More jam tomorrow at Xcite Energy’s Paris AGM

The frustration continues for Xcite Energy shareholders following the AGM yesterday afternoon in Paris, with the shares down another 5% today after an 11% fall yesterday.

Despite the company having a great asset in the North Sea, the Bentley field with 257 million barrels 2P reserves the management team have failed to deliver real shareholder value yet again and the window for an increase in this shareholder value seems to have been put back well into 2015 with plenty of associated risks.

The shares were trading around 90p earlier this week on high hopes of positive news from Paris following the Statoil/Shell collaboration announcement on the 6th May. Today they’re back to 72p and I believe there are plenty of reasons to be pessimistic about the short term – mid term performance of the share price based on what was said at the AGM yesterday. XEL’s share price dropped as low as 59p following the announcement on the 27th March accompanying the 2013 annual results that it had failed to find a farm out partner to bring Bentley’s heavy oil into production. The company has been forced to find an alternative solution with service providers to move things forward which of course meant more delays to first oil. Everyone was hoping there was glimmer of positive news from Paris to mitigate the implications of this announcement, but it was not to be! Quite the contrary.

Rupert Cole

Chief Executive, Rupert Cole, like his predecessor Richard Smith seem to beset with bad news. Smith was forced to resort to unsavoury arrangements with Socius/Global to fund a $250 million Extended Well Test on Bentley after it became clear that the original well test conducted in 2010 was insufficient to get the required funding to develop the field and DECC rejected the original field development plan (FDP). This meant plenty of share holder dilution and delays. The FDP was reconfigured to a phased approach which would have meant first oil early next year with a rig already booked with Rowan but this plan was abandoned after the Extended well test (EWT) for a much larger and more expensive project, “the way a major would do it”,  according to Cole. This new “big project” approach was going to cost the princely sum of $700 million for the first stage. Now through a mixture of over confidence, arrogance or bad luck, Cole has yet again failed to deliver shareholder value in a reasonable time frame – news in late 2014 or more likely 2015.

Vague is the key word right now, partly due to confidentiality agreements but hardly reassuring for investors. The company is working with the service providers to try and get a cheaper solution for field development to try and reduce the gap between the existing $155 million reserves based lending facility and the cost for the initial phase of the project.

The timetable to move from MOU’s (memorandum of understanding) to contracts with the service providers is unclear. The company hope to submit a new Field Development Plan by the end of this year, but Cole’s comments yesterday indicated that this was a stretch (we’ll do everything we can blah blah). Cole believes that the company’s shares will rerate once the FDP has been submitted to DECC, not first oil. But whereas everyone hoped for first oil in 2015, the delays mean that first oil will be lucky to be produced in 2016 and probably later once the necessary rigs and other infrastructure have been sourced. Potentially plenty of jam tomorrow, but can you trust Cole to deliver on his promises?

Much has been made of the company’s apparent Intellectual Property in recovering Bentley’s heavy oil, but it was disappointing to hear that the IP was attached to people – predominantly Stephen Kew. People can walk, be tempted away and this IP cannot be protected. The “golden ticket” of the IP was not quite as golden as we all hoped!

So my reaction from yesterday’s proceedings was that there is plenty of risk – no wonder the big institutions have given this share a wide berth since 2010! What happens if the service providers don’t see enough upside in a potential deal with Xcite and walk away, where does that leave the company with respect to funding? How long will DECC take to approve the new FDP when it is finally submitted, mid 2015? How long will the necessary equipment with Teekay and other providers take to get ordered and delivered?

It seems that the company is not engaged with any independents and Statoil are in no rush to do a deal after buying the well data for $15 million and DECC has told Xcite and Statoil to work together to develop the hub. But production from Statoil’s Bressay field is years away. Those hoping for a takeover may be severely disappointed.

In summary, a fab asset, a second rate management team who do little to inspire confidence (dreadful presentations in Paris). Many shareholders who have been invested since the start hoped that oil would be being sold through BP to the market very soon. External and probably internal events have conspired time after time to knock back XEL’s plans. The next big stimulus to the shares would be the submission of the FDP and confirmation of funding but this will be months not weeks away. I hate to say but the doom mongers on the bulletin boards are right that there is no reason to buy the shares right now and there are plenty of better short term opportunities elsewhere. If the company deliver with the service providers and that’s if, it’s time to bury the scepticism.

Personally I’ve been burnt by XEL in the past following the original reserves report in 2011. Foolishly I decided to reinvest last September on hopes that the lessons of past blunders had been learnt and the high quality of the asset would attract a decent farm out partner. I’ve sold out of Xcite this week, again for a loss and wish those with more patience (and possibly guts) that their dreams are realised. But with the merry band in Guildford in charge, don’t hold your breath for that £6 takeover anytime soon.They’re happy to wait years if need be to deliver the $15 a barrel valuation for Bentley, AIM is not the sort of place for this long term thinking. Too much now rests on a decent deal with the service providers and who knows what they will ask for to sign on the dotted line.

Todd Kozel, Rupert Cole and Kevin Hart have cost many AIM oil and gas investors plenty of money in the last few years. I though RBS’s Fred Goodwin was bad, but it seems there’s plenty of AIM directors like “Fred the Shred” who are focused only on one thing, looking after number one!

Contrarian Investor UK

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