In a deal called that could see the emergence of the largest public independent producer on the Gulf of Mexico shelf with an enterprise value near $6 billion, Energy XXI (Nasdaq:EXXI) (LSE:EXXI) has agreed to acquire and EPL Oil & Gas Inc. (NYSE:EPL) for $2.3 billion, including the assumption of debt.
The friendly 65%/35% cash/stock deal would see EPL stockholders receive $39.00 per EPL share based on Energy XXI's closing price as of March 11, 2014, representing a 37% percent premium to the 30-day average closing price of EPL shares and a 34% premium over the closing price of EPL shares on March 11, 2014. The resulting company, to remain headquartered in Houston and headed up by Energy XXI chairman and CEO John Schiller, is expected to see production of approximately 65,000 barrels of oil equivalent (boe) per day with 70% oil.
Aggregate consideration for the acquisition amounts to $1 billion in cash and roughly 23.4 million EXXI shares. EXXI has received commitments to increase its corporate revolver from $1.0875 billion currently to $1.675 billion in conjunction with the acquisition, as well as a $400 million unsecured bridge loan to augment the available revolver if EPL's bonds are repurchased. Energy XXI would anticipate retiring any bridge loan through the future issuance of high-yield notes.
"EPL's assets and operations closely resemble our own, predominantly oil, with some of the highest margins in the industry and extraordinary opportunities for reserves and production growth through development and exploration activities," Energy XXI chairman and CEO John Schiller said. "Energy XXI will be the only publicly traded pure play on the Gulf of Mexico shelf, with the highest concentration of large, mature oil fields ever owned by a single shelf operator."
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%.
"Upon completion, the combined company will own and operate 10 oil fields on the shelf with cumulative 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," Energy XXI executive vice president of Exploration and Production Ben Marchive said.
Across the board, analysts appear to view the deal favorably, noting the solid operating histories and potential operating synergies of the two Gulf of Mexico pure-plays, but concerns about EXXI closing its discount to PV10 remain.
“EXXI picks up a higher margin, higher organic growth company at approximately the same EV/EBITDA valuation,” said analysts at Global Hunter Securities (GHS) Tuesday. “We also think the GOM is at the tipping point of producing needle-moving discoveries created by advances in 3D seismic and to a lesser extent horizontal drilling - both of which EXXI has been at the forefront on - which adds considerable upside to this deal from a longer-term perspective,” they continued.
Stifel analysts also liked the deal. “EPL has been one of our top value ideas and the current takeout reflects the underlying value in our view,” the analysts said in a note following the announcement. "We view the deal as full and fair and given that it is 35% stock, the offer price could come down if EXXI stock suffers from the announcement. We think the risk of a competing offer from public or private companies is minimal given the valuation and limited buyer list for these types of assets. We think the recent two quarters of disappointments from EPL created an attractive valuation, but also highlighted some of the guidance/production risks of offshore operations. The key potential upside for the acquirer is the ability to direct capital to test deeper shelf opportunities on EPL’s acreage that EPL has not been able to test itself given its historical balance sheet and size. These deep shelf assets have the potential for $58/sh of unrisked upside, but carry higher exploration risk and technical production risk. Applying a 10%-20% risk factor on this number would yield $6-12/sh of upside with only $3/sh reflected in our risked NAV, meaning $3-9/sh of additional risked upside to our $31/sh risked NAV if capital is allocated to testing the leads,” the analysts continued.
While Jefferies LLC analysts see the benefit to the combined company in terms of organic growth, the analysts see EXXI as paying a “fairly full price,” noting that the transaction is valued at ~$110,000 per flowing boe, compared to EXXI trading at around $82,000 per flowing boe.”
“Recent GOM shelf transactions were ~ $50,000 per flowing boe, but production mix in those cases were much gassier. EPL recently purchased 900 boe/d of shelf production for ~$78,000 boe/d (95% oil). In early '13, EPL also acquired shelf properties for ~$156k per flowing (97% oil). On ev/ebitda, EXXI paid about 5x 2014 estimates (based on Consensus) vs. EXXI’s pre-deal valuation of 4.4x. So, transaction would be slightly dilutive on the two metrics. Lastly, the $2.3B consideration compares to EPL’s ye’13 PV-10 of $2.1B,” the analysts said.
“The combined entity should be in a better position to generate stronger organic growth with EPL’s track record and high grading of drilling opportunities, compared to EXXI standalone. But, it is unclear how the transaction will help EXXI close its discount to PV10, especially given leverage ratio will deteriorate slightly. Any excess cash flow will be directed to paying down debt instead of drilling acceleration or share repurchases.” Jefferies analysts concluded.
Upon closing, Energy XXI shareholders are expected to own approximately 77% of the combined company and EPL shareholders are expected to own the remaining 23%. One member of EPL's board of directors will join the Energy XXI board of directors upon completion of the transaction, which is subject to shareholder approval at both companies, receipt of regulatory approvals and customary closing conditions.
Citigroup Global Markets Inc. and Credit Suisse Securities (USA) LLC acted as financial advisors to the Energy XXI board of directors and each rendered a fairness opinion in connection with the transaction. Vinson & Elkins LLP acted as legal advisor to the Energy XXI board of directors. Barclays acted as financial advisors to the EPL board of directors and rendered a fairness opinion in connection with the transaction. Sidley Austin LLP acted as legal advisor to the EPL board of directors.