XLON:EXXI Energy XXI (Bermuda) Ltd Annual Report 10-K Filing - 6/30/2012

Effective Date 6/30/2012

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



 

FORM 10-K



 

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

For the fiscal year ended June 30, 2012
or

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

For the transition period from             to            

Commission file number: 001-33628



 

Energy XXI (Bermuda) Limited

(Exact name of registrant as specified in its charter)



 

 
Bermuda   98-0499286
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 
Canon’s Court, 22 Victoria Street,
PO Box HM 1179,
Hamilton HM EX, Bermuda
  N/A
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (441)-295-2244



 

Securities registered pursuant to Section 12(b) of the Act:

 
Title of each class   Name of each exchange on which registered
Common Stock, par value $0.005 per share   The NASDAQ Stock Market

Securities registered pursuant to Section 12(g) of the Act: None



 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes x No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes o No x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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 x   Accelerated filer o
Non-accelerated filer o
(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

The aggregate market value of the registrant’s common stock held by non-affiliates was approximately $1,704,223,329 based on the closing sale price of $31.88 per share as reported on The NASDAQ Global Select Market on December 30, 2011, the last business day of the registrant’s most recently completed second fiscal quarter.

The number of shares of the registrant’s common stock outstanding on July 31, 2012 was 79,275,890.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the registrant’s definitive proxy statement for its 2012 Annual Meeting of Shareholders, which will be filed within 120 days of June 30, 2012, are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 


 
 

TABLE OF CONTENTS

TABLE OF CONTENTS

 
  Page
GLOSSARY OF TERMS     ii  
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS     1  
PART I
 

Item 1

Business

    2  

Item 1A

Risk Factors

    18  

Item 1B

Unresolved Staff Comments

    36  

Item 2

Properties

    36  

Item 3

Legal Proceedings

    36  

Item 4

Mine Safety Disclosures

    36  
PART II
 

Item 5

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

    37  

Item 6

Selected Financial Data

    38  

Item 7

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    41  

Item 7A

Quantitative and Qualitative Disclosures About Market Risk

    59  

Item 8

Financial Statements and Supplementary Data

    62  

Item 9

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

    105  

Item 9A

Controls and Procedures

    105  

Item 9B

Other Information

    105  
PART III
 

Item 10

Directors, Executive Officers and Corporate Governance

    106  

Item 11

Executive Compensation

    106  

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

    106  

Item 13

Certain Relationships and Related Transactions, and Director Independence

    106  

Item 14

Principal Accounting Fees and Services

    106  
PART IV
 

Item 15

Exhibits, Financial Statement Schedules

    107  
Signatures     108  

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GLOSSARY OF TERMS

Below is a list of terms that are common to our industry and used throughout this Annual Report on Form 10-K:

     
Bbls   Standard barrel containing 42 U.S. gallons   MMBbls   One million Bbls
Mcf   One thousand cubic feet   MMcf   One million cubic feet
Btu   One British thermal unit   MMBtu   One million Btu
BOE   Barrel of oil equivalent. Natural gas is converted into one BOE based on six Mcf
of gas to one barrel of oil
  MBOE   One thousand BOEs
DD&A   Depreciation, Depletion and Amortization   MMBOE   One million BOEs

Call options are contracts giving the holder (purchaser) the right, but not the obligation, to buy (call) a specified item at a fixed price (exercise or strike price) during a specified period. The purchaser pays a nonrefundable fee (the premium) to the seller (writer).

Cash-flow hedges are derivative instruments used to mitigate the risk of variability in cash flows from crude oil and natural gas sales due to changes in market prices. Examples of such derivative instruments include fixed-price swaps, fixed-price swaps combined with basis swaps, purchased put options, costless collars (purchased put options and written call options) and producer three-ways (purchased put spreads and written call options). These derivative instruments either fix the price a party receives for its production or, in the case of option contracts, set a minimum price or a price within a fixed range.

Completion refers to the work performed and the installation of permanent equipment for the production of natural gas and/or crude oil from a recently drilled or recompleted well.

Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. For a complete definition of proved developed oil and gas reserves, refer to Rule 4-10(a)(3) of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”).

Development well is a well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon known to be productive.

Dry Well is an exploratory, development or extension well that proves to be incapable of producing either oil or gas in sufficient quantities to justify completion as an oil or gas well.

Exploitation is drilling wells in areas proven to be productive.

Exploratory well is a well drilled to find and produce oil or gas in an unproved area, to find a new reservoir in a field previously found to be productive of oil or gas in another reservoir, or to extend a known reservoir. Generally, an exploratory well is any well that is not a development well, a service well or a stratigraphic test well.

Fair-value hedges are derivative instruments used to hedge or offset the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment. For example, a contract is entered into whereby a commitment is made to deliver to a customer a specified quantity of crude oil or natural gas at a fixed price over a specified period of time. In order to hedge against changes in the fair value of these commitments, a party enters into swap agreements with financial counterparties that allow the party to receive market prices for the committed specified quantities included in the physical contract.

Field is an area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic condition. For a complete definition of a field, refer to Rule 4-10(a)(8) of Regulation S-X as promulgated by the SEC.

Formation is a stratum of rock that is recognizable from adjacent strata consisting mainly of a certain type of rock or combination of rock types with thickness that may range from less than two feet to hundreds of feet.

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Gathering and transportation is the cost of moving crude oil from several wells into a single tank battery or major pipeline.

Gross acres or gross wells are the total acres or wells in which a working interest is owned.

Horizon is a zone of a particular formation or that part of a formation of sufficient porosity and permeability to form a petroleum reservoir.

Independent oil and gas company is a company that is primarily engaged in the exploration and production sector of the oil and gas business.

Lease operating or well operating expenses are expenses incurred to operate the wells and equipment on a producing lease.

Net acreage and net oil and gas wells are obtained by multiplying gross acreage and gross oil and gas wells by the Company’s working interest percentage in the properties.

Oil includes crude oil, condensate and natural gas liquids.

Operating costs include direct and indirect expenses, including general and administrative expenses, incurred to manage, operate and maintain our wells and related equipment and facilities.

Plugging and abandonment refers to the sealing off of fluids in the strata penetrated by a well so that the fluids from a stratum will not escape into another or to the surface. Regulations of many states and the federal government require the plugging of abandoned wells.

Production costs are costs incurred to operate and maintain our wells and related equipment and facilities. For a complete definition of production costs, please refer to Rule 4-10(a) (20) of Regulation S-X as promulgated by the SEC.

Productive well is an exploratory, development or extension well that is not a dry well.

Proved area refers to the part of a property to which proved reserves have been specifically attributed.

Proved oil and gas reserves are those quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible, from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations, prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. For a complete definition of proved reserves, refer to Rule 4-10(a)(22) of Regulation S-X as promulgated by the SEC.

Proved undeveloped oil and gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. For a complete definition of proved undeveloped oil and gas reserves, refer to Rule 4-10(a)(4) of Regulation S-X as promulgated by the SEC.

Put options are contracts giving the holder (purchaser) the right, but not the obligation, to sell (put) a specified item at a fixed price (exercise or strike price) during a specified period. The purchaser pays a nonrefundable fee (the premium) to the seller (writer).

Reservoir refers to a porous and permeable underground formation containing a natural accumulation of producible oil and/or gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.

Seismic is an exploration method of sending energy waves or sound waves into the earth and recording the wave reflections to indicate the type, size, shape and depth of subsurface rock formation. 2-D seismic provides two-dimensional information and 3-D seismic provides three-dimensional pictures.

Stratigraphic test well refers to a drilling effort, geologically directed, to obtain information pertaining to a specific geologic condition. Such wells customarily are drilled without the intention of being completed for hydrocarbon production. This classification also includes tests identified as core tests and all types of

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expendable holes related to hydrocarbon exploration. Stratigraphic test wells are classified as (i) exploratory-type, if not drilled in a proved area, or (ii) development-type, if drilled in a proved area.

Working interest is the operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and a share of production.

Workover is the operations on a producing well to restore or increase production and such costs are expensed. If the operations add new proved reserves, such costs are capitalized.

Zone is a stratigraphic interval containing one or more reservoirs.

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements and information in this Annual Report on Form 10-K (this “Form 10-K”) 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. Known material factors that could cause actual results to differ materially from those in the forward-looking statements include those described in (1) Part I, “Item 1A. Risk Factors” and elsewhere in this Form 10-K, (2) our reports and registration statements filed from time to time with the SEC and (3) other public announcements we make from time to time.

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 upon which they are made, whether as a result of new information, future events or otherwise.

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PART I

Item 1.  Business

Overview

We are an independent oil and natural gas exploration and production company with operations focused in the U.S. Gulf Coast and the Gulf of Mexico. Our business strategy includes: (1) acquiring producing oil and gas properties; (2) exploiting and exploring our core assets to enhance production and ultimate recovery of reserves; and (3) utilizing a portion of our capital program to explore the ultra-deep trend for potential oil and gas reserves. As of June 30, 2012, our estimated net proved reserves were 119.6 million BOE, of which 71% was oil and 68% was proved developed. Of the oil, 94% was crude oil and condensate with natural gas liquids comprising the remaining 6%. We are the third largest oil producer on the Gulf of Mexico Shelf with interest in six of the eleven largest oil fields in the Gulf of Mexico Shelf.

We were originally formed and incorporated in July 2005 as an exempted company under the laws of Bermuda to serve as a vehicle for the acquisition of oil and gas reserves and related assets. In October 2005, we completed a $300 million initial public offering of common stock and warrants on the Alternative Investment Market of the London Stock Exchange (“AIM”). On August 1, 2007, our common stock was admitted for trading on The NASDAQ Capital Market and on August 12, 2011, our common stock was admitted for trading on the Nasdaq Global Select Market (“NASDAQ”).

Since our inception in 2005, we have completed five major acquisitions for aggregate cash consideration of approximately $2.5 billion. In February 2006, we acquired Marlin Energy, L.L.C. (“Marlin”) for total cash consideration of approximately $448.4 million. In June 2006, we acquired Louisiana Gulf Coast producing properties from affiliates of Castex Energy, Inc. (“Castex”) for approximately $312.5 million in cash (the “Castex Acquisition”). In June 2007, we purchased certain Gulf of Mexico shelf properties (the “Pogo Properties”) from Pogo Producing Company for approximately $415.1 million (the “Pogo Acquisition”). In November 2009, we acquired certain Gulf of Mexico shelf oil and natural gas interests from MitEnergy Upstream LLC (“MitEnergy”), a subsidiary of Mitsui & Co., Ltd., for total cash consideration of $276.2 million (the “Mit Acquisition”). On December 17, 2010, we acquired certain shallow-water Gulf of Mexico shelf oil and natural gas interests from affiliates of Exxon Mobil Corporation (“ExxonMobil”) for cash consideration of $1.01 billion (the “ExxonMobil Acquisition”).

Business Strategy

Acquire Producing Assets.  Our acquisition strategy is to target mature, oil-producing properties in the Gulf of Mexico and the U.S. Gulf Coast that have not been thoroughly depleted by prior operators. We believe these areas will provide us with an inventory of low-risk recompletion and extension opportunities in our geographic area of expertise.

We regularly engage in discussions with potential sellers regarding acquisition opportunities. These acquisition efforts may involve our participation in auction processes, as well as situations in which we believe we are the only party or one of a limited number of potential buyers in negotiations with the potential seller. We finance acquisitions with a combination of funds from our equity offerings, debt offerings, bank borrowings and cash generated from operations.

Exploit and Explore Core Properties.  We intend to focus our efforts on exploitation of acquired properties through production optimization, infill drilling, and extensive field studies of the primary reservoirs. Our goal is to exploit the properties that we acquire to achieve at least a 20% increase in present value of the properties after acquisition. We will consider increasing our commodity derivative positions as we increase production to mitigate the impact of commodity price volatility on our business and to help protect our investments.

Explore the Ultra-Deep Trend.  Using a portion of our exploration budget, we explore for ultra-deep reserves on the shelf (depths in excess of 20,000 feet and water depths of less than 150 feet) and onshore (depths in excess of 20,000 feet) of the Gulf of Mexico, for each target that we believe has potential for significant reserves. Ultra-deep is considered a well that drills below the salt/saltweld. Since 2008, we have partnered with McMoRan Exploration Company to explore the ultra-deep trend. Including the Davy Jones

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discovery well, Davy Jones Offset, Blackbeard East, Lafitte and Blackbeard West wells, the McMoRan-operated group (in which we have various interests) has identified approximately 15 ultra-deep prospects in shallow water near existing infrastructure. In addition we will participate in three onshore ultra-deep prospects located in South Louisiana. The group’s current sub-salt drilling plans include 2 to 3 exploratory wells. We have participated in 7 wells to date with our participations ranging from approximately 9% to 20%. Of these wells, one has been temporarily abandoned pending further evaluation, three are temporarily abandoned pending facilities and completions, two are currently drilling and one is currently being tested. We target to spend less than 10% of our budgeted cash flow on our exploration activities on the ultra-deep trend.

Business Strengths

Significant Technical Expertise.  We have assembled a technical staff with an average of over 23 years of industry experience. Our technical staff has specific expertise in developing our core properties. Additionally, members of our senior management team average over 27 years of operating experience in the Gulf of Mexico. We also own an extensive core focused seismic database covering approximately 5,670 square miles, which assists us in identifying attractive development and exploration drilling opportunities.

Oil Focus.  We believe we have a higher percentage of oil in our reserves and production as compared to many of our peers. Given the current commodity price environment and resulting disparity between oil and natural gas prices on a BOE basis, we believe our high percentage of oil reserves compared to our overall reserve base has provided us with an economic advantage. Additionally, the production decline curve of oil is typically lower than a comparable natural gas decline curve, resulting in longer term production on current reserves.

Operating Control.  As the operator of a property, we are afforded greater control of the optimization of production, the timing and amount of capital expenditures and the operating parameters and costs of our projects.

Geographically Focused Properties in the Gulf of Mexico.  We operate geographically focused producing properties located in the Gulf of Mexico waters and the U.S. Gulf Coast that give us the opportunity to minimize logistical costs and reduce staffing requirements.

General Information on Properties

Our properties are primarily located in the Gulf of Mexico waters and the U.S. Gulf Coast. Below are descriptions of our significant properties at June 30, 2012 which represent approximately 83% of our net proved reserves and 88% of our future net revenues, discounted at 10%.

Main Pass 61 Field.  We operate and have a 100% working interest in the Main Pass 61 field, located near the mouth of the Mississippi River in approximately 90 feet of water on Outer Continental Shelf (“OCS”) blocks Main Pass 60, 61, 62 and 63. The field was discovered by Pogo in 2000, and has produced in excess of 51 MMBOE since production first began in 2002, from four Upper Miocene sands. The primary producer is the J-6 Sand, which consists of a series of stratigraphic traps, located along regional south dip, in a normal pressure environment. The two larger J-6 Sand stratigraphic pods are black oil reservoirs that are being waterflooded to maximize recovery. There are 22 producing wells and three major production platforms located throughout the field. The field’s average net production for the quarter ended June 30, 2012 of 6.4 MBOE/Day (“MBOED”), accounted for approximately 13% of our net production for the quarter. Net proved reserves for the field, which is our largest field based upon net proved reserves, were 89% oil at June 30, 2012.

West Delta 73.  We operate and have a 100% working interest in the West Delta 73 field, located 28 miles offshore of Grand Isle, Louisiana in approximately 175 feet of water on OCS. The field, which was first discovered in 1962 by Humble Oil and Refining, is a large low relief faulted anticline. The field produces from Pleistocene through Upper Miocene aged sands trapped structurally over a large anticlinal feature from 1,500 feet to 13,000 feet. The field has produced in excess of 376 MMBOE. There are six production platforms and 34 active and 30 shut-in wells located throughout the field. The field’s average net production for the quarter ended June 30, 2012 was 4.2 MBOED. Net proved reserves for the field were 84% oil at June 30, 2012. This field is the seventh largest oil field on the Gulf of Mexico Shelf.

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West Delta 30.  We operate the West Delta 30 field, located 21 miles offshore of Grand Isle, Louisiana in approximately 45 feet of water on OCS. The working ownership varies based on unit ownership from 100% to 50% with Maritech being the operator in some wells on the West flank. The field, which was discovered in 1948 by Humble Oil and Refining, is a large salt dome. Pleistocene through Upper Miocene sands are trapped structurally by radial faulting on the flanks of the salt piercement. Productive sands range from 2,000 feet to 17,500 feet in depth and generally produce using moderate water drive. Minor faulting that is secondary to the major normal fault separates hydrocarbon accumulations into individual compartments. The field has produced in excess of 731 MMBOE. There are 12 production platforms and 46 active wells located throughout the field. The field’s average net production for the quarter ended June 30, 2012 was 2.8 MBOED. Net proved reserves for the field were 80% oil at June 30, 2012. This field is the largest oil field on the Gulf of Mexico Shelf.

South Pass 49 Field.  We have a 100% working interest in and operate the South Pass 49 field Unit, which is located near the mouth of the Mississippi River in approximately 400 feet of water. The field was discovered by Gulf Oil in 1974. The field produces from Lower Pliocene sands, which consist of the Discorbis 69 and Discorbis 70 sands, ranging in depths from 8,700 to 9,400 feet, on OCS blocks South Pass 33, 48, and 49. We also have a 57% working interest in and operate all sands located at depths above and below the Discorbis 69 and 70 units. The field is produced from one central production platform. The field’s average net production for the quarter ended June 30, 2012 was 2.2 MBOED. Net proved reserves for the field were 64% oil at June 30, 2012.

Main Pass 73 Field.  We have a 100% working interest in and operate the Main Pass 73 field, located in approximately 100 feet of water near the mouth of the Mississippi River and in close proximity to the Main Pass 61 field. This field consists of OCS blocks Main Pass 72, 73, and part of 74. The field was originally discovered in 1976 by Mobil and production began in 1979. Production is from the Upper Miocene sands ranging in depths from 5,000 to 12,500 feet. Three producing platforms and one central facility are located throughout the field. We also have ownership in two Petroquest operated gas condensate wells on Main Pass 74. Average net production from the complex for the quarter ended June 30, 2012 was 5.7 MBOED and accounted for approximately 12% of our net production for the quarter. Net proved reserves for the field were 69% oil at June 30, 2012.

South Timbalier 21 Field.  We operate and have a 100% working interest in the South Timbalier 21 field, located six miles offshore of Lafourche Parish, Louisiana in approximately 50 feet of water on OCS blocks South Timbalier 21, 22, 23, 27 and 28, as well as on two state leases. In addition, we were the high bidder on South Timbalier Block 22 and received notice that the bid was accepted on August 9, 2012. The field was discovered by Gulf Oil in the late 1950s and has produced in excess of 326 MMBOE since production first began in 1957. The field is bounded on the north by a major Miocene expansion fault. Miocene sands are trapped structurally and stratigraphically from 7,000 feet to 15,000 feet in depth. Minor faulting that is secondary to the major normal fault separates hydrocarbon accumulations into individual compartments. There are 10 major production platforms and 44 smaller structures located throughout the field. The field’s average net production for the quarter ended June 30, 2012 was 2.3 MBOED. Net proved reserves for the field were 84% oil at June 30, 2012. This field is the ninth largest oil field on the Gulf of Mexico Shelf.

Grand Isle 16/18.  We operate and have a 100% working interest in the Grand Isle 16/18 field, located seven miles offshore of Lafourche Parish, Louisiana in approximately 50 feet of water on OCS. The field was originally discovered in 1948 by Humble Oil and Refinery and production begin in 1948. The field consists of two separate shallow piercement salt domes. Pleistocene through Miocene Sands are trapped structurally and stratigraphically from 6,000 feet to 16,000 feet in depth against the salt piercements. Radial faulting separates hydrocarbon accumulations into individual compartments. The field has produced in excess of 517 MMBOE. There are 15 production platforms and 48 active and 33 shut-in wells located throughout the field. The field’s average net production for the quarter ended June 30, 2012 was 10.6 MBOED and accounted for approximately 22% of our net production for the quarter. Net proved reserves for the field were 76% oil at June 30, 2012. This field is the fifth largest oil field on the Gulf of Mexico Shelf.

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South Timbalier 54 Field.  We operate and have a 100% working interest in the South Timbalier 54 field, located 36 miles offshore of Lafourche Parish, Louisiana in approximately 67 feet of water on OCS. The field was originally discovered in 1955 by Humble Oil and Refinery. The field is set up at the confluence of regional and counter/regional fault systems. Pleistocene through Miocene sands are trapped from 4,800 feet to 17,000 feet in shallow low relief structures over a deeper seated salt dome and in some combination of structural and stratigraphic traps against salt at depth. Minor faulting separates hydrocarbon accumulations into individual compartments. The field has produced in excess of 142 MMBOE. There are five production platforms and 27 active and 17 shut-in wells located throughout the field. The field’s average net production for the quarter ended June 30, 2012 was 3.6 MBOED. Net proved reserves for the field were 69% oil at June 30, 2012.

Bayou Carlin Field.  We currently have a 19% working interest in this field operated by McMoRan located onshore South Louisiana. The discovery well, C.M. Peterson Jr. #1 (Laphroaig) was drilled to 20,250 feet measured depth and put on production in 2007 and has produced 6.1 MMBOE to date. In April 2011, the second well in the field, Laphroaig #2 (Pontiff) was drilled to a total depth of 21,099 feet measured depth and has produced 2.5 MMBOE to date. The field’s average net production for the quarter ended June 30, 2012 was 1.2 MBOED. Net proved reserves for the field were 93% gas at June 30, 2012.

Ultra-Deep Trend Exploration and Development Activity

We participate with McMoRan Exploration Company in several prospects in the ultra-deep shelf and onshore area in the Gulf of Mexico. Data received to date from ultra-deep shelf drilling with respect to the Davy Jones and Blackbeard West discovery wells in the Gulf of Mexico confirm geologic modeling that correlates objective sections on the shelf below the salt weld in the Miocene and older age sections to those productive sections seen in deepwater discoveries by other industry participants. In addition to Davy Jones and Blackbeard West, we have also identified approximately 15 ultra-deep prospects in shallow water near existing infrastructure. In addition we will participate in three onshore ultra-deep prospects located in South Louisiana. From January 2008 through June 2012 we drilled the Blackbeard East, Lafitte, Blackbeard West, Blackbeard West No. 2 and Lineham Creek exploratory wells and completed delineation drilling at Davy Jones. Current sub-salt drilling plans include 2 to 3 exploratory wells. We expect to have sufficient cash flow from operations to fund our current commitments related to our ultra-deep trend exploration and development activity.

As previously reported, we have drilled two successful sub-salt wells in the Davy Jones field. The Davy Jones No. 1 well logged 200 net feet of pay in multiple Wilcox sands, which were all full to base. The Davy Jones offset appraisal well (Davy Jones No. 2), which is located two and a half miles southwest of Davy Jones No. 1, confirmed 120 net feet of pay in multiple Wilcox sands, indicating continuity across the major structural features of the Davy Jones prospect, and also encountered 192 net feet of potential hydrocarbons in the Tuscaloosa and Lower Cretaceous carbonate sections. We expect to commence the completion of the Davy Jones No. 2 well in early 2013. The Davy Jones field involves a large ultra-deep structure encompassing four OCS lease blocks (20,000 acres). As of June 30, 2012, our investment in both wells in the Davy Jones field was approximately $111 million.

Davy Jones.  The Davy Jones No. 1 well on South Marsh Island Block 230 was successfully completed in March 2012 and work is ongoing to establish commercial production from the well. The perforation of the Wilcox “D” sand in March 2012 resulted in positive pressure build-up in the wellbore followed by a gas flare from the well. Initial samples indicated that the natural gas from the Wilcox “D” sand is high quality and contains low levels of CO2 and no H2S is present. Blockage from drilling fluid associated with initial drilling operations prevented the group from obtaining a measurable flow rate. Attempts to perforate the Wilcox “C” sand did not clear the blockage. In April 2012, the group commenced operations to remove the tubing from the well, clear the residual drilling fluid, and remove the perforating guns currently set across the Wilcox “F” sand to provide access to all of the Wilcox reservoirs (“A” through “F”) totaling 200 net feet. To maximize production from the well and enable effective formation penetrations, the group used electric wireline casing guns that are larger than the tubing guns used to perforate the Wilcox “C” and “D” sands. We expect the operations currently underway will enable a measurable flow rate during the first quarter of Fiscal 2013, followed by commercial production shortly thereafter. In June 2012, the operator successfully perforated 165 feet of Wilcox sands in the Davy Jones No.1 well with electric wireline casing guns. The operator expects to conduct a measurable flow test within the September 30, 2012 quarter.

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Blackbeard East.  The Blackbeard East ultra-deep exploration by-pass well was drilled to a total depth of 33,318 feet in January 2012. Exploration results from the well indicate the presence of hydrocarbons below the salt weld in geologic formations including Upper/Middle Miocene, Frio, Vicksburg, and Sparta carbonate. The Frio sands are the first hydrocarbon bearing Frio sands encountered either on the Gulf of Mexico (“GOM”) Shelf or in the deepwater offshore Louisiana. Pressure and temperature data below the salt weld between 19,500 feet and 24,600 feet at Blackbeard East indicate that a completion at these depths could utilize conventional equipment and technologies. The operator holds the lease rights to South Timbalier Block 144 through August 17, 2012 and is submitting initial development plans for Blackbeard East to the Bureau of Safety and Environmental Enforcement of the United States Department of the Interior. The operator plans to test and complete the upper Miocene sands during 2013 using conventional equipment and technologies. Additional plans for further development of the deeper zones continue to be evaluated. The group’s ability to preserve the interest in Blackbeard East will require approval from the Bureau of Safety and Environmental Enforcement of the development plans. Blackbeard East is located in 80 feet of water on South Timbalier Block 144. As of June 30, 2012, our investment in the well totaled approximately $50 million.

Lafitte.  The Lafitte ultra-deep exploration well, which is located on Eugene Island Block 223 in 140 feet of water, was drilled to a total depth of 34,162 feet in March 2012. Exploration results from the well indicate the presence of hydrocarbons below the salt weld in geologic formations including Middle/Lower Miocene, Frio, Vicksburg, and Sparta carbonate. The Upper Eocene sands are the first hydrocarbon bearing Upper Eocene sands encountered either on the GOM Shelf or in the deepwater offshore Louisiana. The group is evaluating development options associated with these formations. As of June 30, 2012, our investment in the well totaled approximately $40 million.

Blackbeard West.  Information gained from the Blackbeard East and Lafitte wells will enable us to consider priorities for future operations at Blackbeard West. As previously reported, the Blackbeard West ultra-deep exploratory well on South Timbalier Block 168 was drilled to 32,997 feet in 2008. Logs indicated four potential hydrocarbon bearing zones that require further evaluation, and the well was temporarily abandoned. The Blackbeard West No. 2 ultra-deep exploration well commenced drilling on November 25, 2011 and is drilling below 21,100 feet. The well, which is located on Ship Shoal Block 188 within the Blackbeard West unit, is targeting Miocene aged sands seen below the salt weld approximately 13 miles east at Blackbeard East and has a proposed total depth of 24,500 feet. In May 2012 the operator set a liner after the well encountered a high pressure gas flow immediately below the salt weld. If successful, completion could utilize conventional equipment and technologies. Our investment in both Blackbeard West wells totaled approximately $43 million at June 30, 2012.

Lineham Creek.  The Lineham Creek exploration prospect, operated by Chevron U.S.A. Inc., which is located onshore in Cameron Parish, Louisiana commenced drilling on December 31, 2011. The well, which is targeting Eocene and Paleocene objectives below the salt weld, is currently drilling below 20,700 feet towards a proposed total depth of 29,000 feet. As of June 30, 2012, our investment in the Lineham Creek well totaled approximately $8 million.

Reserve Estimation Procedures

The information included in this Form 10-K about our proved reserves represents evaluations prepared by Netherland, Sewell & Associates, Inc., independent oil and gas consultants (“NSAI”). NSAI has prepared evaluations on all of our proved reserves on a valuation basis and the estimates of proved crude oil and natural gas reserves attributable to our net interests in oil and gas properties as of June 30, 2012. The scope and results of NSAI’s procedures are summarized in a letter, which is included as Exhibit 99.1 to this Form 10-K. For further information on reserves, including information on future net cash flows and the standardized measure of discounted future net cash flows, see “Item 8. Financial Statements and Supplementary Data.”

Internal Controls for Reserve Estimation

The process performed by NSAI to prepare reserve amounts included the estimation of reserve quantities, future producing rates, future net revenue and the present value of such future net revenue. NSAI also prepared estimates with respect to reserve categorization, using the definitions for proved reserves set forth in Regulation S-X Rule 4-10(a) and subsequent SEC staff interpretations and guidance. In the conduct of their preparation of the reserve estimates, NSAI did not independently verify the accuracy and completeness of

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information and data furnished by us with respect to ownership interests, well test data, historical costs of operation and development or any agreements relating to current and future operations of the properties and sales of production. However, if in the course of its work, something came to its attention which brought into question the validity or sufficiency of any such information or data, NSAI did not rely on such information or data until they had satisfactorily resolved their questions relating thereto.

The reserve estimates prepared by NSAI are then reviewed by our Vice President of Corporate Development and members of our senior engineering staff in order to ensure that our reserve estimates are complete and accurate and are in accordance with the rules and regulations of the SEC. Following the review of our Vice President of Corporate Development, NSAI and our senior engineering staff present their respective reserve estimates to our board of directors for review.

The preparation of our reserve estimates is in accordance with our prescribed internal control procedures, which include verification of input data into a reserve forecasting and economic evaluation software, as well as management review. The internal controls include, but are not limited to, the following:

a comparison of historical expenses is made to the lease operating costs in the reserve database;
updated capital costs are supplied by our Operations Department;
internal reserves estimates are reviewed by well and by area by engineering personnel. A variance by well to the previous year-end reserve report and quarter-end reserve estimate is used as a tool in this process;
material reserve variances are discussed among the internal reservoir engineers and the Vice President of Corporate Development to ensure the best estimate of remaining reserves; and
the internal reserves estimates are reviewed by senior management prior to publication.

Technologies Used in Reserve Estimation

Proved reserves are those quantities of oil and natural gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations. The term “reasonable certainty” implies a high degree of confidence that the quantities of oil and/or natural gas actually recovered will equal or exceed the estimate. To achieve reasonable certainty, our independent petroleum consultant employed technologies that have been demonstrated to yield results with consistency and repeatability. The technologies and economic data used in the estimation of our proved reserves include, but are not limited to, well logs, geologic maps, seismic data, well test data, production data, historical price and cost information and property ownership interests. The accuracy of the estimates of our reserves is a function of:

the quality and quantity of available data and the engineering and geological interpretation of that data;
estimates regarding the amount and timing of future operating costs, severance taxes, development costs and workovers, all of which may vary considerably from actual results;
the accuracy of various mandated economic assumptions such as the future prices of oil and natural gas; and
the judgment of the persons preparing the estimates.

Qualifications of Third Party Engineers

NSAI provides worldwide petroleum property analysis services for energy clients, financial organizations and government agencies. NSAI was founded in 1961 and performs consulting petroleum engineering services under Texas Board of Professional Engineers Registration No. F-002699. The technical person primarily responsible for the preparation of our reserves estimates has been a practicing consulting petroleum engineer at NSAI since 1997 and has over 31 years of practical experience in petroleum engineering. He graduated with a Bachelor of Science in Petroleum Engineering. NSAI has informed us that he meets or exceeds the education, training, and experience requirements set forth in the “Standards Pertaining to the Estimating and

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Auditing of Oil and Gas Reserves Information” promulgated by the Society of Petroleum Engineers and is proficient in the application of industry standard practices to engineering evaluations as well as the application of SEC and other industry definitions and guidelines. The technical work was conducted by a team of six NSAI petroleum engineers and geoscientists having an average industry experience of 21 years.

Because these estimates depend on many assumptions, any or all of which may differ from actual results, reserve estimates may be different from the quantities of oil and natural gas that are ultimately recovered.

Summary of Oil and Gas Reserves at June 30, 2012

The following estimates of the net proved oil and natural gas reserves of our oil and gas properties located entirely within the U.S. are based on evaluations prepared by third-party reservoir engineers. Reserves were estimated in accordance with guidelines established by the SEC, which require that reserve estimates be prepared under existing economic and operating conditions with no provisions for price and cost changes except by contractual arrangements. Reserve estimates are inherently imprecise and estimates of new discoveries are more imprecise than those of producing oil and gas properties. Accordingly, reserve estimates are expected to change as additional performance data becomes available.

         
  Summary of Oil and Gas Reserves as of June 30, 2012
Based on Average Fiscal-Year Prices
     Oil (MBbls)   Natural Gas (MMcf)   MBOE   Percent of Total Proved   PV-10
(in thousands)(1)
Proved
                                            
Developed     63.3       110.4       81.7       68 %    $ 3,138,806  
Undeveloped     21.5       98.6       37.9       32 %      1,158,639  
Total Proved     84.8       209.0       119.6             4,297,445  
Future Income taxes                             1,377,363  
10% discount                             385,407  
Future income taxes discounted at 10%                             991,956  
Standardized measure of future discounted net cash flows                           $ 3,305,489  

(1) We refer to “PV-10” as the present value of estimated future net revenues of estimated proved reserves as calculated by NSAI using a discount rate of 10%. This amount includes projected revenues, estimated production costs and estimated future development costs. PV-10 is not a financial measure prescribed under generally accepted accounting principles (“GAAP”); therefore, the table reconciles this amount to the standardized measure of discounted future net cash flows, which is the most directly comparable GAAP financial measure. Management believes that the non-GAAP financial measure of PV-10 is relevant and useful for evaluating the relative monetary significance of oil and natural gas properties. PV-10 is used internally when assessing the potential return on investment related to oil and natural gas properties and in evaluating acquisition opportunities. We believe the use of this pre-tax measure is valuable because there are unique factors that can impact an individual company when estimating the amount of future income taxes to be paid. Management believes that the presentation of PV-10 provides useful information to investors because it is widely used by professional analysts and sophisticated investors in evaluating oil and natural gas companies. PV-10 is not a measure of financial or operating performance under GAAP, nor is it intended to represent the current market value of our estimated oil and natural gas reserves. PV-10 should not be considered in isolation or as a substitute for the standardized measure of discounted future net cash flows as defined under GAAP. The average oil price prior to quality, transportation fees, and regional price differentials was $115.08 per barrel of oil (calculated using the unweighted average first-day-of-the-month Heavy Louisiana Sweet posted prices during the 12-month period ending on June 30, 2012). The report forecasts crude oil and NGL production separately. The average realized adjusted product prices weighted by production over the remaining lives of the properties, used to determine future net revenues were $113.36 per barrel of oil and $56.92 per barrel of NGLs, after adjusting for quality, transportation fees, and regional price differentials. The $113.36 per barrel realized oil price compares to an unweighted average first-day-of-the-month West

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Texas Intermediate price of $95.67 per barrel (differential of +$17.69 per barrel), and an unweighted average first-day-of-the-month Brent price of $112.49 per barrel (differential of +$0.87 per barrel)
   For natural gas, the average Henry Hub price used was $3.15 per MMBtu, prior to adjustments for energy content, transportation fees, and regional price differentials (calculated using the unweighted average first-day-of-the-month Henry Hub spot price). The average adjusted realized gas price, weighted by production over the remaining lives of the properties used to determine future net revenues, was $3.296 per MCF after adjusting for energy content, transportation fees, and regional price differentials.

Changes in Proved Reserves

Our total proved reserves increased 3.0 MMBOE from 116.6 MMBOE at June 30, 2011 to 119.6 MMBOE at June 30, 2012.

Development of Proved Undeveloped Reserves

Our proved undeveloped reserves at June 30, 2012 were 37.9 MMBOE. Future development costs associated with our proved undeveloped (“PUD”) reserves at June 30, 2012 totaled approximately $531.1 million. In the fiscal year ended June 30, 2012, we developed approximately 4% of our proved undeveloped reserves as of June 30, 2011, consisting of 5 gross, 4.9 net wells at a net cost of approximately $24.3 million. Four PUD’s were not converted into proved developed reserves within the five year requirement at June 30, 2012. Main Pass 61 OCS-G 16493 A-3 and Main Pass 73 B-19 ST are both sidetrack PUDs, but are still producing and cannot be drilled until the PDP zone in each well depletes. South Pass 49 OCS-G 2177 A-2 ST and A-10 ST were not converted because SP 49’s “A” platform is located in a mudslide area and had not been certified for drilling until May 2012, when Bureau of Safety and Environmental Enforcement certified that the platform met conditions for acceptance criteria.

The following table discloses our progress toward the conversion of proved undeveloped reserves during the fiscal year ended June 30, 2012.

   
  Crude Oil and
Natural Gas
  Future Development
Costs
     (MBOE)   (In thousands)
Proved undeveloped reserves at June 30, 2011     35,020     $ 406,649  
Extensions and discoveries     8,041       185,266  
Revisions of previous estimates     (1,490 )      (30,595 ) 
Reclassification of proved undeveloped(1)     (2,123 )      (5,889 ) 
Conversions to proved developed reserves     (1,517 )      (24,300 ) 
Total proved undeveloped reserves added     2,911       124,482  
Proved undeveloped reserves at June 30, 2012     37,931     $ 531,131  

(1) Relates to the reclassification of proved undeveloped reserves to probable reserves due to the SEC five-year development rule.

Drilling Activity

The following table sets forth our drilling activity.

           
  Year Ended June 30,
     2012   2011   2010
     Gross   Net   Gross   Net   Gross   Net
Productive wells drilled
                                                     
Development     13.0       10.4       10.0       6.0       3.0       1.5  
Exploratory                 4.0       1.0       3.0       0.6  
Total     13.0       10.4       14.0       7.0       6.0       2.1  
Non productive dry wells drilled
                                                     
Development     1.0       0.1       1.0       0.3       1.0       1.0  
Exploratory     2.0       1.3       3.0       1.3       3.0       1.6  
Total     3.0       1.4       4.0       1.6       4.0       2.6  

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Present Activities

As of June 30, 2012, ten gross wells, representing approximately 5.3 net wells, were being drilled.

Delivery Commitments

As of June 30, 2012, we had no delivery commitments.

Productive Wells

Our working interests in productive wells follow.

       
  June 30,
     2012   2011
     Gross   Net   Gross   Net
Natural Gas     93       40       88       56  
Crude Oil     357       270       331       257  
Total     450       310       419       313  

Acreage

Working interests in developed and undeveloped acreage follow.

           
  June 30, 2012
     Developed Acres   Undeveloped Acres   Total Acres
     Gross   Net   Gross   Net   Gross   Net
Onshore     40,213       19,201       22,339       7,984       62,552       27,185  
Offshore     328,748       220,301       201,940       70,580       530,688       290,881  
Total     368,961       239,502       224,279       78,564       593,240       318,066  

The following table summarizes potential expiration of our onshore and offshore undeveloped acreage.

           
  Year Ending June 30,
     2013   2014   2015
     Gross   Net   Gross   Net   Gross   Net
Onshore     2,876       2,108       1,699       1,338       221       168  
Offshore     45,760       16,947       29,598       24,918       75,447       13,583  
Total     48,636       19,055       31,297       26,256       75,668       13,751  

Capital Expenditures, Including Acquisitions and Costs Incurred

Property acquisition costs:

     
  Year Ended June 30,
     2012   2011   2010
     (In Thousands)
Oil and Gas Activities
                          
Development   $ 383,495     $ 180,191     $ 92,949  
Exploration     183,397       98,133       51,030  
Acquisitions     6,401       1,012,262       293,037  
Administrative and other     3,778       2,909       1,133  
Capital expenditures, including acquisitions     577,071       1,293,495       438,149  
Asset retirement obligations and other, net     (55,399 )      205,702       17,996  
Total costs incurred   $ 521,672     $ 1,499,197     $ 456,145  

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Oil and Gas Production and Prices

Our average daily production represents our net ownership and includes royalty interests and net profit interests owned by us. Our average daily production and average sales prices follow.

     
  Year Ended June 30,
     2012   2011   2010
Sales Volumes per Day
                          
Natural gas (MMcf)     81.5       67.2       42.6  
Crude oil (MBbls)     30.5       23.4       14.7  
Total (MBOE)     44.1       34.6       21.8  
Percent of BOE from crude oil     69 %      68 %      67 % 
Average Sales Price
                          
Natural gas per Mcf   $ 2.97     $ 4.15     $ 4.47  
Hedge gain per Mcf     0.94       1.54       2.68  
Total natural gas per Mcf   $ 3.91     $ 5.69     $ 7.15  
Crude oil per Bbl   $ 106.17     $ 90.95     $ 71.73  
Hedge gain (loss) per Bbl     0.04       (6.80 )      0.75  
Total crude oil per Bbl   $ 106.21     $ 84.15     $ 72.48  
Sales price per BOE   $ 78.97     $ 69.59     $ 57.09  
Hedge gain (loss) per BOE     1.77       (1.61 )      5.74  
Total sales price per BOE   $ 80.74     $ 67.98     $ 62.83  

Oil and Gas Production, Prices and Production Costs — Significant Fields

The following field contains 15% or more of our total proved reserves as of June 30, 2012. Our average daily production, average sales prices and production cost follow.

     
  Year Ended June 30,
     2012   2011   2010
Main Pass 61
                          
Sales Volumes per Day
                          
Natural gas (MMcf)     4.1       3.0       3.5  
Crude oil (MBbls)     6.5       7.2       5.8  
Total (MBOE)     7.2       7.7       6.4  
Percent of BOE from crude oil     90 %      94 %      91 % 
Average Sales Price
                          
Natural gas per Mcf   $ 2.91     $ 4.44     $ 4.99  
Crude oil per Bbl   $ 105.94     $ 88.62     $ 75.37  
Production Costs per BOE   $ 9.77     $ 10.30     $ 11.37  

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Production Unit Costs

Our production unit costs follow. Production costs include lease operating expense and production taxes.

     
  Year Ended June 30,
     2012   2011   2010
Average Costs per BOE
                          
Production costs
                          
Lease operating expense
                          
Insurance expense   $ 1.77     $ 2.21     $ 3.48  
Workover and maintenance     3.49       2.62       2.47  
Direct lease operating expense     13.99       14.12       12.01  
Total lease operating expense     19.25       18.95       17.96  
Production taxes     0.45       0.26       0.53  
Total production costs   $ 19.70     $ 19.21     $ 18.49  
Gathering and transportation   $ 1.01     $ 0.98        
Depreciation, depletion and amortization rates   $ 22.76     $ 23.22     $ 22.87  

Sale of Certain Onshore Properties

In 2011, we closed on the sales of certain onshore crude oil and natural gas properties for cash consideration of $39.6 million. The properties included approximately 70 producing wells in 20 fields with net production on the date of sale of approximately 8 MMcf/d of natural gas and 285 Bbl/d of crude oil, or a total equivalent of 1.6 MBOE/d.

Derivative Activities

We actively manage price risk and hedge a high percentage of our proved developed producing reserves to enhance revenue certainty and predictability. In connection with our acquisitions, we enter into hedging arrangements to minimize commodity downside exposure. We believe that our disciplined risk management strategy provides substantial price protection so that our cash flow is largely driven by production results rather than commodity prices. This greater price certainty allows us to efficiently allocate our capital resources and minimize our operating cost. For further information regarding our risk management activities, please read “Item 7A Quantitative and Qualitative Disclosures About Market Risk.”

Marketing and Customers

We market substantially all of our oil and natural gas production from the properties we operate. We also market more than half of our oil and natural gas production from the fields we do not operate. The majority of our operated oil gas production is sold to a variety of purchasers under short-term (less than 12 months) contracts at market-based prices.

Shell Trading Company (“Shell”) accounted for approximately 32%, 61% and 62% of our total oil and natural gas revenues during the years ended June 30, 2012, 2011 and 2010, respectively. ExxonMobil Corporation (“ExxonMobil”) accounted for approximately 37% and 22% of our total oil and natural gas revenues during the years ended June 30, 2012 and 2011, respectively. J.P. Morgan Ventures Energy Corporation (“J.P. Morgan”) accounted for 18% of our total oil and natural gas revenues during the year ended June 30, 2012. We also sell our production to a number of other customers, and we believe that those customers, along with other purchasers of oil and natural gas, would purchase all or substantially all of our production in the event that Shell, ExxonMobil and or J.P. Morgan curtailed their purchases.

We transport a portion of our oil and gas through third-party gathering systems and pipelines. Transportation space on these gathering systems and pipelines is normally readily available. Our ability to market our oil and gas has at times been limited or delayed due to restricted or unavailable transportation space or weather damage, and cash flow from the affected properties has been and could continue to be adversely impacted.

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Government Regulation

Our oil and gas exploration, production and related operations and activities are subject to extensive rules and regulations promulgated by federal, state and local governmental agencies. Failure to comply with such rules and regulations can result in substantial penalties. Because such rules and regulations are frequently amended or reinterpreted, we are unable to predict the future cost or impact of complying with such laws. Although the regulatory burden on the oil and gas industry increases our cost of doing business and, consequently, affects our profitability, these burdens generally do not affect us any differently or to any greater or lesser extent than they affect others in our industry with similar types, quantities and locations of production.

Regulations affecting production.  The jurisdictions in which we operate generally require permits for drilling operations, drilling bonds and operating reports and impose other requirements relating to the exploration and production of oil and gas. Such jurisdictions also have statutes or regulations addressing conservation matters, including provisions for the unitization or pooling of oil and gas properties, the establishment of maximum rates of production from oil and gas wells, the spacing, plugging and abandonment of such wells, restrictions on venting or flaring natural gas and requirements regarding the ratability of production.

These laws and regulations may limit the amount of oil and natural gas we can produce from our wells and may limit the number of wells or the locations at which we can drill. Moreover, many jurisdictions impose a production or severance tax with respect to the production and sale of oil and natural gas within their jurisdiction. There is generally no regulation of wellhead prices or other, similar direct economic regulation of production, but there can be no assurance that this will remain true in the future.

In the event we conduct operations on federal, state or Indian oil and natural gas leases, our operations may be required to comply with additional regulatory restrictions, including various nondiscrimination statutes, royalty and related valuation requirements, and on-site security regulations and other appropriate permits issued by the Bureau of Land Management (“BLM”) or other relevant federal or state agencies.

Regulations affecting sales.  The sales prices of oil, natural gas liquids and natural gas are not presently regulated but rather are set by the market. We cannot predict, however, whether new legislation to regulate the price of energy commodities might be proposed, what proposals, if any, might actually be enacted by Congress or the various state legislatures, and what effect, if any, the proposals might have on the operations of the underlying properties.

The Federal Energy Regulatory Commission (“FERC”) regulates interstate natural gas pipeline transportation rates and service conditions, which affect the marketing of gas we produce, as well as the revenues we receive for sales of such production. The price and terms of access to pipeline transportation are subject to extensive federal and state regulation. The FERC is continually proposing and implementing new rules and regulations affecting interstate transportation. These initiatives also may affect the intrastate transportation of natural gas under certain circumstances. The stated purpose of many of these regulatory changes is to promote competition among the various sectors of the natural gas industry. We do not believe that we will be affected by any such FERC action in a manner materially differently than other natural gas producers in our areas of operation.

The price we receive from the sale of oil and natural gas liquids is affected by the cost of transporting those products to market. Interstate transportation rates for oil, natural gas liquids and other products are regulated by the FERC. The FERC has established an indexing system for changing the interstate transportation rates for oil pipelines, which allows such pipelines to take an annual inflation-based rate increase. We are not able to predict with any certainty what effect, if any, these regulations will have on us, but, other factors being equal, the regulations may, over time, tend to increase transportation costs which may have the effect of reducing wellhead prices for oil and natural gas liquids.

Market manipulation and market transparency regulations.  Under the Energy Policy Act of 2005 (“EPAct 2005”), FERC possesses regulatory oversight over natural gas markets, including the purchase, sale and transportation of natural gas by “any entity” in order to enforce the anti-market manipulation provisions in the EPAct 2005. The Commodity Futures Trading Commission (“CFTC”) also holds authority to monitor

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certain segments of the physical and futures energy commodities market pursuant to the Commodity Exchange Act. Likewise, the Federal Trade Commission (“FTC”) holds authority to monitor wholesale petroleum markets pursuant to the Federal Trade Commission Act and the Energy Independence and Security Act of 2007. With regard to our physical purchases and sales of natural gas, natural gas liquids, and crude oil, our gathering or transportation of these energy commodities, and any related hedging activities that we undertake, we are required to observe these anti-market manipulation laws and related regulations enforced by FERC, FTC and/or the CFTC. These agencies hold substantial enforcement authority, including the ability to assess civil penalties of up to $1 million per day per violation, order disgorgement of profits, and recommend criminal penalties. Should we violate the anti-market manipulation laws and regulations, we could also be subject to related third party damage claims by, among others, sellers, royalty owners and taxing authorities.

FERC has issued certain market transparency rules pursuant to its EPAct 2005 authority, which may affect some or all of our operations. FERC issued a final rule in 2007, as amended by subsequent orders on rehearing (“Order 704”), which requires wholesale buyers and sellers of more than 2.2 million MMBtu of physical natural gas in the previous calendar year, including natural gas producers, gatherers, processors, and marketers, to report, on May 1 of each year beginning in 2009, aggregate volumes of natural gas purchased or sold at wholesale in the prior calendar year to the extent such transactions utilize, contribute to, or may contribute to, the formation of price indices, as explained in the order. It is the responsibility of the reporting entity to determine which transactions should be reported based on the guidance of Order 704. In addition, on November 20, 2008, FERC issued a final rule pursuant to its EPAct 2005 authority regarding daily scheduled flows and capacity posting requirements, as amended by subsequent orders on rehearing (“Order 720”). Under Order 720, certain non-interstate pipelines delivering, on an annual basis, more than an average of 50 million MMBtu of gas over the previous three calendar years, are required to post certain information daily regarding the pipeline’s capacity and scheduled flows for each receipt and delivery point that has a design capacity equal to or greater than 15,000 MMBtu per day. Over the previous three calendar years, we have delivered, on average, less than 50 million MMBtu of gas, and therefore we believe that we are currently exempt from Order 720.

Oil Pipeline Regulations.  We own interests in FERC-regulated oil pipelines and have interstate tariffs on file with the FERC setting forth our interstate transportation rates and charges and the rules and regulations applicable to our jurisdictional transportation service. The FERC regulates interstate oil pipeline transportation rates under the Interstate Commerce Act (ICA). In October 1992, Congress passed the Energy Policy Act of 1992 (“EPAct of 1992”), which, among other things, required the FERC to issue rules to establish a simplified and generally applicable ratemaking methodology for petroleum pipelines and to streamline procedures in petroleum pipeline proceedings. The FERC responded to this mandate by establishing a methodology for petroleum pipelines to change their rates within prescribed ceiling levels that are tied to an inflation index. Pipelines are allowed to raise their rates to the rate ceiling level generated by application of the index. If the methodology reduces the ceiling level such that it is lower than a pipeline’s filed rate, the pipeline must reduce its rate to conform to the lower ceiling unless doing so would reduce a rate “grandfathered” by EPAct (see below) to below the grandfathered level. A pipeline must, as a general rule, use the indexing methodology to change its rates. Alternatives to the indexing approach that may be used in certain specified circumstances are retained cost-of-service ratemaking, market-based rates, agreement with an unaffiliated shipper, and settlement. The FERC’s indexing methodology is subject to review every five years. On December 16, 2010, the FERC established a new price index — the Producer Price Index for Finished Goods plus 2.65% — for the five-year period beginning July 1, 2011. Requests for rehearing were filed challenging the appropriateness of FERC’s new index. FERC denied rehearing in May 2011 and the new index may be subject to further challenge (for example, on appeal). FERC’s rate-making methodologies limit our ability to set rates that we might otherwise be able to charge, may delay the use of rates that reflect increased costs or reduced volumes and subject us to operational, reporting and other requirements.

Under the EPAct of 1992, petroleum pipeline rates in effect for the 365-day period ending on the date of enactment of the EPAct of 1992 are deemed to be just and reasonable under the ICA, if such rates had not been subject to complaint, protest or investigation during that 365-day period. Generally, complaints against such “grandfathered” rates may only be pursued if the complainant can show that a substantial change has occurred since the enactment of the EPAct of 1992 in either the economic circumstances of the oil pipeline or

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in the nature of the services provided that were a basis for the rate. The EPAct of 1992 places no such limit on challenges to a provision of an oil pipeline tariff as unduly discriminatory or preferential.

The FERC generally has not investigated rates on its own initiative when those rates have not been the subject of a protest or complaint by a shipper. Shippers may challenge FERC through protests any proposed, pending interstate oil pipeline rate changes or changes in the rules and regulations governing our transportation service. Shippers may also challenge FERC through complaints regarding effective interstate oil pipeline transportation rates or rules and regulations. Interstate oil pipelines must provide transportation service that is not unduly preferential or unduly discriminatory.

Outer Continental Shelf Regulations.  Our operations on federal oil and gas leases in the Gulf of Mexico are subject to regulation by the BSEE and the Bureau of Ocean Energy Management (BOEM”), successor agencies to the Minerals Management Service. These leases contain relatively standardized terms and require compliance with detailed BSEE and BOEM regulations and orders issued pursuant to various federal laws, including the Outer Continental Shelf Lands Act (“OCSLA”). These laws and regulations are subject to change, and many new requirements were imposed by the BSEE and BOEM subsequent to the April 2010 Deepwater Horizon incident. For offshore operations, lessees must obtain BOEM approval for exploration, development and production plans prior to the commencement of such operations. In addition to permits required from other agencies such as the U.S. Environmental Protection Agency, (the “EPA”), lessees must obtain a permit from the BSEE prior to the commencement of drilling and comply with regulations governing, among other things, engineering and construction specifications for production facilities, safety procedures, plugging and abandonment of wells on the OCS, calculation of royalty payments and the valuation of production for this purpose, and removal of facilities. To cover the various obligations of lessees on the OCS, the BOEM generally requires that lessees post substantial bonds or other acceptable assurances that such obligations will be met, unless the BOEM exempts the lessee from such obligations. The cost of such bonds or other surety can be substantial, and we can provide no assurance that we can continue to obtain bonds or other surety in all cases. Under certain circumstances, the Bureau of Safety and Environmental Enforcement (“BSEE”), a new federal agency created to enforce compliance with safety and environmental rules applicable to OCS activities, may require our operations on federal leases to be suspended or terminated. Any such suspension or termination could materially and adversely affect our financial condition and operations.

Gathering regulations.  Section 1(b) of the federal Natural Gas Act (“NGA”) exempts natural gas gathering facilities from the jurisdiction of FERC under the NGA. We own certain natural gas pipelines that we believe meet the traditional tests that FERC has used to establish a pipeline’s status as a gatherer not subject to FERC jurisdiction. The distinction between FERC-regulated transmission facilities and federally unregulated gathering facilities is, however, the subject of substantial, ongoing litigation, so the classification and regulation of our gathering lines may be subject to change based on future determinations by FERC, the courts or the U.S. Congress.

State regulation of gathering facilities generally includes various safety, environmental and, in some circumstances, nondiscriminatory take requirements and in some instances complaint-based rate regulation. Our gathering operations may also be subject to state ratable take and common purchaser statutes, designed to prohibit discrimination in favor of one producer over another or one source of supply over another. The regulations under these statutes can have the effect of imposing some restrictions on our ability as an owner of gathering facilities to decide with whom we contract to gather natural gas. In addition, our natural gas gathering operations could be adversely affected should they be subject to more stringent application of state or federal regulation of rates and services, though we do not believe that we would be affected by any such action in a manner differently than other companies in our areas of operation.

Environmental Regulations

Various federal, state and local laws and regulations relating to the protection of the environment, including the discharge of materials into the environment, may affect our exploration, development and production operations and the costs of those operations. These laws and regulations, among other things, govern the amounts and types of substances that may be released into the environment, the issuance of permits to conduct exploration, drilling and production operations, the handling, discharge and disposition of waste materials, the reclamation and abandonment of wells, sites and facilities, the establishment of financial

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assurance requirements for oil spill response costs and the decommissioning of offshore facilities and the remediation of contaminated sites. These laws and regulations may impose liabilities for noncompliance and contamination resulting from our operations and may require suspension or cessation of operations in affected areas.

The environmental laws and regulations applicable to us and our operations include, among others, the following United States federal laws and regulations:

Clean Air Act, and its amendments, which governs air emissions;
Clean Water Act, which governs discharges of pollutants into waters of the United States;
Comprehensive Environmental Response, Compensation and Liability Act, which imposes strict liability where releases of hazardous substances have occurred or are threatened to occur (commonly known as “Superfund”);
Resource Conservation and Recovery Act, which governs the management of solid waste;
Endangered Species Act, Marine Protected Areas, Marine Mammal Protection Act, Migratory Bird Treaty Act, which governs the protection of animals, flora and fauna;
Oil Pollution Act of 1990, which imposes liabilities resulting from discharges of oil into navigable waters of the United States;
Emergency Planning and Community Right-to-Know Act, which requires reporting of toxic chemical inventories;
Safe Drinking Water Act, which governs underground injection and disposal activities; and
U.S. Department of Interior regulations, which impose liability for pollution cleanup and damages.

Oil Pollution Act.  The Oil Pollution Act of 1990 (“OPA”) and regulations adopted pursuant to OPA impose a variety of requirements related to the prevention of and response to oil spills into waters of the United States, including the OCS. The OPA subjects owners of oil handling facilities to strict, joint and several liability for all containment and cleanup costs and certain other damages arising from a spill, including, but not limited to, the costs of responding to a release of oil to surface waters and natural resource damages. Although defenses exist to the liability imposed by OPA, they are limited. OPA also requires owners and operators of offshore oil production facilities to establish and maintain evidence of financial responsibility to cover costs that could be incurred in responding to an oil spill. OPA currently requires a minimum financial responsibility demonstration of $35 million for companies operating on the OCS, although the Secretary of Interior may increase this amount up to $150 million in certain situations. We cannot predict at this time whether OPA will be amended or whether the level of financial responsibility required for companies operating on the OCS will be increased. In any event, if there were to occur an oil discharge or substantial threat of discharge, we may be liable for costs and damages, which costs and liabilities could be material to our results of operations and financial position.

Climate Change.  In December 2009, the U.S. Environmental Protection Agency (the “EPA”) determined that emissions of carbon dioxide, methane and other “greenhouse gases” present an endangerment to public health and the environment because emissions of such gases are, according to the EPA, contributing to warming of the earth's atmosphere and other climatic changes. Based on these findings, the EPA has begun adopting and implementing regulations to restrict emissions of greenhouse gases under existing provisions of the Clean Air Act (“CAA”). The EPA recently adopted two sets of rules regulating greenhouse gas emissions under the CAA, one of which requires a reduction in emissions of greenhouse gases from motor vehicles and the other of which regulates emissions of greenhouse gases from certain large stationary sources, effective January 2, 2011. The EPA has also adopted rules requiring the reporting of greenhouse gas emissions from specified large greenhouse gas emission sources in the United States, including petroleum refineries, on an annual basis, beginning in 2011 for emissions occurring after January 1, 2010, as well as certain onshore oil and natural gas production facilities, on an annual basis, beginning in 2012 for emissions occurring in 2011.

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In addition, the United States Congress has from time to time considered adopting legislation to reduce emissions of greenhouse gases and almost one-half of the states have already taken legal measures to reduce emissions of greenhouse gases primarily through the planned development of greenhouse gas emission inventories and/or regional greenhouse gas cap and trade programs. Most of these cap and trade programs work by requiring major sources of emissions, such as electric power plants, or major producers of fuels, such as refineries and gas processing plants, to acquire and surrender emission allowances. The number of allowances available for purchase is reduced each year in an effort to achieve the overall greenhouse gas emission reduction goal.

The adoption of legislation or regulatory programs to reduce emissions of greenhouse gases could require us to incur increased operating costs, such as costs to purchase and operate emissions control systems, to acquire emissions allowances or comply with new regulatory or reporting requirements. Any such legislation or regulatory programs could also increase the cost of consuming, and thereby reduce demand for, the oil and natural gas we produce. Consequently, legislation and regulatory programs to reduce emissions of greenhouse gases could have an adverse effect on our business, financial condition and results of operations. Finally, it should be noted that some scientists have concluded that increasing concentrations of greenhouse gases in the Earth's atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts, and floods and other climatic events. If any such effects were to occur, they could have an adverse effect on our financial condition and results of operations.

We believe our operations are in compliance with applicable environmental laws and regulations. We expect to continue making expenditures on a regular basis relating to environmental compliance. We maintain insurance coverage for spills, pollution and certain other environmental risks, although we are not fully insured against all such risks. Our insurance coverage provides for the reimbursement to us of costs incurred for the containment and clean-up of materials that may be suddenly and accidentally released in the course of our operations, but such insurance does not fully insure pollution and similar environmental risks. We do not anticipate that we will be required under current environmental laws and regulations to expend amounts that will have a material adverse effect on our consolidated financial position or our results of operations. However, since environmental costs and liabilities are inherent in our operations and in the operations of companies engaged in similar businesses and since regulatory requirements frequently change and may become more stringent, there can be no assurance that material costs and liabilities will not be incurred in the future. Such costs may result in increased costs of operations and acquisitions and decreased production.

Employees

We had 215 employees at June 30, 2012. At June 30, 2012, we had no employees represented by labor unions or covered by any collective bargaining agreement. We believe that relations with our employees are good.

Available Information

We file or furnish annual, quarterly and current reports and other documents with the SEC under the Securities Exchange Act of 1934 (the “Exchange Act”). The public may read and copy any materials that we file with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC. The public can obtain any documents we file with the SEC at www.sec.gov.

Our Web site address is www.energyxxi.com. We make available, free of charge on or through our Web site, our Annual Report on Form 10-K, proxy statement, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and all amendments to these reports as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Information contained on, or accessible through, our website is not incorporated by reference into this Form 10-K.

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Item 1A.  Risk Factors

Risks Related to Our Business

The nature of our business involves numerous uncertainties and operating risks that can prevent us from realizing profits and can cause substantial losses.

We engage in exploration and development drilling activities, which are inherently risky. These activities may be unsuccessful for many reasons. In addition to a failure to find oil or natural gas, drilling efforts can be affected by adverse weather conditions (such as hurricanes and tropical storms in the U.S. Gulf of Mexico), cost overruns, equipment shortages and mechanical difficulties. Therefore, the successful drilling of an oil or gas well does not ensure we will realize a profit on our investment. A variety of factors, both geological and market-related, could cause a well to become uneconomic or only marginally economic. In addition to their costs, unsuccessful wells could impede our efforts to replace reserves.

Our business involves a variety of operating risks, which include, but are not limited to:

fires;
explosions;
blow-outs and surface cratering;
uncontrollable flows of gas, oil and formation water;
natural disasters, such as hurricanes and other adverse weather conditions;
pipe, cement, subsea well or pipeline failures;
casing collapses;
mechanical difficulties, such as lost or stuck oil field drilling and service tools;
abnormally pressured formations; and
environmental hazards, such as gas leaks, oil spills, pipeline ruptures and discharges of toxic gases.

If we experience any of these problems, well bores, platforms, gathering systems and processing facilities could be affected, which could adversely affect our ability to conduct operations. We could also incur substantial losses due to costs and/or liability incurred as a result of:

injury or loss of life;
severe damage to and destruction of property, natural resources and equipment;
pollution and other environmental damage;
clean-up responsibilities;
regulatory investigations and penalties;
suspension of our operations; and
repairs to resume operations.

Our production, revenue and cash flow from operating activities are derived from assets that are concentrated in a single geographic area, making us vulnerable to risks associated with operating in one geographic area.

Unlike other entities that are geographically diversified, we do not have the resources to effectively diversify our operations or benefit from the possible spreading of risks or offsetting of losses. By consummating acquisitions only in the Gulf of Mexico and the U.S. Gulf Coast, our lack of diversification may:

subject us to numerous economic, competitive and regulatory developments, any or all of which may have an adverse impact upon the particular industry in which we operate; and

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result in our dependency upon a single or limited number of hydrocarbon basins.

In addition, the geographic concentration of our properties in the Gulf of Mexico and the U.S. Gulf Coast means that some or all of the properties could be affected should the region experience:

severe weather, such as hurricanes and other adverse weather conditions;
delays or decreases in production, the availability of equipment, facilities or services;
delays or decreases in the availability of capacity to transport, gather or process production; and/or
changes in the regulatory environment.

For example, the oil and gas properties that we acquired in April 2006 were damaged by both Hurricanes Katrina and Rita, and again by Hurricanes Gustav and Ike and the oil and gas properties that we acquired in June 2007 were damaged by Hurricanes Katrina and Rita. This damage required us to spend time and capital on inspections, repairs, debris removal, and the drilling of replacement wells. In accordance with industry practice, we maintain insurance against some, but not all, of these risks and losses. For additional information, please read “— Our insurance may not protect us against all of the operating risks to which our business is exposed.”

Because all or a number of the properties could experience many of the same conditions at the same time, these conditions could have a relatively greater impact on our results of operations than they might have on other producers who have properties over a wider geographic area.

Oil and natural gas prices are volatile, and a substantial or extended decline in oil and natural gas prices would adversely affect our financial results and impede our growth.

Our financial condition, revenues, profitability and carrying value of our properties depend upon the prevailing prices and demand for oil and natural gas. Commodity prices also affect our cash flow available for capital expenditures and our ability to access funds under our revolving credit facility and through the capital markets. The amount available for borrowing under our revolving credit facility is subject to a borrowing base, which is determined by our lenders taking into account our estimated proved reserves and is subject to semi-annual redeterminations based on pricing models determined by the lenders at such time. The markets for these commodities are volatile and even relatively modest drops in prices can affect our financial results and impede our growth.

Natural gas and oil prices historically have been volatile and are likely to continue to be volatile in the future, especially given current geopolitical and economic conditions. For example, the NYMEX crude oil spot price per barrel for the period between January 1, 2012 and June 30, 2012 ranged from a high of $109.77 to a low of $77.69 and the NYMEX natural gas spot price per MMBtu for the period January 1, 2012 to June 30, 2012 ranged from a high of $3.10 to a low of $1.91. Prices for oil and natural gas fluctuate widely in response to relatively minor changes in the supply and demand for oil and natural gas, market uncertainty and a variety of additional factors beyond our control, such as:

domestic and foreign supplies of oil and natural gas;
price and quantity of foreign imports of oil and natural gas;
actions of the Organization of Petroleum Exporting Countries and other state-controlled oil companies relating to oil and natural gas price and production controls;
level of consumer product demand, including as a result of competition from alternative energy sources;
level of global oil and natural gas exploration and productivity;
domestic and foreign governmental regulations;
level of global oil and natural gas inventories;
political conditions in or affecting other oil-producing and natural gas-producing countries, including the current conflicts in the Middle East and conditions in South America and Russia;

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weather conditions;
technological advances affecting oil and natural gas production and consumption;
overall U.S. and global economic conditions; and
price and availability of alternative fuels.

Further, oil prices and natural gas prices do not necessarily fluctuate in direct relationship to each other. Lower oil and natural gas prices may not only decrease our expected future revenues on a per unit basis but also may reduce the amount of oil and natural gas that we can produce economically. This may result in us having to make downward adjustments to our estimated proved reserves and could have a material adverse effect on our financial condition and results of operations.

Our actual recovery of reserves may differ from our proved reserve estimates.

This Form 10-K contains estimates of our proved oil and gas reserves. Estimating crude oil and natural gas reserves is complex and inherently imprecise. It requires interpretation of the available technical data and making many assumptions about future conditions, including price and other economic conditions. In preparing such estimates, projection of production rates, timing of development expenditures and available geological, geophysical, production and engineering data are analyzed. The extent, quality and reliability of this data can vary. This process also requires economic assumptions about matters such as oil and natural gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. If our interpretations or assumptions used in arriving at our reserve estimates prove to be inaccurate, the amount of oil and gas that will ultimately be recovered may differ materially from the estimated quantities and net present value of reserves owned by us. Any inaccuracies in these interpretations or assumptions could also materially affect the estimated quantities of reserves shown in the reserve reports summarized in this Form 10-K. Actual future production, oil and natural gas prices, revenues, taxes, development expenditures, operating expenses, decommissioning liabilities and quantities of recoverable oil and gas reserves most likely will vary from estimates. In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development, prevailing oil and natural gas prices and other factors, many of which are beyond our control.

We may be limited in our ability to maintain or book additional proved undeveloped reserves under the SEC’s rules.

We have included in this Form 10-K certain estimates of our proved reserves as of June 30, 2012 prepared in a manner consistent with our and our independent petroleum consultant’s interpretation of the SEC rules relating to modernizing reserve estimation and disclosure requirements for oil and natural gas companies. Included within these SEC reserve rules is a general requirement that, subject to limited exceptions, proved undeveloped reserves may only be classified as such if a development plan has been adopted indicating that they are scheduled to be drilled within five years of the date of booking. This rule may limit our potential to book additional proved undeveloped reserves as we pursue our drilling program. Further, if we postpone drilling of proved undeveloped reserves beyond this five-year development horizon, we may have to write off reserves previously recognized as proved undeveloped. During the year ended June 30, 2012, we reduced our proved reserve estimates by 2.1 MMBOE due to the five year development rule.

As of June 30, 2012, approximately 32% of our total proved reserves were undeveloped and approximately 16% of our total proved reserves were developed non-producing. There can be no assurance that all of those reserves will ultimately be developed or produced.

While we have plans or are in the process of developing plans for exploiting and producing a majority of our proved reserves, there can be no assurance that all of those reserves will ultimately be developed or produced. We are not the operator with respect to approximately 17% of our proved undeveloped reserves, so we may not be in a position to control the timing of all development activities. Furthermore, there can be no assurance that all of our undeveloped and developed non-producing reserves will ultimately be produced during the time periods we have planned, at the costs we have budgeted, or at all, which could result in the write-off of previously recognized reserves.

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Unless we replace crude oil and natural gas reserves, our future reserves and production will decline.

A large portion of our drilling activity is located in mature oil-producing areas of the U.S. Gulf of Mexico shelf. Accordingly, increases in our future crude oil and natural gas production depend on our success in finding or acquiring additional reserves. If we are unable to replace reserves through drilling or acquisitions, our level of production and cash flows will be adversely affected. In general, production from oil and gas properties declines as reserves are depleted, with the rate of decline depending on reservoir characteristics. Our total proved reserves decline as reserves are produced unless we conduct other successful exploration and development activities or acquire properties containing proved reserves, or both. Our ability to make the necessary capital investment to maintain or expand our asset base of crude oil and natural gas reserves would be impaired to the extent cash flow from operations is reduced and external sources of capital become limited or unavailable. We may not be successful in exploring for, developing or acquiring additional reserves. We also may not be successful in raising funds to acquire additional reserves.

Relatively short production periods or reserve lives for U.S. Gulf of Mexico properties subject us to higher reserve replacement needs and may impair our ability to reduce production during periods of low oil and natural gas prices.

High production rates generally result in recovery of a relatively higher percentage of reserves from properties in the U.S. Gulf of Mexico during the initial few years when compared to other regions in the United States. Typically, 50% of the reserves of properties in the U.S. Gulf of Mexico are depleted within three to four years. Due to high initial production rates, production of reserves from reservoirs in the U.S. Gulf of Mexico generally decline more rapidly than from other producing reservoirs. The vast majority of our existing operations are in the U.S. Gulf of Mexico. As a result, our reserve replacement needs from new prospects may be greater than those of other oil and gas companies with longer-life reserves in other producing areas. Also, our expected revenues and return on capital will depend on prices prevailing during these relatively short production periods. Our need to generate revenues to fund ongoing capital commitments or repay debt may limit our ability to slow or shut in production from producing wells during periods of low prices for oil and natural gas.

Our offshore operations involve special risks that could affect our operations adversely.

Offshore operations are subject to a variety of operating risks specific to the marine environment, such as capsizing, collisions and damage or loss from hurricanes or other adverse weather conditions. These conditions can cause substantial damage to facilities and interrupt production. As a result, we could incur substantial liabilities that could reduce or eliminate the funds available for exploration, development or leasehold acquisitions, or result in loss of equipment and properties. In particular, we are not intending to put in place business interruption insurance due to its high cost. We therefore may not be able to rely on insurance coverage in the event of such natural phenomena.

Ultra-deep trend wells may require equipment that may delay development and incur longer drilling times, which may increase costs.

We have participated in seven shallow-water ultra-deep trend wells to date. Of these wells, one has been temporarily abandoned pending further evaluation, three are temporarily abandoned pending facilities and completions, two are currently drilling and one is currently being tested. These projects have similar geological characteristics as deepwater prospects with a potential for significant reserves. The shallow water ultra-deep wells are some of the deepest wells ever drilled in the world and are subject to very high pressures and temperatures. The drilling, logging and completion techniques are near the limits of existing technologies. As a result, new technologies and techniques are being developed to deal with these challenges. The use of advanced drilling technologies involves a higher risk of technological failure and potentially higher costs. In addition, there can be delays in completion due to necessary equipment that is specially ordered to handle the challenges of ultra-deep wells.

Deepwater operations present special risks that may adversely affect the cost and timing of reserve development.

Currently, we have minority, non-operated interests in three deepwater fields, Viosca Knoll 822/823, Viosca Knoll 821 and Viosca Knoll 1003. We may evaluate additional activity in the deepwater U.S. Gulf of

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Mexico in the future. Exploration for oil or natural gas in the deepwater of the U.S. Gulf of Mexico generally involves greater operational and financial risks than exploration on the shelf. Deepwater drilling generally requires more time and more advanced drilling technologies, involving a higher risk of technological failure and usually higher drilling costs. Deepwater wells often use subsea completion techniques with subsea trees tied back to host production facilities with flow lines. The installation of these subsea trees and flow lines requires substantial time and the use of advanced remote installation mechanics. These operations may encounter mechanical difficulties and equipment failures that could result in cost overruns. Furthermore, the deepwater operations generally lack the physical and oilfield service infrastructure present on the shelf. As a result, a considerable amount of time may elapse between a deepwater discovery and the marketing of the associated oil or natural gas, increasing both the financial and operational risk involved with these operations. Because of the lack and high cost of infrastructure, some reserve discoveries in the deepwater may never be produced economically.

Our insurance may not protect us against all of the operating risks to which our business is exposed.

We maintain insurance for some, but not all, of the potential risks and liabilities associated with our business. For some risks, we may not obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented. Due to market conditions, premiums and deductibles for certain insurance policies can increase substantially, and in some instances, certain insurance policies are economically unavailable or available only for reduced amounts of coverage. Consistent with industry practice, we are not fully insured against all risks, including high-cost business interruption insurance and drilling and completion risks that are generally not recoverable from third parties or insurance. In addition, pollution and environmental risks generally are not fully insurable. Losses and liabilities from uninsured and underinsured events and delay in the payment of insurance proceeds could have a material adverse effect on our financial condition and results of operations. Due to a number of catastrophic events like the terrorist attacks on September 11, 2001, Hurricanes Ivan, Katrina, Rita, Gustav and Ike, and the April 20, 2010 Deep Water Horizon incident, insurance underwriters increased insurance premiums for many of the coverages historically maintained and issued general notices of cancellation and significant changes for a wide variety of insurance coverages. The oil and natural gas industry suffered damage from Hurricanes Ivan, Katrina, Rita, Gustav and Ike. As a result, insurance costs have increased significantly from the costs that similarly situated participants in this industry have historically incurred. Insurers are requiring higher retention levels and limit the amount of insurance proceeds that are available after a major wind storm in the event that damages are incurred. If storm activity in the future is as severe as it was in 2005 or 2008, insurance underwriters may no longer insure U.S. Gulf of Mexico assets against weather-related damage. In addition, we do not intend to put in place business interruption insurance due to its high cost. This insurance may not be economically available in the future, which could adversely impact business prospects in the U.S. Gulf of Mexico and adversely impact our operations. If an accident or other event resulting in damage to our operations, including severe weather, terrorist acts, war, civil disturbances, pollution or environmental damage, occurs and is not fully covered by insurance or a recoverable indemnity from a vendor, it could adversely affect our financial condition and results of operations. Moreover, we may not be able to maintain adequate insurance in the future at rates we consider reasonable or be able to obtain insurance against certain risks.

Competition for oil and gas properties and prospects is intense and some of our competitors have larger financial, technical and personnel resources that could give them an advantage in evaluating and obtaining properties and prospects.

We operate in a highly competitive environment for reviewing prospects, acquiring properties, marketing oil and gas and securing trained personnel. Many of our competitors are major or independent oil and gas companies that possess and employ financial resources that allow them to obtain substantially greater technical and personnel resources than ours. We actively compete with other companies when acquiring new leases or oil and gas properties. For example, new leases acquired from the BOEM are acquired through a “sealed bid” process and are generally awarded to the highest bidder. These additional resources can be particularly important in reviewing prospects and purchasing properties. Competitors may be able to evaluate, bid for and purchase a greater number of properties and prospects than our financial or personnel resources permit. Competitors may also be able to pay more for productive oil and gas properties and exploratory prospects than we are able or willing to pay. Further, our competitors may be able to expend greater resources on the

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existing and changing technologies that we believe will impact attaining success in the industry. If we are unable to compete successfully in these areas in the future, our future revenues and growth may be diminished or restricted.

The present value of future net cash flows from our proved reserves is not necessarily the same as the current market value of our estimated reserves.

This Form 10-K contains estimates of our future net cash flows from our proved reserves. We base the estimated discounted future net cash flows from our proved reserves on average prices for the preceding twelve-month period and costs in effect on the day of the estimate. However, actual future net cash flows from our natural gas and oil properties will be affected by factors such as:

the volume, pricing and duration of our natural gas and oil hedging contracts;
supply of and demand for natural gas and oil;
actual prices we receive for natural gas and oil;
our actual operating costs in producing natural gas and oil;
the amount and timing of our capital expenditures and decommissioning costs;
the amount and timing of actual production; and
changes in governmental regulations or taxation.

The timing of both our production and our incurrence of expenses in connection with the development and production of natural gas and oil properties will affect the timing of actual future net cash flows from proved reserves, and thus their actual present value. In addition, the 10% discount factor we use when calculating discounted future net cash flows may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with us or the natural gas and oil industry in general. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves, which could adversely affect our business, results of operations and financial condition.

The unavailability or high cost of drilling rigs, equipment, supplies, personnel and oil field services could adversely affect our ability to execute exploration and exploitation plans on a timely basis and within budget, and consequently could adversely affect our anticipated cash flow.

We utilize third-party services to maximize the efficiency of our organization. The cost of oil field services may increase or decrease depending on the demand for services by other oil and gas companies. There is no assurance that we will be able to contract for such services on a timely basis or that the cost of such services will remain at a satisfactory or affordable level. Shortages or the high cost of drilling rigs, equipment, supplies or personnel could delay or adversely affect our exploitation and exploration operations, which could have a material adverse effect on our business, financial condition or results of operations.

Market conditions or transportation impediments may hinder access to oil and gas markets, delay production or increase our costs.

Market conditions, the unavailability of satisfactory oil and natural gas transportation or the remote location of our drilling operations may hinder our access to oil and natural gas markets or delay production. The availability of a ready market for oil and gas production depends on a number of factors, including the demand for and supply of oil and gas and the proximity of reserves to pipelines or trucking and terminal facilities. In deepwater operations, market access depends on the proximity of and our ability to tie into existing production platforms owned or operated by others and the ability to negotiate commercially satisfactory arrangements with the owners or operators. We may be required to shut in wells or delay initial production for lack of a market or because of inadequacy or unavailability of pipeline or gathering system capacity. Restrictions on our ability to sell our oil and natural gas may have several other adverse effects, including higher transportation costs, fewer potential purchasers (thereby potentially resulting in a lower selling price) or, in the event we were unable to market and sustain production from a particular lease for an

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extended time, possible loss of a lease due to lack of production. In the event that we encounter restrictions in our ability to tie our production to a gathering system, we may face considerable delays from the initial discovery of a reservoir to the actual production of the oil and gas and realization of revenues. In some cases, our wells may be tied back to platforms owned by parties with no economic interests in these wells. There can be no assurance that owners of such platforms will continue to operate the platforms. If the owners cease to operate the platforms or their processing equipment, we may be required to shut in the associated wells, which could adversely affect our results of operations.

We are not the operator on all of our properties and therefore are not in a position to control the timing of development efforts, the associated costs, or the rate of production of the reserves on such properties.

As we carry out our planned drilling program, we will not serve as operator of all planned wells. We currently operate approximately 85% of our proved reserves. As a result, we may have limited ability to exercise influence over the operations of some non-operated properties or their associated costs. Dependence on the operator and other working interest owners for these projects, and limited ability to influence operations and associated costs could prevent the realization of targeted returns on capital in drilling or acquisition activities. The success and timing of development and exploitation activities on properties operated by others depend upon a number of factors that will be largely outside of our control, including:

the timing and amount of capital expenditures;
the availability of suitable offshore drilling rigs, drilling equipment, support vessels, production and transportation infrastructure and qualified operating personnel;
the operator’s expertise and financial resources;
approval of other participants in drilling wells;
selection of technology; and
the rate of production of the reserves.

Each of these factors, including others, could materially adversely affect the realization of our targeted returns on capital in drilling or acquisition activities and lead to unexpected future costs.

We are exposed to trade credit risk in the ordinary course of our business activities.

We are exposed to risks of loss in the event of nonperformance by our vendors, customers and by counterparties to our price risk management arrangements. Some of our vendors, customers and counterparties may be highly leveraged and subject to their own operating and regulatory risks. Many of our vendors, customers and counterparties finance their activities through cash flow from operations, the incurrence of debt or the issuance of equity. Recently, there has been a significant decline in the credit markets and the availability of credit. Additionally, many of our vendors’, customers’ and counterparties’ equity values have substantially declined. The combination of reduction of cash flow resulting from declines in commodity prices and the lack of availability of debt or equity financing may result in a significant reduction in our vendors, customers and counterparties liquidity and ability to make payments or perform on their obligations to us. Even if our credit review and analysis mechanisms work properly, we may experience financial losses in our dealings with other parties. Any increase in the nonpayment or nonperformance by our vendors, customers and/or counterparties could reduce our cash flows.

We sell the majority of our production to three customers.

Shell accounted for approximately 32%, ExxonMobil accounted for approximately 37% and J.P. Morgan accounted for approximately 18% our total oil and natural gas revenues during the year ended June 30, 2012. Our inability to continue to sell our production to Shell, ExxonMobil and or J.P. Morgan, if not offset by sales with new or other existing customers, could have a material adverse effect on our business and operations.

Unanticipated decommissioning costs could materially adversely affect our future financial position and results of operations.

We may become responsible for unanticipated costs associated with abandoning and reclaiming wells, facilities and pipelines. Abandonment and reclamation of facilities and the costs associated therewith is often

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referred to as “decommissioning.” Should decommissioning be required that is not presently anticipated or the decommissioning be accelerated, such as can happen after a hurricane, such costs may exceed the value of reserves remaining at any particular time. We may have to draw on funds from other sources to satisfy such costs. The use of other funds to satisfy such decommissioning costs could have a material adverse effect on our financial position and results of operations.

Lower oil and gas prices and other factors may result in ceiling test write-downs and other impairments of our asset carrying values.

Under the full cost method of accounting, we are required to perform each quarter, a “ceiling test” that determines a limit on the book value of our oil and gas properties. If the net capitalized cost of proved oil and gas properties, net of related deferred income taxes, plus the cost of unevaluated oil and gas properties, exceeds the present value of estimated future net cash flows discounted at 10%, net of related tax effects, plus the cost of unevaluated oil and gas properties, the excess is charged to expense and reflected as additional accumulated depreciation, depletion and amortization. As of the reported balance sheet date, capitalized costs of an oil and gas producing company may not exceed the full cost limitation calculated under the above described rule based on the average previous twelve-month prices for oil and natural gas. However, if prior to the balance sheet date, we enter into certain hedging arrangements for a portion of our future natural gas and oil production, thereby enabling us to receive future cash flows that are higher than the estimated future cash flows indicated, these higher hedged prices are used if they qualify as cash flow hedges.

Write-downs may be required if oil and natural gas prices decline, unproved property values decrease, estimated proved reserve volumes are revised downward or the net capitalized cost of proved oil and gas properties otherwise exceeds the present value of estimated future net cash flows.

Our success depends on dedicated and skillful management and staff, whose departure could disrupt our business operations.

Our success depends on our ability to retain and attract experienced engineers, geoscientists and other professional staff. We depend to a large extent on the efforts, technical expertise and continued employment of these personnel and members of our management team. If a significant number of them resign or become unable to continue in their present role and if they are not adequately replaced, our business operations could be adversely affected.

Additionally, if John D. Schiller, Jr. ceases to be our chief executive officer (except as a result of his death or disability) and a reasonably acceptable successor is not appointed, the lenders our revolving credit facility could declare amounts outstanding thereunder immediately due and payable. Such an event could have a material adverse effect on our business and operations.

Risks Related to Our Risk Management Activities

If we place hedges on future production and encounter difficulties meeting that production, we may not realize the originally anticipated cash flows.

Our assets consist of a mix of reserves, with some being developed while others are undeveloped. To the extent that we sell the production of these reserves on a forward-looking basis but do not realize that anticipated level of production, our cash flow may be adversely affected if energy prices rise above the prices for the forward-looking sales. In this case, we would be required to make payments to the purchaser of the forward-looking sale equal to the difference between the current commodity price and that in the sales contract multiplied by the physical volume of the shortfall. There is the risk that production estimates could be inaccurate or that storms or other unanticipated problems could cause the production to be less than the amount anticipated, causing us to make payments to the purchasers pursuant to the terms of the hedging contracts.

Our price risk management activities could result in financial losses or could reduce our income, which may adversely affect our cash flows.

We enter into derivative contracts to reduce the impact of natural gas and oil price volatility on our cash flow from operations. Currently, we use a combination of natural gas and crude oil put, swap and collar arrangements to mitigate the volatility of future natural gas and oil prices received on our production.

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Our actual future production may be significantly higher or lower than we estimate at the time we enter into derivative contracts for such period. If the actual amount of production is higher than we estimate, we will have greater commodity price exposure than we intended. If the actual amount of production is lower than the notional amount that is subject to our derivative financial instruments, we might be forced to satisfy all or a portion of our derivative transactions without the benefit of the cash flow from our sale of the underlying physical commodity, resulting in a substantial decrease in our liquidity. As a result of these factors, our hedging activities may not be as effective as we intend in reducing the volatility of our cash flows, and in certain circumstances may actually increase the volatility of our cash flows. In addition, our price risk management activities are subject to the following risks:

a counterparty may not perform its obligation under the applicable derivative instrument;
production is less than expected;
there may be a change in the expected differential between the underlying commodity price in the derivative instrument and the actual price received; and
the steps we take to monitor our derivative financial instruments may not detect and prevent violations of our risk management policies and procedures.

Risks Related to Our Acquisition Strategy

Our acquisitions may be stretching our existing resources.

Since our inception in July 2005, we have made five major acquisitions and have become a reporting company in the United States. Future transactions may prove to stretch our internal resources and infrastructure. As a result, we may need to invest in additional resources, which will increase our costs. Any further acquisitions we make over the short term would likely intensify these risks.

We may be unable to successfully integrate the operations of the properties we acquire.

Integration of the operations of the properties we acquire with our existing business is a complex, time-consuming and costly process. Failure to successfully integrate the acquired businesses and operations in a timely manner may have a material adverse effect on our business, financial condition, results of operations and cash flows. The difficulties of combining the acquired operations include, among other things:

operating a larger organization;
coordinating geographically disparate organizations, systems and facilities;
integrating corporate, technological and administrative functions;
diverting management’s attention from other business concerns;
diverting financial resources away from existing operations;
an increase in our indebtedness; and
potential environmental or regulatory liabilities and title problems.

The process of integrating our operations could cause an interruption of, or loss of momentum in, the activities of our business. Members of our senior management may be required to devote considerable amounts of time to this integration process, which will decrease the time they will have to manage our business. If our senior management is not able to effectively manage the integration process, or if any business activities are interrupted as a result of the integration process, our business could suffer.

In addition, we face the risk of identifying, competing for and pursuing other acquisitions, which takes time and expense and diverts management’s attention from other activities.

We may not realize all of the anticipated benefits from our acquisitions.

We may not realize all of the anticipated benefits from our future acquisitions, such as increased earnings, cost savings and revenue enhancements, for various reasons, including difficulties integrating operations and personnel, higher than expected acquisition and operating costs or other difficulties, unknown liabilities, inaccurate reserve estimates and fluctuations in market prices.

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If we are unable to effectively manage the commodity price risk of our production if energy prices fall, we may not realize the anticipated cash flows from our acquisitions.

Compared to some other participants in the oil and gas industry, we are a relatively small company with modest resources. Therefore, there is the possibility that we may be unable to find counterparties willing to enter into derivative arrangements with us or be required to either purchase relatively expensive put options, or commit to deliver future production, to manage the commodity price risk of our future production. To the extent that we commit to deliver future production, we may be forced to make cash deposits available to counterparties as they mark to market these financial hedges. Proposed changes in regulations affecting derivatives may further limit or raise the cost, or increase the credit support required to hedge. This funding requirement may limit the level of commodity price risk management that we are prudently able to complete. In addition, we are unlikely to hedge undeveloped reserves to the same extent that we hedge the anticipated production from proved developed reserves. If we fail to manage the commodity price risk of our production and energy prices fall, we may not be able to realize the cash flows from our assets that are currently anticipated even if we are successful in increasing the production and ultimate recovery of reserves.

The properties we acquire may not produce as projected, and we may be unable to determine reserve potential, identify liabilities associated with the acquired properties or obtain protection from sellers against such liabilities.

Our business strategy includes a continuing acquisition program, which may include acquisitions of exploration and production companies, producing properties and undeveloped leasehold interests. The successful acquisition of oil and natural gas properties requires assessments of many factors that are inherently inexact and may be inaccurate, including the following:

acceptable prices for available properties;
amounts of recoverable reserves;
estimates of future oil and natural gas prices;
estimates of future exploratory, development and operating costs;
estimates of the costs and timing of plugging and abandonment; and
estimates of potential environmental and other liabilities.

Our assessment of the acquired properties will not reveal all existing or potential problems nor will it permit us to become familiar enough with the properties to fully assess their capabilities and deficiencies. In the course of our due diligence, we historically have not physically inspected every well, platform or pipeline. Even if we had physically inspected each of these, our inspections may not have revealed structural and environmental problems, such as pipeline corrosion or groundwater contamination. We may not be able to obtain contractual indemnities from the seller for liabilities associated with such risks. We may be required to assume the risk of the physical condition of the properties in addition to the risk that the properties may not perform in accordance with our expectations. If an acquired property does not perform as originally estimated, we may have an impairment, which could have a material adverse effect on or financial position and results of operations.

Risks Related to Our Indebtedness and Access to Capital and Financing

Our level of indebtedness may limit our ability to borrow additional funds or capitalize on acquisition or other business opportunities.

As of June 30, 2012, we had total indebtedness of $1,018.3 million. Our leverage and the current and future restrictions contained in the agreements governing our indebtedness may reduce our ability to incur additional indebtedness, engage in certain transactions or capitalize on acquisition or other business opportunities. Our indebtedness and other financial obligations and restrictions could have financial consequences. For example, they could:

impair our ability to obtain additional financing in the future for capital expenditures, potential acquisitions, general business activities or other purposes;

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increase our vulnerability to general adverse economic and industry conditions;
result in higher interest expense in the event of increases in interest rates since some of our debt is at variable rates of interest;
have a material adverse effect if we fail to comply with financial and restrictive covenants in any of our debt agreements, including an event of default if such event is not cured or waived;
require us to dedicate a substantial portion of future cash flow to payments of our indebtedness and other financial obligations, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate requirements;
limit our flexibility in planning for, or reacting to, changes in our business and industry; and
place us at a competitive disadvantage to those who have proportionately less debt.

If we are unable to meet future debt service obligations and other financial obligations, we could be forced to restructure or refinance our indebtedness and other financial transactions, seek additional equity or sell assets. We may then be unable to obtain such financing or capital or sell assets on satisfactory terms, if at all.

We and our subsidiaries may be able to incur substantially more debt. This could further increase our leverage and attendant risks.

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of the indentures governing our senior notes and our revolving credit facility do not fully prohibit us or our subsidiaries from doing so. At June 30, 2012, we and our subsidiary guarantors collectively had approximately $18.3 million of secured indebtedness and $1.0 billion of other indebtedness. If new debt or liabilities are added to our current debt level, the related risks that we now face could increase.

To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.

Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures and development and exploration efforts will depend on our ability to generate cash in the future. Our future operating performance and financial results will be subject, in part, to factors beyond our control, including interest rates and general economic, financial and business conditions. We cannot assure that our business will generate sufficient cash flow from operations or that future borrowings or other facilities will be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs.

If we are unable to generate sufficient cash flow to service our debt, we may be required to:

refinance all or a portion of our debt;
obtain additional financing;
sell some of our assets or operations;
reduce or delay capital expenditures, research and development efforts and acquisitions; or
revise or delay our strategic plans.

If we are required to take any of these actions, it could have a material adverse effect on our business, financial condition and results of operations. In addition, we cannot assure that we would be able to take any of these actions, that these actions would enable us to continue to satisfy our capital requirements or that these actions would be permitted under the terms of the our various debt instruments.

The covenants in the indentures governing our senior notes and our revolving credit facility impose restrictions that may limit our ability and the ability of our subsidiaries to take certain actions. Our failure to comply with these covenants could result in the acceleration of our outstanding indebtedness.

The indentures governing our senior notes and our revolving credit facility contains various covenants that limit our ability and the ability of our subsidiaries to, among other things:

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incur dividend or other payment obligations;
incur indebtedness and issue preferred stock; or
sell or otherwise dispose of assets, including capital stock of subsidiaries.

If we breach any of these covenants, a default could occur. A default, if not waived, would entitle certain of our debt holders to declare all amounts borrowed under the breached indenture to become immediately due and payable, which could also cause the acceleration of obligations under certain other agreements and the termination of our credit facility. In the event of acceleration of our outstanding indebtedness, we cannot assure that we would be able to repay our debt or obtain new financing to refinance our debt. Even if new financing was made available to us, it may not be on terms acceptable to us.

We expect to have substantial capital requirements, and we may be unable to obtain needed financing on satisfactory terms.

We expect to make substantial capital expenditures for the acquisition, development, production, exploration and abandonment of oil and gas properties. Our capital requirements depend on numerous factors and we cannot predict accurately the timing and amount of our capital requirements. We intend to primarily finance our capital expenditures through cash flow from operations. However, if our capital requirements vary materially from those provided for in our current projections, we may require additional financing. A decrease in expected revenues or an adverse change in market conditions could make obtaining this financing economically unattractive or impossible.

The cost of raising money in the debt and equity capital markets may increase substantially while the availability of funds from those markets may diminish significantly. Also, as a result of concerns about the stability of financial markets generally and the solvency of counterparties specifically, the cost of obtaining money from the credit markets may increase as lenders and institutional investors could increase interest rates, impose tighter lending standards, refuse to refinance existing debt at maturity at all or on terms similar to our current debt and, in some cases, cease to provide funding to borrowers.

An increase in our indebtedness, as well as the credit market and debt and equity capital market conditions discussed above could negatively impact our ability to remain in compliance with the financial covenants under our revolving credit facility which could have a material adverse effect on our financial condition, results of operations and cash flows. If we are unable to finance our growth as expected, we could be required to seek alternative financing, the terms of which may be less favorable to us, or not pursue growth opportunities.

Without additional capital resources, we may be forced to limit or defer our planned natural gas and oil exploration and development program and this will adversely affect the recoverability and ultimate value of our natural gas and oil properties, in turn negatively affecting our business, financial condition and results of operations. We may also be unable to obtain sufficient credit capacity with counterparties to finance the hedging of our future crude oil and natural gas production which may limit our ability to manage price risk. As a result, we may lack the capital necessary to complete potential acquisitions, obtain credit necessary to enter into derivative contracts to hedge our future crude oil and natural gas production or to capitalize on other business opportunities.

The borrowing base under our revolving credit facility may be reduced in the future if commodity prices decline, which will limit our available funding for exploration and development.

As of June 30, 2012, we had no borrowings under our revolving credit facility and our borrowing base was $750 million. We expect that the next determination of the borrowing base under our revolving credit facility will occur in the fall of 2012. If the borrowing base is reduced or maintained, the new borrowing base is subject to approval by banks holding not less than 67% of the lending commitments under our revolving credit facility, and the final borrowing base may be lower than the level recommended by the agent for the bank group.

Our borrowing base is redetermined semi-annually by our lenders at their sole discretion. The lenders will redetermine the borrowing base based on an engineering report with respect to our natural gas and oil

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reserves, which will take into account the prevailing natural gas and oil prices at such time. In the future, we may not be able to access adequate funding under our revolving credit facility as a result of (1) a decrease in our borrowing base due to the outcome of a subsequent borrowing base redetermination, or (2) an unwillingness or inability on the part of our lending counterparties to meet their funding obligations. If oil and natural gas commodity prices deteriorate, the revised borrowing base under our revolving credit facility may be reduced. As a result, we may be unable to obtain adequate funding under our revolving credit facility or even be required to pay down amounts outstanding under our revolving credit facility to reduce our level of borrowing. If funding is not available when needed, or is available only on unfavorable terms, it could adversely affect our exploration and development plans as currently anticipated and our ability to make new acquisitions, each of which could have a material adverse effect on our production, revenues and results of operations.

The lenders can unilaterally adjust the borrowing base and the borrowings permitted to be outstanding under our revolving credit facility. Any increase in the borrowing base requires the consent of all the lenders. Outstanding borrowings in excess of the borrowing base must be repaid immediately, or we must pledge other natural gas and oil properties as additional collateral. We do not currently have any substantial unpledged properties, and we may not have the financial resources in the future to make any mandatory principal prepayments required under our revolving credit facility.

Any future financial crisis may impact our business and financial condition. We may not be able to obtain funding in the capital markets on terms we find acceptable, or obtain funding under our revolving credit facility because of the deterioration of the capital and credit markets and our borrowing base.

The recent credit crisis and related turmoil in the global financial systems had an impact on our business and our financial condition, and we may face challenges if economic and financial market conditions deteriorate in the future. Historically, we have used our cash flow from operations and borrowings under our revolving credit facility to fund our capital expenditures and have relied on the capital markets to provide us with additional capital for large or exceptional transactions. A recurrence of the economic crisis could further reduce the demand for oil and natural gas and put downward pressure on the prices for oil and natural gas.

In the future, we may not be able to access adequate funding under our revolving credit facility as a result of (1) a decrease in our borrowing base due to the outcome of a subsequent borrowing base redetermination, or (2) an unwillingness or inability on the part of our lending counterparties to meet their funding obligations. Our current borrowing base under our revolving credit facility is $750 million. Declines in commodity prices, or a continuing decline in those prices, could result in a determination to lower the borrowing base in the future and, in such case, we could be required to repay any indebtedness in excess of the borrowing base. The turmoil in the financial markets has adversely impacted the stability and solvency of a number of large global financial institutions.

The recent credit crisis also made it more difficult to obtain funding in the public and private capital markets. In particular, the cost of raising money in the debt and equity capital markets increased substantially while the availability of funds from those markets generally diminished significantly. Also, as a result of concerns about the general stability of financial markets and the solvency of specific counterparties, the cost of obtaining money from the credit markets increased as many lenders and institutional investors have increased interest rates, imposed tighter lending standards, refused to refinance existing debt at maturity or on terms similar to existing debt or at all, or, in some cases, ceased to provide any new funding. A return of these conditions could materially and adversely affect our company.

Risks Related to Environmental and Other Regulations

Our operations are subject to environmental and other government laws and regulations that are costly and could potentially subject us to substantial liabilities.

Our oil and gas exploration, production, and related operations are subject to extensive rules and regulations promulgated by federal, state, and local agencies. Failure to comply with such rules and regulations can result in substantial penalties. The regulatory burden on the oil and gas industry increases our cost of doing business and affects our profitability. Because such rules and regulations are frequently amended or reinterpreted, we are unable to predict the future cost or impact of complying with such laws.

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All of the jurisdictions in which we operate generally require permits for drilling operations, drilling bonds, and reports concerning operations and impose other requirements relating to the exploration and production of oil and gas. Such jurisdictions also have statutes or regulations addressing conservation matters, including provisions for the unitization or pooling of oil and gas properties, the establishment of maximum rates of production from oil and gas wells and the spacing, plugging and abandonment of such wells. The statutes and regulations of certain jurisdictions also limit the rate at which oil and gas can be produced from our properties.

FERC regulates interstate natural gas transportation rates and service conditions, which affect the marketing of gas we produce, as well as the revenues we receive for sales of such production. Since the mid-1980s, FERC has issued various orders that have significantly altered the marketing and transportation of gas. These orders resulted in a fundamental restructuring of interstate pipeline sales and transportation services, including the unbundling by interstate pipelines of the sales, transportation, storage and other components of the city-gate sales services such pipelines previously performed. These FERC actions were designed to increase competition within all phases of the gas industry. The interstate regulatory framework may enhance our ability to market and transport our gas, although it may also subject us to greater competition and to the more restrictive pipeline imbalance tolerances and greater associated penalties for violation of such tolerances.

Our sales of oil and natural gas liquids are not presently regulated and are made at market prices. The price we receive from the sale of those products is affected by the cost of transporting the products to market. FERC has implemented regulations establishing an indexing system for transportation rates for oil pipelines, which, generally, would index such rate to inflation, subject to certain conditions and limitations. We are not able to predict with any certainty what effect, if any, these regulations will have on us, but, other factors being equal, the regulations may, over time, tend to increase transportation costs which may have the effect of reducing wellhead prices for oil and natural gas liquids.

Under the EPAct 2005, FERC has civil penalty authority under the NGA to impose penalties for current violations of up to $1 million per day for each violation and disgorgement of profits associated with any violation. While our operations have not been regulated by FERC under the NGA, FERC has adopted regulations that may subject certain of our otherwise non-FERC jurisdictional entities to FERC annual reporting and daily scheduled flow and capacity posting requirements, as described more fully in Item 1 above. Additional rules and legislation pertaining to those and other matters may be considered or adopted by FERC from time to time. Failure to comply with those regulations in the future could subject us to civil penalty liability.

Our oil and gas operations are subject to stringent laws and regulations relating to the release or disposal of materials into the environment or otherwise relating to environmental protection. These laws and regulations:

require the acquisition of a permit before drilling commences;
restrict the types, quantities and concentration of substances that can be released into the environment in connection with drilling and production activities;
limit or prohibit drilling activities on certain lands lying within wilderness, wetlands and other protected areas; and
impose substantial liabilities for pollution resulting from operations.

Failure to comply with these laws and regulations may result in:

the imposition of administrative, civil and/or criminal penalties;
incurring investigatory or remedial obligations; and
the imposition of injunctive relief, which could limit or restrict our operations.

Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent or costly waste handling, storage, transport, disposal or cleanup requirements could require us to make significant expenditures to attain and maintain compliance and may otherwise have a material adverse

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effect on our industry in general and on our own results of operations, competitive position or financial condition. Although we intend to be in compliance in all material respects with all applicable environmental laws and regulations, we cannot assure shareholders that we will be able to comply with existing or new regulations. In addition, the risk of accidental spills, leakages or other circumstances could expose us to extensive liability.

Under certain environmental laws and regulations, we could be held strictly liable for the removal or remediation of previously released materials or property contamination regardless of whether we were responsible for the release or contamination, or if current or prior operations were conducted consistent with accepted standards of practice. Such liabilities can be significant, and if imposed could have a material adverse effect on our financial condition or results of operations.

We are unable to predict the effect of additional environmental laws and regulations that may be adopted in the future, including whether any such laws or regulations would materially adversely increase our cost of doing business or affect operations in any area.

The Deepwater Horizon explosion and ensuing oil spill could have broad adverse consequences affecting our operations in the Gulf of Mexico, some of which may be unforeseeable.

The April 2010 explosion and sinking of the Deepwater Horizon drilling rig and resulting oil spill has created uncertainties about the impact on our future operations in the Gulf of Mexico. Increased regulation in a number of areas could disrupt, delay or prohibit future drilling programs and ultimately impact the fair value of our unevaluated properties, a substantial portion of which is in the deep water of the Gulf of Mexico.

In addition to the drilling restrictions, new safety measures and permitting requirements already issued by the BSEE, there have been numerous additional proposed changes in laws, regulations, guidance and policy in response to the Deepwater Horizon explosion and oil spill that could affect our operations and cause us to incur substantial losses or expenditures. Implementation of any one or more of the various proposed responses to the disaster could materially adversely affect operations in the Gulf of Mexico by raising operating costs, increasing insurance premiums, delaying drilling operations and increasing regulatory costs, and, further, could lead to a wide variety of other unforeseeable consequences that make operations in the Gulf of Mexico more difficult, more time consuming, and more costly. For example, OPA currently requires a minimum financial responsibility demonstration of $35 million for companies operating on the OCS, although the Secretary of Interior may increase this amount up to $150 million in certain situations. However, legislation has been proposed in the U.S. Congress to increase the minimum level of financial responsibility to $300 million or more. If we are unable to provide the level of financial assurance required by OPA, we may be forced to sell our properties or operations located on the OCS or enter into partnerships with other companies that can meet the increased financial responsibility requirement, and any such developments could have an adverse effect on the value of our offshore assets and the results of our operations. We cannot predict at this time whether OPA will be amended or whether the level of financial responsibility required for companies operating on the OCS will be increased.

New regulatory requirements and permitting procedures recently imposed by the BSEE could significantly delay our ability to obtain permits to drill new wells in offshore waters.

Subsequent to the Deepwater Horizon incident in the Gulf of Mexico, the BSEE issued a series of Notice to Lessees (“NTLs”) imposing new regulatory requirements and permitting procedures for new wells to be drilled in federal waters of the OCS. These new regulatory requirements include the following:

The Environmental NTL, which imposes new and more stringent requirements for documenting the environmental impacts potentially associated with the drilling of a new offshore well and significantly increases oil spill response requirements.
The Compliance and Review NTL, which imposes requirements for operators to secure independent reviews of well design, construction and flow intervention processes, and also requires certifications of compliance from senior corporate officers.

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The Drilling Safety Rule, which prescribes tighter cementing and casing practices, imposes standards for the use of drilling fluids to maintain well bore integrity, and stiffens oversight requirements relating to blowout preventers and their components, including shear and pipe rams.
The Workplace Safety Rule, which requires operators to have a comprehensive safety and environmental management system in order to reduce human and organizational errors as root causes of work-related accidents and offshore spills.

Since the adoption of these new regulatory requirements, BSEE has been taking much longer to review and approve permits for new wells. Due to the extremely slow pace of permit review and approval, various industry sources have determined that BSEE may take six months or longer to approve applications for drilling permits that were previously approved in less than 30 days. The new rules also increase the cost of preparing each permit application and will increase the cost of each new well, particularly for wells drilled in deeper waters on the OCS.

Our sales of oil and natural gas, and any hedging activities related to such energy commodities, expose us to potential regulatory risks.

FERC holds statutory authority to monitor certain segments of the physical and futures energy commodities markets relevant to our business. These agencies have imposed broad regulations prohibiting fraud and manipulation of such markets. With regard to our physical sales of oil and natural gas, and any hedging activities related to these energy commodities, we are required to observe the market-related regulations enforced by these agencies, which hold enforcement authority. Failure to comply with such regulations, as interpreted and enforced, could materially and adversely affect our financial condition or results of operations.

Climate change legislation or regulations restricting emissions of “greenhouse gases” could result in increased operating costs and reduced demand for the crude oil and natural gas that we produce.

In December 2009, the EPA, determined that emissions of carbon dioxide, methane and other “greenhouse gases” present an endangerment to public health and the environment because emissions of such gases are, according to the EPA, contributing to warming of the earth’s atmosphere and other climatic changes. Based on these findings, the EPA has begun adopting and implementing regulations to restrict emissions of greenhouse gases under existing provisions of the federal Clean Air Act. The EPA recently adopted two sets of rules regulating greenhouse gas emissions under the Clean Air Act, one of which requires a reduction in emissions of greenhouse gases from motor vehicles and the other of which regulates emissions of greenhouse gases from certain large stationary sources, effective January 2, 2011. The EPA has also adopted rules requiring the reporting of greenhouse gas emissions from specified greenhouse gas emission sources in the United States, including petroleum refineries, on an annual basis, beginning in 2011 for emissions occurring after January 1, 2010, as well as certain onshore oil and natural gas production facilities, on an annual basis, beginning in 2012 for emissions occurring in 2011.

In addition, the United States Congress has from time to time considered adopting legislation to reduce emissions of greenhouse gases and almost one-half of the states have already taken legal measures to reduce emissions of greenhouse gases primarily through the planned development of greenhouse gas emission inventories and/or regional greenhouse gas cap and trade programs. Most of these cap and trade programs work by requiring major sources of emissions, such as electric power plants, or major producers of fuels, such as refineries and gas processing plants, to acquire and surrender emission allowances. The number of allowances available for purchase is reduced each year in an effort to achieve the overall greenhouse gas emission reduction goal.

The adoption of legislation or regulatory programs to reduce emissions of greenhouse gases could require us to incur increased operating costs, such as costs to purchase and operate emissions control systems, to acquire emissions allowances or comply with new regulatory or reporting requirements. Any such legislation or regulatory programs could also increase the cost of consuming, and thereby reduce demand for, the oil and natural gas we produced. Consequently, legislation and regulatory programs to reduce emissions of greenhouse gases could have an adverse effect on our business, financial condition and results of operations. Finally, it should be noted that some scientists have concluded that increasing concentrations of greenhouse gases in the

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Earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts, and floods and other climatic events. If any such effects were to occur, they could have an adverse effect on our financial condition and results of operations.

The adoption of financial reform legislation by Congress could have an adverse effect on our ability to use derivative instruments to reduce the effect of commodity price, interest rate and other risks associated with our business.

Congress recently adopted comprehensive financial reform legislation that establishes federal oversight and regulation of the over-the-counter derivatives market and entities, including us that participate in that market. This legislation, known as the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), was signed into law by President Obama on July 21, 2010 and requires the CFTC, the SEC and other regulators to promulgate rules and regulations implementing the new legislation. In its rulemaking under the Act, the CFTC has issued final regulations to set position limits for certain futures and option contracts in the major energy markets and for swaps that are their economic equivalents. Certain bona fide hedging transactions or positions would be exempt from these position limits. The financial reform legislation may also require us to comply with margin requirements and with certain clearing and trade-execution requirements in connection with our derivative activities, although the application of those provisions to us is uncertain at this time. The financial reform legislation may also require certain counterparties to our derivative instruments to spin off some of their derivatives activities to a separate entity, which may not be as creditworthy as the current counterparty. The final rules will be phased in over time according to a specified schedule which is dependent on the finalization of certain other rules to be promulgated jointly by the CFTC and the SEC. The Dodd-Frank Act and any new regulations could increase the cost of derivative contracts (including through requirements to post collateral which could adversely affect our available liquidity), materially alter the terms of derivative contracts, reduce the availability of derivatives to protect against risks we encounter, reduce our ability to monetize or restructure our existing derivative contracts, and increase our exposure to less creditworthy counterparties. If we reduce our use of derivatives as a result of the legislation and regulations, our results of operations may become more volatile and our cash flows may be less predictable, which could adversely affect our ability to plan for and fund capital expenditures. Finally, the legislation was intended, in part, to reduce the volatility of oil, natural gas liquids and natural gas prices, which some legislators attributed to speculative trading in derivatives and commodity instruments related to oil, natural gas liquids and natural gas. Our revenues could therefore be adversely affected if a consequence of the legislation and regulations is to lower commodity prices. Any of these consequences could have a material adverse effect on us, our financial condition and our results of operations.

Our company and our subsidiaries may need to obtain bonds or other surety in order to maintain compliance with those regulations promulgated by the U.S. Bureau of Energy Management, which, if required, could be costly and reduce borrowings available under our bank credit facility.

To cover the various obligations of lessees on the OCS of the U.S. Gulf of Mexico, the BOEM generally requires that lessees have substantial net worth or post bonds or other acceptable assurances that such obligations will be met. While we believe that we are currently exempt from the supplemental bonding requirements of the BOEM, the BOEM could re-evaluate our plugging obligations and increase them which could cause us to lose our exemption. The cost of these bonds or other surety could be substantial and there is no assurance that bonds or other surety could be obtained in all cases. In addition, we may be required to provide letters of credit to support the issuance of these bonds or other surety. Such letter of credit would likely be issued under our credit facility and would reduce the amount of borrowings available under such facility in the amount of any such letter of credit obligations. The cost of compliance with these supplemental bonding requirements could materially and adversely affect our financial condition, cash flows and results of operations.

If we are unable to acquire or renew permits and approvals required for operations, we may be forced to suspend or cease operations altogether.

The construction and operation of energy projects require numerous permits and approvals from governmental agencies. We may not be able to obtain all necessary permits and approvals, and as a result our operations may be adversely affected. In addition, obtaining all necessary permits and approvals may

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necessitate cash expenditures and may create a risk of expensive delays or loss of value if a project is unable to proceed as planned due to changing requirements or local opposition.

We may be taxed as a United States corporation.

We are incorporated under the laws of Bermuda because of our long-term desire to have business interests outside the United States. Currently, legislation in the United States that penalizes domestic corporations that reincorporate in a foreign country does not affect us, but future legislation could.

We plan to purchase any U.S. assets through our wholly owned subsidiary Energy XXI, Inc. and its subsidiaries, who will pay U.S. taxes on U.S. income. We do not currently intend to engage in any business activity in the United States. However, there is a risk that some or all of our income could be challenged, and considered as effectively connected to a U.S. trade or business, and therefore subject to U.S. taxation. In consideration of this risk, we and our U.S. subsidiaries have implemented certain operational steps to separate the U.S. operations from our other operations. In general, employees based in the United States will be employees of our U.S. subsidiaries, and will be paid for their services by such U.S. subsidiaries. Salaries of our employees who are U.S. residents and who render services to the U.S. business activities will be allocated as expenses of the U.S. subsidiaries.

Certain U.S. federal income tax deductions currently available with respect to oil and gas exploration and development may be eliminated as a result of future legislation.

The Budget for Fiscal Year 2013 sent to Congress by President Obama on February 13, 2012, contains recommendations that, if enacted into law, would eliminate certain key U.S. federal income tax incentives currently available to oil and natural gas exploration and production companies. These changes include (1) the repeal of the percentage depletion allowance for oil and natural gas properties, (2) the elimination of current deductions for intangible drilling and development costs, (3) the elimination of the deduction for certain domestic production activities, and (4) an extension of the amortization period for certain geological and geophysical expenditures. Several bills have been introduced in Congress that would implement these proposals. It is unclear whether these or similar changes will be enacted and, if enacted, how soon any such changes could become effective. The passage of this legislation or any similar changes in U.S. federal income tax laws could eliminate or postpone certain tax deductions that are currently available with respect to oil and natural gas exploration and development, and any such changes could have an adverse effect on our financial position, results of operations and cash flows.

U.S. persons who own our common shares may have more difficulty in protecting their interests than U.S. persons who are shareholders of a U.S. corporation.

The rights of shareholders under Bermuda law are not as extensive as the rights of shareholders under legislation or judicial precedent in many U.S. jurisdictions. Class actions and derivative actions are generally not available to shareholders under the laws of Bermuda. However, the Bermuda courts ordinarily would be expected to follow English case law precedent, which would permit a shareholder to commence an action in the name of a company to remedy a wrong done to a company where the act complained of is alleged to be beyond the corporate power of a company, is illegal or would result in the violation of our memorandum of association or bye-laws. Furthermore, consideration would be given by the court to acts that are alleged to constitute a fraud against the minority shareholders or where an act requires the approval of a greater percentage of our shareholders than actually approved it. The winning party in such an action generally would be able to recover a portion of attorneys’ fees incurred in connection with such action. Our bye-laws provide that shareholders waive all claims or rights of action that they might have, individually or in the right of the Company, against any director or officer for any act or failure to act in the performance of such director’s or officer’s duties, except with respect to any fraud or dishonesty of such director or officer. Class actions and derivative actions generally are available to stockholders under Delaware law for, among other things, breach of fiduciary duty, corporate waste and actions not taken in accordance with applicable law. In such actions, the court has discretion to permit the winning party to recover attorneys’ fees incurred in connection with such action.

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Our By-laws contain provisions that discourage corporate takeovers and could prevent shareholders from realizing a premium on their investment.

Our by-laws contain provisions that could delay or prevent changes in our management or a change of control that a shareholder might consider favorable. For example, they may prevent a shareholder from receiving the benefit from any premium over the market price of our common shares offered by a bidder in a potential takeover. Even in the absence of a takeover attempt, these provisions may adversely affect the prevailing market price of our common shares if they are viewed as discouraging takeover attempts in the future. For example, provisions in our by-laws that could delay or prevent a change in management or change in control include:

the board is permitted to issue preferred shares and to fix the price, rights, preferences, privileges and restrictions of the preferred shares without any further vote or action by our shareholders;
election of our directors is staggered, meaning that the members of only one of three classes of our directors are elected each year;
shareholders have limited ability to remove directors; and
in order to nominate directors at shareholder meetings, shareholders must provide advance notice and furnish certain information with respect to the nominee and any other information as may be reasonably required by the Company.

These provisions, alone or in combination with each other, may discourage transactions involving actual or potential changes of control, including transactions that otherwise could involve payment of a premium over prevailing market prices to stockholders for their common shares.

The impact of Bermuda's letter of commitment to the Organisation for Economic Cooperation and Development to eliminate harmful tax practices is uncertain and could affect our tax status in Bermuda.

Bermuda has implemented a legal and regulatory regime that the Organisation for Economic Co-operation and Development (“OECD”) has recognized as generally complying with internationally agreed standards for transparency and exchange of information for tax purposes. This standard has involved Bermuda entering into a number of bilateral tax information exchange agreements which provide that upon request the competent authorities of participating countries shall provide assistance through the exchange of information relevant to the administration or enforcement of domestic laws of the participating countries concerning taxes covered by the agreements without regard to any domestic tax interest requirement or bank secrecy for tax purposes. This includes information that is relevant to the determination, assessment and collection of such taxes, the recovery and enforcement of tax claims or the investigation or prosecution of tax matters. Information is to be exchanged in accordance with the agreements and shall be treated as confidential in the manner provided therein. Consequently, shareholders should be aware that in accordance with such arrangements (as extended or varied from time to time to comply with the current international standards, to the extent adopted by Bermuda or any other relevant jurisdiction), relevant information concerning it and/or its investment in the Company may be provided to the competent authority of a jurisdiction with which Bermuda has entered a tax information exchange agreement (or equivalent).

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Information regarding our properties is included in Item 1. Business of this Form 10-K.

Item 3. Legal Proceedings

We are involved in various legal proceedings and claims, which arise in the ordinary course of our business. We do not believe the ultimate resolution of any such actions will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Item 4. Mine Safety Disclosures

Not applicable.

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PART II

Item 5.  Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information for Common Stock

On August 1, 2007, our unrestricted common stock was admitted for trading on The NASDAQ Capital Market under the symbol “EXXI.” On August 12, 2011, our common stock was admitted for trading on the Nasdaq Global Select Market (“Nasdaq”) and continues to trade under the symbol “EXXI.” The following table sets forth, for the periods indicated, the range of the high and low closing sales prices of our unrestricted common stock as reported on the NASDAQ.

   
  Unrestricted
Common Stock
     High   Low
Fiscal 2011
                 
First Quarter   $ 23.45     $ 15.05  
Second Quarter     28.25       21.55  
Third Quarter     34.48       26.62  
Fourth Quarter     36.52       29.08  
Fiscal 2012
                 
First Quarter     34.89       21.48  
Second Quarter     32.05       20.27  
Third Quarter     39.03       31.63  
Fourth Quarter     37.96       26.41  

As of July 31, 2012, there were approximately 329 holders of record of our common stock.

Dividend Information

On May 2, 2012, our Board of Directors approved payment of a quarterly cash dividend of $0.07 per share to the holders of the Company’s common stock. The quarterly dividend was paid on June 15, 2012 to shareholders of record on June 1, 2012.

On July 18, 2012, our Board of Directors approved payment of a quarterly cash dividend of $0.07 per share to the holders of the Company’s common stock. The quarterly dividend will be paid on September 14, 2012 to shareholders of record on August 31, 2012.

Purchases of Equity Securities

Repurchases of Common Stock

The following table presents information about repurchases of our common stock during the quarter ended June 30, 2012:

       
Period   Total Number of
Shares
Purchased(a)
  Average Price Paid Per Share   Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs   Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
April 1, 2012 through April 30, 2012                              
May 1, 2012 through May 31, 2012     75,000     $ 34.94                    
June 1, 2012 through June 30, 2012                        
Total     75,000     $ 34.94              

(a) Reflects the number of shares of common stock purchased through open-market transactions for future issuances to employees under our benefit plans.

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Item 6.  Selected Financial Data

The selected consolidated financial data set forth below should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with the consolidated financial statements and notes to those consolidated financial statements included elsewhere in this Form 10-K.

         
  Year Ended June 30,
     2012   2011   2010   2009   2008
     (In Thousands, Except per Share Amounts)
Income Statement Data
                                            
Revenues   $ 1,303,403     $ 859,370     $ 498,931     $ 433,830     $ 643,232  
Depreciation, Depletion and Amortization (“DD&A”)     367,463       293,479       181,640       217,207       307,389  
Impairment of Oil and Gas Properties                       576,996        
Operating Income (Loss)     483,284       208,923       102,047       (517,217 )      143,600  
Other Income (Expense) – Net     (108,811 )      (132,006 )      (58,483 )      (76,751 )      (101,857 ) 
Net Income (Loss)     335,827       64,655       27,320       (571,629 )      26,869  
Basic Earnings (Loss) per Common Share   $ 4.10     $ 0.42     $ 0.56     $ (19.77 )    $ 1.57  
Diluted Earnings (Loss) per Common Share   $ 3.85     $ 0.42     $ 0.56     $ (19.77 )    $ 1.49  
Cash Flow Data
        
Provided by (Used in)
                                            
Operating Activities   $ 785,514     $ 387,725     $ 121,213     $ 245,835     $ 414,647  
Investing Activities
                                            
Acquisitions     (6,401 )      (1,012,262 )      (293,037 )            (40,016 ) 
Investment in properties     (570,670 )      (281,233 )      (145,112 )      (266,012 )      (357,173 ) 
Other     7,478       38,423       53,989       2,935       (296 ) 
Total Investing Activities     (569,593 )      (1,255,072 )      (384,160 )      (263,077 )      (397,485 ) 
Financing Activities     (127,241 )      881,530       188,246       (62,795 )      132,016  
Increase (Decrease) in Cash   $ 88,680     $ 14,183     $ (74,701 )    $ (80,037 )    $ 149,178  
Dividends Paid per Average Common Share   $ 0.07                 $ 0.075        

         
  June 30,
     2012   2011   2010   2009   2008
     (In Thousands)
Balance Sheet Data
                                            
Total Assets   $ 3,130,947     $ 2,798,860     $ 1,566,491     $ 1,328,662     $ 2,049,931  
Long-term Debt Including Current Maturities     1,018,344       1,113,387       774,600       862,827       952,222  
Stockholders’ Equity     1,405,840       946,697       436,561       127,500       374,585  
Common Shares Outstanding     79,147       76,204       50,637       29,150       28,987  

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  Year Ended June 30,
Operating Highlights   2012   2011   2010   2009   2008
     (In Thousands, Except per Unit Amounts)
Operating revenues
                                            
Crude oil sales   $ 1,186,193     $ 777,869     $ 383,928     $ 278,014     $ 484,552  
Natural gas sales     88,608       101,815       69,399       113,156       237,628  
Hedge gain (loss)     28,602       (20,314 )      45,604       42,660       (78,948 ) 
Total revenues     1,303,403       859,370       498,931       433,830       643,232  
Percent of operating revenues from crude oil
                                            
Prior to hedge gain (loss)     93 %      88 %      85 %      71 %      67 % 
Including hedge gain (loss)     91 %      84 %      78 %      68 %      62 % 
Operating expenses
                                            
Lease operating expense
                                            
Insurance expense     28,521       27,876       27,603       19,188       18,218  
Workover and maintenance     56,413       33,095       19,630       15,930       22,397  
Direct lease operating expense     225,881       178,507       95,379       87,032       102,244  
Total lease operating expense     310,815       239,478       142,612       122,150       142,859  
Production taxes     7,261       3,336       4,217       5,450       8,686  
Gathering and transportation     16,371       12,499                    
Depreciation, depletion and amortization     367,463       293,479       181,640       217,207       307,389  
Impairment of oil and gas properties                       576,996        
General and administrative     86,276       75,091       49,667       24,756       26,450  
Other – net     31,933       26,564       18,748       4,488       14,248  
Total operating expenses     820,119       650,447       396,884       951,047       499,632  
Operating income (loss)   $ 483,284     $ 208,923     $ 102,047     $ (517,217 )    $ 143,600  
Sales volumes per day
                                            
Natural gas (MMcf)     81.5       67.2       42.6       47.9       75.7  
Crude oil (MBbls)     30.5       23.4       14.7       11.4       13.5  
Total (MBOE)     44.1       34.6       21.8       19.3       26.2  
Percent of sales volumes from
crude oil
    69 %      68 %      67 %      59 %      52 % 
Average sales price
                                            
Natural gas per Mcf   $ 2.97     $ 4.15     $ 4.47     $ 6.48     $ 8.57  
Hedge gain per Mcf     0.94       1.54       2.68       1.60       0.34  
Total natural gas per Mcf   $ 3.91     $ 5.69     $ 7.15     $ 8.08     $ 8.91  
Crude oil per Bbl   $ 106.17     $ 90.95     $ 71.73     $ 67.06     $ 97.72  
Hedge gain (loss) per Bbl     0.04       (6.80 )      0.75       3.56       (17.82 ) 
Total crude oil per Bbl   $ 106.21     $ 84.15     $ 72.48     $ 70.62     $ 79.90  
Total hedge gain (loss)
per BOE
  $ 1.77     $ (1.61 )    $ 5.74     $ 6.04     $ (8.24 ) 
Operating revenues per BOE   $ 80.74     $ 67.98     $ 62.83     $ 61.47     $ 67.16  
Operating expenses per BOE
                                            
Lease operating expense
                                            
Insurance expense     1.77       2.21       3.48       2.72       1.90  
Workover and maintenance
    3.49       2.62       2.47       2.26       2.34  
Direct lease operating expense     13.99       14.12       12.01       12.33       10.68  
Total lease operating expense per BOE     19.25       18.95       17.96       17.31       14.92  
Production taxes     0.45       0.26       0.53       0.77       0.91  
Impairment of oil and gas properties                       81.75        
Gathering and transportation     1.01       0.98                    
Depreciation, depletion and amortization     22.76       23.22       22.87       30.78       32.09  
General and administrative     5.34       5.94       6.25       3.51       2.76  
Other – net     1.98       2.10       2.36       0.64       1.49  
Total operating expenses per BOE     50.79       51.45       49.97       134.76       52.17  
Operating income (loss) per BOE   $ 29.95     $ 16.53     $ 12.86     $ (73.29 )    $ 14.99  

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  Quarter Ended
Operating Highlights   June 30,
2012
  Mar. 31,
2012
  Dec. 31,
2011
  Sept. 30,
2011
  June 30,
2011
     (In Thousands, Except per Unit Amounts)
Operating revenues
                                            
Crude oil sales   $ 314,639     $ 315,723     $ 306,064     $ 249,767     $ 270,252  
Natural gas sales     19,657       19,154       21,659       28,138       31,875  
Hedge gain (loss)     7,650       1,119       12,855       6,978       (19,346 ) 
Total revenues     341,946       335,996       340,578       284,883       282,781  
Percent of operating revenues from crude oil
                                            
Prior to hedge gain (loss)     94 %      94 %      93 %      90 %      89 % 
Including hedge gain (loss)     92 %      93 %      91 %      87 %      85 % 
Operating expenses
                                            
Lease operating expense
                                            
Insurance expense     6,825       7,138       7,096       7,462       8,814  
Workover and maintenance     21,070       15,885       12,805       6,653       17,251  
Direct lease operating expense     59,306       55,424       54,233       56,918       59,557  
Total lease operating expense     87,201       78,447       74,134       71,033       85,622  
Production taxes     2,414       1,499       1,174       2,174       1,205  
Gathering and transportation     4,358       2,465       3,395       6,153       6,868  
DD&A     106,644       88,448       87,568       84,803       85,179  
General and administrative     19,733       25,075       22,147       19,321       17,553  
Other – net     5,186       13,257       14,174       (684 )      7,730  
Total operating expenses     225,536       209,191       202,592       182,800       204,157  
Operating income   $ 116,410     $ 126,805     $ 137,986     $ 102,083     $ 78,624  
Sales volumes per day
                                            
Natural gas (MMcf)     92.5       83.7       72.8       77.0       83.0  
Crude oil (MBbls)     32.2       31.4       30.6       28.0       28.3  
Total (MBOE)     47.6       45.3       42.7       40.8       42.1  
Percent of sales volumes from
crude oil
    68 %      69 %      72 %      69 %      67 % 
Average sales price
                                            
Natural gas per Mcf   $ 2.34     $ 2.52     $ 3.23     $ 3.97     $ 4.22  
Hedge gain per Mcf     0.55       0.54       1.43       1.39       1.37  
Total natural gas per Mcf   $ 2.89     $ 3.06     $ 4.66     $ 5.36     $ 5.59  
Crude oil per Bbl   $ 107.34     $ 110.54     $ 108.80     $ 97.11     $ 105.12  
Hedge gain (loss) per Bbl     1.03       (1.05 )      1.17       (1.11 )      (11.53 ) 
Total crude oil per Bbl   $ 108.37     $ 109.49     $ 109.97     $ 96.00     $ 93.59  
Total hedge gain (loss) per BOE   $ 1.77     $ 0.27     $ 3.27     $ 1.86     $ (5.05 ) 
Operating revenues per BOE   $ 78.90     $ 81.43     $ 86.67     $ 75.91     $ 73.85  
Operating expenses per BOE
                                            
Lease operating expense
                                            
Insurance expense     1.57       1.73       1.81       1.99       2.30  
Workover and maintenance     4.86       3.85       3.26       1.77       4.51  
Direct lease operating expense     13.68       13.43       13.80       15.17       15.55  
Total lease operating expense per BOE     20.11       19.01       18.87       18.93       22.36  
Production taxes     0.56       0.36       0.30       0.58       0.31  
Gathering and transportation     1.01       0.60       0.86       1.64       1.79  
DD&A     24.61       21.44       22.28       22.60       22.24  
General and administrative     4.55       6.08       5.64       5.15       4.58  
Other – net     1.20       3.22       3.60       (0.18 )      2.01  
Total operating expenses
per BOE
    52.04       50.71