holderfield] with Sterne Agee.

Rick Holderfield - Sterne Agee

Good morning, what kind of operational time frame can you give us some on Blackbeard?

John Schiller, Jr

Blackbeard remains it was been, we are moving forward, we have an [AFB] to start building and casting different parts of the equipment from pumping units to wireline units, surface risers, sub-surface valves and well heads. The timing of that, in other words our guess is, what I will hesitate on, whether we -- its such that we go back to Blackbeard or revolving drilling another well in the time is such that we test it. I think its more important that we get to test other well and show the equipment can handle it and so we are moving ahead, we like where everything is. Approximately we think or probably eight months to a year away on that. But with everything going the activity wise, a lot of this will start to speed up. We are able to demand more attention from the service companies, they have got more people to put the work on and with reduction in activities so. It could go quicker than I think.

Operator

We go next to Richard Tullis with Capital One Southcoast.

Richard Tullis - Capital One Southcoast

Good morning.

John Schiller, Jr

Good morning, Richard.

Richard Tullis - Capital One Southcoast

Going back to the production decline coming of in the quarter, could you go in to a little bit more. What was a main driver there? And was it the new production that declined quickly or was it some of the base productions?

John Schiller, Jr

Yeah, it was almost all of South Timbalier, when we talked to you in February at this time, when we were making 8200 barrels a day, equivalent of South Timbalier. Today that number is back down to 5600.

Richard Tullis - Capital One Southcoast

Okay.

Unidentified Company's Representative

We are just bringing on the recompletion over there that’s at 600 barrels day. So, as time comes and goes in that field, due to what it helped a lots, because it’s a type of well, thereis a lot more solid, then in some of these other zones.

Richard Tullis - Capital One Southcoast

Okay. Spoken of Gouda, or what do you expect that to add to your production?

John Schiller, Jr

I thought Steve told you, we said that our initial production, we expect about 1500 barrels a day. That’s been our biggest producers.

Richard Tullis - Capital One Southcoast

Okay.

Richard Tullis - Capital One Southcoast

With the new cost environment to a lower rig costs, service cost, what’s that generally costing you to bring in your thoughts on mine, on average these days, or going forward?

John Schiller, Jr

It depends on what field they are in, but SoftGen -- where the things that are a monetized (inaudible) 16 - 17 million will probably what marks down the -- were down the 10 million sort of range right now.

David West Griffin

Richard Tullis - Capital One Southcoast

Okay.

John Schiller, Jr

And seeing reductions across the board now, even from the big guys that I didn’t bank with would be cutting production or slashing 25% on their costs, to maintain market share.

Richard Tullis - Capital One Southcoast

Okay. In your CapEx number for the quarter, how much was related to Ammazzo?

David West Griffin

We are 8 million for the quarter on Ammazzo.

Richard Tullis - Capital One Southcoast

Okay. And how much more you think you got there just for the drilling phase?

David West Griffin

Not a whole lot. Drilling is going extremely well, it’s a bottom of the whole so we don’t expect to have a lot of new cap.

Richard Tullis - Capital One Southcoast

Okay.

David West Griffin

We spent a 11 on that Richard.

Richard Tullis - Capital One Southcoast

Sorry, John.

John Schiller, Jr

At March we'd spend a total of 11 and so wouldn’t expect really to be much more than 3 million more to that.

Richard Tullis - Capital One Southcoast

Okay.

David West Griffin

Before rather on 15 not against both.

Richard Tullis - Capital One Southcoast

Okay and you may have mentioned this and I missed it. When do you think you would have initial results on Ammazzo?

John Schiller, Jr

I didn’t tell you. We are drilling below 23, the above we did has been out. So we are going there and get TD. I'm guessing think now things or good,, week --- to weeks. …

Richard Tullis - Capital One Southcoast

Okay, alright That’s all for me. Thanks a bunch.

Operator

We'll go next to Evan Templeton with Jefferies.

Evan Templeton - Jefferies & Company

Hi guys. I am jut curious about hedges, whether you guys have done anything since I guess that I think the last summer your pet positions you have was those of March 11. Maybe you guys have anything and kind of what your current philosophy as you got some swaps in place and kind of 55 level, some above still 63 and what consistently –kind of monetizing some of the hedges, could just shed a color on current thoughts?

Steve Weyel

This is Steve. What we have done in recent weeks is really just kind of focus on short term volatility and opportunities to protect short-term position. So Todd Reid has layered in additional hedges for the next two to three months, as we like the numbers that are in the marketplace, we will continue to do that in the far moths. We are beginning to look at doing some more longer term stuff like 2011 timeframe with the commodity price levels that we see today. And that’s pretty much what we have been doing.

Evan Templeton - Jefferies & Company

And what you would look at for the 2011. Is this going to be similar as before, some colors, some swaps or something different?.

Steve Weyel

We probably, at this price levels, we probably do a combination – through nice swaps and just look at where the market value is and based on where the volatility is trading.

Operator

[Operator Instructions]. We will go next to Robert Murray, Credit Capital Investment.

Robert Murray - Credit Capital Investment.

Hi. With regard to for the debt paid down. Are you sure they are coming from cash from operations or asset sales or hedge monetization,, could you say some on that.

John Schiller, Jr

I think you heard the first part

Robert Murray - Credit Capital Investment.

First part.

Steve Weyel

We expect really, primarily come from cash flow from operations.

Robert Murray - Credit Capital Investment.

Okay. I think, are you confident about (inaudible) of covenants in them, fiscal 2010.

John Schiller, Jr

Yeah. I mean we were on from bank redetermination when we did that, we saw that some covenant rely in mark-to-modifications, covenants and based upon on that, our analysis got work things out. We don’t anticipate any issues with our financial covenants, and we do the next calendar year.

Robert Murray - Credit Capital Investment.

Okay.

Steve Weyel

Stress tests are pretty hard for our board, yesterday in terms of all our covenants they were in good shape.

Operator

(Operator Instructions). And we currently have no further questions in the queue. I'll turn the conference back over to Mr. John Schiller for any additional or closing remarks.

John Schiller

We appreciate everybody joining today and shareholders, bond holders and debt holders all of you who keep striving here to keep moving this thing in the right direction and look forward to talk to you next with our end year results. Thanks.

Operator

That concludes today's conference. Thank you for your participation.

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