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How Much Lower Can Xcite Energy Limited Go?

Xcite Energy (LSE: XEL) shareholders have every right to be disappointed in the company’s performance so far this year. Indeed, even after the company reported a stellar set of pre-production flow test results from its Bentley oil field at the end of last year, the oil minnow’s share price has gone nowhere but down during the past few months.

However, Xcite announced some great news this morning, revealing that the company had entered into a collaboration agreement with Statoil and Shell, allowing the parties to evaluate potential synergies between the Bentley and Bressay Fields. This agreement has opened up the possibility of a joint venture between Xcite, Shell and Statoil.

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Still, the question remains, even after this good news, will Xcite’s shares push back to their 2011 high of 400p, or retest the 2010 low of 35p?

The bigger picture
oil rig

Unfortunately, Xcite is facing several headwinds going forward, none of which are under the company’s control.

For example, it is widely believed that Xcite is unlikely to receive any takeover or joint-venture offers to develop the Bentley field, until the Scottish referendum has taken place. 

Further, the company is constrained by operating conditions within the North Sea. Specifically, ageing infrastructure, high tax liabilities and high costs are three factors driving oil companies away from the region.

Still, the recently released Wood Report, commissioned to establish the best way of extending the North Sea’s life and boosting the UK’s oil production, contains many recommendations that would make the region more attractive to investors.

Thankfully, the proposals put forward within the report are likely to be adopted after the outcome of the Scottish referendum; both the Scottish and UK governments have voiced their support for the reports proposals.

Additionally, Xcite’s management remains proactive and are doing everything possible to speed up the development of the Bentley field.

During the space of the last year alone, Xcite has signed an offtake agreement with BP, a memorandum of understanding with AMEC for the development of the Bentley field,another memorandum of understanding with Teekay Shipping for the provision of shipping services for Bentley field infrastructure, and as mentioned above, the collaboration agreement with Statoil and Shell. 

But how much is Xcite worth?

Of course, the key question on everyone’s lips is how much is Xcite actually worth and are the company’s shares under, or overvalued at current levels?

My preferred method of valuing oil exploration companies like Xcite, is to compare the company’s PV-10 figure to its enterprise value.

The PV-10 ratio attempts to show us the future value of all of the hydrocarbon reserves held by the company, net of extraction expenses. Therefore, oil and gas companies trading below their PV-10 figure are often considered undervalued.

Xcite’s PV-10 value of proved and probable reserves stands at £4.5bn, after the deduction of tax this figure drops to £2.1bn, significantly above Xcite’s current enterprise value of around £250 million.

So, as Xcite is currently trading at a huge discount to the value of its oil reserves, it would appear that the company is seriously undervalued.  

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Rupert owns shares in XCITE ENERGY LIMITED.

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