Energy XXI was formed in 2005 with the belief that the Gulf of Mexico holds vast riches yet to be tapped, not just in deepwater frontiers that grab the headlines, but also in shallower depths on the Outer Continental Shelf--and many of the older fields have much more production to yield through use of modern seismic and completion technologies, deeper drilling and horizontal wellbores.

The Houston company’s strategy is to acquire fields from others and rework them, drill deeper and improve facilities, to increase production. This is coupled with drilling the proved undeveloped reserves and then exploring new play concepts. Prior to the EPL Oil & Gas acquisition, the company had achieved an approximate 80% uplift in proved reserves on its five major acquisitions.

Serving as chairman and CEO is founder John Schiller, a petroleum engineer out of Texas A&M who has worked in the Gulf for more than 30 years. He likes to say the old adage is true that big oil fields get bigger. In 2012, the company won Oil and Gas Investor’s Excellence Award for Best Field Rejuvenation. The award recognized Energy XXI’s work on nine fields it bought from ExxonMobil in 2010 for $1 billion. It increased production on those assets by nearly 40% in just the first year.

The EPL merger is Energy XXI’s largest deal yet at $2.3 billion (65% cash). The company gains even more opportunity because now it will operate 10 of the largest fields on the shelf, and do so with an expanded technical team (the vast majority of EPL’s professional employees come along). Energy XXI gains EPL’s working interests in 37 producing fields, mostly concentrated in nine core producing areas, and 90% operated (by reserves).

The larger Energy XXI now has aggregate production of 62,000 barrels of oil equivalent per day (boe/d), 70% oil. It will have nine rigs working on the combined assets.

We talked with Schiller the same day the money was wired to EPL, and shortly before he left for a London roadshow.

Investor: Did you have EPL in your sites, or did they approach you?

Schiller: Every six months or so, we do a strategic review of opportunities for the company. Every time we’d done that for the past four years, EPL screened at the top of the list as the company most like us. We always had them at the top of our list, so we actively visited with them back in the summer of 2012, but we decided that wasn’t the right time to do it. Then in February we were together at a conference in Vail and Gary [Hanna, EPL’s CEO] came to me and asked if we were still pretty serious about buying them--that was the catalyst to make it happen.

Investor: What was the reason to do the deal now?

Schiller: When you look at the rationale, we’ll see $80 million of synergies over the first two years, $50 million in year one. The assets sit right on top of one another. The technology transfer will be good with the two sets of professionals already in place: they were a little more geoscience-heavy than we were and we’re more an engineering shop, so those two cultures will end up enhancing the two sets of properties. We’re retaining about 75% of their people, and all but a couple of their engineers and geologists are coming with us. Of what we’ll call their top 10 executives, the four we wanted most are coming on board with us. With this new team, we’ll see lots of production gains across the board.

Investor: Investors are so obsessed with the shales onshore that you weren’t getting much attention from Wall Street before this deal, and some analysts were questioning your growth profile.

Schiller: We have built this company around going after big mature oil fields that have a lot of oil remaining. Our top 10 fields have produced about 2.7 billion boe but they’ll make a lot more; there’s maybe another 2.7 to 3 billion sitting in the ground. If you can up the recovery 5%, that’s the difference in making good returns for your shareholders. You’ve never had one public independent control this much oil under the ground before in the shelf area. We don’t need to explore; we’ll optimize these assets and use technology to enchance recovery.

Investor: Isn’t there a lot of water production associated with the oil?

Schiller: That’s not a problem for us, as we can handle it efficiently; we dispose of it in saltwater disposal wells and the rest we treat before it goes back overboard. It used to be that we ran from water, because it was a dollar a barrel to handle it and you were only making $20, but now at $100 a barrel, it’s not a big issue for us. Over time you’ll see us grow the size of our facilities, but that’s really the only expense to be able to move more oil.

Investor: Speaking of expenses, you recently upsized a debt offering to $650 million.

Schiller: You step back and look at the big picture--you get 10-year paper at 6% and 7/8ths% and we had huge demand, $2.2 billion of demand. We are hard-pressed to find capital cheaper than that. The prevailing attitude of our board is that when you need money you can’t get it and when you don’t need it, that’s when you can get it, so you always take all you can get when the timing is right. We were going to have $550 million of liquidity on our revolver after we closed the transaction, but this puts us into position to have more money available than we’ve ever had, so we can grow outside of cash flow. We think we’re going to grow pretty well by living within cash flow, but if something else comes up and we want to get aggressive with it, we have money to get through that period.

Investor: So what is the new capex plan?

Schiller: The two companies were going to spend about $1.2 billion before, but we’ll be closer to $800 to $900 million going forward this year. We are focused on solid development wells in the next couple of years to increase cash flow and we’ll let the exploration sit for a while--most of it is held by production anyway, so it’s not going anywhere.

We’ll have nine operated rigs through calendar year-end, but our new budget starts July 1. We’ll be paying for 13 rigs including having a piece of the nonoperated ones; that’s the total from both companies. Towards the end of July we will say more about where we are operationally and where we’re going, and we’ll issue new guidance at that time.

Investor: What’s the new scope and size of your assets?

Schiller: We have six-plus years of ready-to-drill locations in inventory and about a hundred of those are going to be horizontal. Pro forma, we have 258 blocks and 780,000 net acres, and about 140 proved projects and 57 probables. There’s a geographic concentration too, so we should have cost synergies.

Investor: The properties that overlap are an obvious thing, but what about the ones that don’t? What was the real prize you saw in EPL?

Schiller: Big oil fields are what we’ve been all about. East Bay, South Pass 78, South Timbalier 26, Ship Shoal … these are all big fields formerly operated by Shell, Chevron and Exxon. Big oil fields are what we’re interested in. That’s the primary attraction. But 80%-plus of the value is in the same areas where we al- ready operate offshore Louisiana, and close to the Mississippi River.

This deal increases our production just shy of 45% or so.

Processing of the wide-azimuth seismic data is starting to come to us but we won’t have all of it until the end of the year, from our JV with Apache. We’re working on the salt plays. These are the same plays you’ve seen work in deepwater, but by taking new seismic tools and looking underneath the overhangs of the salt domes on the shelf. We are drilling the fourth well, and it’s actually the first to be horizontal, at West Delta 30 now. The first two are on production. The salt-sediment interface was further updip than anyone thought it would be five years ago. These are very shallow sands, 2,800 feet. What we say about West Delta is that it has produced 550 million barrels of oil but it really hasn’t had any drilling done on it in the last 10 years. You look at the top 10 oil fields in the Gulf of Mexico in terms of average water produced per completion and we’re the lowest there is. We think there’s a lot of oil to be produced … and horizontals will help with that.

Investor: Stacked pays aren’t found only in the Permian!

Schiller: There’s a whole lot more here; at West Delta 30 we have productive sands from 2,400 feet to 18,000 feet.

Investor: Talk a bit about the Energy XXI culture you’ve built.

Schiller: For the last two years we have been ranked as one of the Top Workplaces by the Houston Chronicle. Initially we were ranked as the #1 small company, and last year we were the third-best midsized company. I think it’s a combination of good projects to work on, giving people a lot of authority, how you recognize people’s successes--and communication. We have quarterly lunches for all employees where we talk about what’s going on, the goals for the year and where we stand on them, and we do a Q&A session. I do birthday lunches every other month or so for a smaller group. You get a sense of what’s on people minds … we strive to keep everybody involved.

We’ll have close to 500 people post-merger, about 300 in Houston.

Offshore