Hamilton HM EX Sep 29, 2015 (Thomson StreetEvents) -- Edited Transcript of Energy XXI Ltd earnings conference call or presentation Tuesday, September 29, 2015 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Greg Smith Energy XXI Ltd. - VP, IR * John Schiller Energy XXI Ltd. - Chairman, President & CEO * Bruce Busmire Energy XXI Ltd. - CFO ================================================================================ Conference Call Participants ================================================================================ * Kyle Kirk Credit Suisse - Analyst * Mike Kelly Global Hunter Securities - Analyst * Andrew Coleman Raymond James - Analyst * Richard Tullis Capital One Securities - Analyst * David Epstein CRT Capital - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, ladies and gentlemen and thank you for your patience. You've joined Energy XXI's fourth-quarter 2015 earnings conference call. (Operator Instructions). As a reminder, this conference may be recorded. I would now like to turn the call over to your host, the Vice President of Investor Relations, Mr. Greg Smith. Sir, you may begin. -------------------------------------------------------------------------------- Greg Smith, Energy XXI Ltd. - VP, IR [2] -------------------------------------------------------------------------------- Welcome, everyone. Presenting on the call today will be John Schiller, Chairman and President and Chief Executive Officer and Bruce Busmire, our Chief Financial Officer. They will both be available to answer questions at the end of this call. Before we get started, I need to remind everyone that our remarks today, including answers to your questions, include statements that we believe to be forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to materially differ from those currently anticipated. Those risks include, among others, matters described in our earnings release and in our public filings. We disclaim any obligation to update these forward-looking statements. While the Company believes these forward-looking statements are reasonable, they are subject to factors such as commodity prices, competition, technology and environmental and regulatory compliance. Our drilling schedules, capital plans and other factors may cause our results to differ materially. I urge you to read our 10-K to become better familiar with these risks and our Company. I will now turn the call over to John. -------------------------------------------------------------------------------- John Schiller, Energy XXI Ltd. - Chairman, President & CEO [3] -------------------------------------------------------------------------------- Thanks, Greg and thanks, everyone, for joining us for today's call. The commodity price environment we've been living in this time of year has made the oil and gas sector challenged for all of us. Even with these commodity headwinds, our Company has been able to accomplish some significant milestones, all of which were accomplished prior to the promised date of fiscal year-end June 30. We successfully monetized the Grand Isle Gathering System and realized $245 million from that transaction. We sold the East Bay Field, which reduced our P&A liability with [BOEM] by $175 million plus. We began this fiscal year by acquiring producing properties in the Gulf that replaced our East Bay oil barrels with lower cost per barrel production. Additionally, we made great progress in reducing our cost structure, lowering LOE on a per barrel basis by 30% and lowering G&A by 36%. Meanwhile, our production has remained stable. We are producing around 58,800 barrels of oil equivalent per day, in line with our previous quarter of 59,300 barrels per day and more importantly our oil production numbers stayed very strong. The teams have delivered a set of recompletion opportunities that are low cost and low risk. In most cases moving behind pipe reserves to the developed category. These recompletions, along with acquisitions, are going to be key in our ability to maintain production this fiscal year with a minimum capital spend of between $130 million and $150 million. This is exactly what we did in the second half of our last fiscal year. If you looked at the success we had out South Pass 78, taking production from around 2100 barrels equivalent per day in January to over 4500 barrels a day. Operationally, we remained very stable and clicked on all cylinders. As you saw in this morning's release, and Bruce will go into more detail, we've been buying back bonds in the open market at significant discounts to par, which will reduce our annualized interest payment. We know we still have much to accomplish, but we have a plan in place and continue to be opportunistic. I'm going to turn the call over to Bruce now to discuss some key financial metrics. -------------------------------------------------------------------------------- Bruce Busmire, Energy XXI Ltd. - CFO [4] -------------------------------------------------------------------------------- Thanks, John. In my comments, I want to address four areas -- one, CapEx and capital discipline; G&A and LOE; bond purchases; and our liquidity. As we announced, this fiscal year, we have estimated our capital budget to be between $130 million and $150 million. Capital discipline continues to be a major driver of our business plan this fiscal year. Our capital is highly focused on recompletions. I will note that we have completed two development drill wells that are already online leaving us with a robust inventory of low-risk opportunities. In addition to LOE, G&A is an area where we have made significant reductions and continue to look for ways to operate more efficiently. As John mentioned, we have trimmed lifting costs by 30% since July 2014. Some of this is a direct result of how service costs have come down in light of the current commodity price environment. However, it is important to note that our field operations team has also made significant adjustments to the way they do business, accounting for a large part of these reductions. Turning to bond repurchases, with the approval of our Board, we began bond buybacks with the ultimate goal of reducing debt by up to $1 [billion]. To date, we have repurchased $428 million in face value of our bonds, as shown in slide 7, at fractions on the dollar, saving us over $32 million in annualized interest payments so far. We will continue to address this as the market allows. Additionally, we will continue to evaluate other options to significantly reduce our overall debt. As a result, as in the past, we will not be answering any specific questions on our liability management program. Finally, on liquidity, after making the first interest payment on our second lien notes in September and using cash to buy back bonds, we still have $679 million of total liquidity remaining as of September 25. Noting that $556 million of that is in cash. We will continue to be very judicious with the use of our liquidity. In October, we will begin our semiannual redetermination on our borrowing base. If you will recall, we proactively lowered our revolver in March from $1.5 billion to $500 million. We do not foresee any adjustments to that number. With that, I will turn the call back to John for a few closing comments before taking your questions. -------------------------------------------------------------------------------- John Schiller, Energy XXI Ltd. - Chairman, President & CEO [5] -------------------------------------------------------------------------------- Thanks, Bruce. On the balance sheet, as Bruce mentioned, we are being opportunistic with regards to buying back bonds. Using cash to buy bonds now is an excellent return on dollars invested and we will continue to look at every opportunity that presents itself to further reduce debt. At the operations level, we are doing great things to keep production relatively stable. As you can see on slide 11, over the past 14 months, as we've drawn down on the amount of capital we've spent, we've maintained stable production. This is a result of good reservoir management, our asset terms working together with the production engineers and the field people all working on the things that add to our volumes and allow us to find more recompletion projects. The next couple slides are new slides I just thought we would show you how we are picking up 2 and 3 percentage points here and there in our production base. West Delta 30 was a place where we ran rigs through last August as we finished up the acquisition. As you can see during that time, we averaged about 8% downtime. Once we got the rig out of the field and we went back to a more regular environment, our downtime came closer to 5%. So we are looking across our whole base as we run very few rigs this year and looking to improve that downtime by a couple of percentage points over what it's been in the past, which basically has averaged about 10%. On the increased surveillance side, we've targeted the top 100 wells in the Company, producing wells, where we routinely now review their well tests by one of our more senior engineers on a weekly basis, actually daily basis, so that when things start to happen such as this example at Main Pass 61 where you can see the production started falling off, we know it's a migrating find issue, but with running rigs and all the other things that were going on, it really took us 6 to 8 months to identify it before we got an acid job pump. The goal of this increased surveillance is to go and identify these wells a couple of months in, if not sooner, so that whether it's optimizing gas lift, pumping an acid job, playing around with other producing parameters out there, we make sure we maintain our production and don't allow these middle of the year fall-offs as you saw in this example. Again, we think that's a place where we can pick up a couple of percentage points of production over the year. In July, we had a significant headcount reduction. We've now taken Energy XXI from around 500 employees at the time of our merger to around 260 today. As previously mentioned, we also put in place a plan to reduce expenses at the corporate level to add to operation savings already realized. We believe that oil prices will eventually rebound. However, we've established a culture that is highly focused on efficient use of capital and keeping a strong focus on our costs at the same time. The plan we put in place last spring was designed for the possibility of a sustained low commodity price environment, which is what we find ourselves in, and we are responding accordingly. And finally, we know that moving forward, it is the strength of the asset base that will provide long-term value to our stakeholders. With that, I'd like to turn it back over to Bruce for a few closing comments. -------------------------------------------------------------------------------- Bruce Busmire, Energy XXI Ltd. - CFO [6] -------------------------------------------------------------------------------- Thanks, John. I wanted to call everyone's attention to the disclosure on our June 30, 2015 Form 10-K of two material weaknesses in the internal accounting controls. First, as disclosed in the Form 8-K we filed on September 8, 2015, our formal documentation supporting our initial designation of our hedging instruments as cash flow hedges did not meet the technical requirements to qualify for cash flow hedge accounting treatment. We have restated all prior period financial results in the June 30, 2015 Form 10-K to reflect this change in accounting. This change had no impact on the economics of the hedge transactions, the Company's liquidity, or its bank covenants. Secondly, we also disclosed that the Company's Board of Directors is reviewing the results of an internal investigation conducted with the support of independent outside counsel regarding personal loans that were made to John Schiller by personal acquaintances of his, some of whom are vendors of the Company. John also received a personal loan from Norm Louie prior to Norm's appointment to the Company's Board. John failed to disclose to the Board these personal loans before they were made and his failure to disclose did not comply with the Company's code of business conduct and ethics. The Board review is ongoing and John is cooperating fully. The internal investigation has not uncovered any illegal activity or any impact on the Company's financial reporting or financial statements. As part of its review, the Board has begun designing and implementing additional controls and procedures, including strengthening the Company's vendor procurement procedures, revising the code of business conduct and ethics and implementing an enhanced comprehensive training program on the Company's code of business conduct and ethics. The Company does not intend to comment further on this matter until the Board has completed its review. I want to reiterate this second material weakness did not have any impact on our financial results. And operator, with that, we can begin the questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions). Steven Karpel, Credit Suisse. -------------------------------------------------------------------------------- Kyle Kirk, Credit Suisse - Analyst [2] -------------------------------------------------------------------------------- Hey, guys. This is actually Kyle Kirk filling in for Steven. Just a couple quick questions for you guys. First one, maybe turning to potential M&A. I think we saw or we've seen recently from some other guys like Stone that they've mentioned that they'd like to sell some assets in the Gulf. Any interest that you are seeing? One, any interest from you guys that you can talk about on those assets specifically? Or two, any interest from third-party money to come in there and help you guys with something like that? -------------------------------------------------------------------------------- Bruce Busmire, Energy XXI Ltd. - CFO [3] -------------------------------------------------------------------------------- Yes, as it relates to the assets, obviously, we will look at assets. That's not our prime focus right now unless they really were key to what we are doing strategically. I would say as far as third party, that goes under the guise of what I said before. We are not going to talk specifically on any of the calls what we are doing relative to our liability management. -------------------------------------------------------------------------------- Kyle Kirk, Credit Suisse - Analyst [4] -------------------------------------------------------------------------------- Got you. Yes, I guess that's a little bit more strategic, not (inaudible). And then maybe do you guys have an update or any comments around the Exxon LCs or any color you can give there and where that stands? -------------------------------------------------------------------------------- Bruce Busmire, Energy XXI Ltd. - CFO [5] -------------------------------------------------------------------------------- Yes, we are in the midst of our discussions with Exxon. We are in the process of having our entire P&A liability appraised by a third-party appraiser that both Exxon and Energy XXI agree to. We have not concluded that. The discussions with Exxon will be ongoing to our fiscal second quarter. -------------------------------------------------------------------------------- Kyle Kirk, Credit Suisse - Analyst [6] -------------------------------------------------------------------------------- Got you. We will look for that, fiscal second quarter. And then with regards to -- obviously asset prices are low right now, but do you guys still think selling assets and buying back bonds still offers a pretty attractive, on a relative value basis, opportunity for you guys? -------------------------------------------------------------------------------- John Schiller, Energy XXI Ltd. - Chairman, President & CEO [7] -------------------------------------------------------------------------------- What was the first part you said, Kyle, with assets? -------------------------------------------------------------------------------- Kyle Kirk, Credit Suisse - Analyst [8] -------------------------------------------------------------------------------- Yes, so asset prices, obviously, are low in the current environment. Do guys still think or see this -- essentially would you guys sell assets in order to go buy back bonds? -------------------------------------------------------------------------------- John Schiller, Energy XXI Ltd. - Chairman, President & CEO [9] -------------------------------------------------------------------------------- Yes. I think it's all about the returns we generate and look at everything that's out there, as Bruce said, under liability management. There are some properties that we would still be interested in selling. They are properties that, back to your original question, we wouldn't mind having some third-party money in to drill some wells that while economical aren't on our schedule to get to right now. So to the extent we can make those things happen, we are always looking at that as part of our management liabilities. -------------------------------------------------------------------------------- Kyle Kirk, Credit Suisse - Analyst [10] -------------------------------------------------------------------------------- Got you. And maybe just one more from me and you guys may or may not answer, but just with regards to what you guys have done to date on the bond buyback, you guys still have a decent amount of room, you guys think, under your existing documents if you want to buy back some more bonds in the open market? -------------------------------------------------------------------------------- Bruce Busmire, Energy XXI Ltd. - CFO [11] -------------------------------------------------------------------------------- As I said, we will continue -- we will repeat -- we will continue to be opportunistic with the market. We're not going to flood the market. We will look at bond buybacks just like we do any other opportunity to improve the balance sheet. -------------------------------------------------------------------------------- Kyle Kirk, Credit Suisse - Analyst [12] -------------------------------------------------------------------------------- Got you. Okay, thanks a lot, guys. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- Mike Kelly, Global Hunter Securities. -------------------------------------------------------------------------------- Mike Kelly, Global Hunter Securities - Analyst [14] -------------------------------------------------------------------------------- I was curious just on the implications for fiscal 2017 after you are holding production fairly flat this year, but the developing CapEx, a pretty big dropoff 2015 to 2016. Spending $35 million in 2016. What does that mean for production going into 2017 and just kind of anything around in that issue. Thank you. -------------------------------------------------------------------------------- John Schiller, Energy XXI Ltd. - Chairman, President & CEO [15] -------------------------------------------------------------------------------- Yes, Mike, you look at our recompletion opportunities we have documented out there on the Web and show, it really doesn't fall off between this year and next year. So we've got a lot of behind pipe stuff identified already. Obviously, the way we are talking, the way we've got our teams focused, we are trying to identify more opportunities. And to the extent that we can keep coming up with that, do the 2% and 3% I've talked about around increased surveillance of our big wells and also production downtime, we think we can keep that number from getting out of control. -------------------------------------------------------------------------------- Mike Kelly, Global Hunter Securities - Analyst [16] -------------------------------------------------------------------------------- Okay. Is there a fair decline rate we should look at, pretty similar 2016 versus 2015? Just anything else to help us model it out? -------------------------------------------------------------------------------- John Schiller, Energy XXI Ltd. - Chairman, President & CEO [17] -------------------------------------------------------------------------------- Yes, go ahead. -------------------------------------------------------------------------------- Bruce Busmire, Energy XXI Ltd. - CFO [18] -------------------------------------------------------------------------------- Yes, the one thing to take into account that's holding production flat this year over fiscal 2016 is the M21K acquisition. So that keeps us relatively flat. Absent that, you are going to be more in the -- at this cap spend, you are going to be probably in the more high single digit decline. -------------------------------------------------------------------------------- Mike Kelly, Global Hunter Securities - Analyst [19] -------------------------------------------------------------------------------- Okay, got it. And then, Bruce, I know you don't want to get into the specifics with the bond buybacks, but just what really gets you out of trouble here in your opinion? Buybacks sell for $0.22 on the dollar, that's great, but you still have some negative free cash flow this year and next and eventually liquidity is going to get tighter. So maybe you could discuss kind of what gets you where you want to be with this in the grand scheme of things. Thanks. -------------------------------------------------------------------------------- Bruce Busmire, Energy XXI Ltd. - CFO [20] -------------------------------------------------------------------------------- Sure, Mike. We really think that we need in excess of $1 [billion] of debt off our balance sheet equating to somewhere in the $4.50 to $5 a barrel in interest costs. We think that really gets us to where we can sustain the place we want to be in a lower price environment. -------------------------------------------------------------------------------- Mike Kelly, Global Hunter Securities - Analyst [21] -------------------------------------------------------------------------------- Okay. Appreciate it. Thanks, guys. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- (Operator Instructions). Andrew Coleman, Raymond James. -------------------------------------------------------------------------------- Andrew Coleman, Raymond James - Analyst [23] -------------------------------------------------------------------------------- The first one was just kind of looking at the as-measured data heading into the redetermination period. It looks like you didn't recognize a whole lot of cost reductions in some of those numbers. Can you give a sense of what service costs reduction you guys think you could see if you were to put a rig back to work? -------------------------------------------------------------------------------- John Schiller, Energy XXI Ltd. - Chairman, President & CEO [24] -------------------------------------------------------------------------------- Yes, I'll just give you some examples on the big level. We did all our reserves. [Mark] (inaudible) and his guys at around $70,000 a day rate and no sooner than we did that, we are picking up a rig now to do some P&A work at $50,000 a day. So you still see those numbers coming down. You've got costs across the board. Look, we all made a living in the Gulf of Mexico in the $45 and $50 and thought we were doing real good at those prices. So that's the thing that's the hardest thing to keep up with, but we continue to see it across all the major areas. Costs have continued to come down. Keith and his guys each month as we see the numbers come in, we are surprised, but we continue to go to the low side on our LOE versus our estimates of what we planned for the year. So we think you will continue to be impressed with what we do on the cost side. -------------------------------------------------------------------------------- Andrew Coleman, Raymond James - Analyst [25] -------------------------------------------------------------------------------- Okay, cool. And then is the decision to break out NGLs in your reserve report, is that tied to the sale of the GIG system, or is there some other reason behind that? -------------------------------------------------------------------------------- John Schiller, Energy XXI Ltd. - Chairman, President & CEO [26] -------------------------------------------------------------------------------- I think we are just trying to give you a full transparency a little bit more. It's a minimum number to us, but I think in the past, we just stated it as a percent in the footnote. We just put it in the pie charts this time. -------------------------------------------------------------------------------- Andrew Coleman, Raymond James - Analyst [27] -------------------------------------------------------------------------------- Okay. All right, cool. And then the last question I had was just -- we're coming out the tail end here of the storm season. Can you give a sense of what downtime -- how it's been running versus plan for the current quarter? -------------------------------------------------------------------------------- John Schiller, Energy XXI Ltd. - Chairman, President & CEO [28] -------------------------------------------------------------------------------- Yes, we've been short on the numbers. I alluded to 10 being what we were before and an improvement of 2. We are sort of 8 and below so far. Obviously, we haven't taken any shut-ins for storms, even the slightest [winter] was up. Obviously, no reason to move anybody in. We have had some third-party pipeline. We've had some compressors with the heat. This is the time of the year that Keith's guys fight compressors. Most of the downtime we've had has been associated with that type stuff. -------------------------------------------------------------------------------- Andrew Coleman, Raymond James - Analyst [29] -------------------------------------------------------------------------------- Okay. Thank you. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- Richard Tullis, Capital One Securities. -------------------------------------------------------------------------------- Richard Tullis, Capital One Securities - Analyst [31] -------------------------------------------------------------------------------- John, looking at the little over 58,000 barrels a day thus far in the quarter, is that the number we should kind of look at for the next three quarters to keep production flattish with that number, or how should we look at it? -------------------------------------------------------------------------------- John Schiller, Energy XXI Ltd. - Chairman, President & CEO [32] -------------------------------------------------------------------------------- You know, Richard, when you see the numbers, what I think you'll see is that we've done -- the guys have done a better job on the oil side. We actually have lost about -- we will call it 2500 barrels a day on the gas side from some major wells that we are having to do some workovers and recompletions around. You guys I think probably know that Highlander has been off and we are getting ready to bring that back on and get bigger rates. So I would tell you the volumes that matter to cash flow, yes, that's a pretty good estimate to stay flat around here. We can get our volumes higher on an equivalent basis, but it'll probably be some gas work. It's not that it doesn't pay the bills, but it's not the same impact to cash flow as keeping oil at 41,000, 42,000 barrels a day is. -------------------------------------------------------------------------------- Richard Tullis, Capital One Securities - Analyst [33] -------------------------------------------------------------------------------- So you should be able to keep your oil at that 40,000, 41,000 barrel a day level the rest of the year, or --? -------------------------------------------------------------------------------- John Schiller, Energy XXI Ltd. - Chairman, President & CEO [34] -------------------------------------------------------------------------------- No, I think it can drop into the high 30,000s by the end of the year exit rate, but -- -------------------------------------------------------------------------------- Richard Tullis, Capital One Securities - Analyst [35] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- John Schiller, Energy XXI Ltd. - Chairman, President & CEO [36] -------------------------------------------------------------------------------- -- let's see what we do. So far, the guys continue to do a really good job of bringing on some behind pipe stuff, bringing on -- like I said identifying work quicker and getting some acid jobs pumped, optimizing gas lift. A lot of things we can do to pick up 2 and 3 percentage points and that makes all the difference. -------------------------------------------------------------------------------- Richard Tullis, Capital One Securities - Analyst [37] -------------------------------------------------------------------------------- Okay. And on a related note, are there any acquisitions needed to keep the oil production relatively flat or you can do it with the recomplete workover program that you have budgeted? -------------------------------------------------------------------------------- John Schiller, Energy XXI Ltd. - Chairman, President & CEO [38] -------------------------------------------------------------------------------- Correct. We don't model -- as you know, we don't budget our model in acquisitions, so everything we've got here is based on our assets we own today and doing the work to keep them at a minimum decline. -------------------------------------------------------------------------------- Richard Tullis, Capital One Securities - Analyst [39] -------------------------------------------------------------------------------- Okay. What LOE per barrel guidance do you think we should use for the rest of the year relative to this last quarter? -------------------------------------------------------------------------------- John Schiller, Energy XXI Ltd. - Chairman, President & CEO [40] -------------------------------------------------------------------------------- Yes, we are going to be up about -- we are showing you the $21. That's got the GIG system in it for the first time this quarter. I think that we have a chance over the course of the year to pull in $1 to $2, maybe even $3 more a barrel out of that. It won't happen all in this first quarter, but I think you'll see it continue to go down. -------------------------------------------------------------------------------- Richard Tullis, Capital One Securities - Analyst [41] -------------------------------------------------------------------------------- Okay. And I know you guys had done a lot of work on the G&A side. Is there anything left to do there, or is it pretty much optimal in your opinion at this point? -------------------------------------------------------------------------------- John Schiller, Energy XXI Ltd. - Chairman, President & CEO [42] -------------------------------------------------------------------------------- Well, I think we made a big reduction of force in July. Accrued the severance into this quarter, so you are seeing it in the G&A here. You are going to see G&A at a lower level going forward. I think that that mentality continues to go on so that as people saw what we did there, particularly in Ackers operation where we are able to identify some more places and continue to cut out anything that's perceived as fat. So as I've said in some presentations I've made, I think the cost culture across the Company has changed dramatically, all the way down to the guys that sit out on our production platform and guys that we have run what rigs we run. So I think you will see a lot of pressure on that number across the board still. -------------------------------------------------------------------------------- Richard Tullis, Capital One Securities - Analyst [43] -------------------------------------------------------------------------------- Okay. And then just lastly, John, I know your PV-10 value for the group reserves was based on I guess high $60 WTI oil. Did you guys get to run it maybe at a lower price, 50/50 $5 oil? -------------------------------------------------------------------------------- John Schiller, Energy XXI Ltd. - Chairman, President & CEO [44] -------------------------------------------------------------------------------- Yes, Bruce? -------------------------------------------------------------------------------- Bruce Busmire, Energy XXI Ltd. - CFO [45] -------------------------------------------------------------------------------- What's the question? -------------------------------------------------------------------------------- John Schiller, Energy XXI Ltd. - Chairman, President & CEO [46] -------------------------------------------------------------------------------- What's your PV-10 at a $55 [shorter] number? -------------------------------------------------------------------------------- Bruce Busmire, Energy XXI Ltd. - CFO [47] -------------------------------------------------------------------------------- Yes, we are in the -- I want to say it's in the 3 range. I'm sorry, 4 range. Right? -------------------------------------------------------------------------------- John Schiller, Energy XXI Ltd. - Chairman, President & CEO [48] -------------------------------------------------------------------------------- Not at $55. -------------------------------------------------------------------------------- Bruce Busmire, Energy XXI Ltd. - CFO [49] -------------------------------------------------------------------------------- 55? You're 2-9. -------------------------------------------------------------------------------- John Schiller, Energy XXI Ltd. - Chairman, President & CEO [50] -------------------------------------------------------------------------------- 2-9 at (multiple speakers). -------------------------------------------------------------------------------- Bruce Busmire, Energy XXI Ltd. - CFO [51] -------------------------------------------------------------------------------- I'm sorry, you're right, you're right. I was going off of a modified 8-K. -------------------------------------------------------------------------------- John Schiller, Energy XXI Ltd. - Chairman, President & CEO [52] -------------------------------------------------------------------------------- Strip takes you down to like --. -------------------------------------------------------------------------------- Bruce Busmire, Energy XXI Ltd. - CFO [53] -------------------------------------------------------------------------------- Yes, about 1.9, 1.8. Sorry. -------------------------------------------------------------------------------- Richard Tullis, Capital One Securities - Analyst [54] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- John Schiller, Energy XXI Ltd. - Chairman, President & CEO [55] -------------------------------------------------------------------------------- Strip. $55 is going to be a little bit higher than that. -------------------------------------------------------------------------------- Bruce Busmire, Energy XXI Ltd. - CFO [56] -------------------------------------------------------------------------------- I was doing the math backwards. -------------------------------------------------------------------------------- Richard Tullis, Capital One Securities - Analyst [57] -------------------------------------------------------------------------------- Okay. Well, that's all for me. Thank you. Appreciate it. -------------------------------------------------------------------------------- Operator [58] -------------------------------------------------------------------------------- David Epstein, CRT Capital. -------------------------------------------------------------------------------- David Epstein, CRT Capital - Analyst [59] -------------------------------------------------------------------------------- The impairments, which I guess are no surprise on the oil and gas side, does that impact the 277 million BOEM figure? And I think, John, you've said in the past that if you had to deal with that probably $5 million in payments for performance bonds, but is that something you are going to have to post now with the lower book equity? -------------------------------------------------------------------------------- John Schiller, Energy XXI Ltd. - Chairman, President & CEO [60] -------------------------------------------------------------------------------- Yes, it doesn't really impact it. We kind of had that figured in already in terms of what our equity is going to be. It's going to be a bigger impact, but it's going to be where we are with final numbers with them. As you know, they took East Bay down from the 177 to below -- to 70. After reviewing some stuff, we think there's places across our structure where they will do some other adjustments, not that dramatic mind you, but similar areas where there were big differences, most of which were around site clearance. And then we also think that while it early on, all the indications of our third-party work is that we are seeing pretty significant reductions just because of where the P&A market is right now over how we were carrying things. And so I think you put all that together, we feel pretty good that we may have to post some bonds, but we don't think it will be a huge amount. -------------------------------------------------------------------------------- David Epstein, CRT Capital - Analyst [61] -------------------------------------------------------------------------------- Okay. And the covenants. I think you said that, in your October redetermination, you don't expect the revolver to be reduced. Are there any covenant issues that are going to factor in and any sort of waivers you will need? -------------------------------------------------------------------------------- Bruce Busmire, Energy XXI Ltd. - CFO [62] -------------------------------------------------------------------------------- No, we assume, and the banks are pretty comfortable, that we are going to maintain that 500 and then as it relates to anything we might do with the covenants, those will be discussions with the banks during and looking forward what the prices are and how we see the market if we decided to do that. -------------------------------------------------------------------------------- John Schiller, Energy XXI Ltd. - Chairman, President & CEO [63] -------------------------------------------------------------------------------- But remember, our covenants are a little bit different than a typical revolver. They are around our amount of secured debt totals -- net secured debt, so we've got debt less cash on the books. -------------------------------------------------------------------------------- Bruce Busmire, Energy XXI Ltd. - CFO [64] -------------------------------------------------------------------------------- Right. -------------------------------------------------------------------------------- David Epstein, CRT Capital - Analyst [65] -------------------------------------------------------------------------------- Okay, thank you. And can I ask quickly, while it's a good thing that I think technical revisions look like they were in PUDs rather than proved developed, why was that the case that they were confined to PUDs? -------------------------------------------------------------------------------- John Schiller, Energy XXI Ltd. - Chairman, President & CEO [66] -------------------------------------------------------------------------------- Yes, I think it was a couple of different cases. When you actually look at where PUDs went from basically the second lien time where we had 86 million barrels of PUDs, 6 million of those got developed by the drilling we kept doing. So that took you to 80 and then you had another 5 million due to prices and then as we started moving drilling capital out, we lost another 6 million barrels. And then you had about 17 million out of that technical/performance. A lot of that was a reassessment of things like the fact that we had drilled some wells that had gas caps in them on one side of the structure as you went to the other side of the structure. We started putting some gas in there, which is what Netherland Sewell is doing on their number. You started affecting the amount of oil that you had and basically the economics of it. So a lot of that, two-thirds of those reserves haven't really gone away; they are still there in the [problem] category, but their economics changed when you reevaluated the oil/gas mix, if that makes sense? -------------------------------------------------------------------------------- David Epstein, CRT Capital - Analyst [67] -------------------------------------------------------------------------------- And I'm trying to understand why was it just in PUDs rather than -- why didn't it hit the proved developed category at all? I guess because you had already drilled the proved developed wells, so there was no surprise? -------------------------------------------------------------------------------- John Schiller, Energy XXI Ltd. - Chairman, President & CEO [68] -------------------------------------------------------------------------------- Yes, those wells were on and actually we took somewhere in the neighborhood of 10 million or 11 million barrels of positive in the PDPs -- -------------------------------------------------------------------------------- Unidentified Company Representative [69] -------------------------------------------------------------------------------- 6.8 million. -------------------------------------------------------------------------------- John Schiller, Energy XXI Ltd. - Chairman, President & CEO [70] -------------------------------------------------------------------------------- I'm sorry, 7 million barrels to the PDP specific, which was tied into what we talked about. When you level off your production in the second half of the year, you can't keep slamming the same decline on those wells. Obviously, you have to shorten -- you thin out the decline and we actually gained reserves on the PDP category. Basically on the PDPs, we kept flat with where we were during the second lien even though we produced 11 million barrels. -------------------------------------------------------------------------------- David Epstein, CRT Capital - Analyst [71] -------------------------------------------------------------------------------- Thanks. When will the EPL 10-K be coming? -------------------------------------------------------------------------------- John Schiller, Energy XXI Ltd. - Chairman, President & CEO [72] -------------------------------------------------------------------------------- About two weeks is what our expectations are. -------------------------------------------------------------------------------- Bruce Busmire, Energy XXI Ltd. - CFO [73] -------------------------------------------------------------------------------- Two weeks. -------------------------------------------------------------------------------- David Epstein, CRT Capital - Analyst [74] -------------------------------------------------------------------------------- Thanks very much. Good night. -------------------------------------------------------------------------------- Operator [75] -------------------------------------------------------------------------------- Steven Karpel, Credit Suisse. -------------------------------------------------------------------------------- Kyle Kirk, Credit Suisse - Analyst [76] -------------------------------------------------------------------------------- Hey, guys. It's Kyle again. Real quick, on the PV-10 that you guys put out, it looked like essentially costs were a little bit higher than maybe kind of where they are running today. Have you guys quantified how much of the PV-10 was affected maybe by higher LOE? -------------------------------------------------------------------------------- John Schiller, Energy XXI Ltd. - Chairman, President & CEO [77] -------------------------------------------------------------------------------- Quantified how much of it? -------------------------------------------------------------------------------- Kyle Kirk, Credit Suisse - Analyst [78] -------------------------------------------------------------------------------- Or said differently, if I look at the PV-10 that you guys put out when you guys did the second lien deal, it looked like you guys were able to use potentially lower costs that might be more representative with your current cost structure. At least that's when I run the numbers. It looks like LOE or cost structure was higher under the reserve report that you just filed. Just wondering if you are able to kind of quantify that, or how much of it was associated with that in terms of the LOE being lower versus where it was at the second lien deal? -------------------------------------------------------------------------------- John Schiller, Energy XXI Ltd. - Chairman, President & CEO [79] -------------------------------------------------------------------------------- Yes, I think the answer is, if you take 15% off your LOE and 15% off your capital, then just kind of assume a similar discount to what you are seeing out there, you are going to get the right answer. -------------------------------------------------------------------------------- Kyle Kirk, Credit Suisse - Analyst [80] -------------------------------------------------------------------------------- Got you. Okay. -------------------------------------------------------------------------------- Operator [81] -------------------------------------------------------------------------------- Thank you. At this time, I would like to turn the call over to Mr. Schiller for any closing remarks. -------------------------------------------------------------------------------- John Schiller, Energy XXI Ltd. - Chairman, President & CEO [82] -------------------------------------------------------------------------------- Hey, we appreciate everybody joining us at this late hour. There's a good amount of you on the phone and we appreciate that and paying attention to what we are talking to you about. Bruce is heading out to the Deutsche Bank conference. I'm heading down to Johnson Rice and we will be out there talking to a bunch of you over the next couple days. Appreciate your continued interest and know that we are all on the same page here. We are working to get this thing fixed, so I appreciate everyone showing up. Thanks. -------------------------------------------------------------------------------- Operator [83] -------------------------------------------------------------------------------- Ladies and gentlemen, that does conclude your program. Thank you for your participation. Have a wonderful day. You may disconnect your lines at this time.
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