Energy XXI to Acquire GOM Assets from ExxonMobil

Energy XXI (EXXI) provided an operations update and announced an asset purchase and exploration joint venture.

At West Delta 73 (WI 100%/ NRI 83%) the company's first horizontal well, Big Sky 2, was drilled to 8,000 feet true vertical depth (TVD)/10,765 feet measured depth (MD), including a 1,000 foot lateral in the F-30 oil sand. The well was placed on production at 3,000 barrels of oil per day (boepd) gross. Based on the historical results of nine horizontal wells drilled in this field in the late 1990s, the estimated ultimate recovery from Big Sky 2 should exceed 1 million barrels of oil. Weimer, the company's second horizontal well at West Delta, is currently drilling at a depth of 8,234 feet TVD/9,320 feet MD and is targeting the F-45 oil sand. Weimer will be drilled to 8,300 feet TVD/10,200 feet MD with production online during October.

"Our first horizontal well, Big Sky 2, had the highest oil rate ever produced in the West Delta 73 field since its discovery in 1962," Energy XXI Executive Vice President Ben Marchive said. "Continued success with the horizontal program can be transformational for Energy XXI, increasing ultimate recovery per well and continuing to improve the already attractive economics of our drilling program."

In the Main Pass complex, the company successfully drilled the Don Tomas well (WI 100%/ NRI 78%) targeting the BA-4AA sand. Don Tomas was drilled to 8,292 feet TVD/ 8,550 feet MD, encountering 195 net feet of pay within the targeted BA-4AA sand, and placed on production in mid-August at 4,500 (boepd) gross. Additional development wells are scheduled at Main Pass, with as many as five additional wells in the program this fiscal year.

At Grand Isle 16 (WI 100%/ NRI 87%), the Pi development well was drilled to 9,572 feet TVD/ 11,482 feet MD and is currently producing 1,200 boepd. Pay was seen in the primary targets, C1 through C-7 sands, and additional pay was seen in the BF-1 through B-4 sands. The company currently is drilling Cake, a horizontal development well targeting the BF-2 sand updip of a past producer. The well is drilling at 6,898 feet TVD/7,808 feet MD.

Purchase and Exploration Joint Venture

The company has executed a purchase and sale agreement to acquire certain shallow-water Gulf of Mexico interests from Exxon Mobil Corporation. The agreement covers 5,000 gross acres on Vermilion Block 164, currently producing approximately 1,100 boepd net. The asset has produced approximately 44 million barrels of oil equivalent since its discovery in 1957.

Energy XXI and ExxonMobil also have entered into a joint venture agreement to explore for oil and gas on nine contiguous blocks adjacent to Vermilion Block 164 in shallow waters on the Gulf of Mexico shelf. Energy XXI will operate the joint venture, and drilling of the initial prospect, called Pendragon, is expected to commence by the end of the year. The company's total capital commitment is estimated at $75 million, assuming successful completions of two earning wells. Energy XXI plans to adjust its drilling schedule, postponing two large natural gas exploration prospects, Golden Bear and Wombat, to drill the two oil-focused joint venture wells.

"This joint venture provides Energy XXI the opportunity to drill best-in-class exploration projects with a world-class partner," Energy XXI Chairman and CEO John Schiller said. "Acquiring existing production in an oil producing reservoir, along with the additional opportunities identified by our teams, makes this agreement even more significant."

Production Update

Production for the fiscal first quarter was impacted by downtime associated with Hurricane Isaac, as well as pipeline repairs. While the company sustained no significant physical storm damage, production was shut-in for an extended period. Combined with repairs to operated and third-party pipelines, these shut-ins are expected to result in production of approximately 37,000 boepd for the current quarter, with more than 70 percent being liquids. Current production is averaging 45,000 boepd, 71 percent oil, with current capacity of 50,000 boepd.

"Even with the storm and pipeline outages during the fiscal first quarter, and the deferral of two high-rate gas wells to accommodate the joint venture oil exploration, we still expect to grow the average annual production rate this year more than 25 percent while generating significant free cash flow," Schiller said. "Notably, the oil portion of our production could grow by more than 30 percent, with the potential for upward production and reserves additions in the future if we are successful with our high-impact exploration."

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