Moody's Cuts Senior Unsecured Ratings of Energy XXI (EXXI) to 'Caa3'

Moody's Investors Service assigned a B2 rating to Energy XXI Gulf Coast, Inc.'s (Nasdaq: EXXI) (EXXI) proposed offering of $1.25 billion senior secured second lien notes due 2020. Moody's downgraded EXXI's Corporate Family Rating (CFR) to Caa2 from Caa1 and the Probability of Default Rating to Caa2-PD from Caa1-PD. Moody's also downgraded the senior unsecured note ratings of EXXI and its wholly-owned subsidiary EPL Oil & Gas, Inc. (EPL) to Caa3 from Caa2. Moody's raised EXXI's Speculative Grade Liquidity Rating to SGL-3 from SGL-4 reflecting the company's increased liquidity over the next 12 months pro forma for the proposed second lien notes offering. The ratings outlook was changed to stable from negative.

The proceeds from the proposed second lien notes offering will be used to repay drawings under EXXI's existing borrowing base credit facility, including providing an intercompany loan to EPL to pay down a portion of the EPL tranche of the facility, and for general corporate purposes. EXXI's assigned ratings are contingent upon successfully raising approximately $1,250 million of second lien note proceeds and execution of the proposed amendments to the existing revolver. Our ratings are subject to review of all final documentation.

"This offering eases EXXI's liquidity concerns at a time when commodity prices are low, and the proposed revolver amendments provide covenant relief" said Amol Joshi, Moody's Vice President. "However, the additional secured debt further subordinates its unsecured debt, and exacerbates the already high leverage and interest expense burden. While the company continues to pursue asset sales to stabilize its liquidity further, the company's balance sheet remains highly-levered, and reduced capital spending could impact its production and EBITDA."

Assignments:

Issuer: Energy XXI Gulf Coast, Inc.

. US$1,250M Senior Secured Second Lien Notes, Assigned B2 (LGD2)

Rating Actions:

Energy XXI Gulf Coast Inc.

. Corporate Family Rating, Downgraded to Caa2 from Caa1

. Probability of Default Rating, Downgraded to Caa2-PD from Caa1-PD

. Speculative Grade Liquidity Rating, Raised to SGL-3 from SGL-4

. $750 million 9.25% sr unsecured notes due 2017 to Caa3 (LGD4) from Caa2 (LGD4)

. $250 million 7.75% sr unsecured notes due 2019 to Caa3 (LGD4) from Caa2 (LGD4)

. $500 million 7.5% sr unsecured notes due 2021 to Caa3 (LGD4) from Caa2 (LGD4)

. $650 million 6.875% sr unsecured notes due 2024 to Caa3 (LGD4) from Caa2 (LGD4)

EPL Oil & Gas, Inc.

. $210 million 8.25% sr unsecured notes due 2018 to Caa3 (LGD4) from Caa2 (LGD4)

. $300 million 8.25% sr unsecured notes due 2018 to Caa3 (LGD4) from Caa2 (LGD4)

Outlook Actions:

Energy XXI Gulf Coast Inc.

....Outlook changed to Stable from Negative

EPL Oil & Gas, Inc.

....Outlook changed to Stable from Negative

RATINGS RATIONALE

EXXI's Caa2 CFR reflects growing risk for the company's business profile because of high leverage and limited financial flexibility. Moody's expects debt to average daily production to approach $80,000 per barrel of oil equivalent (boe) and debt to proved developed (PD) reserves to exceed $30 per boe over the next 12 months. EXXI's rating also reflects the elevated risk that EXXI will not have the ability to grow out of its weak leverage metrics as reduced capital expenditures impact its production and EBITDA, while its high interest expense limits cash flow.

EXXI's SGL-3 Speculative Grade Liquidity Rating reflects its adequate liquidity profile over the next 12 months. Pro forma for the second lien notes issuance, EXXI has approximately $500 million in cash and $124 million available under its proposed amended $500 million borrowing base revolving credit facility. The credit facility matures in April 2018. We expect the company to remain in compliance with its amended covenants under the amended credit facility through calendar 2015. As EXXI continues to outspend its cash flow, EXXI's liquidity will shrink through 2016. However, EXXI is pursuing the sale of its offshore midstream assets and some non-core exploration & production assets, which if successful will enhance liquidity.

EXXI's and EPL's notes are rated Caa3, which is one notch below EXXI's Caa2 CFR. This notching reflects the priority claim given to the senior secured credit facility and proposed second lien notes. The proposed second lien notes are rated three notches above the company's CFR reflecting its priority claim over EXXI's unsecured notes.

The stable rating outlook reflects the company's sizeable cash balance post closing of the proposed second lien notes issuance.

A downgrade is possible if liquidity falls below $200 million or if debt to average daily production is sustained over $80,000 per boe. An upgrade will not be considered until debt to average daily production is sustained below $60,000 per boe, debt to PD reserves is sustained below $24 per boe and the company continues to maintain adequate liquidity.

The principal methodology used in these ratings was Global Independent Exporation and Production Industry published in December 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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