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Energy XXI (EXXI) Gears Up for Q1: Will it Beat on Earnings?

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Domestic oil and gas explorer Energy XXI (Bermuda) Ltd. is set to release its first-quarter fiscal 2015 results after the closing bell on Wednesday, Nov 5.

In the preceding three-month period, Energy XXI – which bought oil-weighted Gulf of Mexico (GoM) shallow water properties from Exxon Mobil Corp. (XOM - Free Report) in 2010 – delivered a 0.00% earnings surprise, as effects of higher oil production were offset by increase in lease operating expenses. Let’s see how things are shaping up for this announcement.

Factors to Consider This Quarter

Energy XXI’s recent acquisition of EPL Oil & Gas Inc. for about $2.3 billion has allowed the GoM pure play to widen its presence in the central shallow water region, thereby lowering capital costs and improving operating efficiencies. In particular, as access to new energy resources in the GoM becomes more difficult, Energy XXI, like most of its peers, has been facing headwinds to replace its reserve base and grow production. The EPL buy will help Energy XXI to overcome this problem.

However, with liquids contributing most of Energy XXI’s total production, the crude price tumble over the last three months is expected to drag down results for the company.

The company’s high operating leverage and costs have made matters worse.

Earnings Whispers?

Our proven model does not conclusively show that Energy XXI is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP (Expected Surprise Prediction) and a Zacks Rank of #1, 2 or 3 for this to happen. Unfortunately, this is not the case here as elaborated below.

Zacks ESP: Energy XXI’s earnings ESP is 0.00%, as the Most Accurate estimate and the Zacks Consensus Estimate both stand at 7 cents.

Zacks Rank #3 (Hold): Energy XXI carries a Zacks Rank #3. Though a favorable Zacks Rank increases the predictive power of ESP, the company’s ESP of 0.00% makes surprise prediction difficult.

We caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Stocks to Consider

While earnings beat looks uncertain for Energy XII, here are some firms you may want to consider on the basis of our model, which shows that they have the right combination of elements to post an earnings beat this quarter:

Murphy USA Inc. (MUSA - Free Report) has an Earnings ESP of +20.51% and holds a Zacks Rank #1 (Strong Buy).

Energy Transfer Equity L.P. has an Earnings ESP of +50.00% and holds a Zacks Rank #3.




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