Energy XXI Bermuda Ltd: Mkt Cap $1.55bn (as of 14/03/14)
EPL Oil & Gas Inc.: Mkt Cap $1.49bn (as of 14/03/14)

With the goal of becoming the largest publicly traded independent pure-play oil producer on the Gulf of Mexico shelf, Energy XXI is to acquire EPL Oil & Gas in a $2.3bn deal, including the assumption of debt.

Energy XXI was launched in Texas as a special- purpose acquisitions company and came to market in 2005 through a successful $300mln IPO on the London Stock Exchange Alternative Investment Market (AIM). Since then, the main goal of the company was to grow by building a geographically focused portfolio, pursuing an “acquire and exploit” strategy. The 2005 IPO was followed by a series of deals. In March 2006, the company made an agreement to purchase Marlin Energy Offshore for $421mln and a number of South Louisiana properties for a total of $308mlm, while 2007 saw the augmentation of Energy XXI’s portfolio with the $420mln acquisition of POGO’s assets in the Gulf of Mexico.
2010 represented a milestone year for Energy XXI’s development in the Gulf, as the company made a major discovery in the Davy Jones ultra-deep well and further consolidated its hold of the shelf by acquiring ExxonMobil’s regional properties for $1.01bn. As a consequence of this 2010 acquisition, Energy XXI bolstered production by 77%, reaching 46,000 boe/day. The announced acquisition of EPL Oil & Gas would enable Energy XXI to extract up to 65,000 boe/day, which represents a 39% increase from the 2010 levels.

Established in 1998, EPL Oil & Gas was an independent oil and natural gas exploration and production company headquartered in Houston, Texas, with offices in New Orleans, Louisiana. The company’s operations are concentrated in the U.S. Gulf of Mexico shelf, focusing on the state and federal waters off the Louisiana coast. EPL’s 2013 year-end net proved and probable reserves stood at 106.3mln boe, while Energy XXI registered 179mln boe as of June 2013.

Energy XXI’s acquisition of EPL Oil & Gas will create the largest independent oil extraction company in the Gulf of Mexico shelf area, the narrower strip of water that borders the US coastline. According to John Schiller, chairman and CEO of Energy XXI, the deal consolidates the company’s strategy of trying to recover as much oil as possible from oil wells that have been dug in the past and that given the technology constraints of the time proved to be economically unviable to continue to operate. 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. Apart from introducing advanced extraction technologies, such as horizontal drilling and advanced seismic data exploration, Energy XXI’s absorption of EPL also aims to drive capital costs lower and increase levels of operating efficiency. Couple of factors show that the Gulf of Mexico could prove the most important long-term growth driver in the U.S. Oil field services market. The Gulf of Mexico currently accounts for 23 % of total U.S. crude oil production and about 7% of total dry gas production. With its vast reserves, geopolitical stability, proximity to refineries and strong infrastructure it is very attractive to oil companies which puts Energy XXI into an enviable position.

Out of the total $1.53bn price ascribed to EPL, the bidder expects to pay 65% in cash and the rest in common stock. EPL stockholders may elect between 3 payment options for each EPL share: receive $39 a share in cash, 1.669 Energy XXI shares, or $25.35 in cash plus 0.584 Energy XXI share. The payment to EPL holders is expected to comprise $1 billion in cash and about 23.4 million Energy XXI shares. The $39 paid corresponds to a 34% premium over EPL’s share price on the date of announcement. 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%, with the overall enterprise value of the combined entity reaching roughly $6bn.
Citi and Credit Suisse were retained as advisers to Energy XXI, while Barclays acted as adviser to EPL Oil & Gas.

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