Over the last year, Energy XXI has been a dramatic underperformer. Production levels were missed. It drilled a couple of bad wells and oil prices subsided from their peaks of a year or two ago. On the other hand, gas prices have doubled over the last year which helps a little. Little income is derived from gas compared to the huge contribution to cash flow and earnings EXXI derives from being an “oily” company.

Management is now hopeful that it is back on the upswing. After hitting an all time high just under $40 in February of 2012, the stock sank as low as $21.49 in April 2013. On May 6th, the Board voted to substantially raise the dividend on common shares to $0.12 per quarter, providing close to a 2% yield on the common, with the hope that the yield would reduce volatility in the stock. In March, it had previously announced a $250 million share buyback. As of a May 22, 2013 filing, the company has repurchased 1.1 million shares at an average price of about $25. This followed flirting with another billion dollar acquisition that management decided was not as good an investment as its own stock.

In recent weeks, several brokerage firms have either raised or lowered their price targets on the stock. The range is now from $25 at which the stock is now selling to a high of $38. If the upper end of that range proves accurate, the stock offers potential for a 50% move to the upside.

This young company has only been public a few years and has been following a plan of raising money and then spending it to acquire primarily oil producing properties in old fields in the Gulf of Mexico. It’s real game changer was its purchase of some old Exxon Mobil XOM -0.28% fields two years ago for $ 1 billion. Older fields that aren’t really important to a major like Exxon are company makers for a small E&P company and so that transaction has proved to be for EXXI. The price was negotiated with oil at $80 per barrel and the price rose quickly to $110 and higher. That enabled EXXI to take the leverage down fairly rapidly from 68% to 40% and repay most of the debt taken on in the XOM deal that doesn’t have call protection.

In March 2013, EXXI announced a new 25% joint venture with Apache APA +2.38% to explore under the salt weld in the Gulf of Mexico. Decades ago, it was common belief that the salt was a barrier to anything being found below it so drilling more or less stopped when the salt was hit. Now the partners are developing new horizontal azimuth seismic data base to develop new targets in the depths under the salt domes, now a proven play. EXXI also bought some ancillary fields from its long time partner McMoRan. That, too, was a case of developing properties which often pay back in as few as 8-10 weeks on the initial investment and are a big deal to a small company as important add on’s to its other activities. There is also another recent Joint Venture with Exxon in which EXXI is obligated to drill at its own expense (about $40 million per well) two new wells, Merlin and Pendragon. Thereafter, if that partnership proceeds, future wells will be drilled on a 50/50 joint expenditure basis. EXXI is the operator on those wells.

Over the last year, the company suffered some growing pains. It has now reshuffled top management responsibilities and expanded the top team. Most of the officers of EXXI have worked together one place or another in the past. CEO John Schiller has been excellent at reaching out for top people he knows well from the past and supplementing and reinforcing his team as Energy XXI grows. That is especially true as EXXI has moved aggressively in the last 18 months toward horizontal drilling in previously exploited areas. After a couple of failed well efforts and efforts to refine its horizontal techniques, it is now starting to hit its groove. In some cases, the company is looking for new targets in fields in between known pods of hydrocarbons. Tweener is a new target found in this way.

Another very valuable asset is EXXI’s portfolio is its investment in the McMoRan led Shallow Water Ultra Deep (SWUD) play in the Gulf of Mexico. To this point, none of the several large scale discoveries by the partners has been brought onto production. Efforts to complete Davy Jones #2 are likely to be undertaken in the summer months. Decisions on the future for Davy Jones #1 are still ongoing. It is possible that if McMoRan brings in a new partner for the development and exploitation of its many discoveries, that a new partner will want to buy some shares in the venture. In that case, EXXI might be asked to ”monetize” some small portion of its exposure to the SWUD. The good news is that natural gas is now selling above $4 per MMcf now vs half that a year ago.

Joan E. Lappin CFA Gramercy Capital Mgt. Corp.