Energy XXI (ticker: EXXI) is an independent oil and natural gas exploration and production company whose growth strategy emphasizes acquisitions, enhanced by its value-added organic drilling program. The company has implemented an “acquire and exploit” growth strategy to build a geographically focused portfolio with some of the highest per-unit margins in the industry. It aims to develop the acquired properties while ramping up a complementary exploration program designed to provide organic growth for the future. The core properties are located in coastal and offshore Louisiana.

Energy XXI Gulf Coast, Inc., the operating subsidiary of EXXI, announced on September 23, 2013, the pricing of its private placement of $500 million of 7.50% senior unsecured notes due 2021. The notes were sold at 100% of par to yield 7.50% to maturity. The offering, increased from the initial size of $300 million, is expected to close on September 26, 2013, subject to customary closing conditions.

Use of Proceeds

The company intends to use all of the net proceeds from the offering to repay indebtedness outstanding under its revolving credit facility and for general corporate purposes. As of EXXI’s fiscal Q4’13, the company had $340 million outstanding on its revolving credit facility.

Fiscal 2014 Outlook

As we noted in our recent valuation piece on Energy XXI titled, “Energy XXI Reports Expanded Reserve Base; New Subsalt Opportunities Complement Horizontal Drilling; 2014 Forecast – Up!,” EXXI is taking the lead with shareholders, managing the balance sheet and buying in shares. This announcement is another step in adapting to a changing operating landscape (namely in the form of drilling horizontal wells and pre-salt targets) by shoring up the balance sheet to be well positioned to take advantage of generating 2014 production growth and free cash flow.

Analyst Commentary

Andrew Coleman, Managing Director for Raymond James, reiterated an “Outperform” rating in his note on September 24, 2013. He said: “The issue of $500 million senior notes… will enable the company to term out its credit facility and should provide a comfortable liquidity cushion if our ugly 2014 commodity forecast is correct. We continue to believe that the current discount to the value of EXXI’s proved reserves is unjustified and anticipate that the company’s array of potentially accretive drilling projects should help boost those reserves and drive up the market value. Given the scale of the issue after the upsizing we no longer believe a 2014 issuance will be necessary even if the authorized $250 million stock repurchase program is completely filled. With shares threatening the $30 mark we don’t see much incentive to use the proceeds of today’s issuance to advance this program (management hasn’t bought back any shares in six weeks). While a potential acquisition could theoretically be up management’s sleeve, we think they are more likely to divest assets in the near term.”

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