2010-11-30-2010-11-22-2010-12-17

Bought nine fields on 130,853 net acres on the shallow GOM shelf, gaining 20,000 BOE/d, 49.5 MMBOE proved and 66 MMBOE 2P.

Houston-based offshore producer Energy XXI Ltd. (Nasdaq, London AIM: EXXI) has completed a $1.01-billion acquisition of shallow-water oil and gas assets from Irving, Texas-based Exxon Mobil Corp. (NYSE: XOM), propelling it to the third-largest oil producer on the shelf.

The properties include nine fields and 130,853 net acres on the Gulf of Mexico shelf between Energy XXI's existing core South Timbalier and Main Pass operations in water depths of 470 feet or less. The six largest fields account for 89% of the net production.

The acquisition nearly doubles the company's reserves and production profile, adding approximately 20,000 net barrels of oil equivalent (BOE) per day of production (53% oil), and an estimated 66 million BOE of net proved and probable reserves (61% oil). Proved reserves prepared by Netherland, Sewell & Associates Inc. as of Nov. 16 are estimated at 30.1 million barrels of oil and 116.1 billion cubic feet of gas, or 49.5 million BOE (68% proved developed).

Energy XXI chairman and chief executive John Schiller says, "The acquired properties fit our existing assets well, adding nine fields right in the heart of our producing properties. In addition to oil-weighted reserves and production, supported by an extensive pipeline system, this acquisition includes acreage, seismic data and field studies that will help us develop a portfolio of attractive drilling and recompletion opportunities."

Energy XXI will assume $154.6 million in future development and abandonment liability costs.

Jefferies & Co. analyst Biju Perincheril says the purchase price of $29.90 per proved BOE including future development and abandonment liabilities and $50,500 per BOE flowing "appears reasonable" considering oil accounts for 53% of acquired production and 61% of proved reserves.

In 2007, Energy XXI purchased its original interest in these properties from Pogo Producing Co. for nearly $28 per BOE proved and $76,000 per daily BOE, Perincheril estimates. In November 2009, it acquired additional interests in 30 shelf properties from Mitsui & Co. Ltd. for an implied transaction price of $17.80 per BOE proved including abandonment liabilities and $51,000 per BOE of daily output.

Although the assets are in shallow water, Raymond James & Associates analyst Darren Horowitz says the regulatory oversight for these fields has also increased following the Macondo oil spill incident earlier this year, and Exxon's asset sale may indicate its concerns about the new regulatory environment in the Gulf. For Exxon, however, the divestiture is minor and nonstrategic, he notes.

Pro forma the deal, Energy XXI would become the third-largest oil producer on the Gulf of Mexico shelf, with interests in seven of the top 11 oil fields on the shelf. Estimated proved plus probable reserves would increase 72% to 158.1 million BOE from 92.1 million BOE. Production increases to approximately 46,000 BOE per day, up more than 77% from the 25,900 BOE per day average in the most recent fiscal quarter ended Sept. 30, 2010.

"Cash flow from these properties, combined with the excess cash already being generated by our existing asset base, should put us in a position to rapidly retire debt while funding accelerated development of the overall portfolio," says Ben Marchive, Energy XXI executive vice president of exploration and production.

Upside includes total proved probable and possible reserves of 68.1 million BOE (49% oil) with 196 drilling and recompletion opportunities.

Of the total purchase price, Energy XXI has allocated $698 million for proved reserves, $233 million for unproved reserves, $37 million for pipeline and gathering systems, and $44 million for land, seismic and other assets. It values proved reserves at $14 per BOE.

The transaction was funded through a combination of cash on hand, borrowings against the company's $700-million corporate revolver, as amended, and proceeds from a private placement by the company's operating subsidiary, Energy XXI Gulf Coast Inc., of $750 million of 9.25% senior unsecured notes due 2017. Actual funding requirements at closing totaled $1.01 billion, including the 10% deposit that had been placed in escrow.

Based on 46,000 BOE per day of pro forma total production (63% oil), Energy XXI has hedged 70%, 61% and 12% of oil production for 2011, 2012 and 2013, respectively.

The Oil & Gas Asset Clearinghouse is advisor to ExxonMobil.

Analysts at Tudor, Pickering, Holt & Co. Securities Inc. observe that "low-hanging fruit to drill" may offset relatively expensive metrics of $50,000 per flowing BOE and $15 per BOE for 2P reserves. Most sales in the Gulf have been deepwater focused ever the last three years, they note, but "within that period, the last four shelf deals went for $22 per BOE for proved reserves, so the Energy XXI/ExxonMobil deal is in-line at $20 per BOE."

The purchase price including assumed asset retirement obligations equates to $3.93 per billion cubic feet equivalent of proved reserves and $9,705 per flowing thousand cubic feet equivalent, according to analysts at Global Hunter Securities.

The deal closed Dec. 17. The effective date was Dec. 1.