Houston's Energy XXI Ltd., one of the biggest shallow water operators in the Gulf of Mexico (GOM), is selling an oil pipeline system that serves seven fields as it works to ensure its financial viability.
The Grand Isle Gathering System (GIGS) being sold to CorEnergy Infrastructure Trust Inc. moves oil and water from six Energy XXI fields and one field operated by ExxonMobil Corp. Four of the fields are among the top 15 largest on the Outer Continental Shelf (OCS).
CorEnergy, a real estate investment trust (REIT), agreed to pay $257.5 million total for the system, which includes onshore infrastructure, in a deal set to close within a week.
Energy XXI still would operate the 153-mile pipeline system and Grand Isle terminal. It also would earn revenue by transporting oil for other producers.
"The monetization of the GIGS pipeline assets is another important step in executing the strategy we communicated to our investors," CEO John Schiller said. "Continuing to maintain operatorship...is important to us, ensuring transportation of a significant portion of our production."
The GIGS system currently transports 18,000 b/d of oil and 42,000 b/d of water, with total capacity of 120,000 b/d. In fiscal 2014, GIGS volumes represented about 42% of Energy XXI's oil production and $486 million of revenue. The system was deregulated by the Federal Energy Regulatory Commission on Feb. 1. The 16-acre terminal includes four storage tanks, a saltwater disposal facility with three injection wells, and associated pipelines, land, buildings and facilities.
"The GIGS provides essential infrastructure to move oil and water from offshore fields onto land, and will enlarge and diversify the company's portfolio of REIT-qualifying energy infrastructure assets," said CorEnergy CEO David Schulte. "The long-lived system, including the onshore facilities, will further diversify our growing infrastructure portfolio."
For Energy XXI, the transaction is considered essential to boosting its liquidity, and with the sale it would total around $1 billion. The company had slowly been building its offshore portfolio, taking stakes in several prized -- and costly -- natural gas and oilfields in the shallow and deepwater (see Daily GPI, Nov. 29, 2010; Jan. 10, 2010). Since last summer, however, the company has been under increasing financial stress.
Early last year, Energy XXI took a gamble and nearly doubled its debt load to $4.3 billion after buying EPL Oil & Gas Inc. (see Daily GPI, March 12, 2014). Before the merger, it held more than 400,000 acres in the GOM, and with EPL, it added close to 275,000 more acres. The friendly merger was completed before oil prices began to crash. The day the EPL merger was announced, Energy XXI was trading above $21.00/share. On Tuesday morning its share price was around $3.13.
Meanwhile, Energy XXI also has reached an accord with the Bureau of Ocean Energy Management (BOEM) to double its insurance for potential offshore liabilities associated with decommissioning facilities, plugging and abandoning wells. Earlier this year BOEM requested that Energy XXI increase its supplemental bonding to ensure liabilities would be covered if the company were to go out of business. Energy XXI provided another $150 million in supplemental bonding, bringing its total to $319 million at an annual premium of $4.8 million. About $10 million in collateral also is posted. In addition, it maintains $226 million in letters of credit to third parties on additional U.S. offshore assets.
BOEM agreed to wait until Nov. 15 to require additional financial assurances on existing Energy XXI and subsidiaries. Management said it would continue to "engage in constructive discussions" with BOEM and the Department of Interior's Bureau of Safety and Environmental Enforcement regarding decommissioning and financial assurance issues.
BOEM last summer issued an advanced notice of proposed rulemaking (ANPR) to update offshore regulations regarding decommissioning facilities. The ANPR seeks to protect U.S. interests from financial loss when a leaseholder or operator cannot perform required decommissioning, or pay rents or royalties.