Is It Time To Get This Gulf Oil Producer Off the Shelf? – Energy XXI (Bermuda) Limited (EXXI)

The promise of the Ultradeep raised a great deal of interest in Energy XXI. Because of its own robust growth, the company was perceived to be the safe way to play the Ultradeep in contrast to McMoRan, which is heavily leveraged to the project’s success.

That led to a pretty richly valued company. Comps are unfavorable to its peers on a reserve and production basis (see Table). Some of Energy XXI’s high valuation is warranted given its higher percentage of oil in production and reserves, but the premium to peers is high.

Much of that premium likely results from the Ultradeep. Now that production from these Ultradeep reservoirs is proving elusive, some of that interest is waning and Energy XXI’s growth story becomes that much more important.

It’s not where you’ve been

Where you’re going is even more important. Continuing that growth is Energy XXI’s challenge. The last acquisition was a billion dollar deal. They come along infrequently in the first place. Complicating matters is Energy XXI’s preference to remain geographically compact. That reduces costs and eliminates some geopolitical risk, but deals of this size are not common in the Gulf. And that’s what’s required.

To keep its growth trajectory, Energy XXI’s going to have to spread its wings. There have been hints of a desire to diversify in past presentations, but little has materialized. Hiring Antonio dePinho to oversee JV development suggests a desire for more on the JV end.

Spreading overseas to analogous shallow water basins has also been mentioned, as has a move to Deepwater. Both would be more difficult transitions. On the positive side, geographical diversification would add some operational safety. A severe hurricane is perhaps the biggest risk the company faces, since the company’s assets are so highly concentrated. One big one could conceivably shut-in the bulk of production.

More to the point, widening its hunting grounds may be the only way for Energy XXI to maintain the growth that’s built its rich valuation. For now, all investors have to focus on are the Ultradeep and Vermilion JVs. Pendragon was just above its objective at the end of January. With the recent presentation on Mar. 4, investors are undoubtedly very interested in this important well’s timetable.

The article Is It Time To Get This Gulf Oil Producer Off the Shelf? originally appeared on Fool.com and is written by Peter Horn.

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