Should Investors Trust Energy XXI (NASDAQ:EXXI)?
This year has not been too favourable for investors in Energy XXI (NASDAQ:EXXI)’s stock. The company’s stock has declined up to 76% over the previous year. Ironically the investors that own the stock must be extremely disappointed but those who are not a part of the stock might feel tempted into investing due to the huge price cut. It is natural for many people to fell drawn towards things that are on sale and that is the reason why people might want to invest in the company in the hope of getting a real bargain out of the investment. In order to analyze if Energy XXI (NASDAQ:EXXI) has any value for the investors or not we should take a look at the following aspects of the company;
To evaluate the potential of an energy company, one has to look at the oil and gas reserves the company holds. The reserves determine its value based on certainity of production in the upcoming years along with the commodity prices.
A look at the Energy XXI (NASDAQ:EXXI) will tell us that the investors are pricing the whole business at around $5 billion. However, by the end of the company’s monetary year in June, it retained proved reserves, which totalled up to 246 million barrels of oil equivalent. These reserves had a present value of $7.6 billion at the oil price of 103.63 per barrel.
On top of that the company retained further barrels of oil equivalent of 70 million potential reserves with a present value of $3.6 billion and 65 million barrels of oil equivalent of potential reserves of present value of $3.4 billion. Together, the company is sitting on ground that has oil and gas, which is worth $14.6 billion. The numbers indicate that Energy XXI (NASDAQ:EXXI) has 3 times more gas and oil under it than the current value of the company. Despite a few hiccups like the potential increase in the oil price in the near future, it can be said that the company is priced much lower than it’s worth which should readily attract investors to the company.
However there is a catch. The company is under a huge loan of $3.6 billion. The number is huge and it does not give Energy XXI (NASDAQ:EXXI) much room to move. During the last quarter the company made $204 million in cash flow but due to the $65 million interest load about 32% of its cash flow went to pay off the interest on the company’s debt. The rest of the cash flow was used by the company to fund its capex plan. The company spent $280 million in capex during the previous quarter. Due to the debt and the capex plan the company is under a lot of pressure and the continuously sliding prices of the oil makes steady production of oil much harder for Energy XXI (NASDAQ:EXXI). Chances are that the company might have to sell its oil and gas at very low prices just to avoid going bankrupt.