Proceeds will be used to repay revolver borrowings and to fund a portion of the cash consideration of the pending EPL acquisition. If the EPL acquisition is not consummated, proceeds will go to general corporate purposes.
Fitch currently rates EXXI as follows:
Energy XXI (Bermuda)
--Issuer Default Rating (IDR) 'B-';
--Convertible perpetual preferred 'CCC/RR6';
--Convertible notes 'CCC/RR6'.
--Senior secured revolver 'BB/RR1';
--Senior unsecured notes 'B/RR4'.
KEY RATINGS DRIVERS
In March, Energy XXI announced it would acquire EPL for total consideration of
The deal will also significantly increase EXXI's leverage on a pro forma basis. As calculated by Fitch, pro forma debt/boe 1p reserves will increase above
Energy XXI's ratings are supported by the company's growing scale and robust organic drilling program; high exposure to liquids, composed mostly of higher-value black oil linked to waterborne grade pricing; historically strong production economics and cash generation; operator status on a majority of its properties; and the short-term cash flow protections of its hedging position.
Ratings issues for bondholders include higher leverage; the company's status as a small offshore GoM producer; lack of basin diversification; the relatively flat production outlook over the next few years; increasing structural subordination at EXXI Bermuda; and exposure to the riskier ultra-deep shelf exploration program.
INCREASE IN 2013 RESERVES
EXXI reported a large (50%) increase in audited proven (1p) reserves at
INCREASED SUBORDINATION AT EXXI
The notching between the IDRs of
Fitch would note that despite reasonably strong operational ties, the legal separations between
LIMITED ULTRA-DEEP SHELF COMMITMENT
EXXI has participated in eight ultra-deep shelf wells to date with participation levels of 9%-20%. The company seeks to limit its total exposure to these projects to less than 10% of expected cash flow in any one year, and EXXI's strategy has been to fund this higher risk exploration drilling with lower risk drilling prospects across the rest of its portfolio.
EXXI's liquidity was good at
Key revolver covenants include maximum leverage of 3.5x; minimum interest coverage of 3.0x; and a minimum current ratio of 1.0x, as well as change of control provisions and restricted payments. The company had ample headroom on all covenants at
Fitch's Recovery Rating (RR) of '1' on EXXI's secured revolving credit facility indicates outstanding recovery prospects (91%-100%) for holders of this debt. The revolver is secured by at least 85% of the total value of proven reserves of the company and its subsidiaries. The RR for EXXI's senior unsecured notes of '4' indicates average recovery prospects for holders of these issues, while the RR of EXXI's junior securities of '6' indicates poor recovery prospects for these securities.
EXXI's other liabilities are manageable. The company's Asset Retirement Obligation (ARO) was approximately
Positive: Future developments that may lead to positive rating actions include:
--Increased size, scale and portfolio diversification, accompanied by sustained improvement in debt/boe metrics;
--A demonstrated managerial commitment to lower debt levels.
Negative: Future developments that could lead to negative rating action include:
--Additional increase in debt/boe metrics from current levels;
--A change in philosophy on the use of balance sheet;
--A major operational issue such as sustained difficulty in integrating the new acquisition or a well blowout;
--A sustained collapse in oil prices without other adjustments to capex.
Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology Including Short-Term Ratings and Parent and Subsidiary Linkage' (
--Parent and Subsidiary Rating Linkage: Fitch's Approach to Rating Entities Within a Corporate Group Structure, (
--Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (
--Cash Flow Trends in the U.S. Energy Sector--Shareholder Activism Having an Impact (
--Scenario Analysis: Lifting the U.S. Crude Export Ban (
--Investor FAQs--Recent Questions on E&P, Refining, and Drilling and Services Sectors (
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Parent and Subsidiary Rating Linkage Fitch's Approach to Rating Entities within a Corporate Group Structure
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis
Cash Flow Trends in the U.S. Energy Sector (Shareholder Activism Having an Impact)
Scenario Analysis: Lifting the Crude Export Ban (
Investor FAQs: Recent Questions on the E&P, Refining, and Drilling and Services Sectors
Energy Handbook -
Source: Fitch Ratings
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