Is It All Over For Energy XXI Shareholders?

| About: Energy XXI (EXXIQ)


Energy XXI recently issued their FY 2nd Quarter report and noted that they have not yet paid an interest payment that was due 2/16/16, putting them on a default path.

Thanks to low oil prices, the company was required to make another large reserve write-down, and had a large $(2.6Bil) net equity position.

The company is currently negotiating with bondholders, as it is clear that it must restructure itself soon if it is to be a long term going concern.

On the plus side, the company was able to purchase $737mil in unsecured bond debt for only $19.2mil between Jan 1st and today, thus substantially improving the net equity position.

Common stockholders can only hope that management is able to negotiate a reorganization which does not completely eliminate the equity.

I've been following EXXI XXI (NASDAQ:EXXI) since last summer, when I wrote a peice on the stock recommending the speculative purchase of their preferred stock, EXIXF. With oil prices in the $45 range at the time, the company seemed to have positioned themselves with an 18-24 month runway to wait for higher oil prices. Unfortunately, the sustained move down into the $30s and $20s has drastically shortened the company's runway.

Recently, EXXI reported their fiscal 2nd quarter operational and financial results. As expected, the company was required to take another huge write-down of their oil and natural gas assets due to ever decreasing prices during the Oct-Dec period. The company also announced that they had made the decision not to pay $8.8mil of interest due on their 2018 8.25% Senior Notes. This decision means that the company now has 30 days to either renegotiate the terms of their bonds, or face a potential default and acceleration of the bond due date.

In basic terms, this means that EXXI is almost certainly going to come to some sort of reorganization agreement within the next month. Low oil prices have made it impossible for the company to make money on their operations, even though they've worked extremely hard to reduce their operating expenses as much as possible. Back in December, the company produced a presentation showing their Operating Cash Costs to be around $49/barrel. I've also put together a current estimate, using production and cost data from the new report.

Cash Costs per BOE Dec 2015 Feb 2016 Est
Lifting Costs $21 $21
Facilities, P&A, Land $3 $3
Gross G&A $4 $6
Discretionary CapEx $5 $5
Interest Expense $16 $13
Total Cash Costs $49 $48
Click to enlarge

The big issue here is clearly Interest Expenses; Without them, the company would have cash costs of only $33/barrel, not much higher than the current price of oil. Management has already done an amazing job by repurchasing over $1.7Bil in bonds for only $216mil. Their repurchases have been an especially good use of cash since the end of 2015, as the company pointed out in their 10-Q (p16) that they spent only $19.2mil to repurchase $737mil in bonds thus far in 2016.

but thus far it seems that this may not be enough.

What is clear to me is that any current position in the common shares, preferred shares, or unsecured debt should be considered a risky speculation, given that if the company did actually declare bankruptcy, all of these positions would almost certainly be completely wiped out.

Certain analysts believe that a pre-packaged bankruptcy is coming any day now, but others believe that management still has some strategic negotiating room, given that the company is actually still cash rich (in comparison to their hugely negative overall balance sheet), and still has over $100mil in available capacity to repurchase more debt.

Thus far, my initial speculation has not played out as desired. I paid $22/share for the preferred during the summer, and have received $7 in dividends. The preferred have dropped to $5 today, but I for one am extremely curious to see how this plays out. As such, I have decided not to sell my small position in the preferred shares.

Disclosure: I am/we are long EXIXF.

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.

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