Energy XXI (ticker: EXXI), one of the largest operators in the Gulf of Mexico, announced significant liquidity-enhancing measures in two separate press releases on June 22, 2015. The first announcement, released prior to market opening, confirmed an agreement with the Bureau of Ocean Energy Management (BOEM) regarding supplemental bonding requirements. As explained by Capital One Securities, “In April, EXXI received notification from the BOEM that some of its subsidiaries no longer qualified for a waiver of supplemental bonding for some P&A liabilities with the BOEM indication at the time that the potential required supplemental bonding could be as high as $1.0B.”
Several months of cooperation yielded a favorable outcome for the E&P. Per the release: “Energy XXI has provided $150 million of supplemental bonding, bringing the company’s total supplemental bonding to $319 million at an annual premium expense of $4.8 million, with approximately $10 million collateral posted. In addition, the company maintains $226 million in Letters of Credit to third parties on additional assets in the Gulf of Mexico.”
The terms are “well below the worst-case scenario” outlined by Global Hunter Securities, which involved $500 million in incremental bonding, $50 million in collateral and a $10 million annual fee. The BOEM also postponed the issuance of any further financial assurance requirements until November 15.
The second announced the sale of its Grand Isle Gathering System to CorEnergy Infrastructure Trust for $245 million in cash plus the assumption of abandonment liabilities. EXXI will continue to operate the assets and will retain revenues gained from transporting third party volumes. The sale was in line from Capital One Securities estimates but drastically higher than Raymond James’ estimate of $150 million. The latter believes the sale will result in a 10% decline in lease operating expenses unit margins.
The transaction will close no later than June 30 and liquidity will rise to nearly $1 billion, considering the company had $140 million available on the revolver and $602 million in cash on hand prior to the divesture.
According to a CorEnergy Infrastructure press release, the system has a capacity of 120 MBOEPD and is currently running at about half of its maximum flow. Approximately 42% of all EXXI volumes were transported through the system in fiscal 2014.
In a recent conference call, EXXI management mentioned it is evaluating additional sales, including its East Bay asset before the end of June.