Xcite Energy Bentley Farm-Out Will Drive Up Core Value

Xcite Energy (XCL.L) has completed its test programme on the Bentley pre-production well and gained valuable data that will be used to optimise field reservoir and economic models. The test results significantly de-risk the field development plan and should unlock a $155m reserve base lending (RBL) facility that was contingent on satisfying certain test conditions, all of which appear to have been achieved with aplomb. The results also increase the likelihood of Xcite now securing a farm-in partner and avoid further equity dilution, although Phase 1B may move out in time as a result.


Satisfying RBL conditions paves way for farm-out
Xcite’s RBL facility has been conditional on several principal objectives being met in the pre-production test. All of these appear to have been successfully achieved and we expect the process review by the RBL syndicate to unlock the $155m facility in early 2013. This marks a significant endorsement of Xcite’s field development plan to date based on the Phase 1A design concept and opens the way for positive farm-in discussions from late 2012. While a farm-in will mitigate dilution risk we expect it to push out in time Phase 1B first oil from previous expectations. Given the current RBL borrowing base capacity, an increase in the facility is also a strong possibility.

Positive picture of water movement
The Phase 1A test demonstrates that all aspects of drilling, completion and production can be undertaken successfully in Bentley. A key objective of the test was to determine the movement of water in the reservoir, as this can be problematic in viscous oils. Of note, Xcite has reported that the results of this test were better than expected, which could ultimately improve the field recovery factor and/or reduce the number of production wells required for full-field development. However, more work will be required to update reservoir models and reserves reports before this is known with absolute certainty.

Valuation: Farm-out will drive up core NAV
Our fully diluted core NAV has decreased from 129p to 124p, reflecting a potential delay of first oil from Phase 1B to end 2014. Ironically, however, this is actually highly positive news for Xcite as we now expect a farm-out to be achieved that, depending on terms, will likely move our core NAV to 160-190p. An updated Competent Persons Report (CPR), FDP approval and RBL approval along with farm-out announcement, all expected in early 2013, are now the catalysts that we expect to provide support to Xcite’s share price.

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