Is Energy XXI Worth Over 50% More?

Stephen Berman from Canaccord Genuity has a Buy rating and a $5.00 price target on Energy XXI. He likes the outfit’s deep oil-weighted asset base on the Gulf of Mexico Shelf and likes the long-term potential from advanced seismic-driven exploration. Additional driving forces are from it enhancing liquidity, reducing debt and lowering operating costs.

What investors have to keep in mind is that this $3.10 stock has a 52-week range of $2.30 to $24.06.

Another issue with Energy XXI is that it recently executed a purchase and sale agreement to monetize the Grand Isle Gathering System to CorEnergy Infrastructure Trust. That deal was for $245 million in cash, plus the assumption of abandonment liabilities related to the assets. Energy XXI simultaneously entered into an operating lease agreement in which it will continue to have access to and operate the pipeline assets.

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Berman believes that the latest deal takes Energy XXI’s current liquidity to about $1.0 billion. Another hidden boost here is that there are potentially further non-core asset sales that could be made. An additional highlight was that Energy XXI recently announced an agreement with the Bureau of Ocean Energy Management over supplemental bonding requirements for the company and its subsidiaries. Berman said:

Energy XXI has provided $150 million of supplemental bonding, bringing the company’s total supplemental bonding to $319 million at an annual premium expense of $4.8 million, with about $10 million collateral posted. In addition, the company maintains $226 million in Letters of Credit to third parties on additional assets in the Gulf of Mexico. The Bureau of Ocean Energy Management has agreed to withdraw its orders with regard to supplemental bonding upon dismissal of the appeals filed by Energy XXI with the Interior Board of Land Appeals, and postponed until November 15, 2015 the issuance of any further requirements for financial assurance with respect to activities on existing properties of EXXI and its subsidiaries.

The end result of this analyst call was that both pieces of news remove overhangs and uncertainties from Energy XXI’s story. Still, Canaccord Genuity does warn that this company still has a lot of work to do to clean up its complex debt structure. The next driver is expected to be on the debt front over the coming weeks and months.

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Canaccord’s valuation with a $5 price target represents a 35% discount to a net asset value of roughly $7.60 per share. What matters here is that Energy XXI is worth almost $300 million. Other analysts have price targets ranging from $3.00 to $6.00 and the consensus price target is closer to $4.50. If Canaccord Genuity is right, then Energy XXI could be worth over 60% more.