Arbuthnot initiated coverage of Xcite Energy (AIM: XEL), giving the North Sea explorer a “strong buy” rating and setting the target price at 133 pence, which more than favorably compares to the stock’s current value of 39 pence.
The broker said that projects like the “extremely undervalued” company’s sole asset, the wholly owned Bentley viscous oil field, one of the largest underdeveloped fields in the North Sea, give the oil and gas industry the opportunity to boost reserves and further extend the productive life of a very mature oil province in decline, foreseeing a significant increase in investment into such projects. Viscous oil makes for 9 bn bbl (billion barrels) compared to the UK continental shelf’s total resource of 20-25 bn bbl and needs to be developed to extend the productive life of the North Sea.
The valuation was based on the current oil price of around US$80/barrel and the company’s resource base, which, if converted into reserves, could make Xcite the third largest independent oil company active in the UK North Sea and be transformational for the share price. A report prepared by RPS Energy determined an NPV (net present value) of US$181 million and recoverable resources of 72 mmbbl (million barrels) as the low case scenario, translating into a valuation of 133 pence per share.
The stock’s market value is expected to reach US$2-3/bbl, while the current value stands at US$0.40/bbl.
The Bentley project is currently at the pre-development stage and a pre-development well is due to be drilled in early 2010. In the event of a positive outcome of the well, the company will determine how to commercialize the field, hoping to bring it on stream in 2011 with full field development due to commence in 2014.
Xcite is looking to drill another pre-development well, which is estimated to cost about US$40 million. Arbuthnot said this well will determine the future of the project, saying it would be a much lower risk activity than exploration, yet the company would still be running certain risks associated with adverse weather conditions or unexpected drilling problems.