#XEL Xcite Energy

I sense a perfect storm with Xcite - investors split firmly into 2 camps of thought.

On the one hand you have investors who joined the dream 3 years ago during the heady rise to £4. At the time the O&G market was crazy. A company only had to spud a drill to see 15% added onto it's share price and it was quite possible to make a 25% return in no more than 6 weeks, selling out before results were even known. Having seen XEL rise 6 fold, investors didn't take profits, hoping it would double again - who wouldn't hold on for a 12 bagger! Quite forgetting that they already had a 6 bagger! This was partly fueled by comments at the time that the SP would top £10. Irresponsible, probably, but equally common sense was put to one side. I did exactly the same with Range Resources, watching my investment rise from 4p to 24p and still thinking I would hold for a little more. I can't blame anyone but myself and inexperience but what was I thinking??

Since then, the 3 years have been extremely frustrating for Xcite investors. The share has had it's a**e traded out of it and those not brave enough to join the traders have had to sit and watch their paper losses grow bigger and bigger. Not only that, but the months of waiting have given plenty of time to reflect on the loss and build up frustration against the BoD who are perceived as rich, out of touch with the PI's and not doing anything fast enough. Some of that frustration no doubt also reflects back on the investor themselves who feels stupid, annoyed with themselves, and then also turns overly critical and negative about everything to do with their once darling Xcite - desperate to just wash their hands of the rotten investment irrespective of what has been achieved.

But on the other hand, removing emotions, the other camp of investors are those who can hold true to the following story, which goes something like this:

2003 - P1078 Licence awarded during the 21st Promote Licencing Round
2007 - CPR prepared based on well data from 1977 AMOCO and Conoco appraisal programmes. Xcite raises $20m in private equity raise. Initial Public Offering raises $30m
2008 - Successful flow test of 9/3b-5 well 2009 Updated CPR prepared based on results of 9/3b-5 well test
2010 - Agreement with BP to market and sell Bentley crude oil in return for an incentive-based fee per barrel. Successful commercial flow test on 9/3b-6z well
2011 - Blocks 9/3c and 9/3d awarded during 26th Licensing Round. Bentley upgraded to Reserves with 28MMstb of 2P and 87MMstb Contingent Resources. Submission of FDP to DECC
2012 - Reserves upgrade to 116MMstb 2P reserves for Bentley core-area. Signing of US$155m Reserves Based Lending Facility with leading group of institutions. Successful conclusion of Phase 1A
2013 - Bentley Reserves increased to 250MMstb of 2P and 46MMstb of Contingent Resources. $15m sale of data from Extended Well Test.

So what do we have at this point in the journey? Well to remind us all, the Bentley field has been independently assessed by TRACS who have assigned the following:
- Petroleum Initially in Place of approximately 768 MMstb (1P), 907 MMstb (2P) and 1,052 MMstb (3P).
- Oil reserves of approximately 198 MMstb (1P), 250 MMstb (2p) and 312 MMstb (3P).
- And an NPV10 (after tax) for the oil reserves of approximately $1.496 billion (1P), $2.170 billion (2P) and $2.803 billion (3P).

But that's not all. What about the future potential to enhance recovery and prove up further reserves in their other licences adjacent to Bentley?

Xcite plans to undertake enhanced oil recovery tests which, if successful, will be followed by the implementation of an EOR programme for the entire Bentley field as soon as practicable during First Phase Development. It is anticipated that the EOR programme will incur additional costs to be met from cash flow being generated at the time, but will give rise to additional recoverable crude oil that will generate additional revenue in excess of the associated costs. Reserves estimates only include volumes that are currently planned to be produced within the initial 35 years. It is intended that the assigned Contingent Resources assumed to be produced in the 20 years after this period will be the subject of optimization and either brought forward within the initial 35 years, accelerated and captured by implementation of the EOR facilities, or produced through life extension methods during the later stages of field life. Funding for such work programmes is assumed to come from cash flow generated from previous production from the field. It is expected that these work programmes, if successful, will give rise to additional reserves being assigned to Bentley.

It is also planned that prospective resources currently contained within the adjacent and other prospects will be the subject of separate appraisal and development programmes, with funding for such work assumed to come from cash flow generated from the core area of the field. It is expected that these work programmes, if successful, will also give rise to additional reserves being assigned to the Bentley field.

So not only do we get EOR and increased reserves from Bentley core, there is the potential to see increased reserves from adjacent licenses.

Still thinking you can't wait to sell up with Xcite valued at a £340m market cap and sitting on all of this?

The BoD are at a critical and significant point. Having proved up a massive field of heavy oil, proving they can flow and sell it, they will be in highly complex discussions around the best way forwards. With majors all around the Bentley field, support from many banks, and Bentley a "significant strategic North Sea asset", then it doesn't surprise me at all that we are still waiting to hear about what negotiations have been taking place. This will be a highly significant and highly confidential agreement for all parties involved, and I don't expect it to be just one other party. There could easily be multiple parties working together on the best arrangements for the future.

So whilst I share some of the frustrations, and the boredom of waiting, I keep focused on the prize and consider the following... I have not done anything to contribute to the complex operation that has proven up 250,000,000 barrels of P2 oil over the past 10 years. All I have done is buy a few shares from my armchair and then made a few hundred pounds trading it during the last 2 years. I'm basically sitting around waiting for others to do their job. And what a job they are doing - if in any doubt at all I recommend you watch this video again to appreciate the size, scale, and technical complexity that Xcite Engineers have managed to achieve.

http://www.xcite-energy.com/media/video-centre/pre-production-well-test-video

And so, if I have to wait another year or 2, or 3, I think on balance I will do so, as the oil isn't going anywhere. Someone is going to get it out, and it will either be Xcite with others, or others without Xcite. Either way, Xcite's share price will be a long way from £1.20 when Bentley starts pumping 45k bopd. That's 1.64 million barrels per year, which at $100/barrel is $1.64 billion dollars top line revenue PER YEAR.

Sometimes the hardest thing to do in this game is to sit on your hands :)