Energy XXI (Bermuda) Limited (EXXI) is Suffering Growing Pains: Exxon Mobil Corporation (XOM), Mcmoran Exploration Co (MMR)

Page 1 of 2

Energy XXI (Bermuda) Limited (NASDAQ:EXXI) is a Gulf of Mexico shelf oil & gas producer with an acquire-and-exploit business model that’s had a run of big acquisitions in its short lifetime. Management’s built a quality, oil-rich set of assets off-shore Louisiana through a series of purchases. The latest acquisition from Exxon Mobil Corporation (NYSE:XOM) has been a game changer, while also providing some challenges for the young E&P. Energy XXI (NASDAQ:EXXI)’s suffering some growing pains.

Energy XXI is an oil-rich Gulf of Mexico shelf producer focused on legacy assets acquired at a discount to their residual value. The company’s made a series of savvy buys leading to impressive production and reserve growth. Yet, problems have emerged as Energy XXI (Bermuda) Limited (NASDAQ:EXXI) battles top get all of its capacity online following its most recent large acquisition.

It dropped sharply after reporting its quarterly numbers. Production averaged 44.6 MBOEd, exiting the quarter at 47 MBOEd. Capacity sat at 52 MBOEd, with a large amount of that capacity again shut-in for repairs. Shut-ins earlier attributed to Hurricane Isaac seem to continue to hamper efforts to ramp production.

Management was more expansive about the persistently shut-in production this quarter. Isaac’s impact masked a problem that’s more chronic than many investors knew, and XXI may struggle with it for a while. That’s taxed shares, and falling oil prices have only exacerbated their softness.

The shut-ins mask some excellent gains from Energy XXI’s horizontal drilling program. While more common onshore, horizontal drilling is also effective on many of the offshore conventional fields it bought from Exxon Mobil Corporation (NYSE:XOM), because the fields are so uncommonly flat.

Long ago, Exxon gave horizontals a try on these fields with mixed, mostly inferior results. When fields transfer, operational data transfers as well. Energy XXI (Bermuda) Limited (NASDAQ:EXXI) noticed that Exxon Mobil Corporation (NYSE:XOM)’s few successful horizontals employed a common completion method. That encouraged XXI to restart a horizontal program using that completion strategy with excellent results so far.

So why is production growing slower than anticipated?

Energy XXI has to massage these old facilities to accommodate the production increases. Production declines from their heyday leave many of these wells producing predominantly water. In an oil reservoir, natural gas floats on the oil, and the oil floats on water. As the reservoir is depleted, the oil pocket shrinks and water begins to flow from the well in larger and larger amounts.

While handling all that water can be difficult, the nice thing is that the water production keeps reservoir pressure up, sweeping the reservoir. The strong water drive means that the field continues to produce oil, even if it is only 30% of the fluids coming up pipe. That’s why these fields can produce long into the future, and still provide significant residual value to smaller E&Ps like Energy XXI.

You need to be able to handle the water volume, though. Luckily, these old Exxon facilities were designed for much larger volumes of oil than they currently produce, so XXI has plenty of storage and treatment capacity. And because these are Gulf platforms, cleaned up water can simply be sent overboard after treatment.

The problem is the added capacity from the horizontal program has taxed all the creaky, old production equipment beyond its limits. The result has been breakdowns and shut-in production. Unfortunately, that means that XXI expects to run under capacity by roughly 10% for the foreseeable future as they plug leaks and swap out components. The Isaac shut-ins masked a more chronic, persistent problem.

Eventually, they should be able to replace much of that aging equipment and close the gap between capacity and actual production. Guidance is for flat production in 2014, with an incremental increase in 2015.

Two dry wells added insult to injury. Doctor O missed its target, and Sparkplug had to be abandoned when a mistake by a rig worker dropped a tool into the hole. Two more, Pi and Cake were successful, but produced mostly gas. Both are now producing liquids as expected, but drawing off their surprise gas caps nicked cash flow for the quarter.

To make matters worse, Davy Jones, the problem child of the Ultradeep joint venture (JV) with Mcmoran Exploration Co (NYSE:MMR) continued its temper tantrums. Mcmoran Exploration Co (NYSE:MMR) pulled its rig off the well to allow yet another fracture attempt to get the cantankerous well producing. Analysts are beginning to openly question the wisdom of continuing to pour good money down this billion dollar hole. That’s a bad sign for this once popular, high profile program.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

Top 10 Jobs for 2014 by Salary Gain (Predictions)

Top 5 Digital Trends for 2014

Top 6 Things You Can Do To Increase Your Productivity

Top 9 Trending Smartphones in 2013

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!