EXXI trade analysis
I like the EXXI position for the arb book. EXXI convertible preferred was offered at 303.24 vs. 28.32 on March 22.
We currently own 6,700 pref shares (1.67m in bond terms) on a 64 stock only delta and short 152 June 29 strike calls for an effective delta of 74. Using assumptions of 750 credit and 30 vol., I get theo delta of 72.
I would like to increase the position to 20,000 pref shares (5m in bond terms) and move to a 62 stock delta and 72 effective delta. Below I adjusted numbers into bonds points to make it easier to analyze.
| using 750 credit and 30 vol | pref terms | 100% par |
| Convert price |
303.24 |
121.3 |
| stock price |
28.32 |
28.32 |
| current yield |
4.64% |
4.64% |
| conversion premium |
8.62% |
8.62% |
| points premium |
24.07 |
9.63 |
| delta |
72 |
72 |
| Coupon (points per year) |
14.063 |
5.625 |
| CF to soft call (12/15/13) |
10.547 |
4.2 |
| nuke on 62 to call trigger ($32.969) |
331.654 |
132.66 |
| points at call trigger |
6.65 |
2.66 |
Cash flows from the coupon (3 more quarterly payouts) to the soft call date is 4.2 points. If EXXI stock moves up to the call trigger ($32.969), on a 62 delta, the converts would nuke to 2.66 points for a positive 1.5 points gain. (My reading of the prospectus is that holders will get the last coupon on a soft call)
Shorting the June 29 strike calls at 1.3 would give us additional income if they expire worthless. If they get into the money, then the EXXI prefs should move up as there would still be 6 months to the soft call date.
To the downside, the converts should hold up due to the high yield. At $19.6 on 62 delta, the converts cross par at 5.6% current yield up 30% premium. These converts should hold well to the downside.
This is a position where we should let the stock run before re-hedging delta.
The converts are dividend protected from zero. The common stock pays a 7c quarterly dividend.
Credit Analysis
The key to this trade is being positive on the credit of EXXI.
EXXI is a Houston based independent oil and natural gas exploration and production company with operations focused in the US Gulf and Gulf of Mexico. The company is the third largest oil producer in the Gulf of Mexico Shelf with interests in six of the eleven largest oil fields in the GOM shelf. About 70% of revenues is from oil.
In recent quarters, EXXI has guided production down several times, which has caused weakness in the stock. The latest guide down came on 3/20/13, when the company lowered March Q volumes to 44 mboed from 47 mboed due to continued infrastructure downtime and lower than expected production from recent wells.
However, analysts value EXXI’s proved reserves at about $30 per share (using $95 oil and $4 gas) and an additional $5 for exploration upside. The company has low leverage at 1.2x debt/ltm ebitda. I think the stock is close to a bottom and the credit will hold up sell barring an oil price collapse.
Cash = $41m
Revolver ($925m undrawn)
Debt = 1B (9.25% bonds due 2017 $750m, 7.75% bonds due 2019 $250m, rated B+)
LTM EBITDA = $820m
Debt/EBITDA = 1.2x
Expected 2013 capex = $800m
Market cap = $2.2B
The 2017 bonds trade at 350 credit spread and the 2019 bonds trade at 500 credit spread.