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I know oil producer XciteEnergy (LSE:XEL) seems to have a lot of diehard admirers on the Bulletin Boards. I can see the attraction and think it is probably cheap, if speculative at 101p. But it is not a stock I’d travel to the Moon and back for. But for those who care I just bring you a quick note from Fox Davies. It writes:
Post a Company update (16th of Jan), our initial fears over the commerciality of the Bentley field have been partially offset by the disclosure of an active aquifer as drive mechanism. Operational concerns still exist given the heavy oil, potential pour point and gas flashing impact on system temperatures; this can be overcome, but it is uncertain to what extent this has been factored in to costs.
Development funding remains a concern, however, the current valuation is undemanding compared to its peers, but could be a reflection of the development risks.
XEL’s peers are those with assets only in the North Sea. There is a marked difference between those companies that are fully funded, which trade closer to their respective asset values, than those that require funding, that have a heavier discount. As such, and until XEL receives Bentley development funding, we believe that $7.6/2P bbl (see following) is an appropriate valuation to take at this time.
XEL’s market value is being hampered by the fact that investors are aware that funding will be required for it to meet the equity portion of its development costs, providing that it does not farmout the asset or sell the Company first. Even allowing for the funding expectation, the discount to current valuation is excessive, unless you also start to adjust for development risks. Based on peer group comparisons, we believe that 251p a share is a better reflection of Bentley’s value.
