S&P Lowers Outlook on Energy XXI (Bermuda) Limited (EXXI) to Negative

Standard & Poor's Ratings Services said it revised its rating outlook on Energy XXI (Bermuda) Limited (Nasdaq: EXXI) and recently acquired EPL Oil & Gas Inc. to negative from stable. At the same time, we affirmed our 'B+' corporate credit ratings on the companies.

We affirmed our 'B' issue ratings on subsidiaries Energy XXI Gulf Coast Inc.'s and EPL's existing senior unsecured debt. The recovery ratings on these debt issues remain '5', indicating our expectation for modest (10% to 30%) recovery in the event of a payment default.

We also affirmed our 'B-' issue-level rating on Energy XXI (Bermuda) Ltd.'s convertible debt. The recovery rating remains '6', indicating our expectation for negligible (0%-10%) recovery in the event of a payment default.

"The negative outlook reflects higher capital spending and weaker production output in fiscal 2015 than expected, which we expect will result in weaker credit measures over the next year," said Standard & Poor's credit analyst Mark Salierno. "With recent performance issues and the debt-financed acquisition of EPL, credit measures have weakened, and under our revised forecast, we believe debt reduction will be limited during this time."

Capital spending will be about $100 million higher than we previously expected in fiscal 2015, resulting in slightly negative cash flow. We now estimate the company's FFO to debt will be between 15% and 20% and that debt to EBITDA will be in the 4x area by the end of fiscal 2015.

We could lower the ratings if the company continues to encounter additional operating disruptions in the Gulf of Mexico that further hinder production and lead to higher capital spending needs or if crude oil prices drop meaningfully. We believe any of the above scenarios could suppress cash flow and make debt reduction more difficult, potentially causing the company to burn cash and overall liquidity to weaken. We would also consider a lower rating if the company fails to proactively address its covenant issues to allow for covenant cushion, which would restrict the company's ability to borrow under its revolving credit facility.

We could revise the outlook to stable if the company is able to successfully address its operating issues over the next year and if the commodity price environment remains favorable, putting the company on the path toward generating positive free cash flow that can be applied to debt reduction, enabling the company to restore key credit measures and maintain adequate liquidity. This includes total debt to EBITDA below 4x and FFO to total debt approaching 20% or more on a sustained basis.

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