Energy XXI adds assets in the Gulf

In an expansion of its shallow-water business, Energy XXI said Monday it will buy Gulf of Mexico assets from Exxon Mobil Corp. and will enter a joint venture with the company to explore for oil and gas in an adjacent area of the Gulf.

The Houston-based independent, which was formed in 2005 and has grown rapidly, also announced the completion of its first horizontal well in the Gulf.

Energy XXI did not disclose the purchase price for the Gulf assets but estimated its total commitment to the joint venture at $75 million, assuming successful completion of two earning wells.

Energy XXI will operate the joint venture and drill the initial prospect, which it expects to begin by the end of the year.

The company will postpone two large offshore natural gas exploration prospects to drill the oil-focused joint venture wells.

“We had two, what we consider to be very attractive (natural gas) prospects to drill,” said Greg Smith, director of investor relations at Energy XXI. “We’ve agreed internally to push those back to focus on the joint venture.”

Exxon Mobil did not release potential reserve prospects for the joint venture, Smith said, “but it’s big for an independent. We’re pretty bullish on this acquisition and this venture.”

The company’s stock ended the day at $35.60 a share, up 64 cents.

Jeffrey Hayden, head of research and managing director of KLR Group, said the deals with Exxon Mobil are consistent with Energy XXI’s strategy of exploiting offshore shelf assets and indicate they expect to find more oil in the area.

The purchase from Exxon Mobil involves 5,000 acres on Vermilion Block 164, which Energy XXI reported is currently producing about 1,100 barrels of oil equivalent per day.

‘World-class partner’

The adjacent joint venture provides Energy XXI “the opportunity to drill best-in-class exploration projects with a world-class partner,” Energy XXI Chairman and CEO John Schiller said in a statement.

Hayden said the deal appears to be more about the potential for additional exploration and production than about the 1,100 barrels per day from the wells the company bought from Exxon Mobil.

“I think the thing was done to go and find a whole lot more oil,” he said. “I think they see more production.”

The company also acknowledged that production in the July-September quarter was affected by downtime associated with Hurricane Isaac.

Two-week halt

Production is now back to 45,000 barrels of oil equivalent per day, the company said, but it projects the overall production for the quarter will be about 37,000 barrels a day.

Although its properties sustained no significant damage, production was down for about two weeks just before and after the hurricane, partly because onshore processing facilities were closed due to flooding, the company said.

Schiller said despite that setback and the deferral of the two high-rate gas wells in order to focus on the joint venture oil project with Exxon Mobil, he expects the company’s average annual production rate to grow by more than 25 percent.

The oil portion of the company’s production could increase by more than 30 percent, he said in a statement released by the company.

The company’s first horizontal well, Big Sky 2, was drilled to 8,000 feet and placed on production at 3,000 barrels of oil per day, Energy XXI said in its announcement.

Smith said other operators have drilled horizontal wells on the company’s acreage but this well is the first Energy XXI has drilled.

Production is about triple what would be expected from a vertical well, he said.