BULL POINTS:
■ Oil reserves could be substantial
■ Funded for imminent drilling
■ Strong industry partners
■ Fast track to production
BEAR POINTS:
■ Single asset company
■ Company not well known
Supported by a partnership of leading industry players and funded by a recent placing, Xcite Energy is on the verge of drilling a well that could transform this little-known company into the third-largest reserves holder among North Sea independent oil firms.
| IC TIP RATING |
| Tip style: SPECULATIVE |
| Risk rating: HIGH |
| Timescale: SHORT TERM |
Xcite is developing the Bentley heavy oil field in the North Sea, 160km to the east of the Shetland Isles. Heavy oil is more viscous than conventional Brent and requires greater refining, but it's becoming increasingly important to the North Sea oil industry. Of the 25bn barrels of resources estimated to remain in the North Sea, 9bn is believed to comprise heavy oil, according to estimates by broker Arbuthnot. These heavy oil resources will need to be developed to extend the productive life of the North Sea and the UK government has introduced fiscal incentives to encourage their production.
Bentley oil's high diesel content makes it an attractive vehicle fuel and the oil is also good for refining and as a specialist lubricant. Due to the difference in quality, heavy oil sells for 8 to 12 per cent less than Brent, although the discount can be reduced by blending the oil with other crudes.
| XCITE ENERGY (XEL) | ||||
|---|---|---|---|---|
| ORD PRICE: | 57p | MARKET VALUE: | £76m | |
| TOUCH: | 56-58p | 12-MONTH HIGH: | 62p | LOW: 9p |
| DIVIDEND YIELD: | nil | PE RATIO: | na | |
| NET ASSET VALUE: | 34p | NET CASH: | £1.74m | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2007 | nil | -0.63 | -0.02 | nil |
| 2008 | nil | -0.54 | -0.01 | nil |
| 2009 | nil | -0.78 | -0.01 | nil |
| % change | - | - | - | - |
Normal market size: 5,000 Market makers: 6 Beta: 2.19 | ||||
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Bentley is Xcite's sole asset, which adds risk to the investment, although the upside potential is enormous. Bentley has independently assessed contingent resources of 122m barrels of oil, and following a reassessment of three-dimensional seismic surveys, management has raised the estimate to 160m barrels. The resources are 'contingent' because the field has not yet been proven to flow at commercial rates. This is Xcite's challenge as it prepares to drill the 9/3b-R pre-development well in late June or July to test flow rates.
A successful outcome would enable the resources to be upgraded to reserves, with transformational implications for the field's and the company's valuations. If successful, the well will form part of an early production system and Bentley could be fast-tracked into production by mid-2011, with full field development in 2014.
By assembling a group of leading industry partners, the 'Bentley Alliance', to help with various aspects of the project, Xcite plans to finance the project without needing to significantly sell down its interest. BP will market the oil and provide $20m (£13m) of debt finance; AMEC will provide engineering services; Transocean Drilling will provide a rig for the forthcoming well and production system; and ADTI will manage the well and act as drilling contractor alongside Transocean. The partners will take small equity or revenue stakes, which should leave Xcite with most of its 100 per cent interest intact.
Analysts estimate a target flow rate of around 1,200 barrels per day. Drilling and testing should take around two months, so the result could be known by late August.
