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Global Credit Research - 01 Dec 2010
Approximately $1 billion of rated debt affected
New York, December 01, 2010 -- Moody's Investors Service assigned a Caa1 rating to Energy XXI Gulf
Coast, Inc.'s (Energy XXI) proposed offering of $700
million Senior Notes due 2017. Moody's also affirmed Energy
XXI's B3 Corporate Family Rating (CFR) and upgraded the $277
million 10% Senior Notes due 2013 to Caa1 from Caa2. The
Speculative Grade Liquidity (SGL) rating has been lowered to SGL-3
from SGL-2 and the rating outlook is stable. The proceeds
of the offering will be used to partially fund a $1 billion asset
acquisition and the repurchase or redemption of the company's 16%
Second Lien Junior Secured Notes due 2014. The B3 ratings on the
second lien notes will be withdrawn following their repurchase or redemption.
All of these rating actions are based on the offering, acquisition
and redemption being completed as proposed.
"This largely debt-funded acquisition has increased Energy
XXI's leverage metrics to high levels for its rating,"
commented Pete Speer, Moody's Vice-President.
"However, the company's significantly larger reserve
and production scale supports the B3 corporate family rating."
Energy XXI recently agreed to acquire U.S. Gulf of Mexico
(GOM) shelf properties from Exxon Mobil Corporation for $1.01
billion. The company will also assume an estimated $200
million of asset retirement obligations as part of the acquisition.
The acquired properties have proved reserves of approximately 49.5
million boe and were producing almost 19,000 boe per day,
of which approximately 53% was oil production. Including
the estimated future development and plugging and abandonment costs on
the properties, the all-in acquisition cost is around $36/boe.
We view this as a full valuation, especially considering the meaningful
natural gas content in the reserves. The acquisition will be effectively
funded with approximately $300 million of cash proceeds remaining
from the company's October 2010 common and preferred stock offerings
and debt raised from the senior notes offering and revolver borrowings.
Energy XXI is simultaneously refinancing approximately $224.5
million principal amount of higher cost second lien notes.
This acquisition is much larger and more leveraging than we were anticipating
in our recent upgrade of Energy XXI's CFR to B3. While the
company's pro forma reserve and production scale is now larger than
many higher rated independent exploration and production (E&P) companies,
its pro forma debt/average daily production of approximately $31,000
and debt/proved developed reserves of $16/boe significantly exceed
its B3 rated GOM focused peers and most other B3 rated E&Ps.
Somewhat mitigating the high leverage is Energy XXI's pro forma
production volumes being 63% oil and a proved developed reserve
life of 5.3 years.
The stable outlook is based on our expectation of continued supportive
oil prices and the company meeting its forecasts for production growth,
free cash flow and debt reduction to improve its leverage metrics in 2011.
If leverage metrics don't improve from pro forma levels that would
pressure the ratings. Declines in sequential quarterly production
volumes and/or significant negative free cash flow could be early signs
that the acquisition is not meeting expectations and could result in a
negative outlook or ratings downgrade. A positive rating action
is not likely in the near to medium term given the company's high
leverage and the ongoing event risk from its acquisition oriented growth
strategy and aggressive financial policies.
The SGL rating was lowered to SGL-3 from SGL-2 due to the
use of nearly all of Energy XXI's cash and lower revolver availability
following the acquisition. The company has obtained an increase
in its borrowing base for its senior secured revolver to $700 million,
which would create pro forma availability of approximately $167
million inclusive of anticipated borrowings and the $225 million
letters of credit to be posted to Exxon Mobil pursuant to the acquisition
to backstop Energy XXI's assumption of the asset retirement obligations.
We expect the company to have sufficient covenant headroom and that the
revolver availability will provide adequate liquidity for 2011.
The Caa1 Senior Notes ratings reflect both the overall probability of
default of Energy XXI, to which Moody's assigns a PDR of B3,
and a loss given default of LGD5 (71% changed from 83%).
The company has a $700 million borrowing base on its $925
million senior secured revolving credit facility. The Senior Notes
are unsecured and therefore are subordinate to the senior secured credit
facility's potential priority claim to the company's assets.
This results in the Senior Notes being notched one rating beneath the
B3 CFR under Moody's Loss Given Default Methodology.
The principal methodologies used in this rating were Independent Exploration
and Production (E&P) Industry published in December 2008, and
Loss Given Default for Speculative-Grade Non-Financial Companies
in the U.S., Canada and EMEA published in June 2009.
Energy XXI Gulf Coast, Inc. is a wholly owned subsidiary
of Energy XXI (Bermuda) Limited, a publicly traded independent exploration
and production company based in Houston, TX.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, confidential
and proprietary Moody's Investors Service information, and
confidential and proprietary Moody's Analytics information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's rates Energy XXI notes Caa1
250 Greenwich Street
New York, NY 10007
No Related Data.
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