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Xcite Energy Ltd: A Multi-Bagger For The Very Brave

It is tough enough being an oil company right now, even when you actually have some oil to sell. It is even harder if you don’t. That’s the hurdle facing North Sea heavy oil appraisal and development company Xcite Energy (LSE: XEL). The AIM-listed company’s flagship Bentley oilfield has always looked an exciting prospect, only less so with a barrel of Brent crude oil hovering around $50.

Earlier this year chief executive Rupert Cole assured us that full field extraction costs were expected to be around $35 per barrel, relatively cheap for North Sea oil and attractive at the time, when Brent crude oil was trading at $65. If bearish analysts who claim oil could slump as low as $30 are proved correct, it won’t be so reassuring.

Bumpy Bentley

Reservoir modelling and base case production profiles suggest that Bentley has big reserves and bags of promise, but it first has to get the stuff to market. Xcite lost $0.83m in the first six months of this year, and is expected to continue losing money for the next two years (and it will take even longer to turn a profit). It also has to secure funding to construct a mobile offshore production unit, and a floating storage and offloading vessel. Securing cash for investment isn’t easy for any oil company right now, with investors wondering what kind of return they will get in an oversupplied market.

To make life even more frustrating for investors, there has been a shortage of news flow lately, with only bland management statements and the ever-unreliable rumour mill to plug the gap. That partly explains why the share price is down from 65p to 28p over the last 12 months.

Off Message

There was a burst of activity on the message boards this morning on some very vague takeover rumours that seem to be going nowhere. So right now all investors can do is hope that no news is good news, and that, at 28p, the worst of the share price falls are over. This could be a great buying opportunity, so how brave are you feeling? Or rather, patient? Here’s the deal: you part with your money, wait two years for revenues and even longer for profits, and spend the interim dreaming of a juicy takeover bid, or dreading money-burning delays in the project.

Xcite’s volatility isn’t entirely down to oil price shifts. The share price for this risky exploration play has been swinging wildly since 2011. The oil price is just another challenge, but makes it too challenging from me. However, the company’s much-vaunted multi-bagger potential will continue to tempt gamblers. For them, this stock can still Xcite.

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Harvey Jones 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.