Our friends at Tomwinnifrith.com join us on the bull side with Xcite Energy

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From Tom’s sidekick Sam Bottell – a respected Oil & Gas stock commentator

AIM oil explorer Xcite Energy (XEL) is a darling of the Bulletin Boards which is normally a good reason not to buy the shares.  Indeed the shares have fallen from 395p in January 2011 to 103.25p today (they were 67.5p five months ago) and whilst this is not for the feint hearted, there is a string fundamental case for this £299 million capitalised company.  I believe that the shares are worth 181p and are a buy.

The company’s sole asset is the Bentley field in the UK Northern North Sea.  The shares hit the all time higher as Xcite reported on a successful “transformational well” drilling result.  With hindsight investors got ahead of themselves.  A reserves report in May of that year dampened some of the ardour but none the less Bentley is a real asset.   The 100% owned field is located in Block 9/3b (Licence P1078), one of the largest undeveloped fields in the North Sea and contains around 550 MMstb in-place of 10°-12° API heavy oil.

The company is already producing some oil from Bentley from a pre-production test well. In the three months to 30th September it produced approximately 149,000 barrels of Bentley crude, which was combined with approximately 58,000 barrels of diluent.  This generated £13.3 million of revenue.  But it is small beer.  The company need to develop the full field and this will be expensive.  But I expect that we will get news on how this progresses shortly and that will begin with a new reserve update within weeks.

That should provide the platform for securing the funding to bring Bentley into full production. A farm in deal is possible or it may be possible to secure debt finance but do not rule out the possibility of an equity issue too.  As things stand, at 30th September, Xcite had cash of £54.6 million but also £53.7 million of current liabilities. It has invested more than £100 million in Bentley and although it has a $155 million loan facility to drawn down on to bring Bentley onstream it will need more.  It has admitted as such.  My money is on the field being funded with debt but with Xcite also issuing new equity.

So what is the field worth?  The last competent persons report indicated that it offered a post-tax Net Present Value (at a 10% discount rate) for the 2P (‘Proven’ + ‘Probable’) Reserves in the core area of approximately $1.5 billion (£935 million).  However there is upside on this model from the application of enhanced oil recovery techniques.  Xcite has also picked up a few surrounding licenses and in theory these could add to the reserves.  One would hope that the imminent new reserve report would also push the number up.

The risks here are operational (Bentley is heavy oil and in frontier territory) and also financial: how will the funding be secured?   I would therefore risk weight the current estimate of NPV by and additional 30% and would also assume that there is an additional 20% dilution for the issue of new equity.  That leaves me with an aggressively risk weighted target price of 181p.  At 103.25p the shares are a buy.

Link – www.TomWinnifrith.com.

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