Will Xcite Energy Limited Be The Next Oil Explorer To Collapse?

Like the rest of the oil sector, fossil fuel explorer Xcite Energy (LSE: XEL) has suffered severely at the hands of a slumping oil price. Shares in the company have shed more than 75% of their value in the space of 15 months and were recently down more than 6% on the day.

With fears of abundant oil supply and insipid demand growth threatening to drive benchmark prices to fresh multi-year lows — Brent fell below $50 per barrel for the first time in six years earlier this month — speculation that many oil explorers could follow Afren on the brink is reaching fever pitch across investor message boards.

Work at Bentley set to speed up?

Naturally Xcite Energy is one of those that has come into the crosshairs, with investors desperately seeking news on the progress of its gigantic Bentley asset in the North Sea, one of the most promising fields in the region with reserves in excess of 255 million barrels of oil. Development here has been slow to progress, the company having failed to farm out interests in the block to cover costs since 2013.

More recently, however, Xcite Energy has taken a fresh approach to raise financing and has inked commercial agreements with oil service providers to spread the expense and get work moving again.

The firm signed a memorandum of understanding with China Oilfield Services Limited in November to provide drilling services, in turn completing the development group and paving the way for Xcite Energy to draw up strategic and commercial agreements and secure a final investment decision.

Broker Edison now expects a field development plan (FDP) to be formulated during the second half of 2015, with first oil to be produced during the latter stages of 2018.

… but sizeable obstacles still remain

Still, Xcite remains non-committal over expected timing for the FDP, and a lack of any news since November’s interims continues to shake investor confidence over the progress of getting Bentley moving again.

This is hardly surprising given that the major players across the industry are anxiously looking for an uptick in the oil price before committing to heavy investment. Indeed, Shell’s announcement that it was slashing its capital expenditure budget by $15bn over the next three years indicates the huge pressure the industry is under as companies try to conserve cash and ride out the storm.

On top of this, Bentley throws up a number of problems which could stymie development — not only could the viscosity of the crude prove challenging, but of course the business of offshore exploration is extremely unpredictable in terms of both cost and schedule.

In its favour, the extensive testing work carried out by Xcite Energy reveals the strength of the Bentley asset and could therefore make it easier to get its FDP drawn up. But should oil prices continue to decline, the firm could struggle to negotiate satisfactory commercial agreements with its partners and thus have to swallow further project delays, a hugely-worrying scenario given the explorer’s declining cash pile.

Although Bentley carries terrific potential, I believe that Xcite Energy remains a high-risk proposition in the current climate.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.