2 Attractive Gulf Of Mexico Plays

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 |  Includes: BP, EXXIQ
by: Bret Jensen

Drilling in the Gulf of Mexico has recovered nicely since the huge spill there in 2010. BP plc. (NYSE:BP) is still wrapping up its litigation & regulatory challenges but activity overall is returning to normal. With energy reforms proceeding through congress in Mexico and continued high oil prices, the gulf is like to see accelerating exploration and production in the years ahead. Here are two Gulf of Mexico plays that are well positioned and attractive at these levels.

Energy XXI Limited (EXXI) is a Bermuda based deepwater E & P concern that operates five of the most of the productive fields in the Gulf of Mexico. Over 60% of its production is oil and it recently beat quarterly earnings estimates. Proven reserves have grown 50% in the last year and its organic reserve replacement rate was just under 400% over the last year as well.

The company has a strong balance sheet and yields 1.8% after raising its dividend payout ~70% earlier in the year. The 15 analysts that cover the stock have a median price target of $37 a share which is ~35% above its current price of $27.50.

Earnings are on track to post better than a 15% gain this fiscal year and analysts are projecting another gain of 15% to 20% in FY2014. Revenue growth for this and next fiscal year is estimated to be in the 7% to 9% range. On an operating cash flow (OCF) basis, the stock is selling at just over 3x OCF and an insider bought over $50K in stock in August.

It is hard to talk about production in the Gulf of Mexico without covering the biggest producer in the Gulf, BP plc. The company has had three years in purgatory but is almost through with settling all outstanding litigation & regulatory claims. It is time to look at this pariah as it nears the light at the end of the tunnel.

BP offers income investors a juicy dividend yield of 5.2%. The stock is also very cheap at less than 8x forward earnings and just 3% over book value. The company is a more focused energy producer having sold off non-core assets to settle tens of billions of dollars of claims. Revenues should come in flat in 2014 after falling for years as the company was forced to sell assets to raise funds. The median price target of the 8 analysts that follow the company is ~$49 a share, solid implied capital appreciation potential for such a high yielder.

Disclosure: I am long BP, EXXI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.