If you fancy getting your pulse racing, Xcite may be the perfect stock for you. In 2009 its shares traded at below 20p, then soared nearly 40-fold to 395p earlier this year on the back of North Sea oil fever. Since then the price has plummeted 55%. So what is the true picture?
Xcite owns the Bentley heavy oil field in the North Sea, 160km east of the Shetland Isles. This asset was originally discovered by Amoco in the late 1970s and surrendered to the government by Conoco in the early 1990s. Xcite picked up the licence in 2003.Heavy oil is more viscous than conventional crude and requires greater refining – which means it sells for about a 10% discount and typically costs more to extract. However, sky-high prices coupled with new advances in pumping technology, mean that heavy oil is becoming a lucrative business.Xcite was recently credited by Tracs International, an oil and gas exploration consultancy, with possessing between 95 million and 115 million barrels of oil equivalent (boe). This should be recoverable, assuming the government grants a production licence.
Xcite Energy (Aim: XEL)
This shouldn’t prove a major stumbling block as long as Xcite has sufficient funding in place, which is currently being arranged. Importantly, with Tracs giving a clean bill of health on the technical side of operations, Xcite is on course to begin drilling later this year. Initial production is targeted for next spring.
So how much is all this worth? Assuming everything goes to plan, and using a rough benchmark of $10 per barrel, Xcite would be valued at around 350p to 420p per share. The problem for investors, though, is that the risks aren’t insignificant either.
For one thing, Bentley is the company’s only asset, and for another, it has no track record of exploiting this type of reserve. Not surprisingly, therefore, Xcite has assembled a crack team of top-notch partners, such as BP, Transocean and Schlumberger, to help with operations.
Xcite is also exposed to the usual concerns of crude volatility, cost inflation and tighter regulation.
All the same, with Germany recently declaring that it plans to walk away from nuclear power by 2022, there is unlikely to be any softening of pump prices. Interestingly too, the board has just appointed some heavy-weight financial advisers, such as the Rothschild investment bank, to seek out investment partners. So there must be a fair chance of Xcite being snapped up by one of the oil majors before production commences.
Recommendation: SPECULATIVE BUY at 157p (market cap £260m)