Energy XXI ($EXXI) Risk Factors Disclosed in New 10-K
Some highlights from the Risk Factors section of 10-K:
*We may not be able to generate sufficient cash flows to service all of our indebtedness and may be forced to take other actions in order to satisfy our obligations under our indebtedness, which may not be successful. As of June 30, 2015, we had total indebtedness of $4,608 million and, as of September 22, 2015, we had total indebtedness of $4,185 million as a result of certain debt repurchases by the Company subsequent to June 30, 2015. Based on our current debt balance, we expect to have substantial interest payments due during fiscal year 2016, totaling $367.0 million. In addition, the majority of our outstanding indebtedness will mature within the next ten years, with a substantial portion coming due in the next five years.
*We and our subsidiaries have been asked by the BOEM to obtain bonds or other surety in order to maintain compliance with BOEM regulations, which may be costly and could potentially reduce borrowings available under our revolving credit facility. To cover the various obligations of lessees on the OCS, such as the cost to plug and abandon wells and decommission and remove platforms and pipelines at the end of production, the BOEM generally requires that lessees post substantial bonds or other acceptable assurances that such obligations will be met, unless the BOEM exempts the lessee from such financial assurance requirements. As a result of the bankruptcy of another Gulf of Mexico operator, the BOEM indicated that it may review the estimated cost of future plugging, abandonment, decommissioning and removal obligations of other OCS operators, may evaluate any waivers or exemptions for such financial assurance obligations, and may increase the amount of financial assurance required with respect to these obligations. In April 2015, we received letters from the BOEM stating that certain of our subsidiaries no longer qualify for waiver of certain supplemental bonding requirements for potential offshore decommissioning, plugging and abandonment liabilities. The letters notified us that certain of our subsidiaries must provide approximately $1.0 billion in supplemental financial assurance and/or bonding for their offshore oil and gas leases, rights-of-way, and rights-of-use and easements. In June 2015, we reached agreements with the BOEM pursuant to which we provided $150 million of supplemental bonds issued to the BOEM, and the BOEM agreed to withdraw its orders with regard to supplemental bonding and postpone until November 15, 2015 the issuance of further requirements of us related to these supplemental bonding obligations. On June 30, 2015, we sold the East Bay field and the $1.0 billion of requested supplemental bonding was reduced by approximately $178 million.
*In addition, the Board has recently learned that, in 2007, 2009 and 2014, the Company’s Chief Executive Officer borrowed funds from personal acquaintances or their affiliates, certain of whom provided the Company with services. The Board also learned that Norman Louie, one of our directors, made a personal loan to Mr. Schiller in 2014 before Mr. Louie became a director of the Company. At the time the loan was made, Mr. Louie was a managing director at Mount Kellett Capital Management LP, which at the time, and as of June 30, 2015, owned a majority interest in Energy XXI M21K and 6.3% of the Company’s common stock. The loans made in 2014 are still outstanding. Since Mr. Schiller did not disclose the personal loans before they were made, the Board has determined that he did not comply with the procedural requirements of the Company’s Code of Business Conduct and Ethics. Upon learning of Mr. Schiller’s personal loans from affiliates of service providers, the Board engaged independent legal counsel to conduct an internal investigation, with the assistance of outside forensic accountants, to review these loans and the Company’s vendor procurement processes. The Board is still reviewing the results of the internal investigation. Although the internal investigation has not uncovered any illegal activity or any impact on the Company’s financial reporting or financial statements, the Company concluded this non-compliance to be a material weakness in its control environment given the leadership position of this officer, the visibility and importance of his actions to the Company’s overall system of controls and the significance with which the Company views this nondisclosure. As part of its review, the Board has begun the process of designing and implementing additional controls and procedures, including, but not limited to, strengthening the Company’s vendor procurement procedures to address any potential conflicts of interest that could arise from Mr. Schiller’s personal loans; revising the Code of Business Conduct and Ethics to explicitly ban any such personal loans in the future; and implementing an enhanced comprehensive training program on the Company’s Code of Business Conduct and Ethics.
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