Arbuthnot's Youngson take on Xcite Energy

FROM PROACTIVE INVESTORS
http://www.proactiveinvestors.co.uk/companies/news/25128/xcite-energy-city-analyst-looks-ahead-to-bentley-fields-important-milestones--25128.html

Xcite Energy: City analyst looks ahead to Bentley field’s important milestones

Tuesday, February 01, 2011 by Jamie Ashcroft

The recent horizontal appraisal well and flow test proved that the Bentley field could be commercial. Now Xcite is preparing a new CPR which is expected to increase recoverable reserves

Xcite Energy (LON:XEL, TSX-V:XEL)  is likely to become one of the top three independent oil firms in the North Sea as it pushes ahead with the development of the Bentley field, according to Arbuthnot analyst Dougie Youngson.

The recent horizontal appraisal and flow test was one of AIM’s big stories in 2010. For investors the proposition was both clear and binary. 

Xcite was already sitting on substantial oil-in-place volumes between 109 - 235 million barrels. However it is heavy oil (10 to 12 degree API) and the big question was whether or not Xcite would be able to recover sufficient volumes to make the oilfield development commercially viable.

So Xcite drilled the all important 9/3b-6 well, which would conduct a flow test from a horizontal well section across 1,800 feet of gross reservoir.

Frenzied investors poured into the stock ahead of the pivotal well.  In anticipation the shares soared, rising a staggering 550 percent from 65 pence in August to its peak at 425 pence per share as the testing results were announced on 21 December 2010.

The Xcite team conducted multi-rate flow tests, culminating in a final stabilised flow rate of 2,900 stock tank barrels of oil per day.

Ultimately the flow test proved that Xcite would be able to draw up enough of the heavy oil to make the resource commercial.

With all that Xcitement now behind us where does the company go from here? 

First and foremost Xcite and its partners - a group collectively known as the Bentley Alliance which includes AMEC and BP - are working on a new competent persons report (CPR).

Youngson reckons the CPR will boost the field’s current reserves.

“The next major piece of news should be the updated CPR, which we are expecting in late February or early March,” Youngson told Proactive Investors.

He adds: “If you strip out the weather problems that they had, drilling was better than expected and the flow test results were much better than expected as well,” Youngson added.

“So the CPR is going to be pretty interesting because it will see some of the contingent resources moving up into reserves and we’ll get a better feel for how big the project is actually going to be.

“Certainly the higher end of (current) expectations is probably a reasonable assumption.”

Arbuthnot rates Xcite as a ‘strong buy’ with a 600 pence target – which implies around 65 percent upside from the current price of 362 pence per share.

The analyst stressed that the updated CPR will provide the basis for the field’s development plan and drilling is likely to start in the fourth quarter of 2011.

Youngson adds: “If (Xcite) starts drilling early enough we may see a little bit of production this year, but it is really about development drilling and the subsequent ramping up of production into 2012.”

Xcite and the Bentley alliance are considering how they will fund the initial development phase, which will ultimately lead to first oil in 2012.

In the meantime it is keeping its finances in order and revising certain development contracts.

Just this morning it extended a binding letter of intent (LOI) for a production rig - the original LOI was first announced in November and it has been extended twice since then. 

It has been extended by mutual consent to 11 February 2011, with no amendment to the existing US$4 million termination fee payable by Xcite in the event it does not enter into a definitive agreement by this date.

Xcite also secured more short-term funding with a £5 million draw down on its Standby Equity Distribution Agreement (SEDA) with Yorkville Advisors’ investment fund YA Global Master SPV Ltd.

Once the project financing deals are taken care of, the alliance will press ahead with oilfield development.

Xcite shares will have been the standout success story among the portfolio’s of some plucky investors. The stock truly transformed over the past twelve months. This time last year Xcite shares were changing hands at around 40 pence.

While the year began slowly the spudding of the appraisal well sparked investor interest in September. Just a few short weeks later a better than expected drilling update from the well’s vertical section took this interest up another gear.

The vertical pilot section of the well encountered a larger than expected oil column towards the end of October.

Xcite shares finally broke through the 300 pence level in early December, after testing the level a few times in mid-November. The stock reached a new high at 332 pence on 3 December 2010. 

On 21 December Xcite shares rallied sharply as the company announced the news of the successful flow results. The stock hit a new high in of 425.25 pence in intraday trading.

Since then some, quite understandable, profit taking saw the stock pull back to the current level of around 360 pence. With a series of important milestones ahead, it looks like there might be more to come from this popular oil junior.