Xcite Energy - Looking Strong

http://www.xcite-energy.com


It's time to look at Xcite Energy (LSE:XEL) again. Whilst Xcite was originally one of the site's first gainers with a 44% rise netted in late 2012, the company has released an array of good news that has set the shares on a strong upward path that shows no signs of slowing. With oil resources at their North Sea field recently upgraded, sentiment is positive amongst investors and with a favourable chart position, Xcite looks to be heading North. The shares currently stand at 115.5p and with ~292m shares in issue, the company is capitalised at £337m.


The first of the two share price charts that are relevant for XEL is shown above. It focuses upon the shorter term situation where the share is travelling upwards steadily in a well formed channel. The share is currently positioned towards the bottom of this channel hence it would be fair to expect swift upward movement over the next week if the channel is to be maintained. Hence there is the possibility for profit even in the shorter time scales.


The above chart focuses upon the past three years for the company. A bullish pattern is also in place on this timescale and whilst the share is not at the lows around 80p like it was just before entering 2013, it still looks like a decent entry point with at least 15-20% upside on the current price as it follows the support upwards.

Due to my first write-up on Xcite being less in-depth than it could have been, I'll quickly recap what Xcite actually has. The company is an appraisal and development company focused on heavy oil at its North Sea Bentley field where it currently has a 100% working interest although it is looking to farm down this percentage to help fund the development of the field. The field recently had its reserves upgraded to 198, 250 and 312 million stock tank barrels in the 1P, 2P and 3P cases respectively. This is derived from an underlying ~900 million barrels of oil initially in place at the top end. The recent report noted that in the first stage of production the field should be capable of producing 45,000 bopd with this potentially increasing to 57,000 during the second phase. Based on the 2P case the company believes that there will be "revenue of approximately $28.2 billion for the life of field development, equating to a weighted average of $113 per barrel of Bentley oil. "

Source: Xcite Energy
The farm-out will likely be on decent terms for the company considering a series of analytical works on the field have already been carried out including multiple drilled wells, production tests (one which led to 149,000 barrels being sold through BP) and 3D seismic surveys. This has significantly de-risked the area making it an attractive farm-in option for those with funding who wish to reap the long-term rewards. The company already has a reserves based $155m lending facility in place although further funding options will be evaluated. These are likely to be backed by the increased figures in the recent report. As at December 2012 the company also had cash and cash equivalents of £25.5m. As shown above, the Bentley field is located relatively close to two of Statoil's large North Sea developments, namely Bressay (100-150mmstb) and Mariner (250-350mmstb). Xcite's resources are on par with these thus should attract an industry major. Bentley is effectively surrounded by three fields in very close proximity: Bressay (Statoil), Kraken (Enquest) and Bruce (BP) making it a strategic choice for a farm-in partner.

To a less significant extent, Xcite also has further licences awarded to the South and East of the Bentley area. These contain several prospects that are likely to contain lighter oil but are found in supposedly smaller accumulations. As noted before, the company will look to improve its available financial resources which currently include an equity line facility, debt based facility (with a relatively high 14% coupon) and a $155m undrawn facility provided by RBL. If a further non-dilutive facility is arranged in the future, this will likely boost the share price as this is arguably one of the more significant doubts that currently linger over the company - the farmout should alleviate this concern.

Fox Davies noted the following on the valuation of Xcite: "XEL's market value is being hampered by the fact that investors are aware that funding will be required for it to meet the equity portion of its development costs, providing that it does not farmout the asset or sell the Company first. Even allowing for the funding expectation, the discount to current valuation isexcessive, unless you also start to adjust for development risks. Based on peer group comparisons, we believe that 251p a share is a better reflection of Bentley's value." Essentially Fox Davies are noting that pre-farmout the shares should be trading at 251p/share (i.e. twice the current share price). Furthermore, this was based on previous reserves figures that have now been upgraded thus meaning that the disparity has been widened. In addition to this, Xcite have announced they will farm-out the asset which should remove some of the inherent funding risks and (although it would reduce the 251p target as they will have a smaller stake), it should help the share price rise towards around 180p/share. Future confirmation of the development plans by DECC (Department for Energy and Climate Change) should also help boost the share price.

Enquest (LSE:ENQ) is a testament to what can be achieved in the North Sea. The company has 128 million barrels of oil equivalent with an average production flow of ~23000 boepd. Xcite's potential flows in the long-term are double this and they also have almost double the reserves at the 2P case. Considering Enquest is valued at over £1 billion, even if you assume that Xcite farms out half their interest in Bentley, there is still a significant gap that needs to be bridged. Furthermore, Xcite's models are based on recovery factors of ~27% which is substantially different to the 35%+ figures achieved at some nearby fields. Consequently the disparity between OIP and recoverable levels could yet be narrowed further.

Below is a reflection on 2012 from the CEO of Xcite Energy, Rupert Cole.
 


Xcite looks well placed on both a technical front and fundamental front. Without doubt, the job of exploiting Bentley is not yet done with funding still to be arranged, but ultimately the element of geological doubt has been dispelled thus the difficult aspect of any field development has been completed. Whilst Xcite could easily be a good long-term hold, this review primarily focuses upon the medium-term timescale thus I have a target of around 145p-170p as a minimum in place for before year-end. Xcite certainly has a lot of potential which should be realised over the coming 12 months and with broker targets at 160p and upwards, it is likely that shareholders will be rewarded as field development progresses.

UPDATE (27/03/14) - Clearly the bullish situation at Xcite has not played out due to some poorly considered news releases, and slow progress. However, after dropping by over 10% to 73.5p today, I have doubled up the site stake as I believe the drop is unwarranted. The site average has therefore dropped down to 94.5p. I have lowered the price targets accordingly to breakeven

UPDATE (07/05/14) - As per the earlier release, my limit sell of Xcite triggered at just above 95p today, to give an overall neutral profit. The Buy from 73.5p offset the Sell from 115.5p. The poor performance of the stock has been the reason for the move, and that poor performance has been the inability to secure a farm-out for their Bentley field. Huge upside remains in place should they develop it well, but the recent collaboration with BP and Statoil probably does not justify the sharp share price rise, and the share price could certainly fall back closer to the AGM
 

7 comments:

  1. Agree with your conclusions. this is looking veyr good for both the short and medium terms.

    Thanks a bunch

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  2. Some looney tune just posted that they think the sp will be closer to 550p-742p this year than your estimate. What a nutcase

    Poster from ADVFN

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  3. Much appreciated. lets hope this reaches where you expect as it will be happy days for all XEL holders.

    Good luck All

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  4. Very interesting coverage, I have a number of Xcite shares, a longterm holder and sufferer, but good times are coming !

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  5. Thanks for confirming we should start motoring north soon as key posters on III have been saying since RNS

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  6. Hi nice write ups, however what are your current thoughts (from today) on xcite (post AGM) and bowleven? thanks, xcites sentiment was flying after the statoil/shell rns but now after the AGM sentiment seems to have turned very negative again. What would buy back in price to xcite be?

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  7. Hi there,
    Fundamentally there is nothing wrong with Xcite, but it is turning out to be an even slower burner than first envisaged, and that isn't being aided by the Scottish Independence debate (albeit a No vote to independence is pretty likely). It is therefore no surprise to see the share price back nearer the lows when the long timescales were admitted at the AGM. That said, there's every chance of a takeover, but there are hurdles to navigate first, and if BP and Statoil do want to take the asset, they will probably spend at least a further 3 months evaluating the new data available through the collaboration. I'm keeping a close eye on Xcite.

    Bowleven on the other hand has a very good chart setup that should see it having bottomed assuming no untoward news announcement. It has quite a lot of newsflow potential compared to Xcite, which is good, and the decision to double down at sub 30p means that the site's average is relatively close to the current share price compared to before. That said, I have a loose policy where if a stock that is more than 25% down at any point in time surpasses the average again, then I will take the small profit. That's the policy I used on Xcite, an I'll probably look to do the same for Bowleven. My target price has been subsequently revised down to the 40-45p range. Long term, the assets are worth more, but in the short term there are quite a lot of uncertainties with BLVN, that they seem slow to progress

    El1te

    ReplyDelete