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Will Royal Dutch Shell Plc Buy Xcite Energy?

Xcite Energy’s (LSE: XEL) future is uncertain. The company has been working hard over the past year or so, to put in place commitments from other companies to help develop the Bentley oil field. However, as of yet, there have been no firm to help the oil minnow get the field into production and this is concerning.  

What’s more, it would appear as if Xcite’s future is now solely in the hands of Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US). Indeed, Xcite is unlikely to be able to raise enough cash to develop the Bentley field itself, so it will have to rely on a larger peer. Shell and its partner Statoil seem to be the company’s only options. 

High costoil rig

Shell and Statoil are joint owners of the Bressay heavy oil field, which is located almost next to Bentley. The estimated cost of the Bressy project is around $6.5bn, making it one of the UK’s largest North Sea developments. 

However, Shell and its partner have postponed the development of the Bressay field due to rising costs. Bressay is of a similar size to Bentley and is estimated to contain around 250 million barrels of recoverable oil. Statoil and Shell were originally aiming to get the project up and running by the first quarter of 2018, with technology in place to continue production for up to 30 years.

The desire to lower costs is likely to have been the reason why Shell, Statoil and Xcite signed a collaboration agreement, allowing the parties to evaluate potential synergies between the Bentley and Bressay fields.

Still, the decision by Shell and Statoil to postpone Bressay highlights how tough the situation within the North Sea has become. Costs within the region are spiralling out of control and the government’s tax raid on the sector during 2011 scared off many operators. 

Unfortunately, due to rising costs it seems as if a deal with Shell and Statoil is Xcite’s only option. It’s likely that other oil industry players would be unable to extract similar cost-saving synergies from the combination of nearby fields. 

Will Shell buy Xcite?

The question is, will Shell buy Xcite in order to gain control of Bentley?

Well, based on the fact that Shell is trying to get costs down, it is unlikely. Indeed, Shell would have to offer a significant premium to Xcite’s current share price, in order for both management and shareholders agreed to a deal.

At a time when Shell is trying to cut back on spending and reduce costs in the North Sea, the company is unlikely to offer a premium to buy Xcite.

So then, it would appear that the only option is a joint venture, or farm in between Xcite, Shell and Statoil, although before Shell and Statoil commit, they will want further clarity on the North Sea’s future tax regime.

Of course, if Shell really wanted to cut costs, the company could just wait until Xcite runs out of cash, acquiring the Bentley field at a fire sale price. 

Uncertain future

Xcite's future is uncertain, but with more than £2bn worth of oil to its name, the company should not be thrown on the scrap heap just yet.

Still, 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 Hargreaves has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.