Xcite Energy
Edison | Apr 16, 2014 07:30AM ET
Shift in funding strategy
Against a challenging industry backdrop, Xcite Energy Ltd (XEL.V) is seizing the initiative by turning to major service providers to help reduce its capex requirements and make its 257mmboe Bentley project more attractive to farm-in partners. Having announced a plan to agree risk/reward commercial arrangements with key providers, the company has in recent days announced MOUs with FSO and platform suppliers. We expect this trend to continue over the coming months. Ultimately, the new approach will likely result in further delays to finalising the FDP, which we now see as a 2015 activity. Based on this, and first oil in 2018, our core NAV is reduced to 143p/share, although upside to this remains if a farm-out can be secured.
Challenging industry backdrop
Cost pressures on major oil companies have resulted in a sharp drop in corporate activity in the North Sea in recent years, just at the time when Xcite was looking to secure a farm-in partner for Bentley. Coupled with an apparent lack of activity from sovereign funds that have historically targeted large resource plays and Xcite has been left in a difficult position regarding how to develop its flagship project.
New funding strategy
In response to this dilemma, Xcite has sensibly adjusted its approach to put it more in control of addressing its funding requirements. As investment levels in the sector drop, the company intends to take advantage of increasing interest among the service community to share in risk/reward arrangements that will ultimately reduce the upfront capex burden and make Bentley more attractive to a wider range of farm-in partners. Two deals in recent days with Teekay and AMEC/Arup ably demonstrate the appetite that is out there for such arrangements. The downside to this approach, however, is likely to be more complex contracting arrangements with several parties and almost certainly further delays to getting to first oil.
Valuation: Farm-out still an option to add value
Reflecting first oil now in 2018 our core NAV drops to 143p/share (from 172p/share) if we assume that Xcite chooses to develop Bentley on its own. However, working with partners, either service companies or through a farm-out, would likely enhance this valuation. Working with service companies, Xcite would retain 100% ownership of Bentley and could complete pre-FEED/assurance engineering ahead of submitting an updated FDP. This added definition on cost and schedule, earlier in the process than in a traditional model, should reduce project execution risk and therefore attract a wider range of farm-in partners, adding value in due course.
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