Plenty of action in Xcite Energy and more to come…

It’s nearly two months now since Xcite Energy started their Extended Well Test on the North Sea Bentley field and pretty much a month since the last operational update. No sign of the expected RNS today once again.

The shares have popped since the closing of the 3rd tranche of the private placing with Global Resource Funding Partners on August 21st, rising from 77p or so to close at 109.5p on Friday. They dropped into the low 70’s during August as placing shares flooded the market. For those fortunate enough to buy at these levels, they are sitting on a 50% plus gain in little more than 3 weeks.

Speculation has been rife around Xcite as to the reason for the share price rise. There are several schools of thought:

1. Leaked Information from the Bentley well test – with the last operational update confirming that the well was performing as expected, rumours are rife that the reservoir may be significantly larger than expected, allowing the reserves to be upgraded from the current P2 (probable and proven) of 116 million barrels to perhaps 200m+. If this upgrade does take place it will be some time away, since the well test is due to run for another month and then auditors TRACS will have to run their rulers over the data gathered. Should an upgrade towards 200m+ barrels occur we can expect a 50-100% up-lift in the stock price

2. The share price was manipulated to stay in the 70-80p zone pre-placing closure to allow Global to maximise the number of warrants they can receive. The rise is a natural reaction to this “hand brake” effect. We have some sympathy with this school of thought.

3. Rumours of a farm out deal with Statoil or BP – Xcite still have a funding gap to fill to fully meet the costs of phase 1b of the field development. It is possible that Statoil in particular could be interested given that their Bressay and Mariner heavy oil fields are adjacent to Bentley and therefore there could be significant advantages to all parties in sharing infrastructure. With Statoil spending around £18 billion on Mariner and Bressay over the life of the field, a farm-in deal with Xcite seems unlikely, given the Norwegian company’s deep pockets. A more likely scenario would be a straight take over, but this would be more likely to happen after the EWT is complete and analysed. BP are already in the so called Bentley alliance, providing oil off take and crude for diluent purposes. Whether they would increase their commitment is uncertain, but like Statoil an outright takeover would be the more likely outcome.

Stephen Kew (CEO Xcite) has confirmed that a farm in partner would be sought from November following the ending of the extended well test,  “We will be putting it on the market for a farm-in around November to invite other companies to join us on the journey. We hope that could be agreed and completed by the end of 2013. We have submitted an environmental statement. We would like to continue the same way but if a major came along they might want to do it differently.” (Press and Journal Energy 3/9/12 http://www.pandjenergy.co.uk/)

4. The success of the EWT so far means that Xcite is just re-rating closer to the Net Asset Value and this process will continue as Bentley moves from 1a to 1b over the next 18 months – The company already have an option with Rowan to provide a suitable rig for the field once the Rowan Norway drilling the EWT finishes its job and is commissioned by Chevron, but this and Department of Energy and Climate Change (DECC) for the final field development time will take some time. It is unlikely that phase 1b will start before 2014.

So the real reason for the share price reaction of the last 2 weeks is unclear but, with plenty of volume accompanying the rise, it is likely that a better than expected well test is in the bag at a minimum. Whether a major farm out deal or takeover materialises is less certain, but it should only be a matter of time before a larger company starts sniffing around if the core area of the Bentley field gets full proven up by the end of this year. With 116 million 2P already landed from the core area alone, there appears to be plenty of upside not only here but also in adjacent parts of the field. So an excellent longer term story with analyst consensus price targets hugging the 200p level. However, after such a strong run in the last few weeks, there may be a period of consolidation/stabilisation as traders review their positions and bank profits.

In the short term, expect plenty more volatility, as XEL is on AIM and as investors in this market will know, valuation is not always consistent with fundamentals! 

Contrarian investor uk