Don't Give Up on Energy XXI, Just Wait for That Turnaround

Tickers in this article: BP CVX EPL EXXI RDS.A XOM

NEW YORK (TheStreet) -- Shares of Energy XXI , commonly known as EXXI, have fallen by nearly 40% this year, currently trading at $16.50. But that is no reason to sell this stock, even with the company suffering a lack of revenue growth over the last two years.

Why? Because EXXI, a small energy company focused on producing oil from the shallower waters of the U.S. Gulf of Mexico Shelf, has forecast a revival in its latest quarterly results on the back of the $2.3 billion acquisition of its peer EPL Oil & Gas . After completion of the acquisition in June, EXXI became the biggest publicly traded independent operator at the Gulf of Mexico Shelf.

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That means EXXI could also become a takeover target of a bigger oil company looking to expand its position in the Gulf of Mexico. There are several oil majors operating in this area including Exxon Mobil , Chevron , Royal Dutch Shell and BP . While most of the majors are largely focused on exploiting the deepwater areas, with advancements in exploration and production technologies, such as higher quality seismic analysis and horizontal drilling, the big boys of the industry might consider revisiting the shallower waters.

It is worth mentioning that EXXI is essentially an execution story. The company's future depends heavily on its ability to successfully integrate the EPL acquisition. Failure to do so will jeopardize its turnaround plans.

That said, EXXI's growth strategy has always been based on buying and exploiting assets from other oil companies. Since its birth in 2005, EXXI has acquired and integrated a number of properties from several energy companies.

Before EPL, about four years ago, EXXI purchased shallow water assets from Exxon Mobil for $1 billion. In an email to TheStreet, Senior Vice President Stewart Lawrence said that with the exception of some minor setbacks, overall, the "Exxon integration was seamless."

On Aug. 13, the company released its annual results for the fiscal year 2014 showing a lack of any meaningful increase in crude oil production over the last two years. This was largely because EXXI did not undertake any big acquisitions in this period.

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For the full year, EXXI produced around 30,100 barrels of oil per day, slightly higher from 2013 but largely unchanged from 2012. The company's revenue follow a similar trend. Meanwhile, its operating income has gradually dropped from $483 million two years ago to $280 million last year amid increasing operating expenses and derivative activity.