It has been a confusing past few months for Xcite holders with generally positive updates being met with an ever declining share price. The question, as always, is what is in store next? For new investors, Xcite energy (LSE:XEL) was incorporated in January 2007. The real excitement with the share price began in 2010 when it rose 10 fold, finishing the year at circa 400p. As its name suggests, Xcite is an oil development company with assets based in the North Sea. It operates through its fully owned subsidiary Xcite Energy Resources. It has a 100% interest in three blocks; 9/3b, 9/3c and 9/3d.
One of Xcite’s fields is entitled ‘Bentley’ which lies circa 170km East of the Shetland Islands. It is promoted as ‘one of the largest undeveloped fields in the North Sea’ by the company with ‘550 million barrels oil in place with 10-12 degrees API’. Xcite are the third owner of the Bentley field after the two previous owners relinquished the field due to a lack of success both drilling and with external factors such as the low oil price and lack of suitable technology for completely testing the oil that was uncovered. The field’s resources are mostly located within the Lower Eocene and Upper Palaeocene regions. Despite estimated reserves already being large, the company firmly believes that they can be increased through a mixture of EOR techniques and appraisal drilling. EOR techniques involve enhancing oil recovery.
Whilst there are many, the most common is to pump gas into the well whereby it increases the pressure, enhancing flow rates. It also can lower the viscosity of the hydrocarbons so it can flow more freely. This should be particularly effective at Bentley where the oil is ‘heavy oil’. The first well drilled by Xcite was in 2008 with the aim of recovering an oil sample for an assay – the result of which was positive. Another well was drilled in 2010 so that reserves could be assigned to the field. Currently the recoverable value stands at circa 115 million barrels.
Aside from block 9/3b containing Bentley, the other two have significant potential also. It is believed that similar Dornoch sandstone (that of 9/3b) exist at 9/3c and 9/3d. In total if all the leads were to come in as commercial discoveries, you would be looking at around 57mmstb as a high range estimate and 16.4mmstb as a low range estimate. At the top of the range, the numbers are impressive and would surely support commercial success. However, at the lower range this may be less so not least due to the UK government announcing the raising North Sea taxes in early 2011.
Back to Bentley, the original main work program is named as Phase 1A which has the ultimate objective of further testing the oil and allowing for the future development of the field on a long term basis. The tested section lies approximately 70m above the oil-water contact, so water intrusion is unlikely to be encountered high up hence removing some risk and boosting potential of the reservoir as noted by the company, although the movement of the water will carefully be monitored. Xcite will soon onto Phase 1B which will allow for the initial production of the oil. Phase 1B will be especially important to Xcite as it will provide a steady source of cash flow that will help fund Phase 2 which involves the permanent creation of production facilities including a floating production vessel and pipeline between 2015 and 2020.
This increased cash flow will do wonders for Xcite, finally allowing it to generate a return whilst reducing the need to further future fundraisings. Pre-tax profits are forecast to rise from £0.13m in 2011 to £21.15m in 2013, with further upside potential, but of course this depends on the state of an already fragile economy and the oil price.
So, what has Xcite done in 2012? In March, they raised £10.9m through an equity facility with Esousa Holdings, before further raiding another £10.3m with the same firm. Unfortunately for shareholders, these took place slightly below the current share price thus a drift in the share price began after it rose 75% following anticipation over the next phase of the company. Clearly this anticipation was misplaced and a drift was inevitable as no ground-breaking news was expected in the first place. Perhaps, the move since the large rise can be seen as a retracement, albeit slightly too large. Then, a few days later, the company announced the profit – a marked improvement on the multimillion pound loss of 2010. This did little to stem the share price from falling. Notably though, the company had cash reserves of £64m - a sizeable amount.
In April the company announced the signing of £32m worth of loan notes with a Canadian firm with interest of 14% per annum. This will prove useful to Xcite considering it will give them leeway in their cash book should an urgent need for cash arise. At the original lump sum and the interest, this loan should not prove a problem. Then again in May, Xcite further improved the balance sheet with cash reserves rising to £78m. In June an operational update announced that the well entitled 9/3b-7z has reached total depth and has encountered a reservoir section over 600m at a depth higher than prognosis.
Xcite further announced in July that a pre-production flow test had begun with a 90 day estimated completion time, the purpose of which is to collect at least 45000 barrels of oil. The start of this test sent the shares up by double digits – interestingly, this appears to have been a buy the news reaction considering the lengthy completion time. The most recent update came just a few weeks ago in which the company revealed a further strengthened balance sheet although only rising to £81.8m. They also signed a $155m reserves based loan that they had planned for months and have supposedly been assigned circa $800m of tax breaks lasting till 2017. Oriel Securities commented upon the release attributing a 163p risked valuation and a 264p/share unrisked valuation.
So far, work programmes, cash balances and financing have all been indicative that Xcite clearly has an excellent asset in Bentley and that the banks believe their future plans. However, it’s evident that patience is the key to investing in Xcite considering the length of the phases. Large resources have been proved, the assets are surrounded by mid/large companies such as Statoil and Enquest also. It is likely that in some point in 2012 or 2013, they will farm out part of their interest possibly in an effort to expedite Phase 1B and Phase 2. On the contrary, as with all things, potential problems exist. The fragility of the reservoir and discount that heavy oil achieves compares to Brent lead the way in posing problems. Perhaps it is the latter that poses the most problems as a significant decline in the global oil price could make recovery of the oil less commercial. Despite this, the reward for shareholders will come with the progress of Phase 1B and 2.
At 76p, Xcite is worth a look. On fundamentals, investors should not be too hurried for an entry, whilst for traders; on technicals a breach of 80p will be significant. A solid company with a solid future.