Energy XXI Goes XXL In Gulf With $2.3 Billion EPL Merger

Energy XXI (AIM, Nasdaq: EXXI) will pay $2.3 billion to buy EPL Oil & Gas Inc. (NYSE: EPL), a higher growth, higher operating margin company that will make EXXI the largest public, independent producer on the Gulf of Mexico shelf.

EXXI will pay a 34% premium on EPL’s stock price. EXXI believes the payoff will be a production increase to 65,000 barrels of oil equivalent per day (BOE/d), 70% oil, including a reduction related to the pending divestiture of non-operated interests in the Eugene Island 330 and South Marsh Island 128 fields.

The merger is consistent with EXXI’s strategy of “bulking up in shelf through acquisitions and squeezing oil out of older fields,” Tudor, Pickering, Holt & Co. said.

EXXI’s enterprise value will be about $6 billion, the company said. EXXI’s merger includes the assumption of debt. Shareholders of both companies must approve the deal.

EXXI is paying about $102,600 per BOE/d based on EPL’s 2013 production and $29.45 per BOE based on its 2013 proved reserves, said Pearce Hammond, managing director and co-head of E&P research for Simmons and Co. International. EXXI said combined cost savings will total up to $80 million within two years.

The merger likely doesn’t augur a sector wide consolidation, he said.

“We see this deal as unique opportunity for two producers to further consolidate GOM shelf assets. Keep in mind that Fieldwood (a private equity backed producer) has also been consolidating the GOM shelf with their recent Apache and SandRidge asset acquisitions,” he said.

Mike Kelly, Global Hunter Securities analyst, noted that the company’s expected production will be 44% higher than recent production of 45 MBOE/d.

The deal has considerable upside from a longer-term perspective, he said.

“The GOM is at the tipping point of producing needle-moving discoveries created by advances in 3-D seismic and to a lesser extent horizontal drilling – both of which EXXI has been at the forefront on,” Kelly said.

EPL owns working interests in 37 producing fields, most concentrated within nine core producing areas. An estimated 91% of proved reserves, 88% of production and 91% of revenues are associated with the Ship Shoal, East Bay, South Timbalier, South Pass 78 and 49, West Delta, Main Pass, Eugene Island and South Marsh complexes.

EPL operates 90% of its properties, by reserves, similar to Energy XXI’s 94%.

“EPL’s assets and operations closely resemble our own, predominantly oil, with some of the highest margins in the industry and extraordinary opportunities for reserves and production growth through development and exploration activities,” said John Schiller, Energy XXI chairman and CEO. “Energy XXI will be the only publicly traded pure play on the Gulf of Mexico shelf, with the highest concentration of large, mature oil fields ever owned by a single shelf operator.”

Schiller will remain chairman and CEO following the merger. EPL will nominate one board member to join EXXI’s directors after the acquisition is completed.

EPL’s properties have estimated net proved and probable reserves of 106.3 MMBOE, 71% of which is oil. Proved reserves are estimated at 54.9 million barrels of oil and 139.2 billion cubic feet (Bcf) of natural gas – a total of 78.1 MMBOE. At the end of 2013, EPL reported total assets of $1.86 billion, with net income for the year totaling $85.3 million.

“This acquisition adds meaningfully to our reserves, production, infrastructure and acreage positions, complemented by seismic data and field studies,” said Ben Marchive, Energy XXI executive vice president of exploration and production.

The combined company will own and operate 10 oil fields on the shelf with cumulative production exceeding 80 million barrels of oil each. EXXI will recover hydrocarbons from known reservoirs as well as by exploring around and below producing horizons.

“The combined company’s larger presence on the central Gulf of Mexico shelf can drive capital costs lower and operating efficiencies higher,” Marchive said. “We will be able to apply horizontal drilling and other exploitation expertise across the expanded portfolio while leveraging advanced seismic data to explore sub-salt and deeper horizons across the region.”

EPL stockholders will receive $39 per EPL share based on Energy XXI’s closing price as of March 11, a 37% premium to the 30-day average closing price of EPL shares. EXXI's credit facility was increased 54% to $1.675 billion and the company has secured a $400 million bridge loan to potentially repurchase outstanding EPL bonds.

Vinson & Elkins advised EXXI on the EPL acquisition.