Energy XXI aims at $75 million of debt reduction for fiscal Q3

By Paul Deckelman

New York, April 13 - Energy XXI (Bermuda) Ltd. plans to release its results for the fiscal third quarter ended March 31 in about two weeks - and the oil and natural gas operator's chief executive officer said Wednesday that it should about hit its target of a $75 million debt reduction for the quarter.

CEO John D. Schiller told attendees at an energy industry investor conference that "if we hit that number - and we'll be pretty close - that's going to give us $94 million of debt paydown" since the Dec. 17 closing of Energy XXI's $1.01 billion acquisition of an extensive portfolio of shallow-water oil and gas properties in the Gulf of Mexico from energy giant Exxon Mobil Corp. and its affiliates.

"And that's the beauty of the cash-flow generation machine that we have, that we've created in Energy XXI."

Schiller, in a presentation before the Oil & Gas Investment Symposium that the Independent Petroleum Association of America, an industry trade group, holds annually in New York, said that "one of the things that has been going on continuously," even as Hamilton, Bermuda-based Energy XXI has proceeded with its strategy of acquiring mature oil properties and exploring for new finds in the vicinity of existing core offshore oil fields, "is a constant improvement in the balance sheet."

"Us [in management] and the board made that a big target," he said. "We meant it seriously, and we've been doing very well on it."

Bonds boost total debt level

The company's net debt calculated as of the end of February - the closest available proxy for the upcoming fiscal third-quarter figures - actually increased substantially to $1.23 billion from the $715 million level it held at the end of the 2010 fiscal year on June 30, 2010 and from $770 million at the end of the 2009 fiscal year on June 30, 2009, chiefly due to two big recent bond deals from its Energy XXI Gulf Coast, Inc. subsidiary totaling $1 billion.

Energy XXI sold an upsized $750 million of 9¼% notes due 2017 in early December and followed that up with its mid-February sale of $250 million of 7¾% notes due 2019. Both bond deals priced at par.

Proceeds from the two deals, along with borrowings from its revolving credit facility, which was doubled in size by its lenders to $700 million from $350 million earlier, were used to fund the acquisition of the Exxon Mobil assets and to fund tender offers for two of its closer-maturing bonds, the 10% notes due 2013 and the 16% second-lien notes due 2014.

As of Feb. 28, all $342 million of the 16% notes that the company had carried on its balance sheet at June 30, 2010 had been extinguished, while the amount of the 2013 notes had been sharply whittled down to just $107 million from $277 million on June 30, 2010 and from $624 million outstanding on June 30, 2009.

Revolver borrowings, which stood at $235 million at the end of fiscal 2009, declined to $109 million at the end of fiscal 2010 but moved back up to $163 million as of Feb. 28, reflecting revolver use for the Exxon Mobil deal.

Cash and cash equivalents, which had stood at $89 million at the end of fiscal 2009 but which then slid to $14 million at the end of 2010, climbed back up to $44 million at Feb. 28.

Reserves up, debt ratios down

Even as its overall debt level rose, the sharp increase in Energy XXI's proven reserves of oil and natural gas resulting from the Exxon Mobil transaction brought its ratio of net debt per barrel of oil equivalent, a key energy industry financial performance indicator, to $9.80 at Feb. 28 from $9.46 on June 30, 2010 and $14.50 at the end of fiscal 2009.

Net debt as a percentage of the company's total book-value capitalization came down to 58.3% at Feb. 28 from 62.1% on June 30, 2010 and 85.7% at the end of fiscal 2009.

Net debt as a percentage of the company's total market-value capitalization fell sharply to 29.1% at Feb. 28 from 42.8% on June 30, 2010 and 91.0% at the end of fiscal 2009.

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