Xcite Energy Bentley Phase 1A Well Test

Xcite has announced first production from its Phase 1A Bentley flow test. However, from an investor perspective the critical news is recent confirmation of a $155m reserve-based lending (RBL) facility that increases our valuation floor to 129p at current prices. This is a major endorsement of Xcite’s Bentley development plan and could act as a springboard for further valuation gains. In the near term we see upside if more non-equity finance or a farm-out can be secured for the Phase 1B core development, while the potential for enhanced oil recovery (EOR) could be even more significant in the long term.

Flow test de-risks field development
Phase 1A is designed to test water movement in the Bentley reservoir and confirm Xcite’s field development concept. The RBL facility is tied in to successful execution of Phase 1A and we see this as a critical endorsement of the Bentley development plan by the RBL syndicate that includes Royal Bank of Scotland, Société Générale and BP.

EOR upside in the longer term
While Xcite could target undrilled structures around Bentley with 36mmboe of prospective resources, we consider the more significant long-term upside from Xcite’s Block 9/3 assets will come from applying EOR techniques. Although we consider plans for this to still be at an early stage, we expect EOR testing during Phase 1B that could re-base valuation expectations if successful.

Valuation: 129p ‘floor’ with upside from funding
Our Xcite core NAV has dropped from a May 2011 peak of 320p to 129p per share, largely as a result of continued equity dilution during 2011 as the company could not access debt markets. However, with debt now secured via the RBL our core NAV can be considered as a fully diluted floor price assuming Xcite’s share price does not drop further. While Phase 1A activities will be used by the company to optimise its development plan, we see further non-equity funding deals as the key investment catalysts in the near term. We expect the company to seek a potential farm-out partner ahead of Phase 1B in 2013 to fund the balance of the Phase 1B requirement that, depending on terms, could raise our core NAV to around 195p. Nevertheless the potential with current reserves to access up to $125m of mezzanine finance could equally move up our valuation to 160p without a farm-out.

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