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Buy Xcite as Bentley revs up

It's been slow going for Xcite Energy at its flagship Bentley field development in the North Sea, but a series of collaborative agreements with industry heavyweights has convinced us that the field will be making money sooner rather than later.
November 6, 2014

Xcite Energy (XEL) is a speculative resource play with an investment case that hinges on its ability to bring the massive Bentley field in the North Sea into production. Xcite's shares have fallen by 55 per cent in the year to date, as the oil price slumped and risk appetite dwindled for offshore oil and gas plays on the UK Continental Shelf (UKCS). But the tide could soon turn, as we believe that a succession of developments means Bentley is now likely to be brought into production sooner rather than later. The question is by whom?

IC TIP: Buy at 43p
Tip style
Speculative
Risk rating
High
Timescale
Long Term
Bull points
  • Collaborative agreements with Shell & Statoil
  • Potential field synergies
  • Baker Hughes involvement
  • Potential price catalysts through farm-outs
Bear points
  • Majors trimming capital spending
  • Uncertainties over funding

The Bentley field contains about the same hydrocarbon volumes as its neighbouring Bressay field, which is owned by Norway's Statoil and Royal Dutch Shell (RDSB). Development costs for the adjacent Bressay field are estimated in the $6bn-$7bn bracket. This time last year, the Bressay partners took the decision to delay the development of the field in a bid to simplify the project and reduce costs. Meanwhile, it is highly unlikely that Xcite would be able to raise enough cash to develop the Bentley field itself, so it will probably have to rely on an industry peer with deep pockets, such as Bressay's owners.

The Bentley and Bressay heavy-crude oil fields are located 160 kilometres from the Shetland Islands, concentrated together with Statoil's Mariner and EnQuest's (ENQ) Kraken. So it was unsurprising that earlier this year Shell, Statoil, EnQuest and Xcite signed collaboration agreements that allow the parties to evaluate potential synergies, including the sharing of gas pipeline infrastructure.

Aside from the collaborative agreements, Xcite has taken other concrete steps towards moving the Bentley project forward. In July, Xcite Energy entered into a memorandum of understanding with Norwegian oil services provider Aibel AS, which sets out the principles for the construction of the self-installing ACE platform. A similar agreement has been reached with US oil services group Baker Hughes, involving drilling and completion services in addition to well engineering, electronic submersible pumps and reservoir engineering.

Given that Bentley is one of the largest undeveloped fields in the UKCS, it seems improbable that the project would ever be mothballed, particularly given the proximity of Bressay. The uncertainty is whether Xcite will choose to progressively farm-out interests in the field, or whether one of the bigger operators will simply come in and take Xcite out.

Bentley is estimated to hold reserves of 203m barrels proven (1P), 257m barrels proven and probable (2P); and 317m barrels proven plus probable plus possible reserves (3P). Assuming Xcite produces a final development plan sometime next year, Edison Research reckons that its 2P resources are worth approximately $1.05bn, or 143p a share, on a standalone basis. But Edison believes this value could be substantially boosted if Xcite finds a farm-in partner, which would put a firm value on the as-yet-untapped oil. Indeed, based on a 20 per cent equity farm-out at Bentley and an undemanding $6 a barrel price on the 2P reserves, Edison comes up with a 187p per share valuation.

XCITE ENERGY (XEL)
ORD PRICE:43pMARKET VALUE:£132m
TOUCH:42-43p12-MONTH HIGH:120pLOW: 38p
FORWARD DIVIDEND YIELD:nilFORWARD PE RATIO:na
NET ASSET VALUE:74p*NET DEBT:12%

Year to 31 DecTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2011nil0.10.1nil
201213.3-1.7-0.7nil
2013nil9.52.3nil
2014**nil-7.6-2.4nil
2015**nil-11.4-3.6nil
% change----

Normal market size: 5,000

Matched bargain trading

Beta: 0.84

*Includes intangible assets of £254m, or 82p a share

**Forecasts provided by Edison