XCITE. EDISON

Look closely. Big gains here

Lot of emails and some comment asking to post the full Edison note recently released on XCITE. So here it is. Have a good read.

Xcite Energy is a research client of Edison Investment Research Limited
21 October 2010
Xcite Energy’s strategic aim is to become a significant heavy oil producer in the
North Sea by 2014. The company is currently drilling a critical well, 9/3b-6, to prove
commerciality of its 160mmboe Bentley field and move into production as early as
2011. With a unique alliance financing structure that both incentivises partners and
retains Xcite’s 100% working interest, the company could rapidly become one of the
North Sea’s largest independent players. A conservative valuation of Xcite’s
prospects suggests a significant premium to its current share price, with very large
upside potential as it derisks its assets moving through the financial and heavy-oil
technical challenges to full field development.
Heavy oil specialists
Some of the technical challenges facing Xcite’s development of the Bentley field
remain. However, with a management team with heavy oil experience, high-quality
partners and a responsive approach to risk management, the company appears well
prepared to mitigate these risks effectively.
Alliance funding
The company intends to fund most of its field development through an alliance
structure with key project partners. As well as providing the necessary billion dollar
funding required for such a major North Sea development this points to the
confidence major industry players have in working with Xcite. Funding details and
partner off take agreements for both the first stage production and full field
development have still to be published and these will ultimately determine the
netback value to Xcite.
Valuation: Trading at a discount
With economies of scale and sole licence rights we value Xcite at 235p per share
even on a conservative basis. This valuation is likely to rise significantly if the 9/3b-6
well is a success, both in terms of de-risking of the Bentley project and potentially
adding to the already considerable 160mmboe of oil resources. Valuation will also
depend on the alliance structure, details of which have still to be published.
Outlook
Price 138p
Market Cap £204m
Share price graph
Share details
Code XEL
Listing AIM, TSX-V
Sector Oil & Gas
Shares in issue 148.1m
Price
52 week High Low
138p 31p
Balance Sheet as at end September 2010
Debt/Equity (%) N/A
RENAV per share (p) 235
Net cash (£m)* 34
*Management view
Business
Xcite Energy is an oil appraisal and
development company focused on
heavy oil resources in the UK sector of
the North Sea. It has one project, the
Bentley field, in which it is has 100%
working interest.
Valuation
2009 2010e 2011e
P/E relative N/A N/A 56%
P/CF N/A N/A 8.8
EV/Sales N/A N/A 5.6
ROE N/A N/A 36%
Revenues by geography
UK Europe US Other
100% 0% 0% 0%
Analysts
Ian McLelland 020 3077 5756
Elaine Reynolds 020 3077 5700
Neil Shah 020 3077 5715
oilandgas@edisoninvestmentresearch.co.uk
Xcite Energy
Year
End
Revenue
(£m)
PBT*
(£m)
EPS*
(p)
DPS
(p)
P/E
(x)
Yield
(%)
12/08 0.0 (0.5) (0.9) 0.0 N/A N/A
12/09 0.0 (0.8) (1.2) 0.0 N/A N/A
12/10e 0.0 (0.9) (0.6) 0.0 N/A N/A
12/11e 66.4 30.8 20.8 0.0 4.5 N/A
Note: *PBT and EPS are normalised, excluding intangible amortisation and exceptional items.
Investment summary: Current well is key
2 | Edison Investment Research | Outlook | Xcite Energy | 21 October 2010
Investment summary: Transformation Opportunity
Company description: Focus on the Bentley field
Xcite Energy’s strategy is to become a significant heavy oil producer in the North Sea by 2014. Its
key asset, the Bentley field in Block 9/3b, is progressing to first oil by the end of 2011, with a
critical pre-development well being drilled in October/November 2010. At present the company is
concentrating on progressing this potentially transformational project, although in future it intends
to explore and appraise the identified prospects and leads elsewhere in the block.
Heavy oil now accounts for 10% of oil production in the UK North Sea. Although more challenging
to extract oil from these reservoirs, technology is now available to develop these fields. Bentley sits
in a key heavy oil area, with Nautical’s Kraken and Statoil’s Bressay in adjacent blocks.
Sector positioning: Xcite has the potential to be transformed
We use a range of criteria to consider whether a company optimises the risk/reward balance for
investors. Our ideal company has high impact exploration acreage, is ready to drill, has good
subsurface understanding, has an ability to balance risk and reward within its portfolio, and has
demonstrated efficient use of capital. Unlike many of its peers, Xcite is focused on a single asset and
is not looking to farm down its stake. As such investors are exposed to significantly more upside and
downside risk. Within the other criteria we look for, we believe the company is well positioned:
 Good subsurface understanding: Xcite drilled its first well in Bentley, 9/3b-5, in 2007
and successfully brought oil to surface, something that had not been achieved in earlier
wells drilled on the field by majors Amoco and Conoco. Xcite subsequently carried out
3D seismic over the field in 2009, resulting in a 31% increase in best estimate
contingent resources. Key senior management at Xcite have extensive heavy oil
experience, and, through a proposed alliance structure, the company will have access
to the expertise of industry leaders such as AMEC, BP and Schlumberger.
 Funding: By choosing to enter into an alliance with a group of industry partners, Xcite
will maintain 100% equity, while spreading the capital requirement between the
partners. Although the partner terms are not publicly available, this will financially de-risk
the project and will be crucial in order to meet the expected Bentley full field
development cost, likely to be c $1.5 bn.
 Near-term activity: With the critical 9/3b-6 well currently being drilled, first oil could be
achieved by end 2011 from the First Stage Production, with full field development to
follow within two to three years and the potential transformation of the company.
Key facts
 Net ‘best estimate’ contingent resources (CPR) 122.5mmbbls, management update
post 3D seismic 160mmbbls
 Debt free (at end September 2010), net cash £34m plus £17m Standby Equity
Distribution Agreement (SEDA) established (initially £20m, £3m having been drawn
down)
 Near-term development of Bentley with first oil target of end 2011
3 | Edison Investment Research | Outlook | Xcite Energy | 21 October 2010
Recent newsflow and upcoming catalysts
 £5m placing to fund enhanced drill programme for critical 9/3b-6 well 26 August 2010
 Established £20m SEDA with Yorkville Advisors LLP 28 September 2010 (first £3m
drawdown announced 7 October)
 Drilling critical 9/3b-6 well spudded 29 September 2010
 Outcome of 9/3b-6 well expected end November 2010
Valuation: RENAV of 235p
We value Xcite at 235p based on a risk weighted exploration NAV (RENAV) with a conservative
50% chance of success. This is still a significant premium to the current share price of 138p. A
successful outcome of the 9/3b-6 well should significantly de-risk the project and remove
shareholder doubts regarding the technical ability to bring Bentley onstream, with the potential to
unlock shareholder value. The neighbouring close analogue Bressay field, operated by Statoil, will
also provide additional confidence of success as it is moved through development. Although
technically it is difficult to compare Xcite’s contingent resources to the 2P resources of the majority
of its North Sea peers, the company is trading at a low level for the region at $1-2/boe.
Sensitivities: Focus on technical challenges
As with any E&P company, investors are exposed to a range of risks. Within this report, we focus
on the technical challenges of the Bentley field and the work Xcite is undertaking to mitigate these
risks.
 9/3b-6 well outcome. The pre-development well must achieve stable and explainable
flow rates to give confidence for First Stage Production (FSP) to proceed.
 Technical risk. There are a number of technical challenges involved in developing heavy
oil fields. Xcite’s approach of drilling a pre-development well followed by FSP will de-risk
the project before committing to full field development. The presence of companies
such as AMEC, BP and Schlumberger in the development Alliance gives Xcite access to
a depth of expertise.
 Funding. Capital expenditure on Bentley will be substantial once the project is approved
pending a successful 9/3b-6 well. Full details have yet to be made public but Xcite has
indicated it intends to fund this using a mix of debt, alliance funding and equity for the
FSP and via a development alliance with project partners to provide an extraction
service for FFD.
 Bentley is the only asset, 100% owned. This potentially results in substantial upside for
would be shareholders, but also the equivalent risk on the downside should the well fail
to be successfully developed.
Financials: Profitable from FSP start-up
With FSP due to start in 2011 we forecast that Xcite will be profitable from 2011 and thereafter. Our
projections do not take into account funding as this is expected to be largely driven by the
development alliance once agreements are in place.
4 | Edison Investment Research | Outlook | Xcite Energy | 21 October 2010
Company description: Current Bentley well is key
Xcite Energy is an oil appraisal and development company focused on heavy oil resources in the
UK sector of the North Sea. The company’s sole project is the Bentley oil field, in which it has a
100% interest, and a successful outcome of the 9/3b-6 pre-development well, spudded on 29
September 2010, would allow initial development of the field through to First Stage Production
(FSP) with first oil planned for end 2011. With management best estimate of 160mmbbls
contingent resources (post 3D seismic, CPR pre-seismic estimate of 122.5mmbbls), the field has
the potential to transform the valuation of the company. If the resources can be converted to 2P
reserves, Xcite will become one of the largest independent operators in the North Sea.
Bentley background
The Bentley field is a heavy oil accumulation discovered by Amoco in 1977, subsequently operated
by Conoco until 1993, and then acquired by Xcite in 2003. It is located 160km east of the
Shetlands in around 113m of water and sits in an area of heavy oil discoveries, with both Statoil’s
Bressay and Nautical’s Kraken fields in adjacent blocks. Xcite holds a 100% working interest and is
operator of the field, which contains best estimate contingent resources of 160mmbbls.
Five wells have been drilled in Bentley to date. Following Amoco’s discovery well, Conoco drilled
9/3-2A in 1983 which was tested inconclusively due to equipment problems, 9/3-3 in 1986 which
was dry, and 9/3-4 in the same year which had oil shows but was not tested as it was not
considered economic due to the low oil prices at that time.
Exhibit 1: Bentley field sits near other heavy oil discoveries
Source: Xcite Energy
The only well to be successfully tested to date in Bentley is 9/3b-5, drilled by Xcite in December
2007. The test was carried out in January 2008 and designed to recover oil to surface to prove
fluid characteristics. The test string contained an electrical submersible pump (ESP), which was
necessary as the viscous oil was not able to flow naturally. Stable flow rates were not achieved
during the test, curtailed due to bad weather, but an average flow rate 109bopd was achieved,
with a range of circa 100-250bopd.
Bentley
5 | Edison Investment Research | Outlook | Xcite Energy | 21 October 2010
Subsequent test data analysis by Xcite and Schlumberger showed that the well had a high skin (a
measure of formation damage in the well). If the well is modelled for no damage and a full pay zone
perforation, a corrected flow rate from the well would be 647bopd. (Note that this flow rate is for a
vertical well. The CPR estimates that a rate of around 3,700bopd could be achievable for a
horizontal well.) Comparison with the analogue field, Bressay, is also important. The stable flow rate
achieved from Bressay 3/28a-2 well was over 3,200bopd from a 140 ft vertical section with similar
oil. Xcite requires 1,200bopd from its 500m horizontal #6 well to prove the Bentley downside
commerciality in the CPR, with 1,800bopd for base case and 2,400bopd for the upside case.
Success with the #6 well will be measured in terms of both proving actual flow rate (as a function of
the available well) as well as the ability to control the flow of oil to the surface.
In addition to proving flow rates, there also remains uncertainty regarding the viscosity of the oil,
which is important for future development planning. The most representative sample obtained from
Bentley gives a viscosity of 627cp at reservoir conditions, however a dead oil sample from the test
gave a viscosity of 1,111cp, while a dead oil sample from the 9/3-2A well yielded a viscosity of
1,000cp. Given the methane saturation in the Bentley oil, which also provides solution drive, such
viscosity drop in-situ appears reasonable and is a known phenomenon.
Current well: 9/3b-6 well designed to remove uncertainties
Because of these uncertainties, Xcite spudded the 9/3b-6 well on 29 September 2010, and this will
be tested with the principal objective of proving flow rates and confirming fluid properties. Drilling
and testing is expected to take around 60 days at a cost of $35m to $40m. The well will be drilled
with a slanted pilot section through the reservoir in order to correctly pinpoint the formation depths.
A horizontal well will then be drilled high up in the attic of the reservoir, as it is planned to use
horizontal wells in the development of the field, and it will be suspended on completion of testing as
a future producer to be re-entered as part of the FSP programme. The test will focus on achieving
a stable flow rate from the well rather than a maximum rate and, as such, the capacity of the test
equipment is limited to 2,800-3,000bopd to ensure low-end and mid-range performance.
Xcite also plans to tag an upside structure play potentially seen on 3D seismic with this well and, if
the 3D interpretation is confirmed, this would increase the best estimate contingent resources to
235mmbbls. In addition, Xcite plans to test for the presence of a tar mat at the base of the reservoir
using core samples from the well, also providing potential for yet further recovery.
Future development: De-risks project in stages, accelerates first oil
The #6 well test will also be used to move an initial volume of resources, in the order of 10-
40mmbbls, to 1P/2P, which will allow Xcite to submit an FDP for FSP. At present, the FSP plan
envisages five wells, with two multi-laterals each producing via a jack-up rig with process facilities
to a Floating Storage Unit (FSU). However, this may be subject to change depending on the results
of the 9/3b-6 well. Xcite expects the FSP to be operational around 12 months after a successful
test on the #6 well, and estimates average flow rates in the first year of around 15,000bbl/day.
The purpose of the FSP is to iron out longer-term production issues associated with heavy oil
developments, such as the movement of water through oil, which only become apparent after
production periods in the order of six to nine months. This will significantly de-risk the project
6 | Edison Investment Research | Outlook | Xcite Energy | 21 October 2010
before committing to a full field development and could be a source of significant revenue by the
end of 2011. In addition, following this initial six to nine months’ production, Xcite expects it should
be possible to book the full field reserves at 160mmbbls plus upside.
The full field development is planned to come onstream two to three years after the FSP. It will be a
substantial development, currently planned to consist of 72 multi-lateral producers drilled from 36
slots.
An independent third party marketing study, carried out by KBC, characterises Bentley crude as
being 10 to 12° API, low in sulphur and metals and with no wax, which will be suitable for the
European refinery market. It expects the discount to Brent to decline from 12% currently, to below
10% by 2030, as the discount should reduce as upgrading capacity increases. The marketing and
offtake agreement with BP is significant here, as it monetises the Bentley oil and provides BP with
an incentivised agreement to minimise the discount to Brent. Initial studies have demonstrated that
simple blending should reduce the discount below 10%, which would add material sums to the
underlying field economics. Xcite plans to test the blending during this 9/3b-6 well, with BP buying
the crude and also undertaking refinery tests.
Strategy: Provide shareholders with exposure to 100% of the upside
Xcite holds 100% of Bentley. Unlike many of its peers, the company is not planning to farm down
any of its interest in order to commercialise the project. Instead it plans to develop the field using a
mixture of debt, partner financing and ultimately a full field alliance, details of which are not yet
available.
An E&P company moves through certain key stages of a project to generate value. With a relatively
small team, it can move a field from exploration to appraisal to submission of a development plan.
Once a final investment decision is made and work starts towards FSP and full field development
(FFD), a much larger team of people is usually assembled. Throughout this entire process, funding
is usually required at various stages.
 Appraisal: The cost of the 9/3b-6 well and working capital has been funded through
placings of £24m in March 2010 and £5.8m in August 2010. In September, the
company entered into a £20m Standby Equity Distribution Agreement (SEDA) with
Yorkville Advisors. This enables Xcite to withdraw funds of up to £20m in tranches in
exchange for the issue of new equity, with the first £3m having been drawn in early
October at a much higher price than the previous placings.
 First Stage Production: Xcite estimates that the funding required to commence this
stage is circa $100 million, with at least 50% being met through debt and the remainder
in equity and from project partners. The company has chosen to adopt a contractor
model, where it works with industry partners in an alliance to develop the field. In this
way, Xcite will retain field equity and minimise capital requirement, while drawing on the
expertise of the partners. Our assessment of the economic value of the agreement will
only be possible once further details are available. The alliance partners will be involved
on a risk-reward basis in the FSP and through the full field development, providing
risked cash flow and in return earning enhanced margins based on the cash flow of the
project. The members of the alliance are:
7 | Edison Investment Research | Outlook | Xcite Energy | 21 October 2010
– AMEC: engineering services for FSP and full field development
– BP: marketing and offtake partner for Bentley crude
– Subsurface partners under discussion
– Rig and floating storage unit providers under discussion
 Full Field Development: With a planned 72 wells, this will be a substantial development
and is estimated to cost in the region of $1.5bn, of which capital expenditure will be c.
$1.2bn. With the first stages of engaging the alliance partners in this project already in
place and the principles of the risk/reward mechanism established, the ability to contract
for a complete extraction service from the contractor group will be clarified at the FSP
stage. FSP free cashflow could also give Xcite the opportunity to free fund the full field
development with debt financing, in the absence of agreeing funding via the alliance
partners.
Management: Experienced industry players
Roger Ramshaw, chairman, has over 30 years of experience in operations, project and commercial
activity in the petroleum industry. In his most recent role before Xcite he was Chairman and
managing director of ConocoPhillips (UK) Ltd, where he led the company’s exploration,
development and production business on the UKCS. Prior to that, he was president of Conoco
Venezuela Ltd, leading the company’s commercialisation of heavy oil assets.
Richard Smith, CEO: Mr Smith is a Chartered Engineer and has over 25 years of experience in
engineering and business management in onshore and offshore oil and gas projects. Prior to
joining Xcite in 2003 he was programme director at Granherne, where he was responsible for the
creation and formation of a business providing programme management services to clients in the
international oil and gas business. He is a Fellow of the Institute of Civil Engineers and a Corporate
Member of the Institute of Marine Engineers and the Royal Institute of Naval Architects.
Rupert Cole, CFO: Mr Cole is a Chartered Accountant and has over 20 years of experience in
corporate finance. Prior to joining Xcite in 2003 he was Programme Management Business Adviser
at Granherne, providing strategic, commercial and financial advice to upstream oil and gas services
providers. From 1990 to 1996, he was Finance Director at Harpur, an international downstream
service provider to major oil companies.
Stephen Kew, exploration and development director: Mr Kew is a Petroleum Engineer and has over
34 years of development engineering and project management experience in the oil and gas
industry, including 25 years with Conoco where he gained experience of the Bentley field, Block
9/3b. He has been a director of 3 Sigma Limited since 1999, a petroleum engineering consultancy
company in the upstream oil and gas business. He is an associate of the Institution of Chemical
Engineers, a member of the Society of Petroleum Engineers and president of the Scottish Oil Club.
8 | Edison Investment Research | Outlook | Xcite Energy | 21 October 2010
Sensitivities: Focus on technical challenges
As with any E&P company there are risks any investor involved is exposed to. In the case of Xcite,
we focus on the technical challenges and then highlight some generic risks as well.
Heavy oil: The technical challenges
Previously we have discussed how Xcite is de-risking Bentley by splitting the project into the three
separate stages of pre-development well, FSP and full field development. Here we highlight the
ways in which it has worked to further de-risk the project, both technically and financially.
Heavy oils are defined as those oils having an API oil gravity less than 22°. Bentley has an API of 10°
to 12° but oil viscosity is the fluid property seen as more useful in predicting flow characteristics,
with viscosities greater than 5cp defined as heavy. In the North Sea, Chevron’s Captain oil field,
producing since 1997, has a viscosity of 88cp, while Statoil’s Bressay, the field most closely
analogous to Bentley, has a viscosity of 550-1,200cp. The best estimate of viscosity in Bentley is
627cp, so to date there is no North Sea heavy oil development in production with viscosities as
high as seen in Bentley, and this has implications for full field design.
The main technical challenges are:
 The shallow nature of the reservoir, and the requirement for horizontal wells, demands a
rapid angle build up during drilling. In addition, for full field development, wells will be
running parallel to and within 200m of each other. This is a challenging drilling plan, but
has been achieved in the Captain field with over 80 wells already drilled in a shallower
reservoir. Other fields have also demonstrated success in drilling closely spaced horizontal
wells both in the North Sea and elsewhere.
 Artificial lift in the form of pumps is required to lift the oil to surface. The type of pump
planned for the development has yet to be confirmed, with the need to balance the
expected better performance of progressive cavity pumps (PCP) against the higher
reliability of Electrical Submersible Pumps (ESP). Frequent workovers may be required
due to a high pump failure rates, and hence will be a key test during the FSP. However,
on Captain and other North Sea fields, mean time to failure on ESP’s is now measured in
years.
 As the viscosity of oil is much greater than that of water, water breakthrough occurs early,
and a large portion of the reserves are recovered at high watercut. This water movement
will be tested as part of the FSP, as it is estimated these effects will require a minimum of
six to nine months’ production to be properly tested. The required water handling facilities
required are included in the full field development plan.
 The poorly consolidated nature of the reservoir means that sand control is required. Xcite
is confident that this will be achieved through the use of slotted liners, and surface
facilities will be designed to cope with sand production. This technology has been used in
the Captain field and other unconsolidated reservoirs successfully.
 Recovery factors are lower. Currently the assumed recovery factor is 22%, but Xcite
hopes to increase this later in the field life to 35–40% through the use of polymer flooding
9 | Edison Investment Research | Outlook | Xcite Energy | 21 October 2010
and/or other Enhanced Oil Recovery techniques that have been used successfully in
Captain and elsewhere.
In conclusion, while the development of a heavy oil reservoir such as Bentley is challenging, it
remains well within the possibilities of existing technology, and Xcite has shown that it is addressing
the main issues.
Other factors to consider
 Financial risk: Xcite has raised sufficient funds to cover the 9/3b-6 well and working
capital. In order to maintain100% interest in the field going forward, the company will
manage the substantial financial commitment for the project through the Alliance
structure, with the partners providing their share of risked cash flow in return for earning
enhanced margins based on oil production. Terms of the agreement are not yet
published.
 Single asset risk: Bentley is Xcite’s sole asset.
 Political risk: With exposure in the UKCS, Xcite’s political risk is very low.
Valuation: Trading below peers
Exhibit 2 shows Xcite relative to a group of North Sea peers in terms of resource.
Exhibit 2: Xcite relative to North Sea peers
Note: Nautical adjusted to reflect proposed farm-down of Mariner to 6.67%. Prices as at 19 October
Source: Edison Investment Research, Datastream, various company accounts and presentations
As Xcite’s resources are 2C, or contingent resources, this is not strictly comparable with 2P
reserves. The only other company in the peer group with 2C resources is another North Sea heavy
oil specialist, Nautical Petroleum. Nautical is currently trading at $10/boe, up from $0.18/boe in
May 2010, following successes in the Catcher discovery and Kraken appraisal. Xcite has an EV of
$227m, leaving it trading at $1-2/boe, well below Nautical and many of its North Sea peers.
Exhibit 3 shows our valuation of Xcite’s asset. Our RENAV of 235p is a significant premium to the
current share price of 138p. This is based on a relatively conservative chance of success that we
have applied of 50%, reflecting the fact that the company has no assets in the
development/production phase and the inherent risks in bringing the field to production. It should
be noted that the CPR concluded that the chance of success of the Bentley Field is 70%, and it
Market
cap US$m
EV
US$m
3P 2P 1P Liquids % 3P 2P 1P
Premier Oil PMO:LN 1,602p 2,797 3,112 468 315 188 32 6.7 9.9 16.6
Stratic Energy SE:CN 10p 41 149 8 5 76 17.9 28.1
Endeavour International END:US $1.43 234 430 62 45 18 28 7.0 9.6 23.6
Northern Petroleum NOP:LN 88p 121 90 103 25 70 0.9 3.5
Xcite Energy XEL:LN 125p 278 227 220 160 0 1.0 1.4
Nautical Petroleum NPE:LN 360p 474 442 44 100 10.0
Antrim Energy AEN:CN C$0.71 95 64 67 37 5 80 1.0 1.7 14.3
Ithaca Energy IAE:LN 129p 494 280 77 42 21 95 3.6 6.7 13.4
Sterling Resources SLG:CN C$3.29 439 368 40 33 24 3 9.1 11.3 15.7
Valiant Petroleum VPP:LN 750p 441 517 56 27 97 9.2 19.1
Serica Energy SQZ:LN 42p 111 163 18 10 9.0 17.2
Faroe Petroleum FPM:LN 193p 505 472 227 2 0 2.1 235.8
Valuat ion
$/boe
Price/
s hare
Stocks Symbol Res ources /res erves (mmboe)
10 | Edison Investment Research | Outlook | Xcite Energy | 21 October 2010
can be seen that at this level, the RENAV increases to 331p. Success in the 9/3b-6 well will further
enhance value.
Exhibit 3: 235p RENAV
Source: Edison Investment Research
Our valuation is based on an NPV discount rate of 10% and a fixed heavy oil discount to Brent of
12%. Based on these parameters the break-even Brent oil price for Xcite to be NPV neutral at
Bentley is only $37/bbl. The relative impact on RENAV of our assumptions regarding the project
chance of success, Brent oil price and discount are shown in Exhibit 4.
Exhibit 4: Valuation sensitivities based on oil price, chance of success and heavy oil discount
Source: Edison Investment Research
Financials
Exhibit 5 summarises the financial performance of Xcite based on our modelling of the
development of the Bentley field. With FSP due to start in 2011 we expect the company to move
into net profit in 2011 and remain thereafter. Our financial projections do not cover the period from
2013 onwards when we would expect the Bentley full field development to begin.
Our model does not account for the creation of the proposed alliance structure at present as these
agreements are not yet confirmed. As such we have left the balance sheet untouched showing a
£584m net debt position by the end of 2012. This debt we expect to be in part funded through
bank financing and alliance partner equity injections (for the FSP) and from alliance partner
injections (with corresponding extraction service agreements) in later years for the full field
development.
Current no of shares (million) 148 .1
FD shares (million) 0
$ /£ 1.5
Netback
As s ets Country/ WI Hydroc. CoS Gros s Net NPV/boe EMV EMV Value/s h
Licence % Fluid % mmboe mmboe $ /boe $m GBP p
Exploration/Appraisal
Bentley UK 100% Oil 50% 161.0 161.0 6.3 48 1.4 320.9 216.7
TOT 16 1.0 TOT 48 1.4 3 21 217
Cash/(Net Debt) 51 34 23
G&A -7 -7 -5
RENAV TOT 525.5 3 48 23 5
Unris ked
Reserves/Resources
Oil Price
[$/bbl] 40% 50% 60% 70% 80% 100%
40 29 37 46 54 63 79
60 187 235 283 331 378 474
80 322 403 485 566 647 810
100 450 564 677 791 905 1,132
Project Chance of Success [%]
100
150
200
250
300
0% 5% 10% 15% 20%
RENAV [p)
Brent Discount (%)
11 | Edison Investment Research | Outlook | Xcite Energy | 21 October 2010
Exhibit 5: Summary financials
Source: Edison Investment Research, Company accounts
£ ‘000s 2007 2008 2009 2010e 2011e 2012e
Year end 31 December UK GAAP IFRS IFRS IFRS IFRS IFRS
PROFIT & LOS S
Revenue 0 0 0 0 6 6 ,422 142,751
Cost of Sales 0 0 0 0 (34,702) (91,465)
Gross Profit 0 0 0 0 31,721 51,28 5
EBITDA (9 8 2) (8 8 1) (78 9 ) (9 47) 3 0,58 4 49 ,9 22
Operating Prof it (before amort. and except.) (9 8 2) (8 8 8 ) (79 8 ) (9 50) 3 0,58 1 49 ,9 18
Intangible Amortisation 0 0 0 0 0 0
Exceptionals 0 0 0 0 0 0
Other 0 0 0 0 0 0
Operating Prof it (9 8 2) (8 8 8 ) (79 8 ) (9 50) 3 0,58 1 49 ,9 18
Net Interest 252 345 6 17 236 (1,654)
Profit Before Tax (norm) (73 0) (543 ) (79 2) (9 3 3 ) 3 0,8 17 48 ,26 3
Profit Before Tax (FRS 3 ) (73 0) (543 ) (79 2) (9 3 3 ) 3 0,8 17 48 ,26 3
Tax 0 (17) (97) 0 0 0
Profit Af ter Tax (norm) (73 0) (56 0) (8 9 0) (9 3 3 ) 3 0,8 17 48 ,26 3
Profit After Tax (FRS 3 ) (730) (560) (8 90) (933 ) 30,8 17 48 ,263
Average Number of Shares Outstanding (m) 60.6 61.4 71.6 148 .1 148 .1 148 .1
EPS – normalised (p) (1.2) (0.9) (1.2) (0.6) 20.8 32.6
EPS – normalised and fully diluted (p) (1.2) (0.9) (1.2) (0.6) 20.8 32.6
EPS – (IFRS) (p) (1.2) (0.9) (1.2) (0.6) 20.8 32.6
Dividend per share (p) 0.0 0.0 0.0 0.0 0.0 0.0
Gross Margin (%) N/A N/A N/A N/A 47.8 35.9
EBITDA Margin (%) N/A N/A N/A N/A 46.0 35.0
Operating Margin (before GW and except.) (%) N/A N/A N/A N/A 46.0 35.0
BALANCE SHEET
Fixed As s ets 6 ,58 2 22,018 23 ,03 6 3 0,6 45 243 ,109 6 9 8 ,405
Intangible Assets 6,58 2 21,997 23,023 30,632 243,096 698 ,38 9
Tangible Assets 0 21 13 13 14 16
Investments 0 0 0 0 0 0
Current As s ets 21,150 1,8 42 1,754 23 ,6 27 10,3 6 0 27,020
Stocks 0 0 0 0 0 0
Debtors 8 3 14 18 0 10,360 27,020
Cash 21,067 1,8 28 1,736 23,627 0 0
Other 0 0 0 0 0 0
Current Liabilities (5,043 ) (1,111) (211) 0 (16 8 ,3 8 1) (59 2,073 )
Creditors (5,043) (1,111) (211) 0 (2,960) (7,720)
Short term borrowings 0 0 0 0 (165,421) (58 4,353)
Long Term Liabilities 0 0 (505) (505) (505) (505)
Long term borrowings 0 0 0 0 0 0
Other long term liabilities 0 0 (505) (505) (505) (505)
Net As s ets 22,6 8 9 22,750 24,073 53 ,76 7 8 4,58 4 13 2,8 47
CASH FLOW
Operating Cas h Flow 0 (4,704) (1,542) (1,140) 23 ,18 4 3 8 ,022
Net Interest 0 345 6 17 236 (1,654)
Tax 0 0 400 0 0 0
Capex 0 (27) (1) (3) (212,468 ) (455,300)
Acquisitions/disposals 0 (15,330) (903) (7,609) 0 0
Financing 0 478 1,948 30,626 0 0
Dividends 0 0 0 0 0 0
Net Cash Flow 0 (19,239) (92) 21,8 91 (18 9,048 ) (418 ,932)
Opening net debt/(cash) 0 (21,06 7) (1,8 28 ) (1,73 6 ) (23 ,6 27) 16 5,421
HP finance leases initiated 0 0 0 0 0 0
Other 0 0 0 0 0 (0)
Clos ing net debt/(cash) 0 (1,8 28 ) (1,73 6 ) (23 ,6 27) 16 5,421 58 4,3 53
12 | Edison Investment Research | Outlook | Xcite Energy | 21 October 2010
Growth Profitability Balance sheet strength Sensitivities evaluation
Litigation/regulatory 
Pensions 
Currency 
Stock overhang 
Interest rates 
Oil/commodity prices 
Growth metrics % Profitability metrics % Balance sheet metrics Company details
EPS CAGR 07-11e N/A ROCE 10e N/A Gearing 10e (%) N/A Address:
EPS CAGR 09-11e N/A Avg ROCE 07-11e N/A Interest cover 10e 54.7 Banchory Business Centre
Hill of Banchory Business Park
Burn O’Bennie Road
Banchory AB31 5ZU
EBITDA CAGR 07-11e N/A ROE 10e N/A CA/CL 10e N/A
EBITDA CAGR 09-11e N/A Gross margin 10e N/A Stock turn 10e N/A Phone 01330 826740
Sales CAGR 07-11e N/A Operating margin 10e N/A Debtor days 10e N/A
Sales CAGR 09-11e N/A Gr mgn / Op mgn 10e N/A Creditor days 10e N/A www.xcite-energy.com
Principal shareholders % Management team
Fidelity Investment Services (UK) 8.9 CEO: Richard Smith
Ignis Investment Services 7.4 Mr Smith is a chartered engineer and has over 25 years of
experience in engineering and business management in
onshore and offshore oil and gas projects. Prior to joining XER
in 2003 he was programme director at Granherne where he
was responsible for its business providing programme
management services to clients in the oil and gas business.
Third Point LLC 5.3
Standard Life Investments 5.0
Stephen A. Kew 4.7
Richard E. Smith 4.7 CFO: Rupert Cole
Rupert E. Cole 4.7 Mr Cole is a chartered accountant and has over 20 years of
experience in corporate finance. Prior to joining XER in 2003
he was programme management business adviser at
Granherne providing strategic, commercial and financial advice
to upstream oil and gas services providers. From 1990 to
1996, he was finance director at Harpur, an international
downstream service provider to major oil companies.
Forthcoming announcements/catalysts Date *
9/3b-6 drilling results November 2010
Q310 Interim results November 2010
Annual results March 2011 Exploration & Development Director: Stephen Kew
AGM May 2011 Mr Kew is a petroleum engineer and has over 34 years of
development engineering and project management experience
in the oil and gas industry, including 25 years with Conoco
where he gained experience of the Bentley field, Block 9/3b.
He has been a director of 3 Sigma Limited since 1999, a
petroleum engineering consultancy company in the upstream
oil and gas business.
Companies mentioned in this report:
Premier Oil, Stratic Energy, Endeavour International, Northern
Petroleum, Nautical Petroleum, Antrim Energy, Ithaca Energy,
Sterling Resources, Valiant Petroleum, Serica Energy
-5
0
5
10
15
20
25
2007 2008 2009 2010 2011
EPS normalised (p)
-140%
-120%
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
2007 2008 2009 2010 2011
ROCE
-200,000
-150,000
-100,000
-50,000
0
50,000
2007 2008 2009 2010 2011
Net cash (£’000s)
Edison Investment Research
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