Energy XXI pays $2.3B for EPL Oil & Gas

HOUSTON (The Deal) -- Houston-based Energy XXI (EXXI) announced Wednesday it is acquiring crosstown counterpart EPL Oil & Gas (EPL) for $2.3 billion, creating the largest publicly traded independent oil and gas producer on the Gulf of Mexico shelf.

The deal works out to $39 per share, a 37% premium over EPL's average trading price over the past 30 days and a 34% premium over EPL's closing price on Tuesday. EPL shareholders can choose either $39 per share in cash, 1.669 shares of Energy XXI, or $25.35 per share in cash and 0.584 shares of Energy XXI, as long as the final consideration is 65% cash, 35% stock and totals $1 billion in cash and 23.4 million shares of Energy XXI.

Analysts at Tudor, Pickering, Holt & Co. Securities Inc. wrote in a note that the deal's implied metrics are $110,000 per barrel of oil equivalent per day, $29.45 per barrel of oil equivalent for proved reserves and 5 times this year's enterprise value to Ebitda. "[The] merger [is] consistent with EXXI's strategy of bulking up in [the] shelf through acquisitions and squeezing oil out of older fields," the firm said.

Global Hunter Securities Inc. analyst Curtis Trimble wrote in a note that the transaction appears to be "fair and equitable" as the takeout price of $39 is near its own price target of $38.

"Energy XXI and EPL both represent Gulf of Mexico pure-plays with solid operating histories and a great deal of potential operating synergies," he said.

Simmons & Co. International said the transaction should have a positive read through for Stone Energy Corp. and W&T Offshore Inc., although it doesn't believe the transaction is the starting point for a sectorwide consolidation. "Rather we see this deal as unique opportunity for two producers to further consolidate GOM [Gulf of Mexico] shelf assets," the firm said, noting that Riverstone Holdings LLC-backed Fieldwood Energy has also been consolidating in the Gulf of Mexico shelf with its recent Apache Corp. and SandRidge Energy Inc. asset acquisitions.

The deal has to clear both companies' shareholders and regulators but could close as early as June. Energy XXI shareholders are expected to own 77% of the combined company, and EPL stockholders 23%.

On a conference call with analysts and investors, Energy XXI CEO John Schiller said the deal was negotiated "offline" - in other words, directly, with no other bidders - that the deal will save $80 million plus in costs in the first two years and that the breakup fee is 3% of market value.

"This is a big deal for us," he said. "They are properties we've looked at for a while. It will combine two companies with a lot of synergies and strengths [Energy XXI in production and EPL in geoscience] that complement each other very well."

Energy XXI plans to pay for EPL with cash on hand and funds from its revolver, which it has received commitments to boost to $1.675 billion from $1.0875 billion. It has also secured a $400 million unsecured bridge loan to add to the revolver if EPL's bonds are repurchased. Energy XXI said it expects to retire any bridge loan by issuing high-yield notes.

To help pay down the company's debt from over 60% to its targeted range of 40% to 60%, Schiller said Energy XXI would sell noncore assets. He wouldn't specify which ones, noting that the company was waiting for results of its deepwater exploration assets before deciding whether to sell those. He also said the company won't pursue a planned $100 million acquisition of assets in Malaysia that, combined with an asset sale expected to close in April for $100 million, "makes a swing of $200 million in funds we would need to borrow."

"I think what you'll see is a 5% reduction in debt-to-cap for the first couple of years and we'll high value the portfolio to get the best assets," he said.

Energy XXI also said it expects that the transaction will trigger change-of-control provisions in the indenture governing EPL's senior notes, entitling holders to receive 101% of par for them, plus accrued and unpaid interest. Energy XXI said it expects that any EPL notes not tendered will remain outstanding post-transaction, unless the notes are refinanced depending on market conditions.

The combination will have an enterprise value of $6 billion and production of 65,000 barrels of oil equivalent per day, 70% of which is oil, including a reduction related to the pending divestiture of nonoperated interests in the Eugene Island 330 and South Marsh Island 128 fields.

Energy XXI's Schiller said in a statement that EPL's assets and operations closely resemble Energy XXI's own properties, which are predominantly oil, with some of the highest margins in the industry and opportunities for reserves and production growth through development and exploration.

"Energy XXI will be the only publicly traded pure play on the Gulf of Mexico shelf, with the highest concentration of large, mature oilfields ever owned by a single shelf operator," he said. "With a history of increasing acquired reserves, we have proven the adage that big oilfields get bigger, and we are excited at the prospect of continuing that trend with the addition of EPL's properties."

EPL chairman, president and CEO Gary Hanna said in a statement that as part of a larger organization, EPL shareholders will benefit from synergies "across the board," a "high-grading" of the drilling portfolio and opportunities to expand across the Gulf of Mexico.

"We're excited about the combination," he said on a separate conference call held by EPL. "It's a landmark moment for both companies - a great strategic fit and tremendous scale."

EPL owns working interests in 37 producing fields, mainly concentrated within nine core producing areas. An estimated 91% of proved reserves, 88% of production and 91% of revenues are associated with the Ship Shoal, East Bay, South Timbalier, South Pass 78 and 49, West Delta, Main Pass, Eugene Island and South Marsh complexes. EPL operates 90% of its properties, by reserves, similar to Energy XXI's 94%.

According to year-end estimates prepared by independent oil and gas consultants Netherland, Sewell & Associates Inc., the properties are estimated to contain net proved and probable reserves of 106.3 million barrels of oil equivalent, 71% of which is oil - including estimates for the recently acquired Eugene Island 258/259 field and adjustments for lease-use natural gas.

Proved reserves are estimated at 54.9 million barrels of oil and 139.2 billion cubic feet of natural gas or 78.1 million barrels of oil equivalent, 70% of which are proved developed.

Offshore leases total 273,713 net acres.

At the end of last year, EPL reported total assets of $1.86 billion with net income for the year amounting to $85.3 million.

Ben Marchive, executive vice president of exploration and production at Energy XXI, said in a statement that the acquisition adds meaningfully to the company's reserves, production, infrastructure and acreage positions complemented by seismic data and field studies. He noted that the combined company will own and operate 10 oilfields on the shelf with production exceeding 80 million barrels of oil each with "ample opportunity" to grow organically by increasing recovery from those known reservoirs as well as by exploring around and below the producing horizons.

"The combined company's larger presence on the central Gulf of Mexico shelf can drive capital costs lower and operating efficiencies higher," he said.

Marchive added that the company will be able to apply horizontal drilling and other exploitation expertise across the expanded portfolio while leveraging advanced seismic data to explore subsalt and deeper horizons across the region.

Schiller said that based on expectations and market conditions, the acquisition is expected to be immediately accretive to Energy XXI shareholders and the ability for EPL stockholders to participate in the future success of the combined company.

Schiller will remain chairman and CEO of the combined entity, whose headquarters will remain in Houston. One member of EPL's board will join Energy XXI's board.

Citigroup Global Markets Inc.'s Jerry Schretter and Credit Suisse Securities (USA) LLC's Greg Weinberger, Tim Perry and Kevin Adam advised Energy XXI's board. Vinson & Elkins LLP provided Energy XXI with legal counsel with a team led by Mark Kelly and Steve Gill that included Kai Liekefett, Adam Law, David Wicklund, Gary Huffman, David Stone, Sarah Morgan, Shane Tucker, Billy Vigdor, Larry Nettles, Tom Wilson, Peter Mims, Robert Wilson, Kate Rainey, Mark Wang, Justin Hunter, Grace Ho, Lina Dimachkieh and Lavonne Burke Hopkins.

Barclays plc's Greg Pipkin and Chris Watson assisted EPL's board. Sidley Austin LLP's Mark Metts, Anna Ha, Katy Lukaszewski, Tommer Yoked, Chris Folmsbee, Troy Hunt, Tim Devetski, Lindsay Heyen, Rob Hardy, Kelly Dybala, Marc Raven, Karen Kazmerzak, Laura Leonard and Fiona Philip counseled EPL's board.

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