UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)
x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2014
or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-16179

 

EPL Oil & Gas, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware		72-1409562
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1021 Main Street, Suite 2626, Houston, Texas		77002
(Address of principal executive offices)		(Zip Code)

(713) 351-3000

Registrant’s telephone number, including area code

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o
Non-accelerated filer x (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No x

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.Yes x No o

There is no market for the common stock of EPL Oil & Gas, Inc.

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		Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of December 31, 2014 (Unaudited) and June 30, 2014			1
Condensed Consolidated Statements of Operations (Unaudited) for the three and six months ended December 31, 2014 and 2013			2
Condensed Consolidated Statements of Comprehensive Loss (Unaudited) for the three and six months ended December 31, 2014			3
Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended December 31, 2014 and 2013			4
Notes to Condensed Consolidated Financial Statements (Unaudited)			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3. Quantitative and Qualitative Disclosures about Market Risk			38
Item 4. Controls and Procedures			39
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			41
Item 1A. Risk Factors			41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			43
Item 3. Defaults Upon Senior Securities			43
Item 4. Mine Safety Disclosures			43
Item 5. Other Information			43
Item 6. Exhibits			43

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements and information in this Quarterly Report may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The words “believe,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could” or other similar expressions are intended to identify forward-looking statements, which are generally not historical in nature. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to those summarized below:

For additional information regarding known material factors that could cause our actual results to differ from our projected results, please see Part I, “Item 1A. Risk Factors” in our Transition Report on Form 10-K for the period ended June 30, 2014 (the “2014 Transition Report”) and Part II, “Item 1A. Risk Factors” in this Quarterly Report.

Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.

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PART I — FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS.

EPL OIL & GAS, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

		December 31, 2014				June 30, 2014
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	484			$	5,601
Trade accounts receivable – net			68,917				72,301
Derivative financial instruments			2,004				—
Deferred tax asset			15,748				24,587
Prepaid expenses			10,060				26,521
Total current assets			97,213				129,010
Property and equipment, under the full cost method of accounting, including $498.7 million and $908.5 million of unevaluated properties not being amortized at December 31, 2014 and June 30, 2014, respectively			2,554,922				3,205,187
Goodwill			—				329,293
Restricted cash			6,024				6,023
Other assets			16				317
Total assets		$	2,658,175			$	3,669,830
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable		$	25,326			$	92,981
Due to EGC			138,057				4,960
Accrued liabilities			133,026				161,518
Asset retirement obligations			39,831				39,831
Derivative financial instruments			—				26,440
Total current liabilities			336,240				325,730
Long-term debt			1,020,462				1,025,566
Asset retirement obligations			218,317				232,864
Deferred tax liabilities			240,049				483,798
Derivative financial instruments			—				2,140
Other			6				6
Total liabilities			1,815,074				2,070,104
Commitments and contingencies (Note 12)
Stockholder's equity:
Preferred stock, par value $0.001 per share. Authorized 1,000,000 shares; no shares issued and outstanding at December 31, 2014 and June 30, 2014			—				—
Common stock, par value $0.001 per share. Authorized 75,000,000 shares; 1,000 shares issued and outstanding at December 31, 2014 and June 30, 2014			—				—
Additional paid-in capital			1,599,341				1,599,341
Accumulated other comprehensive income (loss)			5,972				(6,252	)
Retained earnings (loss)			(762,212	)			6,637
Total stockholder's equity			843,101				1,599,726
Total liabilities and stockholder's equity		$	2,658,175			$	3,669,830

 
 
See accompanying notes to condensed consolidated financial statements.

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share data)

		SUCCESSOR COMPANY								PREDECESSOR COMPANY
		Three Months Ended December 31, 2014				Six Months Ended December 31, 2014				Three Months Ended December 31, 2013				Six Months Ended December 31, 2013
Revenue:
Oil and natural gas		$	156,070			$	329,790			$	141,645			$	324,759
Other			543				932				965				1,843
Total revenue			156,613				330,722				142,610				326,602
Costs and expenses:
Lease operating			55,304				111,604				39,178				81,469
Transportation			1,149				1,774				1,251				2,225
Exploration expenditures and dry hole costs			—				—				12,946				18,092
Impairment of oil and natural gas properties			682,868				682,868				754				766
Goodwill impairment			—				329,293				—				—
Depreciation, depletion and amortization			88,547				162,292				46,512				100,501
Accretion of liability for asset retirement obligations			6,098				12,279				9,835				16,101
General and administrative			6,810				14,852				7,210				13,636
Taxes, other than on earnings			1,944				4,472				2,606				5,891
Gain on sales of assets			—				—				(80	)			(1,825	)
Other			—				21				1,865				28,399
Total costs and expenses			842,720				1,319,455				122,077				265,255
Income (loss) from operations			(686,107	)			(988,733	)			20,533				61,347
Other income (expense):
Interest income			4				4				8				72
Interest expense			(10,947	)			(21,848	)			(12,998	)			(26,175	)
Loss on derivative instruments			(26	)			(56	)			(25,328	)			(55,340	)
Total other expense			(10,969	)			(21,900	)			(38,318	)			(81,443	)
Loss before income taxes			(697,076	)			(1,010,633	)			(17,785	)			(20,096	)
Deferred income tax benefit			(247,598	)			(241,784	)			(5,727	)			(6,754	)
Net loss			(449,478	)			(768,849	)			(12,058	)			(13,342	)
Basic loss per share											(0.31	)			(0.35	)
Diluted loss per share											(0.31	)			(0.35	)
Weighted average common shares used in computing loss per share:
Basic											38,641				38,615
Diluted											38,641				38,615

 
 
See accompanying notes to condensed consolidated financial statements.

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
(In thousands)

		Three Months Ended December 31, 2014				Six Months Ended December 31, 2014
Net loss		$	(449,478	)		$	(768,849	)
Other comprehensive income (loss)
Crude oil and natural gas cash flow hedges
Unrealized change in fair value net of ineffective portion			22,287				44,174
Effective portion reclassified to earnings during the period			(23,237	)			(25,076	)
Total other comprehensive income (loss)			(950	)			19,098
Deferred income tax expense (benefit)			(143	)			6,874
Net other comprehensive income (loss)			(807	)			12,224
Comprehensive loss		$	(450,285	)		$	(756,625	)

 
 
See accompanying notes to condensed consolidated financial statements.

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)

		SUCCESSOR COMPANY				PREDECESSOR COMPANY
		Six Months Ended December 31, 2014				Six Months Ended December 31, 2013
Cash flows from operating activities:
Net loss		$	(768,849	)		$	(13,342	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, depletion and amortization			162,292				100,501
Accretion of liability for asset retirement obligations			12,279				16,101
Change in derivative financial instruments
Proceeds from sale of derivative financial instruments			4,559				—
Other			1				48,184
Non-cash compensation			—				3,896
Deferred income taxes			(241,784	)			(6,604	)
Exploration expenditures			—				1,829
Impairment of oil and natural gas properties			682,868				766
Goodwill impairment			329,293				—
Amortization of premium, discount and deferred financing costs on debt			(5,104	)			2,741
Gain on sales of assets			—				(1,825	)
Other			—				21,815
Changes in operating assets and liabilities:
Trade accounts receivable			9,721				8,344
Prepaid expenses			16,461				7,938
Other assets			301				506
Accounts payable and accrued liabilities			(71,099	)			30,770
Asset retirement obligation settlements			(32,038	)			(26,537	)
Net cash provided by operating activities			98,901				195,083
Cash flows provided by (used in) investing activities:
Decrease in restricted cash			—				51,757
Property acquisitions			(350	)			(25,478	)
Deposit for Nexen Acquisition			—				(7,040	)
Capital expenditures			(239,090	)			(169,936	)
Other property and equipment additions			(58	)			(753	)
Proceeds from sale of assets			—				80
Net cash used in investing activities			(239,498	)			(151,370	)
Cash flows provided by (used in) financing activities:
Repayments of indebtedness			—				(35,000	)
Advances from EGC			135,480				—
Deferred financing costs			—				(36	)
Purchase of shares into treasury			—				(4,544	)
Exercise of stock options			—				794
Net cash provided by (used in) financing activities			135,480				(38,786	)
Net increase (decrease) in cash and cash equivalents			(5,117	)			4,927
Cash and cash equivalents at beginning of period			5,601				3,885
Cash and cash equivalents at end of period		$	484			$	8,812

 
 
See accompanying notes to condensed consolidated financial statements.

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(1) Organization and Basis of Presentation

Nature of Operations.  EPL Oil & Gas, Inc. was incorporated as a Delaware corporation on January 29, 1998 and is a wholly-owned subsidiary of Energy XXI Gulf Coast, Inc. (“EGC”), a Delaware corporation, which is an indirect wholly-owned subsidiary of Energy XXI Ltd, an exempted company under the laws of Bermuda (“Energy XXI”). References in this Quarterly Report to “we,” “our,” “us,” “the Company” or “EPL”) are to EPL Oil & Gas, Inc. and its wholly-owned subsidiaries. We operate as an independent oil and natural gas exploration and production company with current operations concentrated in the U.S. Gulf of Mexico shelf (the “GoM shelf”) focusing on state and federal waters offshore Louisiana, which we consider our core area.

Principles of Consolidation and Reporting.  On June 3, 2014, Energy XXI, EGC, Clyde Merger Sub, Inc., a wholly-owned subsidiary of EGC (“Merger Sub”), and EPL, completed the transactions contemplated by the Agreement and Plan of Merger, dated as of March 12, 2014 (as amended, the “Merger Agreement”), by and among Energy XXI, EGC, Merger Sub, and EPL, pursuant to which Merger Sub was merged with and into EPL with EPL continuing as the surviving corporation (the “Merger”). Pursuant to the Merger Agreement, at the effective time of the Merger, the issued and outstanding shares of EPL common stock, par value $0.001 per share, were converted, in the aggregate, into the right to receive merger consideration consisting of approximately 65% in cash and 35% in shares of common stock of Energy XXI, par value $0.005 per share.

The Merger resulted in EPL becoming an indirect, wholly-owned subsidiary of Energy XXI. Therefore, in the preparation of our financial statements, we have applied “pushdown” accounting, based on guidance from the Securities and Exchange Commission (“SEC”). Pushdown accounting refers to the use of the acquiring entity’s basis of accounting in the preparation of the acquired entity’s financial statements. As a result, our separate financial statements reflect the new basis of accounting recorded by Energy XXI upon acquisition. As such, in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”), due to our new basis of accounting, our financial statements include a black line denoting that our financial statements covering periods prior to the date of the Merger are not comparable to our financial statements as of and subsequent to the date of the Merger. References to the “Predecessor Company” refer to reporting dates of the Company through June 3, 2014, reflecting results of operations and cash flows of the Company prior to the Merger on our historical accounting basis; subsequent thereto, the Company is referred to as the “Successor Company,” reflecting the impact of pushdown accounting and the results of operations and cash flows of the Company subsequent to the Merger.

Energy XXI follows the “full cost” method of accounting for its oil and gas producing activities, while we had historically followed the “successful efforts” method of accounting. Subsequent to the Merger, we converted our accounting method from successful efforts to the full cost method of accounting to be consistent with Energy XXI’s method of accounting pursuant to SEC guidance, which requires a reporting entity that follows the full cost method to apply that method to all of its operations and to the operations of its subsidiaries. Under U.S. GAAP, a change in accounting method is required to be applied retroactively in order to provide comparable historical period information to users of financial statements. However, due to the new basis of accounting established as a result of the Merger transaction and pushdown accounting, our financial statements are no longer comparable to those of periods prior to the Merger and we have applied the full cost method of accounting on a prospective basis from the date of the Merger.

The accompanying consolidated financial statements include the accounts of EPL and its wholly-owned subsidiaries and have been prepared in accordance with U.S. GAAP. All significant intercompany accounts and transactions are eliminated in consolidation. Our interests in oil and natural gas exploration and production ventures and partnerships are proportionately consolidated.

Interim Financial Statements.  The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(1) Organization and Basis of Presentation  – (continued)

Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments of a normal and recurring nature considered necessary for a fair presentation have been included in the accompanying consolidated financial statements. The results of operations for the interim period are not necessarily indicative of the results that will be realized for the entire fiscal year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our 2014 Transition Report.

Use of Estimates.  The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates of proved reserves are key components of our depletion rate for our proved oil and natural gas properties and the full cost ceiling test limitation. Other items subject to estimates and assumptions include fair value estimates used in pushdown accounting and accounting for acquisitions; carrying amounts of property, plant and equipment; goodwill; asset retirement obligations; deferred income taxes; and valuation of derivative financial instruments, among others. Accordingly, our accounting estimates require exercise of judgment by management in preparing such estimates. While we believe that the estimates and assumptions used in preparation of our consolidated financial statements are appropriate, actual results could differ from those estimates, and any such differences may be material.

Recent Accounting Pronouncements.  In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09). ASU 2014-09 provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. The standard is effective for public entities for annual periods beginning after December 15, 2016, and interim periods within those annual reporting periods. Early adoption is not permitted. We are currently evaluating the provisions of ASU 2014-09 and assessing the impact, if any, it may have on our financial position, results of operations or cash flows.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15). ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. The standard is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016, with early adoption permitted. We are currently evaluating the provisions of ASU 2014-15 and assessing the impact, if any, it may have on our consolidated financial statements.

(2) Acquisitions

The South Pass 49 Transfer

On June 3, 2014, Energy XXI GOM, LLC, transferred an asset package to us consisting of certain shallow-water GoM shelf oil and natural gas interests in our South Pass 49 field (the “SP49 Interests”) for $230.0 million to reflect an economic effective date of June 1, 2014 (the “SP49 Transfer”). Prior to the SP49 Transfer, we owned a 43.5% working interest in certain of these assets, and Energy XXI owned a 56.5% working interest in certain of these assets as well as 100% interest in additional assets in the field. As a result of the SP49 Transfer, we have become the sole working interest owner of the South Pass 49 field. We financed the SP49 Transfer with borrowings of approximately $135 million under our credit facility and a $95 million capital contribution from EGC. See Note 7, “Indebtedness” for more information regarding our credit facility.

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(2) Acquisitions  – (continued)

The following table summarizes the assets acquired and liabilities assumed in the transfer to reflect an economic effective date of June 1, 2014.

(In thousands)
Oil and natural gas properties		$	231,271
Asset retirement obligations			(1,086	)
Net assets acquired		$	230,185

The Nexen Acquisition

On January 15, 2014, we acquired from Nexen Petroleum Offshore U.S.A., Inc. (“Nexen”) a 100% working interest in certain shallow-water central GoM shelf oil and natural gas assets for $70.4 million, subject to customary adjustments to reflect the September 1, 2013, economic effective date (the “Nexen Acquisition”). The assets we acquired comprise five leases in the Eugene Island 258/259 field (the “EI Interests”). The Nexen Acquisition was financed with borrowings under our senior secured credit facility with BMO Capital Markets, as lead arranger, and Bank of Montreal, as administrative agent and a lender, and the other lender parties thereto (as amended and restated, the “Prior Senior Credit Facility”).

The following table summarizes the estimated values of assets acquired and liabilities assumed and reflects final adjustments to purchase price provided for by the purchase and sale agreement of approximately $5.7 million to reflect an economic effective date of September 1, 2013.

(In thousands)
Oil and natural gas properties		$	82,897
Asset retirement obligations			(18,165	)
Net assets acquired		$	64,732

The West Delta 29 Acquisition

On September 26, 2013, we acquired from W&T Offshore, Inc. (“W&T”) an asset package consisting of certain GoM shelf oil and natural gas interests in the West Delta 29 field (the “WD29 Interests”) for $21.8 million in cash, subject to customary adjustments to reflect an economic effective date of January 1, 2013 (the “WD29 Acquisition”). The WD29 Acquisition was funded with a portion of the proceeds from the sale of certain shallow water GoM shelf oil and natural gas interests located within the non-operated Bay March and field in a tax-deferred exchange of properties.

The following table summarizes the estimated values of assets acquired and liabilities assumed and reflects final adjustments to purchase price provided for by the purchase and sale agreement of approximately $7.1 million to reflect an economic effective date of January 1, 2013.

(In thousands)
Oil and natural gas properties		$	16,544
Asset retirement obligations			(1,398	)
Net assets acquired		$	15,146

We have accounted for the Nexen Acquisition and WD29 Acquisition using the acquisition method of accounting for business combinations, and therefore we have estimated the fair value of the assets acquired and the liabilities assumed as of their respective acquisition dates. In the estimation of fair value, management uses various valuation methods including (i) comparable company analysis, which estimates the value of the acquired properties based on the implied valuations of other similar operations; (ii) comparable asset transaction analysis, which estimates the value of the acquired operations based upon publicly announced transactions of assets with similar characteristics; (iii) comparable merger transaction analysis, which, much

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(2) Acquisitions  – (continued)

like comparable asset transaction analysis, estimates the value of operations based upon publicly announced transactions with similar characteristics, except that merger analysis analyzes public to public merger transactions rather than solely asset transactions; and (iv) discounted cash flow analysis. The fair value is based on subjective estimates and assumptions, which are inherently subject to significant uncertainties which are beyond our control. These assumptions represent Level 3 inputs, as further discussed in Note 9, “Fair Value Measurements.”

Results of Operations and Pro Forma Information

Revenues and lease operating expenses attributable to acquired interests and properties were as follows:

		SUCCESSOR COMPANY								PREDECESSOR COMPANY
(In thousands)		Three Months Ended December 31, 2014				Six Months Ended December 31, 2014				Three Months Ended December 31, 2013				Six Months Ended December 31, 2013
SP49 Interests:
Revenues		$	12,051			$	27,031			$	—			$	—
Lease operating expenses		$	2,368			$	4,363			$	—			$	—
EI Interests:
Revenues		$	8,145			$	19,992			$	—			$	—
Lease operating expenses		$	5,731			$	9,996			$	—			$	—
WD29 Interests:
Revenues		$	2,902			$	6,745			$	3,011			$	3,011
Lease operating expenses		$	127			$	371			$	44			$	44

We have determined that the presentation of net income attributable to the acquired interests and properties is impracticable due to the integration of the related operations upon acquisition.

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(2) Acquisitions  – (continued)

The following supplemental pro forma information presents consolidated results of operations as if the WD 29 Acquisition, the Nexen Acquisition and the SP49 Transfer had occurred on July 1, 2012. In addition, this information has been prepared to reflect the Merger and pushdown accounting as if it occurred on July 1, 2012. The supplemental unaudited pro forma information was derived from a) our historical condensed consolidated statements of operations and b) unaudited revenues and direct operating expenses of the SP49 Interests, WD29 Interests and the EI Interests as derived from the records of the applicable seller provided to us in connection with the acquisitions. This information does not purport to be indicative of results of operations that would have occurred had the transactions occurred on July 1, 2012, nor is such information indicative of any expected future results of operations. The most significant pro forma adjustments for the three and six months ended December 31, 2013, were the following:

		PRO FORMA
(in thousands, except per share data)		Three Months Ended December 31, 2013				Six Months Ended December 31, 2013
Revenue		$	165,603			$	386,270
Net loss			(17,073	)			(19,048	)
Basic loss per share			(0.44	)			(0.49	)
Diluted loss per share			(0.44	)			(0.49	)

(3) Pushdown Accounting and Goodwill

As described in Note 1, the Merger resulted in EPL becoming an indirect, wholly-owned subsidiary of Energy XXI. Therefore, we applied “pushdown” accounting, based on guidance from the SEC. In accordance with the acquisition method of accounting, the purchase price established in the Merger was allocated to the assets acquired and liabilities assumed based on their estimated fair values on the acquisition date. The fair value estimates were based on, but not limited to, quoted market prices, where available; expected future cash flows based on estimated reserve quantities; estimated costs to produce and develop reserves; current replacement cost for similar capacity for certain fixed assets; market rate assumptions for contractual obligations; appropriate discount rates and growth rates; and crude oil and natural gas forward prices. The excess of the total consideration over the estimated fair value of the amounts initially assigned to the identifiable assets acquired and liabilities assumed was recorded as goodwill. Goodwill recorded in connection with the Merger is not deductible for income tax purposes.

On April 2, 2013, we sold certain shallow water GoM shelf oil and natural gas interests located within the non-operated Bay March and field to Chevron U.S.A. Inc. (“Chevron”) with an effective date of January 1, 2013. In September 2014, we were informed by Chevron that the final settlement statement did not reflect a portion of production in the months of January 2013 and February 2013 totaling to approximately $2.1 million. After review of relevant supporting documents, we agreed to reimburse Chevron approximately $2.1 million. This resulted in an increase in liabilities assumed by Energy XXI in the Merger and a

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(3) Pushdown Accounting and Goodwill  – (continued)

corresponding increase in goodwill of approximately $2.1 million; accordingly the June 30, 2014 condensed consolidated balance sheet has been retrospectively adjusted to increase the value of goodwill.

ASC 350, Intangibles — Goodwill and Other (ASC 350), requires that intangible assets with indefinite lives, including goodwill, be evaluated for impairment on an annual basis or more frequently if events occur or circumstances change that could potentially result in impairment. Our annual goodwill impairment test is performed as of the last day of the fourth quarter each fiscal year.

Impairment testing for goodwill is performed at the reporting unit level. We have only one reporting unit, which includes all of our oil and natural gas properties. Accordingly, all of our goodwill, as well as all of our other assets and liabilities, are included in our single reporting unit.

At September 30, 2014, we conducted a qualitative goodwill impairment assessment by examining relevant events and circumstances that could have a negative impact on our goodwill, such as macroeconomic conditions, industry and market conditions, cost factors that have a negative effect on earnings and cash flows, overall financial performance, dispositions and acquisitions, and any other relevant events or circumstances. After assessing the relevant events and circumstances for the qualitative impairment assessment, we determined that performing a quantitative goodwill impairment test was necessary. In the first step of the goodwill impairment test, we determined that the fair value of our reporting unit was less than the carrying amount, including goodwill, primarily due to price deterioration in forward pricing curves for oil and natural gas and an increase in our weighted average cost of capital used to estimate fair value, both factors which adversely impacted the fair value of our estimated reserves. Therefore, we performed the second step of the goodwill impairment test, which led us to conclude that there would be no remaining implied fair value attributable to goodwill. As a result, we recorded a goodwill impairment charge of $329.3 million to reduce the carrying value of goodwill to zero at September 30, 2014.

In estimating the fair value of our reporting unit and our estimated reserves, we used an income approach which estimated fair value primarily based on the anticipated cash flows associated with our estimated reserves, discounted using a weighted average cost of capital rate. The estimation of the fair value of our reporting unit includes the use of significant inputs not observable in the market, such as estimates of reserves quantities, the weighted average cost of capital (discount rate), future pricing beyond a certain period and estimated future capital and operating costs. The use of these unobservable inputs results in the fair value estimate being classified as a Level 3 measurement. Although we believe the assumptions and estimates used in the fair value calculation of our reporting unit are reasonable and appropriate, different assumptions and estimates could materially impact the analysis and resulting conclusions.

The final valuation of assets acquired and liabilities assumed is not complete and the net adjustments to those values may result in changes to carrying amounts initially assigned to the assets and liabilities based on the initial fair value analysis at the time of the Merger. The principal remaining items to be valued are tax assets and liabilities, and any related valuation allowances, which will be finalized in connection with the filing of related tax returns.

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(4) Earnings Per Share

The following table sets forth the calculation of basic and diluted weighted average shares outstanding and earnings per share for the indicated periods for the Predecessor Company.

		Three Months Ended December 31, 2013				Six Months Ended December 31, 2013
		(in thousands, except per share data)
Income (numerator):
Net loss		$	(12,058	)		$	(13,342	)
Net income attributable to participating securities			—				—
Net loss attributable to common shares		$	(12,058	)		$	(13,342	)
Weighted average shares (denominator):
Weighted average shares – basic			38,641				38,615
Dilutive effect of stock options			—				—
Weighted average shares – diluted			38,641				38,615
Basic loss per share		$	(0.31	)		$	(0.35	)
Diluted loss per share		$	(0.31	)		$	(0.35	)

The following table indicates the number of shares underlying outstanding stock-based awards excluded from the computation of dilutive weighted average shares because their effect was antidilutive for the period indicated.

		Three Months Ended December 31, 2013				Six Months Ended December 31, 2013
		(in thousands)
Weighted average shares			987				1,012

(5) Property and Equipment

Under the full cost method of accounting at the end of each financial reporting period, we compare the present value of estimated future net cash flows from proved reserves (computed using the unweighted arithmetic average of the first-day-of-the-month historical price, net of applicable differentials, for each month within the previous 12-month period discounted at 10%, plus the lower of cost or fair market value of unproved properties and excluding cash flows related to estimated abandonment costs) to the net full cost pool of oil and natural gas properties, net of related deferred income taxes. We refer to this comparison as a “ceiling test.” If the net capitalized costs of proved oil and natural gas properties exceed the estimated discounted future net cash flows from proved reserves, we are required to write-down the value of our oil and natural gas properties to the value of the discounted cash flows. At December 31, 2014, our ceiling test computation resulted in an impairment of our oil and natural gas properties of $682.9 million.

The ceiling test computation takes into account the impact of our cash flow hedges at the end of each financial reporting period. Our ceiling test computation would have resulted in an impairment of our oil and gas properties of $690.3 million had the effects of the cash flow hedges not been considered in the computation.

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(6) Asset Retirement Obligations

The following table reconciles the beginning and ending aggregate recorded amount of our asset retirement obligations.

		Six Months Ended December 31, 2014
		(in thousands)
Beginning of period total		$	272,695
Accretion expense			12,279
Liabilities incurred and true-up to liabilities settled			5,212
Liabilities settled			(32,038	)
End of period total			258,148
Less: Current portion			(39,831	)
End of period, noncurrent portion		$	218,317

(7) Indebtedness

The following table sets forth our indebtedness.

		December 31, 2014				June 30, 2014
		(In thousands)
8.25% senior notes due 2018		$	545,462			$	550,566
Revolving Credit Sub-Facility			475,000				475,000
Total indebtedness		$	1,020,462			$	1,025,566

Revolving Credit Sub-Facility

On September 5, 2014, the second amended and restated first lien credit agreement (“First Lien Credit Agreement” or “Revolving Credit Facility”) underwent its Ninth Amendment (the “Ninth Amendment”). The First Lien Credit Agreement, as amended, requires the consolidated EGC to maintain certain financial covenants. Specifically, as of the end of each fiscal quarter, EGC may not permit the following: (a) EGC’s total leverage ratio to be more than 4.25 to 1.0 through the quarter ending March 31, 2015 and 4.0 to 1.0 from the quarter ending June 30, 2015 and beyond, (b) EGC’s interest coverage ratio to be less than 3.0 to 1.0, (c) EGC’s current ratio to be less than 1.0 to 1.0 and (d) EGC’s secured debt leverage ratio to be more than 1.75 to 1.0 through the quarter ending March 31, 2015 and 1.5 to 1.0 from the quarter ending June 30, 2015 and beyond (in each case as defined in the First Lien Credit Agreement). In addition, EGC is subject to various other covenants including, but not limited to, those limiting its ability to declare and pay dividends or other payments, its ability to incur debt, restrictions on change of control, the ability to enter into certain hedging agreements, as well as a covenant to maintain John D. Schiller, Jr. in his current executive position, subject to certain exceptions in the event of his death or disability.

Pursuant to the terms of the Ninth Amendment, the lenders under the First Lien Credit Agreement also maintained the borrowing base for EGC at $1.5 billion, of which such amount $475.0 million is the borrowing base for EPL under the sub-facility established for EPL under the First Lien Credit Agreement (“Revolving Credit Sub-Facility”). These respective borrowing bases were set in accordance with the regular annual process for determination of the borrowing bases and the borrowing bases are to remain effective until the next redetermination thereof under the terms of the First Lien Credit Agreement. For additional information regarding our Revolving Credit Sub-Facility, see Note 8, “Indebtedness,” of our 2014 Transition Report.

Our Revolving Credit Sub-Facility restricts our ability to obtain additional financing, make investments, lease equipment, sell assets and engage in business combinations. As of December 31, 2014, EGC was in

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(7) Indebtedness  – (continued)

compliance with all financial covenants under the First Lien Credit Agreement. Based on projected market conditions and lower commodity prices, we currently expect that EGC will not be in compliance with certain covenants under this agreement in certain future periods. We and EGC are focused on reducing leverage and are pursuing arrangements with third parties to monetize certain midstream assets or sell certain non-core oil and gas properties to enable us to further reduce the amount of required capital commitments. We and EGC are also evaluating various alternatives with respect to the First Lien Credit Agreement, including other sources of financing, although any such alternative sources of financing likely would be at higher cost than our current Revolving Credit Sub-Facility. There can be no assurance any of these discussions or transactions will prove successful. Absent success in these pursuits, a resultant breach of the covenants under the Revolving Credit Facility would cause a default under such facility, potentially resulting in acceleration of all amounts outstanding under our Revolving Credit Sub-Facility. Certain payment defaults or an acceleration under our Revolving Credit Sub-Facility could cause a cross-default or cross-acceleration of our 8.25% senior notes due 2018 (the “8.25% Senior Notes”). Such a cross-default or cross-acceleration could have a wider impact on our liquidity than might otherwise arise from a default or acceleration of a single debt instrument. If an event of default occurs, or if other debt agreements cross-default, and the lenders under the affected debt agreements accelerate the maturity of any loans or other debt outstanding, we may not have sufficient liquidity to repay all of our outstanding indebtedness.

8.25% Senior Notes

The 8.25% Senior Notes consist of $510.0 million in aggregate principal amount issued under an Indenture dated February 14, 2011 (as amended and supplemented, the “2011 Indenture”). The 8.25% Senior Notes bear interest from the date of their issuance at an annual rate of 8.25% with interest due semi-annually, in arrears, on February 15^th and August 15^th of each year. The 8.25% Senior Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured senior basis initially by each of our existing direct and indirect domestic subsidiaries (other than immaterial subsidiaries). The 8.25% Senior Notes will mature on February 15, 2018. The effective interest rate on the 8.25% Senior Notes is approximately 5.8%, reflecting the fair value adjustment recorded in pushdown accounting. For additional information regarding the 8.25% Senior Notes, see Note 8, “Indebtedness,” of our 2014 Transition Report.

(8) Derivative Financial Instruments

We enter into derivative instruments to reduce exposure to fluctuations in the price of oil and natural gas for a portion of our production. Our fixed-price swaps fix the sales price for a limited amount of our production and, for the contracted volumes, eliminate our ability to benefit from increases in the sales price of the production. Derivative instruments are carried at their fair value on the consolidated balance sheets as Derivative financial instruments. Prior to the Merger, we did not designate derivative instruments as hedges, and all gains and losses due to changes in fair market value and contract settlements were recorded in Gain (loss) on derivative instruments in Other income (expense) in the condensed consolidated statements of operations.

Subsequent to the Merger, we designate a majority of our derivative financial instruments as cash flow hedges. No components of the cash flow hedging instruments are excluded from the assessment of hedge ineffectiveness. Any gains or losses resulting from the change in fair value from hedging transactions that are determined to be ineffective are recorded as a Loss (gain) on derivative instruments, whereas gains and losses from the settlement of cash flow hedging contracts are recorded in crude oil and natural gas revenue in the same period during which the hedged transactions are settled. See Note 9 for information regarding fair values of our derivative instruments.

In connection with the Merger, Energy XXI assumed our existing hedges with contract terms beginning from June 2014 through December 2015. Our oil contracts were primarily swaps and benchmarked to Argus-LLS and Brent. During the quarter ended December 31, 2014, we monetized all the calendar 2015

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(8) Derivative Financial Instruments  – (continued)

Brent swap contracts, keeping one natural gas contract intact, and received proceeds of $4.6 million. These monetized amounts received along with a $2.9 million positive change in fair value of the monetized contracts have been recorded in stockholders’ equity as part of accumulated other comprehensive income (“AOCI”) and will be recognized in income over the contract life of the underlying hedge contracts through December 31, 2015. As of December 31, 2014, we had $7.5 million of monetized amounts remaining in AOCI of which approximately $1.9 million will be recognized in income during the quarters ending March 31, 2015, June 30, 2015, September 30, 2015, and December 31, 2015, respectively.

During January 2015, we entered into Argus-LLS three-way collars on 7,000 barrels of our estimated oil production per day from February through December 2015.

The following table sets forth our derivative instrument outstanding as of December 31, 2014. See Note 13 for information regarding derivative instruments entered subsequent to December 31, 2014.

Gas Contracts

Remaining Contract Term

Type of Contract

Volume (Mmbtu)

Swap Fixed Price ($/Mmbtu)

January 2015 – December 2015

Fixed Price Swaps

1,569,500

4.31

For the three and six months ended December 31, 2014, we reclassified from AOCI a gain of approximately $23.2 million and $25.1 million to oil and natural gas revenue, respectively. The amount expected to be reclassified from AOCI to income in the next 12 months is a gain of $9.5 million ($6.0 million net of tax) on our commodity hedges. The estimated and actual amounts are likely to vary significantly due to changes in market conditions.

The effect of derivative financial instruments on our condensed consolidated statements of operations was as follows:

		SUCCESSOR COMPANY								PREDECESSOR COMPANY
		Three Months Ended December 31, 2014				Six Months Ended December 31, 2014				Three Months Ended December 31, 2013				Six Months Ended December 31, 2013
Location of (Gain) Loss in Income Statement
Cash Settlements
Oil sales		$	(22,395	)		$	(24,408	)			—				—
Natural gas sales			(842	)			(668	)			—				—
Total cash settlements			(23,237	)			(25,076	)			—				—
Commodity Derivative Instruments designated as hedging instruments:
Loss on derivative financial instruments
Ineffective portion of commodity derivative instruments			(3	)			—				—				—
Commodity Derivative Instruments not designated as hedging instruments:
Loss on derivative financial instruments
Realized mark to market loss			29				55				3,623				7,156
Unrealized mark to market loss			—				1				21,705				48,184
Total loss on derivative financial instruments			26				56				25,328				55,340
Total (gain) loss		$	(23,211	)		$	(25,020	)		$	25,328			$	55,340

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(8) Derivative Financial Instruments  – (continued)

We monitor the creditworthiness of our counterparties. However, we are not able to predict sudden changes in counterparties’ creditworthiness. In addition, even if such changes are not sudden, we may be limited in our ability to mitigate an increase in counterparty credit risk. Possible actions would be to transfer our position to another counterparty or request a voluntary termination of the derivative contracts resulting in a cash settlement. Should one of these financial counterparties not perform, we may not realize the benefit of some of our derivative instruments under lower commodity prices and could incur a loss. At December 31, 2014, we had no deposits for collateral with our counterparties.

(9) Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy with three levels based on the reliability of the inputs used to determine fair value. These levels include: Level 1, defined as inputs such as unadjusted quoted prices in active markets for identical assets and liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for use when little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of December 31, 2014 and June 30, 2014, we held certain financial assets and liabilities that are required to be measured at fair value on a recurring basis, primarily our derivative financial instruments. We estimate the fair values of these instruments based on published forward commodity price curves, market volatility and contract terms as of the date of the estimate. The discount rate used in the discounted cash flow projections is based on published LIBOR rates. The fair values of derivative financial instruments in an asset position include a measure of counterparty nonperformance risk, and the fair values of derivative financial instruments in a liability position include a measure of our own nonperformance risk, each based on the current published issuer-weighted corporate default rates. These price inputs are quoted prices for assets and liabilities similar to those held by us and meet the definition of Level 2 inputs within the fair value hierarchy.

The following table sets forth our financial assets and liabilities that are accounted for at fair value on a recurring basis.

		December 31, 2014				June 30, 2014
		(in thousands)
Assets
Derivative financial instruments designated as hedging instruments
Current		$	2,004				—
Noncurrent			—				—
Total gross derivative financial instruments subject to enforceable netting agreement			2,004				—
Gross amounts offset in balance sheet			—				—
Net amounts presented in balance sheet		$	2,004				—
Liabilities
Derivative financial instruments designated as hedging instruments
Current			—			$	26,440
Noncurrent			—				2,140
Total gross derivative financial instruments subject to enforceable netting agreement			—				28,580
Gross amounts offset in balance sheet			—				—

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(9) Fair Value Measurements  – (continued)

		December 31, 2014				June 30, 2014
		(in thousands)
Net amounts presented in balance sheet			—			$	28,580

The carrying values reported in the condensed consolidated balance sheet for cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short term maturities of these instruments. The fair value for the 8.25% Senior Notes is estimated based on quoted prices in a market that is not an active market, which are Level 2 inputs within the fair value hierarchy. The carrying value of the Revolving Credit Sub-Facility approximates its fair value because the interest rate is variable and reflective of market rates, which are Level 2 inputs within the fair value hierarchy.

The following table sets forth the carrying values and estimated fair values of our long-term indebtedness.

		December 31, 2014								June 30, 2014
		(In thousands)
		Carrying Value				Estimated Fair Value				Carrying Value				Estimated Fair Value
8.25% Senior Notes		$	545,462			$	416,290			$	550,566			$	545,700
Revolving Credit Sub-Facility			475,000				475,000				475,000				475,000
Total		$	1,020,462			$	891,290			$	1,025,566			$	1,020,700

As addressed in Note 2, “Acquisitions,” we apply fair value concepts in estimating and allocating the fair value of assets acquired and liabilities assumed in acquisitions in accordance with acquisition accounting for business combinations. The inputs to the estimated fair values of assets acquired and liabilities assumed are described in Note 2.

(10) Income Taxes

We are a (U.S.) Delaware company and, as a result of the Merger, a direct subsidiary of EGC. We are a member of a consolidated group of corporations for U.S. federal income tax purposes where Energy XXI, Inc., (the “U.S. Parent”) is the parent entity. Energy XXI indirectly owns 100% of U.S. Parent, but is not a member of the U.S. consolidated group. We operate through our various subsidiaries in the United States as they apply to our current ownership structure. ASC Topic 740 provides that the income tax amounts presented in the separate financial statements of a subsidiary entity that is a member of a consolidated group should be based upon a reasonable allocation of the income tax amounts of that group. We allocate income tax expense/benefit and deferred tax items between affiliates as if each affiliate prepared a separate U.S. income tax return for the reporting period. We have recorded no income tax-related intercompany balances with affiliates.

We estimate our annual effective tax rate for the current fiscal year and apply it to interim periods. However, during the first quarter of fiscal year 2015, we recorded a goodwill impairment charge of $329 million (see Note 3 — Pushdown Accounting and Goodwill). In light of the form of the transaction related to the Merger on June 3, 2014, the goodwill recognized as a result of the Merger during fiscal year 2014 did not have tax basis. Therefore, the goodwill impairment is nondeductible for federal and state income tax purposes. Currently, our estimated annual effective tax/(benefit) rate is approximately 35.3% excluding the effect of the goodwill impairment charge. For purposes of computing our interim provision (benefit) for income taxes, the goodwill impairment charge is treated as a discrete item in the quarter in which it occurred. Our actual effective tax/(benefit) rates for the three and six months ended December 31, 2014 were (35.5)% and (23.9)%, respectively. The variance from the U.S. statutory rate of 35% is primarily due to two elements:

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(10) Income Taxes  – (continued)

(i) the impairment of goodwill during the first quarter of fiscal year 2015 and (ii) an increase to the statutory rate due to the presence of common permanent difference items (such as non-deductible compensation, meals and entertainment expenses and state income taxes).

(11) Related Party Transactions

On June 3, 2014, we entered an intercompany services and cost allocation agreement with Energy XXI Services, LLC (“Energy Services”), an affiliate of the Company. Services provided by Energy Services include management, legal, accounting, tax, corporate secretarial, human resources, employee benefit administration, office space and other furniture and equipment management, and other support services. Cost of these services for the three months ended December 31, 2014 was approximately $5.8 million, of which $5.4 million is included in general and administrative expense. Cost of these services for the six months ended December 31, 2014 was approximately $9.8 million, of which $9.1 million is included in general and administrative expense.

(12) Commitments and Contingencies

Litigation.  We are a defendant in a number of lawsuits and are involved in governmental and regulatory proceedings, all of which arose in the ordinary course of business, including, but not limited to, personal injury claims, royalty claims, contract claims, and environmental claims, including claims involving assets owned by acquired companies. While the ultimate outcome and impact on us cannot be predicted with certainty, management believes that the resolution of pending proceedings will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

In March and April, 2014, three alleged stockholders (the “Plaintiffs”) filed three separate class action lawsuits in the Court of Chancery of the State of Delaware on behalf of our stockholders against our Company, our directors, Energy XXI, EGC, and Clyde Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of EGC (“Merger Sub” and collectively, the “defendants”). The Court of Chancery of the State of Delaware consolidated these lawsuits on May 5, 2014. The consolidated lawsuit is styled In re EPL Oil & Gas Inc. Shareholders Litigation, C.A. No. 9460-VCN, in the Court of Chancery of the State of Delaware (the “lawsuit”).

Plaintiffs alleged a variety of causes of action challenging the Agreement and Plan of Merger between Energy XXI, OpCo, Merger Sub, and EPL (the “merger agreement”), which provided for the acquisition of EPL by Energy XXI. Plaintiffs alleged that (a) our directors allegedly breached fiduciary duties in connection with the Merger and (b) we along with Energy XXI, OpCo, and Merger Sub allegedly aided and abetted in these alleged breaches of fiduciary duties. Plaintiffs sought to have the merger agreement rescinded and also sought damages and attorneys’ fees.

On January 16, 2015, Plaintiffs filed a voluntary notice of dismissal. On January 20, 2015, the Court of Chancery of the State of Delaware entered an order dismissing the lawsuit in its entirety without prejudice.

Other.  We maintain restricted escrow funds in a trust for future abandonment costs at our East Bay property. The trust was originally funded with $15.0 million and, with accumulated interest, increased to $16.7 million at December 31, 2008. We may draw from the trust upon completion of qualifying abandonment activities at our East Bay field. At December 31, 2014, we had $6.0 million remaining in restricted escrow funds for decommissioning work in our East Bay field, which will remain restricted until substantially all required decommissioning in the East Bay field is complete. Amounts on deposit in the trust account are reflected in Restricted cash on our condensed consolidated balance sheets.

We record liabilities when we deliver production that is in excess of our interest in certain properties. In addition to these imbalances, we may, from time to time, be allocated cash sales proceeds in excess of

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(12) Commitments and Contingencies  – (continued)

amounts that we estimate are due to us for our interest in production. These allocations may be subject to further review, may require more information to resolve or may be in dispute.

We and our oil and gas joint interest owners are subject to periodic audits of the joint interest accounts for leases in which we participate and/or operate. As a result of these joint interest audits, amounts payable or receivable by us for costs incurred or revenue distributed by the operator or by us on a lease may be adjusted, resulting in adjustments, increases or decreases, to our net costs or revenues and the related cash flows. Such adjustments may be material. When they occur, these adjustments are recorded in the current period, which generally is one or more years after the related cost or revenue was incurred or recognized by the joint account.

(13) Subsequent Events

During January 2015, we entered into Argus-LLS three-way collars on 7,000 barrels of our estimated oil production per day from February through December 2015.

(14) Supplemental Condensed Consolidating Financial Information

In connection with issuing the 8.25% Senior Notes described in Note 7, all of our existing direct and indirect domestic subsidiaries (other than immaterial subsidiaries) each of which is 100% owned by EPL (the “Guarantor Subsidiaries”), jointly and severally guaranteed the payment obligations under our 8.25% Senior Notes. The guarantees are full and unconditional, as those terms are used in Rule 3-10 of Regulation S-X, except that a Guarantor Subsidiary can be automatically released and relieved of its obligations under certain customary circumstances contained in the 2011 Indenture. So long as other applicable provisions of the indenture are adhered to, these customary circumstances include: when a Guarantor Subsidiary is declared “unrestricted” for covenant purposes, when the requirements for legal defeasance or covenant defeasance or to discharge the indenture have been satisfied, or when the Guarantor Subsidiary is sold or sells all of its assets. The following supplemental financial information sets forth, on a consolidating basis, the balance sheets, statements of operations and cash flow information for EPL (Parent Company Only) and for the Guarantor Subsidiaries. We have not presented separate financial statements and other disclosures concerning the Guarantor Subsidiaries, or for any individual Guarantor Subsidiary, because management has determined that such information is not material to investors.

The supplemental condensed consolidating financial information has been prepared pursuant to the rules and regulations for condensed financial information and does not include all disclosures included in annual financial statements. The principal eliminating entries eliminate investments in subsidiaries and intercompany balances.

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SUCCESSOR COMPANY
 
Supplemental Condensed Consolidating Balance Sheet
As of December 31, 2014
(UNAUDITED)

		Parent Company Only				Guarantor Subsidiaries				Eliminations				Consolidated
		(In thousands)
ASSETS
Current assets:
Cash and cash equivalents		$	484			$	—			$	—			$	484
Trade accounts receivable – net			68,773				144				—				68,917
Intercompany receivables			—				31,805				(31,805	)			—
Derivative financial instruments			2,004				—				—				2,004
Deferred tax asset			15,748				—				—				15,748
Prepaid expenses			10,060				—				—				10,060
Total current assets			97,069				31,949				(31,805	)			97,213
Net property and equipment			2,390,774				164,148				—				2,554,922
Investment in affiliates			128,352				—				(128,352	)			—
Restricted cash			6,024				—				—				6,024
Other assets			418				90				(492	)			16
Total assets		$	2,622,637			$	196,187			$	(160,649	)		$	2,658,175
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable		$	24,938			$	388			$	—			$	25,326
Due to EGC			138,057				—				—				138,057
Intercompany payables			31,805				—				(31,805	)			—
Accrued liabilities			133,518				—				(492	)			133,026
Asset retirement obligations			34,627				5,204				—				39,831
Total current liabilities			362,945				5,592				(32,297	)			336,240
Long-term debt			1,020,462				—				—				1,020,462
Asset retirement obligations			177,459				40,858				—				218,317
Deferred tax liabilities			218,664				21,385				—				240,049
Other			6				—				—				6
Total liabilities			1,779,536				67,835				(32,297	)			1,815,074
Stockholder's equity:
Preferred stock			—				—				—				—
Common stock			—				—				—				—
Additional paid-in capital			1,599,341				85,479				(85,479	)			1,599,341
Accumulated other comprehensive income			5,972				—				—				5,972
Retained earnings (loss)			(762,212	)			42,873				(42,873	)			(762,212	)
Total stockholder's equity			843,101				128,352				(128,352	)			843,101
Total liabilities and stockholder's equity		$	2,622,637			$	196,187			$	(160,649	)		$	2,658,175

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SUCCESSOR COMPANY
 
Supplemental Condensed Consolidating Balance Sheet
As of June 30, 2014
(AUDITED)

		Parent Company Only				Guarantor Subsidiaries				Eliminations				Consolidated
		(In thousands)
ASSETS
Current assets:
Cash and cash equivalents		$	5,601			$	—			$	—			$	5,601
Trade accounts receivable – net			72,156				145				—				72,301
Intercompany receivables			—				26,311				(26,311	)			—
Deferred tax asset			24,587				—				—				24,587
Prepaid expenses			26,521				—				—				26,521
Total current assets			128,865				26,456				(26,311	)			129,010
Net property and equipment			3,034,805				170,382				—				3,205,187
Investment in affiliates			126,638				—				(126,638	)			—
Goodwill			329,293				—				—				329,293
Restricted cash			6,023				—				—				6,023
Other assets			226				91				—				317
Total assets		$	3,625,850			$	196,929			$	(152,949	)		$	3,669,830
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable		$	92,325			$	656			$	—			$	92,981
Due to EGC			4,960				—				—				4,960
Intercompany payables			26,311				—				(26,311	)			—
Accrued liabilities			161,503				15				—				161,518
Asset retirement obligations			33,357				6,474				—				39,831
Derivative financial instruments			26,440				—				—				26,440
Total current liabilities			344,896				7,145				(26,311	)			325,730
Long-term debt			1,025,566				—				—				1,025,566
Asset retirement obligations			193,908				38,956				—				232,864
Deferred tax liabilities			459,608				24,190				—				483,798
Derivative financial instruments			2,140				—				—				2,140
Other			6				—				—				6
Total liabilities			2,026,124				70,291				(26,311	)			2,070,104
Stockholder's equity:
Preferred stock			—				—				—				—
Common stock			—				—				—				—
Additional paid-in capital			1,599,341				85,479				(85,479	)			1,599,341
Accumulated other comprehensive loss			(6,252	)			—				—				(6,252	)
Retained earnings			6,637				41,159				(41,159	)			6,637
Total stockholder's equity			1,599,726				126,638				(126,638	)			1,599,726
Total liabilities and stockholder's equity		$	3,625,850			$	196,929			$	(152,949	)		$	3,669,830

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SUCCESSOR COMPANY
 
Supplemental Condensed Consolidating Statement of Operations
Three Months Ended December 31, 2014
(UNAUDITED)

		Parent Company Only				Guarantor Subsidiaries				Eliminations				Consolidated
		(In thousands)
Revenue:
Oil and natural gas		$	144,345			$	11,725			$	—			$	156,070
Other			461				82				—				543
Total revenue			144,806				11,807				—				156,613
Costs and expenses:
Lease operating			50,044				5,260				—				55,304
Transportation			1,148				1				—				1,149
Impairment of oil and natural gas properties			682,868				—				—				682,868
Depreciation, depletion and amortization			82,382				6,165				—				88,547
Accretion of liability for asset retirement obligations			4,910				1,188				—				6,098
General and administrative			6,810				—				—				6,810
Taxes, other than on earnings			494				1,450				—				1,944
Total costs and expenses			828,656				14,064				—				842,720
Loss from operations			(683,850	)			(2,257	)			—				(686,107	)
Other income (expense):
Interest income			4				—				—				4
Interest expense			(10,947	)			—				—				(10,947	)
Loss on derivative instruments			(26	)			—				—				(26	)
Income from equity investments			(1,424	)			—				1,424				—
Total other income (expense)			(12,393	)			—				1,424				(10,969	)
Loss before provision for income taxes			(696,243	)			(2,257	)			1,424				(697,076	)
Deferred income tax benefit			(246,765	)			(833	)			—				(247,598	)
Net loss		$	(449,478	)		$	(1,424	)		$	1,424			$	(449,478	)
Comprehensive loss
Net loss			(449,478	)			(1,424	)			1,424				(449,478	)
Other comprehensive loss			(807	)			—				—				(807	)
Comprehensive loss		$	(450,285	)		$	(1,424	)		$	1,424			$	(450,285	)

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SUCCESSOR COMPANY
 
Supplemental Condensed Consolidating Statement of Operations
Six Months Ended December 31, 2014
(UNAUDITED)

		Parent Company Only				Guarantor Subsidiaries				Eliminations				Consolidated
		(In thousands)
Revenue:
Oil and natural gas		$	300,437			$	29,353			$	—			$	329,790
Other			778				154				—				932
Total revenue			301,215				29,507				—				330,722
Costs and expenses:
Lease operating			102,618				8,986				—				111,604
Transportation			1,772				2				—				1,774
Impairment of oil and natural gas properties			682,868				—				—				682,868
Goodwill impairment			329,293				—				—				329,293
Depreciation, depletion and amortization			150,387				11,905				—				162,292
Accretion of liability for asset retirement obligations			10,252				2,027				—				12,279
General and administrative			14,852				—				—				14,852
Taxes, other than on earnings			599				3,873				—				4,472
Other			21				—				—				21
Total costs and expenses			1,292,662				26,793				—				1,319,455
Income (loss) from operations			(991,447	)			2,714				—				(988,733	)
Other income (expense):
Interest income			4				—				—				4
Interest expense			(21,848	)			—				—				(21,848	)
Loss on derivative instruments			(56	)			—				—				(56	)
Income from equity investments			1,711				—				(1,711	)			—
Total other income (expense)			(20,189	)			—				(1,711	)			(21,900	)
Income (loss) before provision for income taxes			(1,011,636	)			2,714				(1,711	)			(1,010,633	)
Deferred income tax expense (benefit)			(242,787	)			1,003				—				(241,784	)
Net income (loss)		$	(768,849	)		$	1,711			$	(1,711	)		$	(768,849	)
Comprehensive income (loss)
Net income (loss)			(768,849	)			1,711				(1,711	)			(768,849	)
Other comprehensive income			12,224				—				—				12,224
Comprehensive income (loss)		$	(756,625	)		$	1,711			$	(1,711	)		$	(756,625	)

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PREDECESSOR COMPANY
 
Supplemental Condensed Consolidating Statement of Operations
Three Months Ended December 31, 2013
(UNAUDITED)

		Parent Company Only				Guarantor Subsidiaries				Eliminations				Consolidated
		(In thousands)
Revenue:
Oil and natural gas		$	123,256			$	18,389			$	—			$	141,645
Other			152				813				—				965
Total revenue			123,408				19,202				—				142,610
Costs and expenses:
Lease operating			33,405				5,773				—				39,178
Transportation			1,250				1				—				1,251
Exploration expenditures and dry hole costs			12,329				617				—				12,946
Impairment of oil and natural gas properties			754				—				—				754
Depreciation, depletion and amortization			40,617				5,895				—				46,512
Accretion of liability for asset retirement obligations			8,168				1,667				—				9,835
General and administrative			7,210				—				—				7,210
Taxes, other than on earnings			236				2,370				—				2,606
Gain on sale of assets			(80	)			—								(80	)
Other			1,865				—				—				1,865
Total costs and expenses			105,754				16,323				—				122,077
Income from operations			17,654				2,879				—				20,533
Other income (expense):
Interest income			8				—				—				8
Interest expense			(12,998	)			—				—				(12,998	)
Gain on derivative instruments			(25,328	)			—				—				(25,328	)
Income from equity investments			1,819				—				(1,819	)			—
Total other expense			(36,499	)			—				(1,819	)			(38,318	)
Income (loss) before provision for income taxes			(18,845	)			2,879				(1,819	)			(17,785	)
Deferred income tax expense (benefit)			(6,787	)			1,060				—				(5,727	)
Net income (loss)		$	(12,058	)		$	1,819			$	(1,819	)		$	(12,058	)

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PREDECESSOR COMPANY
 
Supplemental Condensed Consolidating Statement of Operations
Six Months Ended December 31, 2013
(UNAUDITED)

		Parent Company Only				Guarantor Subsidiaries				Eliminations				Consolidated
		(In thousands)
Revenue:
Oil and natural gas		$	283,158			$	41,601			$	—			$	324,759
Other			279				1,564				—				1,843
Total revenue			283,437				43,165				—				326,602
Costs and expenses:
Lease operating			69,400				12,069				—				81,469
Transportation			2,224				1				—				2,225
Exploration expenditures and dry hole costs			17,474				618				—				18,092
Impairment of oil and natural gas properties			766				—				—				766
Depreciation, depletion and amortization			89,068				11,433				—				100,501
Accretion of liability for asset retirement obligations			13,245				2,856				—				16,101
General and administrative			13,636				—				—				13,636
Taxes, other than on earnings			461				5,430				—				5,891
Gain on sale of assets			(1,825	)			—				—				(1,825	)
Other			28,272				127				—				28,399
Total costs and expenses			232,721				32,534				—				265,255
Income from operations			50,716				10,631				—				61,347
Other income (expense):
Interest income			72				—				—				72
Interest expense			(26,175	)			—				—				(26,175	)
Gain on derivative instruments			(55,340	)			—				—				(55,340	)
Income from equity investments			6,749				—				(6,749	)			—
Total other expense			(74,694	)			—				(6,749	)			(81,443	)
Income (loss) before provision for income taxes			(23,978	)			10,631				(6,749	)			(20,096	)
Deferred income tax expense (benefit)			(10,636	)			3,882				—				(6,754	)
Net income (loss)		$	(13,342	)		$	6,749			$	(6,749	)		$	(13,342	)

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SUCCESSOR COMPANY
 
Supplemental Condensed Consolidating Statement of Cash Flows
Six Months Ended December 31, 2014
(UNAUDITED)

		Parent Company Only				Guarantor Subsidiaries				Eliminations				Consolidated
		(In thousands)
Net cash provided by operating activities		$	93,232			$	5,669			$	—			$	98,901
Cash flows used in investing activities:
Property acquisitions			(350	)			—				—				(350	)
Capital expenditures			(233,421	)			(5,669	)			—				(239,090	)
Other property and equipment additions			(58	)			—				—				(58	)
Net cash used in investing activities			(233,829	)			(5,669	)			—				(239,498	)
Cash flows provided by financing activities:
Advances from EGC			135,480				—				—				135,480
Net cash provided by financing activities			135,480				—				—				135,480
Net decrease in cash and cash equivalents			(5,117	)			—				—				(5,117	)
Cash and cash equivalents at beginning of period			5,601				—				—				5,601
Cash and cash equivalents at end of period		$	484			$	—			$	—			$	484

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PREDECESSOR COMPANY
 
Supplemental Condensed Consolidating Statement of Cash Flows
Six Months Ended December 31, 2013
(UNAUDITED)

		Parent Company Only				Guarantor Subsidiaries				Eliminations				Consolidated
		(In thousands)
Net cash provided by operating activities		$	173,834			$	21,249			$	—			$	195,083
Cash flows provided by (used in) investing activities:
Decrease in restricted cash			51,757				—				—				51,757
Property acquisitions			(25,478	)			—				—				(25,478	)
Deposit for Nexen Acquisition			(7,040	)			—				—				(7,040	)
Capital expenditures			(148,687	)			(21,249	)			—				(169,936	)
Other property and equipment additions			(753	)			—				—				(753	)
Proceeds from sale of assets			80				—				—				80
Net cash used in investing activities			(130,121	)			(21,249	)			—				(151,370	)
Cash flows provided by (used in) financing activities:
Repayments of indebtedness			(35,000	)			—				—				(35,000	)
Deferred financing costs			(36	)			—				—				(36	)
Purchase of shares into treasury			(4,544	)			—				—				(4,544	)
Exercise of stock options			794				—				—				794
Net cash used in financing activities			(38,786	)			—				—				(38,786	)
Net increase in cash and cash equivalents			4,927				—				—				4,927
Cash and cash equivalents at beginning of period			3,885				—				—				3,885
Cash and cash equivalents at end of period		$	8,812			$	—			$	—			$	8,812

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Statements we make in this Quarterly Report on Form 10-Q (the “Quarterly Report”) which express a belief, expectation or intention, as well as those that are not historical fact, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our forward-looking statements are subject to various risks, uncertainties and assumptions, including those to which we refer under the headings “Cautionary Statement Concerning Forward-Looking Statements” and “Risk Factors” in Items 1 and 1A of Part I of our 2014 Transition Report and under the heading “Risk Factors” in Item 1A of Part II of this Quarterly Report.

OVERVIEW

EPL Oil & Gas, Inc. (“we,” “our,” “us,” “the Company” or “EPL”) was incorporated as a Delaware corporation in January 1998 and is a wholly-owned subsidiary of Energy XXI Gulf Coast, Inc. (“EGC”), a Delaware corporation and indirect wholly-owned subsidiary of Energy XXI Ltd, an exempted company under the laws of Bermuda (“Energy XXI”). We operate as an independent oil and natural gas exploration and production company with current operations concentrated in the U.S. Gulf of Mexico shelf (“GoM shelf”) focusing on state and federal waters offshore Louisiana, which we consider our core area.

On June 3, 2014, Energy XXI, EGC, Clyde Merger Sub, Inc., a wholly-owned subsidiary of EGC (“Merger Sub”), and EPL, completed the transactions contemplated by the Agreement and Plan of Merger, dated as of March 12, 2014 (as amended, the “Merger Agreement”), by and among Energy XXI, EGC, Merger Sub, and EPL, pursuant to which Merger Sub was merged with and into EPL with EPL continuing as the surviving corporation (the “Merger”). Pursuant to the Merger Agreement, at the effective time of the Merger, the issued and outstanding shares of EPL common stock, par value $0.001 per share, were converted, in the aggregate, into the right to receive merger consideration consisting of approximately 65% in cash and 35% in shares of common stock of Energy XXI, par value $0.005 per share.

The Merger resulted in EPL becoming an indirect, wholly-owned subsidiary of Energy XXI. Therefore, in the preparation of our financial statements, we have applied “pushdown” accounting, based on guidance from the Securities and Exchange Commission (“SEC”). Pushdown accounting refers to the use of the acquiring entity’s basis of accounting in the preparation of the acquired entity’s financial statements. As a result, our separate financial statements reflect the new basis of accounting recorded by Energy XXI upon acquisition. As such, in accordance with U.S. GAAP, due to our new basis of accounting, our financial statements include a black line denoting that our financial statements covering periods prior to the date of the Merger are not comparable to our financial statements as of and subsequent to the date of the Merger. References to the “Predecessor Company” refer to reporting dates of the Company through June 3, 2014, reflecting results of operations and cash flows of the Company prior to the Merger on our historical accounting basis; subsequent thereto, the Company is referred to as the “Successor Company,” reflecting the impact of pushdown accounting and the results of operations and cash flows of the Company subsequent to the Merger.

Energy XXI follows the “full cost” method of accounting for its oil and gas producing activities, while we had historically followed the “successful efforts” method of accounting. Subsequent to the Merger, we converted our accounting method from successful efforts to the full cost method of accounting to be consistent with Energy XXI’s method of accounting pursuant to SEC guidance, which requires a reporting entity that follows the full cost method to apply that method to all of its operations and to the operations of its subsidiaries. Under U.S. GAAP, a change in accounting method is generally required to be applied retroactively in order to provide comparable historical period information to users of financial statements. However, due to the new basis of accounting established as a result of the Merger transaction and pushdown accounting, our financial statements are no longer comparable to those of prior periods and we have applied the full cost method of accounting on a prospective basis from the date of the Merger.

Under the full cost method of accounting, the costs of unsuccessful, as well as successful, exploration and development activities are capitalized as properties and equipment. This includes any internal costs that are directly related to property acquisition, exploration and development activities but does not include any costs related to production, general corporate overhead or similar activities. Gain or loss on the sale or other

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disposition of oil and gas properties is not recognized, unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves.

Under the full cost method, oil and natural gas properties include costs that are excluded from costs being depleted or amortized. Costs excluded from depletion or amortization represent investments in unevaluated properties and include non-producing leasehold, geological and geophysical costs associated with leasehold or drilling interests and exploration drilling costs. We exclude these costs until the property has been evaluated. We also allocate a portion of our acquisition costs to unevaluated properties based on fair value. Costs are transferred to the full cost pool as the properties are evaluated or over the life of the reservoir.

As noted above, prior to the Merger, we used the successful efforts method of accounting for oil and natural gas producing activities. Costs to acquire mineral interests in oil and natural gas properties, to drill and complete exploratory wells with found proved reserves, and to drill and complete development wells were capitalized. Exploratory drilling costs were initially capitalized, but charged to expense if and when a well was determined not to have reserves in commercial quantities. Geological and geophysical costs were charged to expense as incurred. Leasehold acquisition costs were capitalized as unproved properties. If proved reserves were discovered on undeveloped leases, the related leasehold costs were transferred to proved properties and amortized using the units of production method. For individual unevaluated properties with capitalized costs below a threshold amount, we allocated capitalized costs to earnings generally over the primary lease terms. Properties that were subject to amortization and those with capitalized costs greater than the threshold amount were assessed for impairment periodically. Capitalized costs of producing oil and natural gas properties were depreciated and depleted by the units-of-production method.

We produce both oil and natural gas. Throughout this Quarterly Report, when we refer to “total production,” “total reserves,” “percentage of production,” “percentage of reserves,” or any similar term, we have converted our natural gas reserves or production into barrel of oil equivalents. For this purpose, six thousand cubic feet of natural gas is equal to one barrel of oil, which is based on the relative energy content of natural gas and oil. Natural gas liquids are aggregated with oil in this Quarterly Report.

Overview and Outlook

As a result of pushdown accounting in connection with the Merger, the Predecessor Company’s operations are deemed to have ceased on June 3, 2014 and the Successor Company began operations as of that date. In the following discussion, the consolidated financial information for the three and six months ending December 31, 2014 (reflecting operations of the Successor Company) is not comparable to that for the three and six months ending December 31, 2013 (reflecting operations of the Predecessor Company). However, the comparability of certain components of our operating results and key operating performance measures was not significantly impacted by the Merger, specifically those related to production, average oil and natural gas selling prices, revenues and lease operating expenses. Therefore, we believe that comparing the Successor Company’s results of operations and cash flows with those of the Predecessor Company is useful when analyzing certain measures of our performance.

As a result of the Merger, the future strategy of the Company is determined by Energy XXI’s Board of Directors. Our fiscal year 2015 capital budget is approximately $250 million, excluding potential capitalized general and administrative expenses. The budgeted capital is allocated to development activities, which are geared toward the improvement of existing production, the continued development of core fields, and the performance of necessary plugging, abandonment and other decommissioning activities.

Our revenue, profitability and future growth rate depend substantially on factors beyond our control, such as oil and natural gas prices, tropical weather, economic, political and regulatory developments and availability of other sources of energy. Prices for oil and natural gas historically have been extremely volatile and are expected to continue to be volatile. Oil prices declined severely during the second quarter of our 2015 fiscal year, with continued lower prices in the third fiscal quarter of 2015. The posted price per barrel for West Texas intermediate light sweet crude oil, or WTI, for the period from January 1, 2014 to December 31, 2014 ranged from a high of $107.26 to a low of $53.27 in the last calendar quarter of the year, a decrease of 50.3%, and the NYMEX natural gas price per MMBtu for the period January 1, 2014 to December 31, 2014 ranged from a high of $6.15 to a low of $2.89, a decrease of 53%. As of January 30, 2015, the spot market

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price for WTI declined further to $48.24. During January 2015, we entered into Argus-LLS three-way collars on 7,000 barrels of our estimated oil production per day from February through December 2015.

The recent declines in oil prices have adversely affected our financial position and results of operations, and sustained periods of low prices for oil and natural gas are likely to materially adversely affect our financial position, our results of operations, the quantities of oil and natural gas reserves that we can economically produce and our access to capital. At December 31, 2014, we recognized a ceiling test write-down of our oil and natural gas properties totaling $682.9 million. The write-down did not impact our cash flows from operating activities but did reduce net income and stockholder’s equity. If the current downward trend in oil prices continues, there is a reasonable likelihood that we could incur further impairment to our full cost pool in calendar 2015 based on the average oil and natural gas price calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the previous 12-month period under SEC pricing methodology. The decline in commodity prices, if sustained, may result in a reduction of our borrowing base under our Revolving Credit Sub-Facility, which would adversely affect our working capital available to fund our capital spending program as well as potentially require us to repay certain of our outstanding indebtedness. The next borrowing base redetermination is expected during the quarter ended June 30, 2015, although an earlier redetermination is possible under our Revolving Credit Sub-Facility. In addition, a continued low commodity price environment and the negative impact to our cash flow from operations, when combined with our significant indebtedness, will impair our ability to comply in future quarters with our debt instruments unless we are able to improve our liquidity position or take other mitigating actions. See “Risk Factors” in Part I, Item 1A of our 2014 Transition Report and Item 1A of Part II of this Quarterly Report for a more detailed discussion of these risks.

We intend to continue to focus on integrating operations to realize consolidation benefits and maximize returns on existing assets by deploying capital resources on lower risk development drilling in the fields where we have previously enjoyed success, reducing capital commitments on exploration and other activities that do not provide incremental production while we seek to improve cash flow and pay down debt. To further accelerate the reduction in leverage, we and EGC are pursuing potential arrangements with third parties to monetize certain midstream assets or sell certain non-core oil and gas properties to enable us to further reduce the amount of required capital commitments. We and EGC are also evaluating various alternatives with respect to the Revolving Credit Facility and other indebtedness. There can be no assurance any of these discussions or transactions will prove successful. Absent success in these pursuits, a resultant breach of the covenants under the Revolving Credit Facility would cause a default under such facility, potentially resulting in acceleration of all amounts outstanding under the Revolving Credit Facility, including our Revolving Credit Sub-Facility, as well as all of the other outstanding indebtedness of EGC and EPL. Certain payment defaults or an acceleration under our Revolving Credit Sub-Facility could cause a cross-default or cross-acceleration of our 8.25% Senior Notes. Such a cross-default or cross-acceleration could have a wider impact on our liquidity than might otherwise arise from a default or acceleration of a single debt instrument. If an event of default occurs, or if other debt agreements cross-default, and the lenders under the affected debt agreements accelerate the maturity of any loans or other debt outstanding, we may not have sufficient liquidity to repay all of our outstanding indebtedness.

Known Trends and Uncertainties

Ceiling Test Write-down.  During the three months ended December 31, 2014, we recognized a write-down of our oil and natural gas properties. Continued declines or suppression of commodity prices and/or widening negative price differentials could result in additional write-downs of our oil and natural gas properties in future periods.

Oil Spill Response Plan.  Energy XXI maintains a Regional Oil Spill Response Plan (the “Plan”) that defines response requirements, procedures and remediation plans in the event we have an oil spill. Oil Spill Response Plans are generally approved by the Bureau of Safety and Environmental Enforcement (“BSEE”) bi-annually, except when changes are required, in which case revised plans are required to be submitted for approval at the time changes are made. We believe the Plan specifications are consistent with the requirements set forth by the BSEE. Additionally, these plans are tested and drills are conducted periodically at all levels of the Company.

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Hurricanes.  Since the majority of our production originates in the Gulf of Mexico, we are particularly vulnerable to the effects of hurricanes on production. Significant hurricane impacts could include reductions and/or deferrals of future oil and natural gas production and revenues, increased lease operating expenses for evacuations and repairs and possible acceleration of plugging and abandonment costs.

RESULTS OF OPERATIONS

The following table presents information about our oil and natural gas operations (in thousands, except per unit amounts).

		Three Months Ended December 31, 2014				Three Months Ended December 31, 2013				Six Months Ended December 31, 2014				Six Months Ended December 31, 2013
Net production (per day):
Oil (Bbls)			18,465				15,109				18,264				16,295
Natural gas (Mcf)			38,737				29,101				38,735				31,399
Total (Boe)			24,921				19,959				24,720				21,528
Average sales prices(1):
Oil (per Bbl)		$	83.99			$	94.37			$	90.05			$	101.07
Natural gas (per Mcf)			3.76				3.91				3.81				3.76
Total (per Boe)			68.07				77.14				72.50				81.98
Oil and natural gas revenues (in thousands):
Oil		$	142,680			$	131,183			$	302,620			$	303,030
Natural gas			13,390				10,462				27,170				21,729
Total			156,070				141,645				329,790				324,759
Impact of derivatives instruments settled during the period(1):
Oil (per Bbl)						$	(2.65	)						$	(2.40	)
Natural gas (per Mcf)							0.02								0.01
Average costs (per Boe):
LOE		$	24.12			$	21.34			$	24.54			$	20.57
Taxes, other than on earnings			0.85				1.42				0.98				1.49
General and administrative (“G&A”) expenses			2.97				3.93				3.27				3.44
Increase (decrease) in oil and natural gas revenues due to:
Changes in prices of oil		$	(14,420	)						$	(32,542	)
Changes in production volumes of oil			25,917								32,132
Total increase (decrease) in oil sales			11,497								(410	)
Changes in prices of natural gas		$	(401	)						$	289
Changes in production volumes of natural gas			3,329								5,152
Total increase in natural gas sales			2,928								5,441