The last time I took a look at Xcite Energy (LSE: XEL) was at the beginning of May, and I concluded that the company was ‘seriously undervalued’, although it was unlikely that development of the company’s Bentley field would occur before the Scottish referendum.
However, since that article, Xcite has reported first-quarter results and more details have emerged about the company’s deal with Statoil and Shell, a deal which could potentially lead to a buyout, or joint venture in the near future.
When I covered Xcite at the beginning of May, the articles main focus was on the value of the company’s oil reserves, in relation to Xcite’s enterprise value. As covered previously:
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.
After a brief spike higher, Xcite’s enterprise value now sits at around the same level it was when I first undertook this analysis; the company remains undervalued.
Since the initial analysis, Xcite has released its results for the first three months of this year, which showed a small loss of £0.4m. Of this loss, £0.3m was due to the impact of unfavourable currency movements. So, Xcite effectively broke even for the first three months of this year.
Additionally, the company’s books showed a cash balance of £17m at the end of the first quarter, indicating that Xcite has plenty of cash to stay afloat for the time being.
However, the most important news and analysis to emerge during the past few weeks is related to Xcite’s deal with Statoil and Shell.
Statoil and Shell own the Bressay field, which neighbours Xcite’s Bentley filed and together the two oil fields hold up to 500m barrels of reserves.
According to the arrangement, the three parties are planning to work together to analyse all available data and various development proposals. Xcite’s management has drawn the conclusion from this that there is the possibility of sharing infrastructure, assets and operational solutions.
This does raise some important questions, as Statoil and Shell had previously stated that they were postponing the development of the Bressay filed following the analysis of data from Xcite’s Bentley test well, received at the end of 2013.
It’s possible that as a result of this deal, Statoil and Shell are now reconsidering their decision to postpone development.
Bressay field will cost $7bn to develop but if Statoil and Shell can leverage these development costs in order to access the reserves from the Bentley field, all parties will benefit.
The recent deal between Statoil, Shell and Xcite now makes a joint venture, or buyout a very real possibility.
Xcite appears undervalued at current levels, although one thing to remember is, that the oil business can make you rich but it can also make you poor. That's why the best investors build a portfolio with a combination of both risky oil companies and reliable dividend paying stocks, reducing risk and allowing you to sleep soundly at night.
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Rupert owns shares in XCITE ENERGY LIMITED.