The challenge for North Sea explorer Xcite Energy (LSE: XEL) is to turn a profit before its cash runs out, and that uncertainty has helped push the share price down over the past 12 months — even with an uptick in May, we’re still looking at an overall 48% fall.
Those expecting good news from today’s first-quarter update were disappointed, with the price down 2% to 37p by midday.
Reserves up
In his statement, chief executive Rupert Cole focused on Xcite’s reserves, after the company upped its estimates to an after-tax value of “…approximately US$1.9 billion, US$2.3 billion and US$2.6 billion on a 1P, 2P and 3P basis” for its Bentley field. Mr Cole also told us that “full field unescalated costs are expected to be approximately US$35 per barrel“, which is relatively low for North Sea oil, and at prices around today’s $63 for a barrel of Brent crude, it’s clearly a very nice proposition.
However, there’s a very big difference between knowing it’s there and getting it out and to market, with Mr Cole going on to say “We remain focused on developing the funding required to crystallise value from this asset“.
More cash needed
At the end of March, Xcite had a cash balance of $41m (£27m), which is better than I’d expected after the firm had reported a year-end balance of £32.5m at 31 December. But that’s unlikely to last more than around 18 months, and there’s obviously going to be a good bit more cash needed. Investors will be reluctant to snap up the shares until they know how much dilution there’s going to be from any future funding deal — and with oil prices low and with plenty of small explorers needing cash, we’re very much in a buyer’s market now when it comes to the financing of oil assets.
The firm does have some impressive partnerships, with Royal Dutch Shell, EnQuest and Statoil, and there’s no real doubt that the Bentley field will become nicely profitable. But even Xcite’s current debt funding is secured against its future production, and the amount that current shareholders will actually get to keep is the big unknown right now.
There are no revenues expected for at least two more years, never mind profits, and the analysts who are often enthusiastic about small oilies are putting out a distinctly unexciting Hold vibe for Xcite. But against that, the company’s own broker, Liberium Capital, has a multi-bagger price target on the shares.
A multi-bagger?
And sentiment does seem to be improving generally — though they’re down over 12 months, the shares are actually up nearly 50% from the 52-week low of 25p set in March. An investment in Xcite right now would certainly be risky, but the prospects for a multi-bagger performance are not unrealistic.