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.

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