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Energy XXI (Bermuda) Ltd. (EXXI)

F4Q09 Earnings Call

September 4, 2009 9:00 am ET

Executives

Stewart Lawrence - Vice President of Investor Relations

John D. Schiller Jr. - Chairman of the Board, Chief Executive Officer

Steven A. Weyel - President, Chief Operating Officer, Director

David West Griffin - Chief Financial Officer, Director

Analysts

Duane Grubert - CRT Capital Group LLC

Catherine Sebulski - Jefferies & Company

Robert Murray - Credit Capital Investment

Zas Majenson - Pine Cobble Capital

Bob Clements - Brittany Capital

Richard Tullis - Capital One Southcoast

Simon Balk - Brigade

Operator

Good day and welcome to the Energy XXI fourth quarter 2009 earnings conference. Today’s conference is being recorded. At this time, I would like to turn the call over to Mr. Stewart Lawrence. Please go ahead.

Stewart Lawrence

Thank you. Presenting today is John Schiller, Chairman and CEO; Steve Weyel, President and Chief Operating Officer; and West Griffin, Chief Financial Officer, will all 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 which was filed this morning to be become better familiar with these risks and our company.

Now I'll turn the call over to John.

John D. Schiller Jr.

Thanks, Stewart. Good morning, everyone. We started our new fiscal year with a flurry of events and news and we are very upbeat about what lies ahead. In case you missed it this morning, we launched a tender for the majority of our high yield bonds. I won't go into details because we are in the offering period with offers expected to do a couple of things for us.

We intend to reduce our total principal amount of our bonds by between $56 million and $66 million, and we will refinance a large portion of our debt extending the term by an extra year.

While launching the tender, we had commitment letters from several of our large holders representing $345 million of the $624 million bonds in circulation, nearly the full $360 million maximum to be exchanged. Also significant, this has been structured in coordination with existing bond holders who in many cases are shareholders committed to the ultimate success of Energy XXI.

This part of our overall effort to strengthen our capital structure, which was important to our efforts to grow the company, whether through expiration or acquisition. We believe we see a clear path forward in that regard and we have some important recent data points we can discuss this morning.

We reported pre-reserves of $53.1 million barrels of oil equivalent and delivered a reserve replacement ratio of 165% for fiscal 2009. We continue to remain excited about the significant expiration targets in the ultra deep shelf and we were pleased to welcome the legendary Tex [Moncri] to this effort and find his commitment to the play a meaningful sign of confidence. Tex has taken a promoted interest with us in the Davey Jones well which is currently drilling below 20,000 feet and making good progress towards testing the objective intervals.

Furthermore, we’ve received a determination by third-party engineers regarding the potential size of our Blackbeard discovery. [Nevan Soles & Associates] has identified a contingent resource potential of as much as 20 million barrels of oil net to the company, or about 142 million barrels total gross.

We have unveiled a fiscal 2010 capital campaign designed to deliver strong production and free cash flows that will further reduce debt and increase our financial flexibility. In addition, we reached an agreement with our insurance -- with our lead insurance under-writer for a global hurricane settlement that will provide Energy XXI with $53 million of incremental cash within the next six weeks.

Overall we’ve gained a lot of breathing room. There’s no question that fiscal 2009 presented some challenges for Energy XXI and the entire industry. We have adjusted and adapted to the new environment. We’ve delivered solid results for fiscal 2009 and set ourselves up to achieve great things in the next fiscal year.

One of the things that has come out of this slowdown in capital in time to actually shut down and review our assets is that we realized just how much opportunity we have on these big oil fields that we talked about as we acquired them. And in the coming months, you are going to start seeing us do more and more opportunities within our existing asset base to prove up additional reserves and we are very excited about those opportunities, in addition to the other existing exploration we had already identified.

Steve will review the year-end reserve reports and outline the capital program in a few minutes. First let’s turn it over to West to review the financials.

David West Griffin

Thanks, John. We included all the key financial detail in the earnings release, so let’s take a look at a few of the line items. Energy XXI generated $277 million of EBITDA during the year ended June 30, which equates to more than $39 a barrel. Operationally, our daily production volumes hovered right around the 19,000 barrels a day level throughout the year. That level was down from fiscal year ’08 because of the hurricane damage that we continued working to repair. Notably, cash flows benefit from a higher crude oil mix, which by year-end had gone up to 64% from 52% last year, reflecting our oil exploitation strategy.

Our quarterly pre-hedging revenues swung dramatically during the year, going from a record high $94.62 per barrel in the first quarter to less than $36 a barrel in the third quarter, as oil and gas prices plunged.

Tempering that volatility, the risk management program continued to prove its value across the year, resulting in a full year gain of $6.05 a barrel. This slide puts the longer term hedging impact in better perspective. We have consistently benefited from our natural gas hedges, with positive contributions to the net realized price in each of the last three years.

On oil, we gave up some of the upside in fiscal year 2008 but we went back to having hedge gains again in fiscal year 2009. Overall, the three-year performance is strong and relatively steady, which is the goal of the risk management program.

Hedges currently in place for fiscal 2010 cover about 75% of production based on maintaining flat production. That helps ensure that we will have substantial free cash flow to reduce debt.

Looking at our debt, this slide highlights that we have no sizable near-term maturities. The revolver is in place until June 2011 and the high yield bonds don’t mature until June 2013. As John mentioned, the tender we just announced seeks to replace the majority of our existing bonds with new ones that mature in 2014.

Adding in the revolver and miscellaneous items, like put financing, total year-end debt was $866 million. Applying the cash on hand, net debt at June 30 was down to $774 million.

Cash on hand at June 30 included $8.5 million Bermuda and about $80 million at the operating subsidiary, totaling $89 million.

Looking ahead at fiscal year 2010 in round numbers, our cash requirements for the capital program and interest expense should total less than $170 million. Assuming EBITDA comes in around $250 million, we would reduce our net debt by another $80 million in fiscal 2010, in addition to whatever we achieved in the current bond tender and private placement. Also, the $53 million insurance settlement will add significant near-term liquidity. Part of that amount represents reimbursement of cash already spent.

Taken all together, we have a manageable debt level with efforts underway to reduce it further and we have liquidity in the form of cash that should cover any unforeseen -- or any foreseeable needs.

Now I will turn it over to Steve for the operations discussion.

Steven A. Weyel

Thanks, West. Let’s start with a quick review of the reserves table. We ended the year at 53.1 million barrels, up from the prior year, and produced more than 7 million barrels last year and came close to replacing those reserves strictly through extensions and discoveries. Notably the success of our capital program also resulted in significant effort reserve revision. Taken together, we’ve successfully replaced 165% of production through extensions, discoveries, and performance revisions.

The year-on-year plunge in oil and gas prices led to 2.9 million barrels of price related downward revisions, which hampered the growth in the reserve space. The [Décor] program delivered excellent results. Excluding the impaired reserves in minor property sales from the calculation, reserves would have been up more than 9%.

Looking at the entire resource base rather than just proved reserves, you can see even more value. As an [inaudible] listed company, we are required to report three key reserves as shown on slide 11 -- the June 30 PV10 for crude reserves was about $1.1 billion. Above and beyond that is nearly $600 million of probables and possibles. Incremental to this is our Blackberry discovery which [Neville & Soole] has estimated to be as much as 20 million barrels net to Energy XXI. It’s important to note the Blackbeard number is based on the data collected to date. If the sands thicken on the planks as our model suggests, this number could be just a fraction of the ultimately recoverable reserves.

So what value should we place on these contingent resources? Clearly they are worth something, an amount significantly above our cumulative investment to date. The [Mont Crefe] deal is proof that our interest in the ultra-deep play have a lot of market value. Whether we receive credit for exploration upside or just proved reserves, simple math indicates our stock is trading far below its net asset value.

Digging a little deeper into the crude reserves data, 64% of our crude reserves are developed. Of those, you will see that a little over half are crude developed, non-producing. This provides visibility on our efforts to hold production flat with minimal capital spending.

Most notably, our [inaudible] fastball discoveries are scheduled to begin producing in the October at a combined rate of 2,500 barrels a day, which will move 3.6 million barrels of reserves into the producing category.

About 2,000 barrels a day of additional production is expected in the November to January timeframe as we restore volume shut-in by last year’s hurricane damage. Putting all the hurricane impacted fields back online will move another 1.9 million barrels of reserves into the producing category.

Completion of these projects will lower the non-producing wedge to just 22% of our crude reserves. That leaves nearly 12 million barrels of non-producing category, primarily representing reserves behind pipe that can be placed on production over time at relatively small costs. This is why we can keep volumes flat for an extended period with low reinvestment rates.

On that note, let’s look at the fiscal 2010 capital program. We have set the spending level at a range of $75 million to $85 million. Slide 13 provides a detailed breakdown of where the capital is targeted. The largest portion of the budget is for facilities primarily related to [Codemere] and Fastball development drilling. Development drilling takes only a modest amount of capital and exploration drilling gets even less this year. Keep in mind that the percentages in the table apply to much larger budgets than the 2008 and 2009 fiscal years.

Along the same lines, G&A and other looks like a large slice but that’s only because the capital spend has been significantly curtailed relative to last year.

Bottom line, we are pursuing a greatly scaled down capital program, but one that is well-balanced with an OLE focus and is expected to deliver near-term cash-on-cash returns.

Now before taking a look at some of the bigger projects in the budget, let me quickly address costs. We captured operational efficiencies during the year in our direct LOE, which unfortunately were masked by the fall in production due to hurricane disruptions. Direct LOE for fiscal year 2009 was $12.34 a barrel, up from $10.68 a barrel in 2008. However, as West showed in the earlier slide, efficiencies are evident on a quarter-on-quarter basis. We lowered LOE from $15.15 per barrel in the first quarter to $10.56 in the third and $9.20 in the fourth. The effort and the results are there.

One of the biggest cost reductions has been for offshore rigs. As a result, we have recently accelerated a three-well development drilling program in our Main Pass 61 field. The Hercules 350 arrived at Main Pass 61 and is currently on location and preparing to begin operations. We will drill two wells from the Main Pass 61 location, targeting [inaudible] and the J6 sand and expect to complete both wells as high rate oil producers.

The Seahawk 2601 is also on location at Main Pass 61 and is preparing to start operation. We will drill one well from Main Pass 61C, also targeting an up-dip position of J6 Sand with the 1,000 foot expiration tale at 50%.

Overall, we expect the three wells to provide a net uplift of somewhere between 2,000 to 3,000 barrels a day. This program should be cash flow neutral to us in the current fiscal year.

At Davey Jones, we are currently drilling ahead below 20,000 feet toward a proposed 28,000 foot depth. This well is targeting eocine and possibly cretaceous sands that have never been seen on a Gulf of Mexico shell. In the deep water, the industry essentially has 100% success rate drilling [eocine] four-way closures. This includes DP’s giant ultra deep discovery amounts Wednesday.

There are a lot of key points to make about Davey Jones in that regard. First, we should see those sands about 10,000 feet shallower than we could drill them at Blackbeard. That’s a huge difference in terms of pressures and temperatures. Second, we recently shown [inaudible] at the same target depth, roughly 24,000 feet, where we should enter the [eocine], we now have proof that excellent quality sands can exist on the shelf.

When you can compare this effort against the equivalent deepwater targets, we can drill at a fraction of the cost and if successful, can bring it online in a fraction of the time.

Every new data point we get makes us increasingly optimistic about the potential of the ultra deep shelf and we look forward to updating you on our drilling efforts moving forward.

Now let’s turn it back over to John for the closing.

John D. Schiller Jr.

Thanks, Steve. I want to do things a little different today to wrap up the call and we’ll quickly review the value proposition that Energy XXI offers. We can’t show slide 15 enough, where 64% oil by design, not happenstance. It wasn’t a commodity price call but an engineering and value call. Even at six to one pricing, oil is a better investment because of the decline curve and overall opportunities to extract additional reserves and upside from the reservoirs. At today’s 25, the long haul is a no-brainer.

We’ve been showing slide 16 in presentations for a while and making the point that our [oily] nature makes our barrel more valuable than our Gulf of Mexico peers, but that somewhat misses the point that even peers at the low end of the Gulf of Mexico look great compared with many of our on-shore natural gas brands. So we’ve added the investment communities favorite resource players to the comparison. We don’t label the peers but it’s safe to assume that the ones on the lower end of the scale, our on-shore natural gas players who get much higher valuations than Energy XXI, even though the returns pale in comparison.

That’s a very important slide because it neutralizes both our higher LOE per barrel of oil equivalent as well as our higher interest expense, given our debt level. With oil, we have higher cash operating costs but that’s meaningless because our cash flow is so much greater and as a company, we are more levered than many of our peers but we can easily manage the higher debt load and the cost of the cash returns.

Furthermore, our price risks have largely been neutralized by our hedging program. As Wes pointed out earlier, we have consistently made money on the hedges and have given us the upside -- on the gas hedges and have given us the upside on oil only during the most extreme oil price scenarios.

Moving forward, we continue to enjoy the hedge production. 75% of our fiscal 2010 volumes are hedged on an average of $68.50 for oil and $6.10 at NCL for gas.

Looking at the asset base that supports our valuation, you see that the crude reserve base alone makes Energy XXI a great value, and Steve explained our probables and possibles have a very real value. It will be interesting to see how other companies choose to deal with the new SEC rules allowing them to disclose [inaudible] reserves at the end of the year. Beyond the 3P numbers, we have exponential upside, represented by Black Beard and the rest of our ultra deep shelf initiative.

As the recent [mon creek] format demonstrates, this represents real value, and the catalyst may be much closer than the market is expected. Davey Jones can be just a short time away from proving [up a play] that would be a complete game changer for the industry -- the industry, let alone Energy XXI. We are talking about a couple hundred million dollars versus billions of dollars in months, rather than years, to be on production. Anyone who has the slightest notion of present value can do that in math. Are we excited about the future of our operation strategy? Oh yeah.

In closing, I would like to add that we are very proud of our accomplishments, given the enormously challenging environment we faced in our fiscal 2009 year. We survived one of the worst hurricane seasons in the Gulf of Mexico in 50 years, increased our reserves, maintained solid production levels, and strengthened the balance sheet.

I want to thank our employees for their great effort and our shareholders for their support. We believe that we are set to deliver breakout results for fiscal 2010. We are confident that we will live within cash flow and continue to reduce our debt. In addition, we are excited about adding another great partner to our ultra deep exploration efforts.

I know we have given everyone a lot of great news today to chew on, so let’s open up the lines for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question from Duane Grubert with CRT Capital Group.

Duane Grubert - CRT Capital Group LLC

Let’s start with sort of the rational for raising fresh capital right now. You made reference in your release this morning to a private placement equity raise as well. Can you just talk us through? And I guess my ingoing hypothesis is as you bolster the balance sheet and have more flexibility that you will be doing more of your own projects and that would be a reason for having some extra cash around and that it would not be so much related to I need to have cash to develop my ultra deep stuff. Am I on the right track?

John D. Schiller Jr.

Yeah, Duane I think you are on the right track. I mean, there’s several things -- increased liquidity gives us options both on taking advantage, like Steve talked about, where we are going to drill three oil wells at main pass that are cash flow neutral in the year and then set us up in a great position going forward to next year. It gives us flexibility to look at some asset acquisitions and have some cash to make that happen and it just continues to improve our overall balance sheet, so there’s several reasons behind it.

Duane Grubert - CRT Capital Group LLC

Okay, that’s great. Wes, with the proposed tender, my ingoing assumption is that you are going to have to report a gain on the reduction of face value of the debt. Is that likely to give you a tax bill?

David West Griffin

There is a tax provision, basically, would give us a tax bill associated with it but we have a lot of NOLs that will shelter that tax, so we don’t anticipate that we will actually have to write any checks.

Duane Grubert - CRT Capital Group LLC

Yeah, that’s great. Kind of an old topic that I think people are interested in, the pace of getting equipment to test Blackbeard and/or Davey Jones, can you update us on how that is progressing?

John D. Schiller Jr.

Yeah, it’s actually a couple of different questions in that depending on what depth we get into the pay at Davey Jones and the pressures that we see, there may be existing equipment out there to handle it. Don’t know that yet, we’re just going to have to wait and see as we drill the well what kind of -- where we encounter the reservoirs and what the pressures are. But particularly if the [eocine] turns out to be oil there, then we can probably test Davey Jones with existing equipment in the industry.

On the Blackbeard side, we continue to do all the development work, the engineering design, all the things necessary to create equipment for 30,000 pounds and as I’ve mentioned before, we’ve run into no stumbling blocks there to tell us there’s anything to be concerned about.

Duane Grubert - CRT Capital Group LLC

Is there any idea on the timing? So nothing to be concerned about but how soon do you think it could be available?

John D. Schiller Jr.

Yeah, Duane, in my mind, you know, it’s a fluid situation because we are bringing partners into this thing. We are looking at things with our existing partner base. My guess is you are still talking a year. We won't really know until we start cutting steel and the fabrication process in my mind just how long we’re looking at.

Duane Grubert - CRT Capital Group LLC

Okay, and then maybe if you can shed some light on -- there’s been some insider sales recently. What’s the rational behind that?

Steven A. Weyel

I’ll speak for both Wes and I but basically it was a proactive effort on our part with a personal banking relationship that pertained to when we exercise, Wes and I exercise into the early [inaudible] exercise. Not something that we wanted to do but something we had to do.

Duane Grubert - CRT Capital Group LLC

Okay, got it. Thank you very much.

Operator

Your next question is from [Catherine Sebulski] with Jefferies & Company.

Catherine Sebulski - Jefferies & Company

I was hoping you might address your credit facility briefly, just discuss plans to possibly reduce your borrowings with proceeds from this offering and you know, any potential redeterminations coming up.

David West Griffin

As part of the overall tender, we have an obligation with our banks to pay down the corporate revolver and reduce the borrowing base by $41 million, so currently the borrowing base is $240 million. Assuming the tender is successful, the borrowing base would then be reduced to $199 million and so the objective of putting this all together in terms of the tender and the private placement is really to put the company in a cash neutral to slightly cash positive position after all the dust settles.

Catherine Sebulski - Jefferies & Company

Okay, and the proceeds from the insurance settlement, and it looks like there’s another private offering of $50 million of common, would those proceeds be used to reduce bank debt as well?

David West Griffin

The private placement is actually -- it’s not just an equity issue. There’s an equity component to it but it’s a debt issue with a little equity component.

Catherine Sebulski - Jefferies & Company

Gotcha. Okay, and the proceeds from the insurance settlement?

John D. Schiller Jr.

The cash from the private placement is what’s going to help pay down the revolver Dave was talking about. And on the insurance proceeds, I mean, obviously what you will see us do now that our bank group has kind of settled out is we are going to take a lot of the cash we’ve been holding and put it back against the revolver, so we will be much less drawn when we talk next quarter than what we’ve been in the past couple of quarters.

In addition to that, the insurance money coming in, some of it we’ve already spent, so that offsets those costs. Other dollars are yet to be spent primarily on the Eugene Holland 330 platform removals that Devon’s working on, so some of that money will head out the door over the next 12 months.

Catherine Sebulski - Jefferies & Company

Okay. Sorry for the confusion, lots of moving parts here. And to switch topics, on your proved reserves, there’s 14% that are internally engineered. Could you just discuss why you chose to do that if it was costs or timing or --

John D. Schiller Jr.

Yeah, it’s real simple. If you’ll remember, we had three reserve auditors doing our reserves. We moved the one, [Neville & Sole]. When we did that, we saved $300,000 for the year by doing that. The flipside of that is really our top 12 fills held most of the value, and then we had another 45 miscellaneous fills that maybe one or two wells in South Louisiana and things like that. So from a present value standpoint, they were a much smaller piece than the large fill. So we did that in-house, just to help save on the money. But we basically cut the same curves that had been put on there by the previous auditor, or the previous engineers that worked it.

Catherine Sebulski - Jefferies & Company

Okay, great. And if I could get just one more quick question in there -- looking forward to next year based on your $75 million to $85 million CapEx budget, I don’t know if you are willing to talk about production outlook, but do you have a sense of whether or not this could hold production steady or if you expect a bump up or --

John D. Schiller Jr.

No, if you look at the grants out there and all, that’s exactly what we expect, to keep production flat at a sort of 19,000 to 20,000 barrel a day plateau. As we said in the release, we are probably going to dip a little in this first quarter but then once we get all the wells that are ready to come on either from the hurricane or the hookups, you’ll see us come back up significantly in the second quarter and kind of maintain that 19, 20 number.

Catherine Sebulski - Jefferies & Company

Okay, great. Thank you.

Operator

(Operator Instructions)

John D. Schiller Jr.

It looks like a short and sweet one today. Oops -- keep going.

Operator

It does look like we have another question. We’ll go next to Robert Murray with Credit Cap Investments.

Robert Murray - Credit Capital Investment

I notice in the footnote here that you are going to be surrendering the bonds you hold. Will that create a capital gain as well?

David West Griffin

On the purchase of the bonds, we’ll record a gain associated with that, or -- and for book purposes. We paid a little over $90 million for the $126 million of bonds, so we’ll have pretax gains associated with that.

Robert Murray - Credit Capital Investment

Okay, you’ll have your NOLs to offset that?

David West Griffin

Yes, that’s correct.

Robert Murray - Credit Capital Investment

And your upward -- you had upward oil revision I saw but you had a downward gas provision. Is that right, or --

John D. Schiller Jr.

That’s correct, yes.

Robert Murray - Credit Capital Investment

What accounted for the downward gas provision?

John D. Schiller Jr.

Prices more than anything. You have to remember, we were at $9 and something last year -- no, $14 -- what was our number last year? We were at $14 gas last year and $3.80 something this year, so a lot of the gas revisions were due to pricing, just cutting off the economic [inaudible] soon.

Robert Murray - Credit Capital Investment

Right, and the oil is largely due to performance?

John D. Schiller Jr.

Oil is mainly due to performance, that’s correct. And drilling activity.

Robert Murray - Credit Capital Investment

Okay, great. Thanks very much, guys.

Operator

Your next question is from [Zas Majenson] with [Pine Cobble] Capital.

Zas Majenson - Pine Cobble Capital

Can you talk a little bit about the call protection on the new bonds?

David West Griffin

Sure. In the description of the notes, I believe it’s a one-year note call.

Zas Majenson - Pine Cobble Capital

One year, okay, great. Thank you.

John D. Schiller Jr.

One-year note call and then after that --

David West Griffin

And then it’s at half the cash coupons, so it’s 106.5, declining ratably.

Zas Majenson - Pine Cobble Capital

Okay, thanks. And is there a change in control provision?

David West Griffin

Yes, there is.

Zas Majenson - Pine Cobble Capital

What is that?

David West Griffin

The change in control has a 101 -- there’s a couple of modifications to the change of control. One of the things that is attractive to us about the new bonds is that it gives us some flexibility to do acquisitions and things of that nature, as long as the majority of our board is -- stays in place, we can have -- do a deal where we issue more than 50% of the stock to a target company and as -- or as part of an asset purchase, and still avoid triggering change of control on the new bonds. That’s something that we don’t have on the existing bonds.

Zas Majenson - Pine Cobble Capital

Okay. Thank you.

Operator

Your next question is from Bob Clements with Brittany Capital.

Bob Clements - Brittany Capital

Good morning, guys. Two questions on Blackbeard -- first a year ago, we were talking about needing a year to get the equipment on site, to complete and test the well. Could you give us a little color on why the addition year for that? And then --

John D. Schiller Jr.

Well, simple one is a year ago we were enjoying $140 oil and $14 gas, too, so -- I think a lot of it has literally been the environment we’ve been in, trying to deal with other issues beside kicking off that program. The AFE is out there, the work is starting to get done. We’re cautiously optimistic that with the slow-down in overall industry, we may be able to get a little bit more attention on some of the design work and we’ll see how quick we get there.

Bob Clements - Brittany Capital

And the second question there would be has the group thought about what they were going to do with respect to the testing the flanks for the second well?

John D. Schiller Jr.

Yeah, I’ll tell you at Blackbeard, I think you are going to see one of two things -- if we hit the [eocine] at Davey Jones and we see a nice oil pay or gas pay there, I would expect that we will look hard at drilling another 1,500, 2,000 feet at Blackbeard to deepen that well into the [eocine]. At the same time, we may very well still do it on the flank. The problem with the flank for the [eocine] is you are getting -- you are going to have to go a lot, you are going to start talking about going another couple thousand feet deep to find the [eocine] there as opposed to the sand we’ve already seen just getting bigger, which is the main plan for development well on the flank.

Bob Clements - Brittany Capital

Okay. So we just wait until we see how Davey Jones comes out?

John D. Schiller Jr.

I think that’s how it’s always been in this prospect and it goes back to what you have to remember, is when 16 wells drilled below 22,000 feet on the shell, so every piece of data we get from drilling these wells enlightens us significantly more as to what is going on out there, and so as we see that data, then it helps us determine okay, what do we see, what’s the next best prospect, what does that tell us about something we’ve already drilled, that we need to go back and drill a flank, et cetera.

I think the other thing that is important to remember is you compare this to deep water and the thunder horses of the world that took 10 years to go into production, I can assure you that Blackbeard and all the others will be way ahead of those schedules, so we are where we want to be with the type of discoveries we think they can be industry changing.

Bob Clements - Brittany Capital

I understand and you may not be able to comment on this but are all the partners pretty much on the same page as to how they want to go forward?

John D. Schiller Jr.

On Blackbeard, you’re talking about?

Bob Clements - Brittany Capital

Yes.

John D. Schiller Jr.

Yeah, I think so, best I know. I mean, I think a majority of us are for sure.

Bob Clements - Brittany Capital

Very good. That’s all I’ve got, John. Thanks.

Operator

Your next question is from Richard Tullis with Capital One Southcoast.

Richard Tullis - Capital One Southcoast

In the year-end prove reserve number, how much did you get for [Coat Damere]?

John D. Schiller Jr.

[Coat Damere] was -- we’re looking it up, 2.9, 3.9 -- 3.1 million barrels of the number.

Richard Tullis - Capital One Southcoast

Okay. The Blackbeard number that [inaudible] pointed to, contingent reserve number, 20 million barrels, what’s the split there between oil and gas?

John D. Schiller Jr.

They treated it as gas, correct? Yeah, for their evaluation, they put gas to it and we are looking it up -- they call it oil and gas. They didn’t really put any context towards it or anything.

Richard Tullis - Capital One Southcoast

Okay. What was the adjustment to deferred tax in 4Q?

John D. Schiller Jr.

That would be our -- I’ll let the CFO give you the details. That would be the lovely hedge trading up other comprehensive income portion that has to do with pulling the hedges through and rolling them into this quarter’s earnings. In other words, for the common man it makes absolutely no sense.

Richard Tullis - Capital One Southcoast

All right.

John D. Schiller Jr.

If you want more detail on it though, you can talk to West and he’ll give it to you.

Richard Tullis - Capital One Southcoast

Okay. He’s looking forward to that, huh?

John D. Schiller Jr.

Yes -- [inaudible] -- that’s what it’s all about, is you drive the gain through the tax from the hedge gain that’s out on your books for the remaining market through and it just looks -- makes it looks like it does to you guys. It’s one most people miss. We got a much greater hit from income tax and [inaudible].

Richard Tullis - Capital One Southcoast

Okay, and --

John D. Schiller Jr.

Cash flow is what makes us work, it doesn’t really matter -- you know, it doesn’t impact the cash flow.

David West Griffin

Yeah, the key thing I would look at is just look at the cash flow statement on an annual basis and what you basically see is that we really are in a -- you know, there’s no taxes there.

Richard Tullis - Capital One Southcoast

Okay, very good. And the borrowing base, do you already have a commitment on the $199 million or could it actually go lower?

John D. Schiller Jr.

As far as the bond deal, we’ve agreed to take it to 199 and then the re-determination will take place over the next couple of months. We don’t have a commitment but it would probably be -- let’s say real surprised if it goes much lower. Unlike others, you’ve got to remember, our -- the oil deck is actually up since our last re-determination to offset the gas, so it’s 60-40. We kind of wash out about the same place we were previously.

Richard Tullis - Capital One Southcoast

All right. When is that going to be redetermined?

David West Griffin

We start the re-determination process September 30th. That’s when we delivered the reserve report to the banks and then they evaluate it. It normally takes about a month to a month-and-a-half or so by the time you’re done.

Richard Tullis - Capital One Southcoast

Okay. And then just finally, did you guys run a PB10 using maybe a couple of years strip price on your year-end reserves?

John D. Schiller Jr.

Yeah, I mean, if you use strip and hedges that we have, you’re close to like $1.4 billion, $1.5 billion, somewhere in there.

Richard Tullis - Capital One Southcoast

Okay, versus the 1.1?

John D. Schiller Jr.

Right.

Richard Tullis - Capital One Southcoast

All right, well, that’s all I have. Thanks a bunch. It looks like your stock is having a pretty good day.

John D. Schiller Jr.

Yeah, I think so.

Richard Tullis - Capital One Southcoast

All right. Thank you.

Operator

(Operator Instructions) We will take our next question from Simon [Balk] with Brigade.

Simon Balk - Brigade

Can you -- do you have a standardized measure for PB10?

John D. Schiller Jr.

Yeah, for PB10 on the reserves?

Simon Balk - Brigade

Yeah.

John D. Schiller Jr.

Yeah, it’s what’s disclosed in there -- a million, a billion fifty.

Simon Balk - Brigade

I thought that was -- that’s pretax, right?

David West Griffin

The 10-K was filed this morning as well, so on page -- page 84, you can see the full after tax.

Steven A. Weyel

The standardized measure is $1.005 billion.

Simon Balk - Brigade

Okay. You mentioned the $50 million equity but you said it was more debt than equity -- can you kind of give more detail on what exactly you meant?

John D. Schiller Jr.

Hold on one second, I want to make sure -- the $1.005 billion, that’s an after tax standard measure for PB10, okay?

Simon Balk - Brigade

Okay.

John D. Schiller Jr.

What was your other question? I’m sorry.

Simon Balk - Brigade

The equity, somebody asked about the equity but you said it was kind of more debt with an equity component?

John D. Schiller Jr.

Right.

Simon Balk - Brigade

Can you kind of be more specific?

David West Griffin

Sure. If the private placement is -- we have a range for which we can do the private placement anywhere from $50 million total raised up to $89 million. At $50 million, it’s basically -- in all cases, it’s basically comprised of second lien notes that work just like the other second lien notes that are subject to the exchange and then there’s an equity component of $50 million, it would be equity for 7% of the company, up to at $89 million, just under 12%.

Simon Balk - Brigade

Okay, and then two more questions -- did you -- if I missed this, what is your kind of percent production hedged for next year on oil and gas?

John D. Schiller Jr.

75% for this fiscal year, which began July 1st.

Simon Balk - Brigade

Okay, 75% for both oil and gas?

John D. Schiller Jr.

75% in aggregate.

Simon Balk - Brigade

Okay.

David West Griffin

The hedge schedule is on the website under financials.

Simon Balk - Brigade

Okay. And then you mentioned that $20 million EOE kind of estimate for Blackbeard. Do you have a similar one for Davey Jones or not yet?

John D. Schiller Jr.

We got to at last [log sands] -- we’re not to the [inaudible] there yet. We’re actually drilling salt right now there.

Simon Balk - Brigade

Okay.

John D. Schiller Jr.

So maybe over the next couple of months, we’ll have an answer there.

Simon Balk - Brigade

Okay, great. Thank you.

Operator

This will conclude today’s question-and-answer session. At this time, I would like to turn the conference back to Mr. Schiller for any additional remarks.

John D. Schiller Jr.

I appreciate everybody joining us today. Sorry to do it to you on the Friday before Labor Day but we were wrapping up until late last night getting all the bond bill done and we wanted to get all that data out there to you, so I appreciate it, we had a good turnout today and we look forward to visiting on the next quarter results.

Operator

This will conclude today’s conference and we thank you for your participation.

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Source: Energy XXI F4Q09 (Qtr End 6/30/09) Earnings Call Transcript
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