Houston companies to form major Gulf oil producer in $1.5B deal

HOUSTON – Energy XXI said Wednesday it is planning to pay $1.5 billion to buy EPL Oil & Gas, a significant corporate acquisition that would make it the largest publicly traded independent oil producer in the shallow waters of the Gulf of Mexico.

The deal would bring Energy XXI’s daily production in the Gulf to 65,000 barrels of oil equivalent over 10 of the largest fields in the U.S. offshore region’s shelf, each of which produce more than 80 million barrels of oil per year. And it would push the Bermuda-based oil and gas company, which has its main office in Houston, to collect 91 percent of its revenue from oil in the region.

“Today’s deal represents a step change for Energy XXI, taking us to a level of production of cash flow that puts on a different playing field,” Energy XXI Chairman and CEO John Schiller said in a conference call with investors Wednesday.

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Houston-based EPL had working interests in 32 producing fields and 80 million barrels of oil in net proved reserves in the shelf last year, according to regulatory filings.

In reserves, Energy XXI would follow only Fieldwood Energy, a private equity-backed producer in the Gulf shelf, and major integrated oil producer Chevron Corp. Fieldwood amassed the largest position in the shelf after two deals in the past eight months, and expects to produce 125,000 barrels of oil per day.

Schiller said Energy XXI’s large oil fields will give the company a starting point to grow organically in the region as it increases production at existing operations and as “big oil fields get bigger.”

The combined company, he said, would have 243 million barrels of oil equivalent in proved reserves, but if the company recovers just 5 percent more oil from its top 10 fields, that would double its proved reserves to 400,000 million barrels.

“That’s a lot of oil left in the ground, and we’re going to go get more of it,” Schiller said. “The key point about our fields is that they are big.”

But it’s more than an asset purchase, he said. The deal will combine skill sets from two large Gulf operators together worth $6 billion in enterprise value. Schiller said a larger company will rely on less volatile amounts of oil flow and likely see gains in its share price.

Wall Street investors erased $136 million from Energy XXI’s market value on Wednesday, but that’s not an unexpected reaction to a big deal,  said Nicholas Pope, an analyst with Cowen & Co.

EPL is “a big entity to take on,” Pope said, adding that the company currently looks like an expensive buy. “They paid a healthy premium.”

But EPL has earned a high price with its “nice run on production,” he said. “I think you end up with a company that’s in really good shape. These are not assets that have not been taken care of.”

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In addition to $1 billion in cash, Energy XXI also agreed to pay EPL shareholders about $500 million in common shares, a 37 percent premium on recent stock prices. Energy XXI investors are expected to own 77 percent of the company after the deal.

Schiller will continue in his role as chairman and CEO of the company after the deal is completed, and the company’s headquarters will remain in Houston. Energy XXI anticipates acquiring EPL’s corporate debt, about $720 million, bringing the deal’s total value to $2.3 billion.

In general, Pope said, the Gulf shelf has lost some of its shine in recent years. Several major integrated companies have left the shallow waters for deep-water projects, and independents like Apache Corp. put the shelf region on its list of expendable assets last year in a $3.75 billion sale.

“The shelf is not young,” Pope said. “There are some fantastic fields out there, but they’ve been producing for a long time.”

He added oil producers are not likely to see 10 percent production growth in the Gulf shelf, as in years long past.

Energy XXI shares fell 5.8 percent to $22.02 in early trading Wednesday on the Nasdaq. EPL shares rose 30 percent to $37.85 on the New York Stock Exchange.

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