Another major setback for investors in Xcite Energy – more hopes dashed!

Well what can I say! Holding shares in North sea focused oil explorer Xcite Energy has always been associated with a roller coaster of emotions but this morning’s RNS detailing the company’s results for the year ending 2013 and updating the market on the company’s progress on the development of its 257 million barrel North Sea Bentley Heavy oil field certainly left me with a sinking feeling in the stomach at 7am!

After waiting well over a year since the end of the Extended Well Test (EWT) on Bentley (which finished in November 2012) and being told that farm out discussions were continuing throughout 2013, the bombshell hit this morning that farm out talks had been more difficult and protracted than expected and the company was now pursuing “a development partner solution”. A development partner solution is potentially a company like AMEC, an original member of the Bentley Alliance.  In June 2013, Xcite signed a memorandum of understanding with AMEC, setting out commercial principles for future cooperation to support the development of Bentley.  It could also include companies like Petrofac.

The shares predictably declined heavily, dropping as low as 71p, and they are currently down 7.5% at 76p. It shouldn’t have been a great surprise since the market has marked down the shares signficantly over the last few weeks.  Over the last month Xcite is down 17.5%. With these AIM companies, news seems to percolate out well before the RNS lands.

So with Chief Executive Rupert Cole promising much in 2013 and raising the hopes of long suffering private investors, he unfortunately has followed his predecessor Richard Smith in consistently under delivering. Finding $700 million to begin production on Bentley was always going to be challenge which begs the question, why did they abandon the original phased production approach which would have seen oil being produced from Bentley this year? Cole talked about “a major doing it this way” which gave reassurance that a player with big pockets was in the wings ready to do a deal. The aspirations of a farm out at $15 a barrel which was Cole’s goal didn’t materialise and presumably any offers were low ball so the company probably had to walk away or accept $3-6 a barrel.

 

The original $700 million development cost was going to be funded by a combination of farm out funds and Reserves Based Lending (RBL). On RBL, Xcite have confirmed that “We do not currently intend to enter into a new facility agreement until we have progressed the farm-out and development partner discussions, which would enable us to more accurately assess the overall financing required.”

So the company has a great asset in the North Sea but is struggling to find someone to hand over the cash at the right price. Look what happened to Rockhopper Exploration when it announced the Premier Oil deal! Those looking to farm in to projects are clearly playing hard ball when they are dealing with weakly capitalised AIM companies knowing that ultimately time is on their side. In addition, the big players in the North Sea are cautious in this environment and the string of divestments by majors probably hasn’t helped.

The announcement today speaks of the board of directors playing chicken and losing whilst having dreadfully exaggerated hopes of a good price.

Eventually Bentley will produce oil given the size of the asset and its location but now not until 2016 against hopes of quarter four 2015. Fortunately DECC are playing ball, “In recent months, and have received confirmation of a material extension to the Bentley licence until 31 December 2016, in order to facilitate the continued progress of the Bentley field towards production.”. On the approval of the Enviromental Statement and Field Development plan, “The ES is one of the key components of the overall Bentley field development plan and will be finalised prior to the final submission of the formal FDP for approval, which will include a demonstration of the technical capability and financial capacity of the development partners.”

At least the board hasn’t capitulated to a low ball farm in offer and there is hope that a combination of Reserves Based Lending and a development partner will plug the financing gap with a farm out perhaps happening later. The anxiety will be now how quickly the development partner deal can be landed but at least the carrot of a long term deal might in effect facilitate a cheap up front loan for guaranteed work over the life of the field. A one step at a time approach could have saved all the stress, rather than reaching for the sky with the mega project programme.

So yet more hope and then disappointment. With the shares at £4 in 2010 its been a long and painful trip down to the 70’s. I’ve had my fingers burnt before in 2011 with the original reserves report of 28 million barrels 2P (against hopes of 200 million barrels) and I probably should have learnt my lesson and never touched this share again. Cole should follow Smith out of the door and they can bring in a management team that actually delivers. As for promoting Andy Fairclough to be CFO beggars belief after this news. On his promotion to the board in February 2014, the RNS said “Since joining, Andrew has become increasingly involved with the financing strategy and development of the Company.”

The news tops off a dreadful few months for the AIM oil and gas sector and leaves private investors wondering is there any hope at all after substantial losses in the likes of Gulf Keystone, Bowleven as well as Xcite.

Its the same old story with AIM……lack of communication….lack of transparency….disappointments…..be careful out there!

Contrarian Investor UK

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The detail in the RNS said that:

“Discussions with industry service partners are progressing and, while a number of farm-out discussions continue, progress is slow, and our emphasis is now moving in favour of a development partner solution which we can influence and direct.  This approach would engage key industry service providers to help fund and supply key resources for the development plan, such as the floating storage and offtake vessel, project management, drilling rig and drilling management services, in return for incentivised contracts which would potentially deliver enhanced returns based on agreed performance targets.  In the current market, we believe that this approach enables us to progress Bentley without compromising any farm-out discussion.

We remain focused on monetising the inherent value of Bentley and nothing we have learned has undermined our confidence in the field or in our development plan.  Our conviction remains that we have a viable, cost effective and efficient approach to developing Bentley in the current environment and we shall maintain our flexibility and innovative approach to progress the field development plan.

In 2013, your management team worked hard to develop a range of options and to create a strategy that accommodates all our potential development partners.  We look forward to evolving this strategy and will update the market as we show material progress.

A substantial part of this past year has been devoted to preparing Xcite Energy and the Bentley field for the process to find a development partner, as explained in the accompanying Chairman’s Review.  We were diligent and thorough in our preparation of the information to be used and maintaining flexibility and generating viable options were key priorities.  We have also been conscious of the clear and significant changes in the market environment and have sought to adapt to those as we progressed.

With the promoting of Bentley within our control, and external market forces outside of it, we saw benefit in extending our discussions beyond conventional oil companies into the major industry service providers.  A number of these organisations have expressed an interest to work with us, based on a risk/reward based commercial structure, with the catalyst from our perspective being the successful EWT outcome.  We believe that combining the current development-ready status of Bentley, with the potential returns driven by the size and longevity of the field and the limited number of major development opportunities available in the North Sea, has encouraged a number of the major industry service providers to actively engage with us.

As these discussions have matured, we have identified what we believe to be a flexible and cost effective commercial operating structure, in which these potential development partners would provide their respective assets and services in return for long term contracts with Xcite Energy, and the opportunity to participate in performance related upside.  The costs of key components of the project such as the FSO, platform and topsides, project management, drilling rig and drilling management services, could potentially be phased to align with the cashflows generated by the first phase development.  Importantly, we believe this structure remains compatible with any future farm-out of Bentley and, as we continue to define and reduce the front-end cash requirements, may enable us to re-engage with parties who currently have material capital constraints.

Over the coming months, we plan to select our key preferred development partners and commence engineering programmes to more accurately define the development concept with a view to signing binding contracts with them for the project execution phase following approval of the FDP.  In addition, we shall continue to work to clarify the funding requirement for the Bentley development, taking into account the relevant contributions from each partner in the development group,  and evaluate the available financing options to take advantage of the cash flows generated during the First Phase Development, with the emphasis on debt finance. “