North Sea gusher! | FT Alphaville

North Sea gusher!

We didn’t think it would happen — but Aim-listed Xcite Energy has delivered an early Christmas present to punters in the oil exploration sector on Tuesday:

Heavy oil has flowed from its Bentley in the North Sea at a rate of 2,900 barrels a day, a result the company says demonstrates the commercial viability of its 100 per cent-owned field.

According to Xcite’s press release:

The Company announces that the flow test of the 9/3b-6z horizontal well on the Bentley field has been successfully completed.

The flow rates achieved demonstrate both the commerciality of the Bentley field and the reservoir properties to be above the upper end of modelled expectations.

For analysts this means Xcite is now targeting recoverable reserves of 166m barrels of oil rather than a more conservative estimate of 122.5m.

That won’t be confirmed, of course, until data acquired during the recent drilling is given to RPS Energy, who will then update the Competent Persons Report.

However, Dougie Youngson of house broker Arbuthnot Securities reckons this process should see contingent resources converted into reserves and provide the basis for Amec and others to begin developing Bentley.

He estimates this is likely to cost Xcite $100m:

Xcite has already secured a Letter of Intent (LoI) for a long term contract with Rowan to provide a drilling/production rig (the “Rowan Norway”, currently under construction) from 4Q11 to drill the development wells in order to get to First Stage Production (FSP). We expect the LoI to convert shortly to meet to a contract ahead of the 15th January 2011 deadline. This deadline is subject to a $4m termination fee if not met.

Assuming the updated CPR warrants development there are a number of other significant milestones which need to be achieved.
– Sign off on a potential FSP development plan in conjunction with Amec
– Raise capital (through a combination of both debt and equity) to fund the FSP development, we estimate the total to in the order of $100m
– Gain the necessary approvals from DECC for drilling and construction.

So there’s quite a bit of work to be done before Xcite — now valued at a cool £620m — starts to produce oil.

However, Youngson maintains that this is a transformational result for the company and given the scale of the opportunity in terms of reserves and production, will put Xcite it on a par with several E&P companies listed on the main market:

We continue coverage with a Strong Buy recommendation (neutral previously) and we increase our target price to 600p (247p previously). This target price is derived from the high case scenario from the previous Competent Persons Report. Investors should note that this CPR was originally published in September 2007 and was updated in February 2009 and is subject to review. The assumptions and valuation output will very likely change to take into account the Heavy oil fiscal terms, 3D seismic data as well as the drilling and testing data gathered from the recent well, including the upside oil in place in the reservoir.

And he could be right.