Some key highlights:
- Outperform rating and £5.10 12 month target
- Large Resource Base with Significant Upside: Xcite holds 200 mmbbl in contingent resources (company estimate). Following the award of the 9/3c and 9/3d blocks during the 26th UK licensing round, Xcite also has 207 mmbbl in place of potential low cost tie-in upside. We currently carry no value for these tie-in assets in our target price but believe that over time these assets could contribute up to £3.95 per share to the current share price.
- produce in excess of 15 mbbl/d, with first production as early as Q4 this year or early 2012. This could generate US$197 mm in cashflow for Xcite in 2012, increasing to US$416 mm by 2013.
- Given the size of the project we anticipate Xcite will need additional funding. We have used a 50% equity financing (for FPS towards first production) and 50% debt financing (post first production of the FPS) for the project, anticipating that Xcite will need up to US$399 mm in additional funding.
- In February 2009, RPS Energy published a CPR for block 9/3b, assigning contingent resources development pending to the fi eld with a probability of commercial success of 70% and base case resources of 122.5 mmbbl. Subsequent to the CPR, based on reprocessed 3D seismic, Xcite has shown the Bentley East feature to be part of the overall Bentley field. The Bentley field now includes a second drill centre to the south to access Bentley East and the southern areas of the field, thereby adding approximately 40 mmbbl to the base case resources. The horizontal 9/3b-6z well also encountered significant thicker sands than previously anticipated. The thickness of the reservoir was anticipated to be 72ft thick but instead proved to be 114ft. Furthermore, the net to gross rate of close to 100% also supports this case. Bentley is supported by a 400ft underlying water driver, although an electrical submersible pump will be needed to achieve commercial production rates.
- The first phase of the development involves five wells on the Bentley field and includes a two to three year pilot production facility that could produce approximately 15 mbbl/d from these five wells, and following the successful flow test, Xcite hopes to be able to book between 20 to 30 mmbbl of 2P reserves through this well, which it aims to confirm through a reserves report in the first quarter of this year. The RPS report in 2009 that determined 120 mmbbl (P50) resources with a low to high range (broadly equivalent to P90 to P10) from 109 to 220 mmbbl, assumes conventional, cold flow recovery, utilizing pumps to lift the oil. There is considerable up-side in the field through application of enhanced oil recovery techniques, which has the potential to double the recoverability.
- Development drilling will continue to increase production which we expect to peak in 2018 at 65 mbbl/d, which we feel could be conservative as this is only marginally above the previous base case scenario which was based on 120 mmbbl contingent resources.
- We have projected early cashflow from the FPS of US$1.1 billion funded by a US$190 mm equity raise in early 2011. We have assumed the shares will be priced at £3.50 per share.
- The UK government’s recent fi scal changes in favour of heavy oil assets will allow Xcite to claim up to £800 mm in tax credit spread out over five years. We expect the Company will not pay any tax until 2017
