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Ever heard of Doggerland? Some think it’s an adult themed pleasure park off the M4, but in fact it’s an ancient underwater land mass encroaching on Scandinavia from the UK where the estuarine tophaceous boulder layer of the Bentley field sits. The field was picked up back in the 70’s, and owned by majors twice until the 80’s, when it was dropped due to low oil prices and lack of tech, most recently being picked up by Xcite in a government auction. According to the company this is a 500 million barrel field – not just 116Mbbls of 2P reserves. This is plausible as we all know the games of competent persons conservatism gradually egging fees as management assertions are proved right.
Xcite energy… need more be said? The stock has been the darling of PI’s, has rocked and rolled, and fallen faster than a whore’s drawers on numerous occasions, especially when a dose of Futura medicals lotion had been applied in the form of numerous RNS feeds, the most recent being an expected reserves upgrade earlier this year. However, that particular stiff outburst of enthusiasm was short lived and the share price has lost over 50% as the Company has battled to raise finance to secure its future plans.
At present the Rowan Rig is in the ocean with the Scott Spirit tanker plugged in and sucking up the heavy crude in its 90 day extended well test. This was phase 1A. Get the well flowing, test the possibilities for enhanced recovery, secure the reserves based lending by producing more than 45,000 barrels and move on to phase 1B – drilling the core of the field and producing cash after DECC approval.
This is the question…why is a 750,000 barrel tanker sitting there taking off oil for a 2,900 barrels per day payload for 90 days? The Scott spirit left the BP Amsterdam refinery with a draught line of 9.8m versus empty of 9m (tankers have a flat bottom and coefficient of 0.95 so a linear relationship of water level to weight on board), so approximately 80,000 barrels of diluant light crude to lower the viscosity of the heavy crude to come out of the well and increase the eventual selling price. There could be other reasons, such as another stop off after the Bentley field or alternatively expectations, amongst those in the know, of filling the tanks after enhanced recovery techniques are applied (N.B. a dose of speculation and hope). Why rent a big boat when you’re cash strapped and only need a small one?
This has been the problem for AIM stocks – and a particular one for Xcite in raising finance for phase 1B. Placements have increased the shares in issue from just over 200 million to nearly 300 million and a reserved based lending facility of $155m have secured the bulk of this. Coupled with a hefty level of shorting and perpetual renewed weakness in the Eurozone, it’s no surprise that the share has performed badly. However, the dark days of Xcite seem to be coming to an end. Global Resource has received the second tranche of their three placements, although slightly amended to 12.5m shares from 10-12m after the share price falls. So finally all is falling into place and the dark clouds of improbability that sat on Xcite’s horizon are gently winding their way into the distance.
Xcite has been in the sights of takeover speculators on the bulletin boards, especially a couple of weeks back when Rupert Cole, the CFO, was twittered to be gallivanting in Norway courting Statoil. Well it would be no surprise if there was some interest from this corner as Statoil’s investment in the North Sea will total £18bn in the coming years and they own the Northern and Southern fields of Mariner and Bressay in relation to Bentley, a strategic and solid synergistic fit. BP is another player that clearly has the ear of Xcite, as they are incentivised to sell the heavy crude, alongside being one of the banks involved in the reserves based lending facility.
Looking at BP more closely you can see the new strategy of refocusing on singular assets in their back garden with a £10bn investment target in the North Sea – they don’t want to become the Osama Bin Laden of the Oil world again on America’s watch. They’ve flogged off shale gas assets to Linn energy in Wyoming for $1bn and have just raised £230m from selling two stakes in the North Sea Britannia and Alba fields to Mitsui. This brings the total divestments since 2010 to $24bn, over halfway to their target of $38bn. Obviously a large slug of this cash is going to be slipped under the table to the US but that still leaves a fair wad to go shopping with and snap up some deals to replenish matured assets in their home waters.
There has been good reason for majors to go sniffing at the smaller players as depressed share prices have meant cheap deals were on the table. CNOOC were the latest to take the plunge securing Canadian Nexen (if approved) for $15bn. This gives a spread of assets globally, but specifically 60,000 barrels of North Sea production per day, 30% of BP’s 200,000 barrels, or roughly 5% of total production. Sinopec has also made a grab for 49% of Talisman Energy’s North Sea 71,000 bpd production valuing it at $1.5bn. And let’s not forget Cairn Energy’s £414m bid for Nautical petroleum.
In all Xcite looks well positioned, even though there are the large risks of being in relatively unexplored territory in terms of heavy crude with new methodology, it does seem as if the news results from EWT are positive so far especially as the company keeps highlighting that 2900 barrels per day as being well within the operational performance of the reservoir. Financing is almost out of the way – DECC approval awaits. The discount to NAV sits at around 80% and 50% to Seymour Pierce’s target price. Furthermore, the company would make a fantastic fit for two of the dominant major’s re-worked strategies for the North Sea, so potential farm-ins are on the table – but that is only speculation. A buy and a punt – yes – but a waiting game with risks to the downside.
(Author has a holding in Xcite Energy)
Good article and very valid point concerning that tanker. The next annoucement due next will be the one to watch out for!