Wednesday, 31 October 2012

Xcite Energy a ‘compelling opportunity’ says Liberum Capital

Xcite Energy (LON:XEL, CVE:XEL) offers a compelling opportunity for investors to access rare heavy oil expertise, says City broker Liberum.
It is currently on the cusp of developing the Bentley heavy oil field in the North Sea, with first production possibly coming next year.
Two weeks ago Xcite completed the first part of its development programme for the oil field, which comprised a number of production tests designed to gain an insight into the field’s longer term production profile.
It was a significant milestone the field’s development that moved Xcite closer to securing remaining project finance, which should in turn lead to approval from the UK Department of Energy and Climate Change (DECC).
And it will mark the end of a period of perceived uncertainty for investors, according to Liberum analyst Andrew Whittock.
Highlighting the significant volatility in the shares over the last two years, Whittock says there were legitimate concerns over the value of the Bentley driven by the perceived difficulty, cost and technical issues associated with heavy oil.
But he now believes there should now be greater confidence in the commerciality of the field following the recently completed testing programme, as well as the initial financing arrangements that have been put in place – which includes a $155 mln reserves based loan (RBL) from a banking consortium.
“The due diligence undertaken by the banks will have included a thorough assessment of technical risks and the offer of a debt facility demonstrated confidence in the project’s long term viability,” Whittock said in a note.
“We believe the recent extended well test should have addressed any residual concerns and anticipate this will be confirmed by the unconditional availability of RBL funds, expected to be announced early next year.”
As such Whittock believes the investment case has been de-risked and there is significant upside in the share price.
In today’s initiating note the Liberum analyst rated the North Sea firm as a ‘buy’ and set a 242p a share price target – which is some 135% more than the current price of 102p.
Looking forward the Liberum analyst reckons there will be significant potential further upside too as Xcite upgrades its reserves further as the field development advances.
And while he says that some funding concerns may remain through part of next year Xcite will be able to secure the necessary capital.
“We believe that between debt markets, industry partners and equity markets there is little doubt the financing can be raised. The only question is, given markets at that time, which source(s) can provide best value for shareholders.”
Whittock is expecting a series of positive updates from Xcite in the first half of next year – including an updated CPR, the DECC approval of the development plan and news of possible industry partnerships.
“These should provide the catalysts to move the share price closer to our value of 2P reserves (estimated at 246p) and, when the development of Bentley is clear, the experience of the team can move to focus on the next opportunity.”
The addition of new projects through the UK's 27th licensing round privided a hint of the new opportunities that Xcite is now also pursuing as it attempts to grow Xcite into a significant North Sea player.

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