After the market close on Tuesday, Energy XXI (EXXI) announced its fiscal 2013 year-end reserves estimates and gave an operational update. All the news was quite bullish. The organic reserve replacement ratio (RRR) was 390%. Combined with the stock buybacks, and operational update, it is clear the company is even more undervalued now then it was a month ago when I wrote Energy XXI Limited: Vastly Undervalued, Nicely Hedged, and Shareholder Friendly. I expect analysts' upgrades and for the stock to easily trade up to $35/share before the end of the year - a 43% gain from the today's closing price ($24.39).
Since the previous article gave a pretty good summary of EXXI, I'll cut to the chase here with respect to valuation. The press release said:
Pre-tax proved-only present value, using a 10 percent discount rate (PV10), totaled $6.1 billion as of June 30, 2013, using prices of $91.60 per barrel of oil and $3.44 per MMBTU of gas, before differentials, based on the SEC-prescribed first-of-the-month average prices for the preceding 12 months. Proved plus probable reserves as of June 30, 2013 are estimated at 232 MMBOE, with a PV10 of $8.4 billion.
- Total Net Proved Value (PV-10) = $6.1 billion
- Total Net Proved + Probable (PV-10) = $8.4 billion
The press release also gave an update on the $250 million Share Repurchase Plan. Through July 16, 2013, the company repurchased 3,852,900 shares at an average price of $24.35/share. Following these purchases, the company has a total of 75,571,910 shares in issue.
EXXI: Vastly Undervalued!
That means the company's valuation, based on PV-10 net proved reserves and current shares issued, is $80.72/share. On a proved plus probable basis, the company would be valued at $111/share.
Today the stock closed at $24.29, a 70% discount to its net proved reserves value of $80.72/share. Even if the stock trades up to my $35 target price, it would still be selling at more than a 50% discount.
Horizontal Drilling Unlocking GOM Reserves
Energy XXI Chairman and CEO John Schiller commented on the results:
The horizontal drilling campaign was a key driver to our reserves growth in fiscal 2013. Since initiating the horizontal program a year ago, we have been successful in nine of our first 11 attempts. On average, the successful horizontal wells added about 1 MMBOE of incremental proved reserves per location due to higher recoveries of oil-in-place. We have addressed the early challenges associated with the program and the value generated by the overall horizontal program has been outstanding.
All of the company's reserves are in the United States Gulf of Mexico or Gulf Coast, with approximately 75 percent being liquids, of which 95 percent is crude oil and condensate. Approximately 61 percent of proved reserves are proved developed.
You can read more about EXXI's horizontal drilling programs in this June presentation at Enercom.
The production update appeared to be on par with previous guidance. During the company's Q4, production hit a peak of 50,200 boe/d, averaged approximately 47,000 BOE/d for the quarter, and oil production averaging nearly 29,000 bpd (62%).
Summary & Conclusion
After writing my earlier article on EXXI and seeing how undervalued the shares were, I felt compelled to take a position. Since that time, the shares have drifted slightly lower. I was getting a bit nervous and almost sold some of the position last week. I am glad I did not. After this report I am convinced my earlier $35 year-end price target is still intact. As the title of the first article said: EXXI is vastly undervalued, nicely hedged, and shareholder friendly. EXXI is a BUY.