Thursday, 27 February 2014

#Xcite : Is it worth the wait?

What sort of return is worth waiting for? Well it seems on AIM a return is now only worth a few hours or days. But what if I asked you to lend me £4,000 for 2 years and said I would give you back £16,000? Would you think that was a reasonable wait? Or what about buying an antique for £5,000 and selling it for £30,000 4 years later? Would that be worth the wait? It’s funny how timescales outside of investing seem reasonable when measured in years, but that the stock market drives an expectation for 100% return in the space of weeks or months.  

And so what about returns from Xcite Energy? I'm fed up of hearing everyone moan about the wait. Yes I am bored. Yes 2013 was not the “exciting year” that Rupert Cole said it would be (well not from an investment point of view anyway). Yes I tweeted the other day that I wished they would just release some news, any news, to break the boredom. Even if it was just what they were having for breakfast. But the way I see it is that Xcite is a substantially undervalued asset, which has been proven commercial beyond doubt, and eventually, however long it may take, will be produced or bought, resulting in a far higher share price than today’s 91p.

At this point I have to recognize the pain for those investors who bought and held from 2010. The wait for them is just as long for what may turn out to be a much more modest gain. But the reality is that the O&G market is completely different from those days when increases were seen on nothing more than news of a licence being issued or the move of a tug boat. That’s not Xcite’s fault, although the board seem to get plenty of blame for the collapse in the O&G small cap market.

This week Xcite released yet another unanticipated RNS, containing nothing especially significant, but definitely nothing negative. In fact once again they released news containing positive content with no prior warning and no leaks. But it’s not the RNS that really matters; the one that confirms they have secured the financial fire power to pump their huge reserves of oil out of the ground. I still wait for that one to pop up on the i-phone out of the blue one morning.

For the last 2 years Xcite’s news has all been positive but the share price has remained stuck at around £1. The market simply does not yet believe that Xcite will be able to secure the funds required to move forwards to production. That leaves longer term development assets, especially in the O&G sector, completely unloved and undervalued.

For those of you who have spent the last 2 years on planet Zog here’s a quick reminder of Xcite’s “positive only” news flow during this time:

2012
·         April 27th - Xcite confirm 1P, 2P, 3P reserves of 96MMstb, 116MMstb and 140MMstb
·         June 12th - enhanced marketing and offtake agreement arranged with BP to provide dilutent, marketing and sales of Bentley crude.
·         June 22nd - $155m reserves based lending facility arranged with consortium of banks.
·         September 20th - Pre-Production Flow test results exceed management expectations producing 149,000 barrels of oil, with less water than expected and the wells suspended as future producers, generating revenue of over £13.3 million.
2013
·         January 30th - Westface loan notes extended for an additional year to end of March 2014
·         April 8th - Following the well test and new 3D seismic, Xcite reserves are upgraded to 1P, 2P, 3P of 198MMstb, 250MMstb, and 312MMstb.
·         May 20th - Confidential well data is sold for $15m plus $1m when certain milestones are achieved by the purchaser. This is complementary to the farm out process and without compromising Xcite’s intellectual property.
·         June 12th - a memorandum of understanding is entered into with AMEC to cooperate on the development of Bentley.
·         July 2nd - environmental statement for Bentley field is submitted to DECC
·         November 20th - Statoil confirmed as the well data purchasers at the same time as they announce that as a result of what they have learnt from the data they are to shelve their current Bressay development plan and go back to the drawing board for a new one. And supposedly Xcite never compromised their IP as part of the sale so what does that mean for Statoil’s new development plan? License deal? Further collaboration?
·         December 30th - $80 million of unsecured loan notes raised to repay the West Face loan notes at a 2% reduction to the previous interest rate.
2014
·         February 26th - Revised production methods result in an increase to reserves of 1P, 2P, 3P to 203MMstb, 257MMstb, and 317MMstb. P50 Contingent resources are 48MMstb. There are also over 30BCF of 2P natural gas reserves. Reservoir modelling and draining work is underway to optimise enhanced oil recovery which is not yet factored into the above reserve numbers.

I don’t think there has been one negative news release during this period. And not one of the releases was leaked or anticipated to any great extent.

They say the stock market transfers wealth from the impatient to the patient (I’d also add from the PI to the II) Patience really is needed with Xcite. The BoD have been working for well over 10 years on this project and have always been focused on delivering right to the end game - production. Whether they get there as an independent or not is another matter, but I’m certain they won’t give up their dream of building Xcite Energy into a Heavy Oil Major E&P company without good reason.  

Steven Kew stated “We see 2 billion barrels or more in the triangle between Bentley, Kraken and Bressay. We see a lot of potential there and it is a long life production” He went on to say “there are many fields like that emerging and we have worked out how to get it out.” Xcite retain the intellectual property for their technical ability and knowledge surrounding heavy oil and the North Sea is expected to hold at least another 7 billion barrels of the stuff.

We know Xcite have one of the largest undeveloped proven assets in the North Sea. We know Statoil bought data from Xcite and are now reworking their plans for Bressay. We know Xcite achieved a significant Reserves Based Lending facility on a far lower reserve figure. We know Bentley has a net present value in today’s money of $2.1 billion after tax and excluding enhanced oil recovery, contingent reserves or surrounding licence potential. We know that Blackbeard could potentially be another Bentley. We know that they are in discussions with potential farm in partners.

We just don’t know, for certain yet, whether Xcite can find someone to fund them to production. But at less than $2 value per barrel that’s a big discount for this uncertainty. Fair enough if that’s how the market wants to value this monster - I don’t set the prices. But provided Xcite can do the deal, and I have no reason to believe they won't based on their previous achievements, not to mention the importance of this asset, then I look forward to the day when the uncertainty is removed and the valuation starts to look seriously wrong. Because I am certain the news will come out of the blue with no prior leak. 


In the meantime I’ll wait for as long as it takes. No doubt I’ll still be completely hacked off with not knowing what the board are having for their breakfast when the crucial RNS arrives. It might be a long boring wait, but I think it will be worth it when it comes. Happy waiting......

9 comments:

  1. The trouble is,interest on debt does not wait,it accrues and compounds with inexorable certainty.So Xcite doesn't have unlimited time.

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  2. Im not sure their debt is a significant issue to be honest. They successfully arranged a RBL facility at the height of the credit crunch, the original west face loan, and end of last year successfully raised another $80m unsecured facility to repay that loan. So whilst I agree debt is important, relative to the asset value I don't find it it a material issue unless they fail to secure the funds to take the project to production which I find hard to believe. But a fair point on the risk as ever which is present in O&G investments. Thanks.

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  3. You make fair point about waiting, But there is a return vs time scales issue here, those who say they are happy to wait as long as it takes are either locked in or have more money than they need IMO. While we wait as the SP stagnates our capital is not working for us, thats after all why we invest. So how long should you wait and what sort of returns are acceptable on the casino market that is AIM? Lets say you you wait 4 years for an investment like xcite to turn around if that 4 years turns out to only yield a return on investment of 10 to 30% then that would not have been a good result considering the AIM market is currently very high risk. A good example is to use the IPO of xcite at 81p in 2007 it is now only 12% above that, if you had bought and held from then the the past 7 years would have been a waste of time. Yes it went from 3p to 400p but that was pure luck and noting to do with the fundamentals ad not many would taken a punt at 3p. Wind back the clock 3/4 years when the rig was announced for drilling the field the SP hit 91p. Will the wait have been worth it when they finally release some news and deliver the funding they have been promising for 3 years? I doubt it...........

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    1. Hi - I agree there is a waiting vs return tension. But in your example of buying 4 years ago, that would be a price of under 50p and in that case their investment rose 8 fold to over £4! Any investor who didn't take at least their original investment out plus some profit is either greedy, in for the end game, or a complete novice. I believe the current price is well undervalued vs reserves and at some point this gap will close. That should see anywhere from +50% spikes to +300% rises from here over the next 1, 2 3 years, who knows, but from here any of those returns over those timescales represent great returns for me. That may be different to others expectations who play the AIM casino but this is just my view of course. Thanks for your comment. Hopefully the wait will be worth it :)

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  4. Anticipate SP will creep up pre 19/3 budget good news for industry plus end of tax year for ISA's. This should continue then for first half year key RNS.

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  5. Most PI investor focus has been on the Bentley field. They have in fact "exploited" this field as THE test model with a new IP approach not yet illuminated to "THE MARKET", but the oil industry IS AWARE.
    However, XER could and should become "the heavy oil partner of choice". It will soon come to pass.

    Don't miss the forest by looking at just the trees peeps ;)

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  6. The sale of data to Statoil has demonstrated financially how Xcite have the potential to become partners of choice and industry specialists. The fact XEL say this has been achieved without compromising their IP is very exciting to me. To think they may be able to collaborate and develop other fields, who knows maybe even with royalty deals would be incredible. Here's hoping.

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  7. Question: if, for the sake of arguement, that XEL were not successfull in obtaining funding, what price would they get
    for selling Bentley as is?

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    1. Hi. That is virtually impossible to say but we can speculate. Let's assume that rather than they don't obtain funding (in which case it could be a fire sale) but instead we assume that they choose to look for a full sale of Bentley instead of taking to production themselves. Let's use $6 as an oil in ground valuation, could be less if it was a distressed sale, but could also be more if it was a decent deal. But let's say $6. 257m barrels of P2 x $6 = $1.542bn Exchange rate at 0.6 pound to the dollar would see a sale price of £920m. With around 330m fully diluted shares in issue that would equate to a share price of c.£2.80 per share, minus any debt but they also have many other upsides like other licences, IP, tax losses etc.. That also takes no account of enhanced recovery or contingent resources! Personally I think that a sale of just Bentley is really unlikely. But even at $6 per barrel you can see how undervalued we potentially are if a sale, takeover, or half decent farm out was to come along.
      Thanks for stopping by. Tim

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