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Xcite Energy (XEL) Buy

Post collaboration agreement….radio silence

Post the 6th May 2014 announcement of a collaboration agreement with Statoil (UK) and Shell (UK) to share field specific technical information for the evaluation of potential synergies between Bentley and Bressay, there has been radio silence on the work of the joint teams. Whilst not negative from the point of view of possible M&A activity – the technical evaluation process may take some months further- we are nevertheless surprised at the lack of any commentary.

Xcite’s new conventional bond issue ($140m raised at 12%) will retire $80m of maturing 12.5% bonds due 25th December 2014. The new capital has been raised at 10 under par with a 3% extra coupon (cash/ bond coupon PIK provision) equate to a very high 20.19% YTM. The exorbitant cost of finance for Xcite is significantly above than recent bond offers from the sector (Enquest $650m at 7% / Premier Oil 5%) and suggests the bond market would be prohibitive for any sort of development funding as opposed to the refinancing activity just completed.

In addition Xcite raised £10.9m via an issue of shares to bond placing investors at 68.5p. This gives some insight into where Xcite might consider future equity issues.

Valuation remains attractive

We have conducted a review of UK North Sea operators (table below). This suggests the following :-

  1. Investors are willing to pay more for diversified E&P. Investors are applying a discount and differentiating Xcite on the basis of its single asset (Bentley) structure and more binary outcome.
  2. Xcite 2P reserves are significant relative to sector peers albeit without similar growth characteristics in that Xcite are unlikely to be adding offshore assets.
  3. One possible interpretation for Xcite valuation is the problem evaluating the timing of risk profiles of varying M&A outcomes and the (high) probability of Xcite having to self-fund via equity.
UK mid cap oil co 2P ’12 (mmboe) 2P ’13 (mmboe) Net Debt($m) EV ($m) EV/2P ($/bbl) Comment
Afren 270.3 286.0 739 2,734 9.56 Fair value
Enquest 128.5 194.8 716 2,360 12.11 Fair value
Premier Oil 291.9 259.4 1,689 4,701 18.12 PMO reserves fell in 2013
Xcite Energy 250.0 257 54 386 1.50 Low relative & absolute

Source: CSS Investments Ltd.

Xcite Energy Q1-Q2 Summary

*Xcite summarised its Q1 and 6 months on 14th August identifying a £0.51m Q2 profit (EPS 0.2p) and cash of £41.5m post the US$ bond issue.
*Xcite will shift its Exploration and Evaluation (E&E) costs from intangible assets into tangible assets (“Production Assets”) including a £5.9m accumulated fee for terminating the RBL facility. This will occur when the Dept of Energy approves Xcite’s FPD for Bentley.
*The refinancing extension to 2016 pushes extends the bond liability by 18 months which should be sufficient time for M&A activity to arrive and conclude.
*The working capital position is strong, a factor which should persist given low cash requirements.
*Xcite has yet to draw on its ratchet agreement the £30.8m Equity Line Facility. The minute is does, there is likely to be an adverse market reaction. An Equity facility is a risk for shareholders given the potential for market share sales by the provider.

Xcite Energy 30 June 2014 (£m) 30 June 2013 (£m)
Cash 41.5 24.9
Current Liabilities 1.0 46.9
Bonds 72.7 0.9
Net Assets 228.2 217.7
Gearing (%) 14.1 10.5

Source: Xcite Energy

Xcite Energy 2YR chart

Screen Shot 2014-09-26 at 10.19.48

Source: Yahoo! Finance

Xcite Energy shares underperformance v UK 250 is noticeable and harsh treatment.

Conclusion

Investor patience is being tested at Xcite hence the swift reversal post the XEL surge on the collaboration deal with Statoil/ Shell. Whilst we welcome the May 2014 Collaboration Agreement the Xcite team need to market Bentley more widely. We expect DECC approval for Bentley’s FPD program soon. The recent sell off is harsh treatment for a high quality asset with good logistics that should start development soon.

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