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Xcite Energy Ltd
Symbol XEL
Shares Issued 292,811,000
Close 2014-03-26 C$ 1.59
Market Cap C$ 465,569,490
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Xcite Energy earns 6.6 million British pounds in 2013

2014-03-27 06:18 ET - News Release

Mr. Rupert Cole reports

XCITE ENERGY LIMITED ANNOUNCES RESULTS FOR THE YEAR ENDED 31 DECEMBER 2013

Xcite Energy Ltd. has released its results for the year ended Dec. 31, 2013.

Highlights:

  • Material uplift in Bentley 2P oil reserves from 116 million stock tank barrels to 250 million stock tank barrels in April, 2013, subsequently revised to 257 million stock tank barrels of 2P oil reserves in February, 2014;
  • Signing of a memorandum of understanding with AMEC, setting out commercial principles for future co-operation to support the development of the Bentley field;
  • Sale of technical well data for $15.0-million (U.S.) (9.8 million British pounds) to a third party, contributing to an overall profit for the year of 6.6 million British pounds;
  • Strengthened balance sheet, with new debt financing of $80-million (U.S.) unsecured 12.5-per-cent loan notes, with repayment in full of the existing $60-million (U.S.) unsecured 14-per-cent loan notes. Cash balance at year-end of 21.9 million British pounds;
  • Continuation of the process to secure a development partner for the Bentley field;
  • Development of commercial principles with industry service providers to share the financing, risk and reward of the Bentley field development;
  • Received confirmation of extension to licence P.1078 from the Department of Energy and Climate Change on the Bentley field until Dec. 31, 2016.

Commenting on today's announcement Rupert Cole, chief executive officer, said: "Two thousand thirteen has been another year of significant effort and progress for Xcite, as we have adapted to challenging market conditions and remained innovative in pursuit of a viable development plan for Bentley. I am equally pleased with the start of 2014 following confirmation of a material licence extension from DECC, which will support our plans, together with important industry interest, to bring them to fruition. Our substantial Bentley asset value remains and I believe that we shall now be able to leverage that value to commence development of the field."

Chairman's review

Two thousand thirteen was another successful year for Xcite Energy, with steady progress toward development of the Bentley field. It may not have had the overt excitement generated by the preproduction extended well test completed in 2012, but it represented another milestone for the company, as the analysis and evaluation of the information gathered during the EWT led to material upgrade of 2P reserves from 116 million stock tank barrels to 250 million stock tank barrels, early in the second quarter of the year, and subsequently to 257 million stock tank barrels in early 2014.

To put Bentley into some context, the average U.K. Continental Shelf discovery size over the past 10 years has been 25 million barrels of oil equivalent and 90 per cent of current fields in production on the UKCS are producing less than 15,000 barrels of oil equivalent per day(1). At 10 times the average size of a UKCS discovery, Bentley is currently expected to have an economic field life of 50 years and modelled to produce approximately 15,000 barrels of oil per day after 17 years of production and approximately 8,500 barrels per day after 35 years of production. As such, Xcite Energy believes Bentley is a major development-ready asset of significant importance to the U.K. North Sea.

Offshore heavy oil remains a relatively new development concept in the North Sea and, as an independent company, Xcite need to focus on being able to deliver a cost-effective and robust development plan. The main purpose of the EWT was to achieve the key technical and commercial objectives, which would provide the company greater certainty around that plan and enable it to materially reduce the overall project risk. Following the successful EWT, Xcite can now demonstrate that the reservoir can be drilled and completed successfully, that water production is predictable and manageable and that the oil will flow to surface at sustainable commercial rates. Xcite has proven the methodology to dehydrate the oil to export quality on a floating storage vessel which, together with an effective in-field blending strategy, will allow the Bentley crude to be exported directly to the market. The EWT data also allow the company to continue optimization of the development plan and undertake further enhanced oil recovery work programs. This greatly increased knowledge was also important to help address a changing industry environment, which has seen a shift in the allocation of development budgets and a tightening of available human resources, both of which have had a clear impact on major new development projects.

A changing environment in the U.K. North Sea

As Xcite engaged with potential development partners from the middle of 2013, the company has confirmed the value of the EWT and validated the company's understanding of the Bentley field. Xcite believes the EWT was a well-planned and thorough project, which produced high-quality data and supported an efficient development plan. The reservoir successfully withstood technical diligence and the phased development plan, Xcite believes, remains the most appropriate approach to develop the field. Over all, the EWT supported management's belief that Bentley is a substantial oil field, with a long field life and a high-quality reservoir; there are few such opportunities available in the North Sea.

During the course of this past year Xcite has seen a reduction in resource allocation in the North Sea, as many major oil companies have come under pressure to restrict their development spend. This, combined with escalating costs, has recently led to delays to a number of major projects. Human resources, as already noted, has continued to be a constraint in the basin, with many oil companies having full project pipelines and limited spare capacity to manage new projects. Furthermore, both existing participants and new entrants to the North Sea appear to be seeking existing production or developing fields through existing infrastructure, rather than making new capital commitments to large, stand-alone developments.

Against this market backdrop, it was important to provide potential development partners with as much data and information as possible and to pursue a range of potential financing routes in order to be able to continue moving Bentley toward development. These included discussions beyond oil companies to major industry service providers, for which the size, long field life and predictability of Bentley offer the opportunity to participate in material, long-term contracts.

Progress through innovation

Discussions with industry service partners are progressing and, while a number of farm-out discussions continue, progress is slow, and the company's emphasis is now moving in favour of a development partner solution which Xcite can influence and direct. This approach would engage key industry service providers to help finance and supply key resources for the development plan, such as the floating storage and offtake vessel, project management, drilling rig and drilling management services, in return for incentivized contracts which would potentially deliver enhanced returns based on agreed performance targets. In the current market, Xcite believes that this approach enables the company to progress Bentley without compromising any farm-out discussion.

Xcite remains focused on monetizing the inherent value of Bentley and nothing Xcite has learned has undermined its confidence in the field or in its development plan. Xcite's conviction remains that it has a viable, cost-effective and efficient approach to developing Bentley in the current environment, and the company shall maintain its flexibility and innovative approach to progress the field development plan.

In 2013, your management team worked hard to develop a range of options and to create a strategy that accommodates all its potential development partners. The company looks forward to evolving this strategy and will update the market as the company shows material progress.

(1) Source: Wood Mackenzie submission to the Wood Review, September, 2013.

Chief executive officer's review

Overview of 2013

Two thousand thirteen saw further progress for Xcite Energy as the company expanded its resource base, secured an extension for the Bentley licence into 2014, substantially increased reserves, advanced the development plan of the Bentley field, provided short-term financial stability and progressed the longer-term financing options for the company. Two thousand fourteen has commenced with real purpose, with confirmation of the company's existing reserves and field economics despite an increasing cost base and reduction in the near-term future oil price assumptions. Xcite has also received confirmation of a material licence extension on Bentley until the end of 2016.

In March, 2013, Xcite was formally awarded licences over blocks 9/4a, 9/8b and 9/9h, through the 27th licensing round. These prospects lie to the east and south of Bentley and are a deeper oil play in the Lower Paleocene Maureen sandstone which Xcite believes may contain a lighter crude. In the event that these prospects prove to be commercial discoveries, they are close enough to be tied back into Bentley and would support Xcite Energy's current strategy to use the Bentley infrastructure as a hub to develop the surrounding prospects in a cost-effective manner during the phased development program. This lighter crude could be used as a diluent for the Bentley crude during production. That same month, Xcite also received an extension over the Bentley licence until Sept. 30, 2014. Xcite has worked closely with the Department of Energy and Climate Change in recent months, and has received confirmation of a material extension to the Bentley licence until Dec. 31, 2016, in order to facilitate the continued progress of the Bentley field toward production.

April, 2013, saw the release of Xcite's independent reserves assessment report after the successful extended well test, effective as of Dec. 31, 2013, which upgraded the company's 2P reserves from 116 million stock tank barrels to 250 million stock tank barrels over a 35-year facilities life, with an additional 46 million stock tank barrels of mean contingent resources assigned to production beyond the first 35 years, and mean unrisked prospective resources of 97 million stock tank barrels in the company's nearby prospects. This was recently updated in the company's independent RAR dated Feb. 25, 2014, with a small increase in 2P reserves to 257 million stock tank barrels and mean contingent resources to 48 million stock tank barrels. These increases arose from preliminary optimization to increase offshore fluid handling capacity, offset by costs being inflated by approximately 3.5 per cent and the forward assumed oil price decline of approximately 2 per cent, to deliver an NPV10 (after tax) value for 2P oil reserves of approximately $2.1-billion. Prospective resources remained unchanged in the current RAR.

Over the year Xcite has been optimizing the field development solution, with a view to maximize economic recovery and reduce the risks associated with the development plan. This work continues and covers all technical and commercial aspects of the project development; from the reservoir, focusing on optimal spacing and positioning of wells, up to the pump where capacity and multilateral well configuration will have an impact on flow rates, then on to the platform where fluid handling and processing equipment will influence production, and finally to the floating storage and offtake vessel where dehydration, diluent and market offtake requirements were demonstrated by the EWT. Early results from the initial enhanced oil recovery laboratory studies have been encouraging and have supported the potential for EOR to play an important role in the ultimate recovery from the Bentley field. An EOR pilot program has been included in the first-phase development plan to further assess and quantify the EOR opportunity.

The success of the Bentley EWT enabled the sale of the associated data in May, 2013, for $15-million. The value of these data was further highlighted when Statoil referred to its interpretation of the EWT data from Bentley in its decision to re-evaluate the development concept for the Bressay field, the neighbouring analogue to the north of Bentley, and to delay its field development decision. Statoil stated that the data had given positive indications that there was potential to simplify the concept and investigate alternative development solutions. Xcite continues to work with Statoil to support analysis of the data and its application to Bressay, as Xcite believes that there are significant potential benefits from collaboration in any future wider-area development.

In June, 2013, Xcite signed a memorandum of understanding with AMEC, setting out commercial principles for future co-operation to support the development of Bentley. AMEC's expertise and record in delivering major UKCS offshore and heavy oil projects will, Xcite believes, complement Xcite Energy's own skill set to deliver a best-in-class development solution.

During the summer, Xcite submitted an environmental statement to DECC for public consultation. The feedback received will be addressed in due course, but the company does not consider that it will have a material impact on the current development concept. The ES is one of the key components of the overall Bentley field development plan and will be finalized prior to the final submission of the formal FDP for approval, which will include a demonstration of the technical capability and financial capacity of the development partners.

Toward the end of 2013, Xcite concluded a refinancing of the outstanding loan notes, replacing them with $80-million unsecured 12.5-per-cent loan notes, with a term of 360 days.

Xcite has also been working with existing and new banks on an increased reserves-based lending facility, founded on the 2013 development plan and increased reserves base to replace the existing facility, which was based on the 2012, pre-EWT development plan and reserves base. Xcite does not currently intend to enter into a new facility agreement until Xcite has progressed the farm-out and development partner discussions, which would enable the company to more accurately assess the overall financing required.

The commercial development model

A substantial part of this past year has been devoted to preparing Xcite Energy and the Bentley field for the process to find a development partner, as explained in the accompanying chairman's review. Xcite was diligent and thorough in its preparation of the information to be used and maintaining flexibility and generating viable options were key priorities. Xcite has also been conscious of the clear and significant changes in the market environment and has sought to adapt to those as the company progressed.

With the promoting of Bentley within the company's control, and external market forces outside of it, Xcite saw benefit in extending its discussions beyond conventional oil companies into the major industry service providers. A number of these organizations have expressed an interest to work with the company, based on a risk/reward-based commercial structure, with the catalyst from the company's perspective being the successful EWT outcome. Xcite believes that combining the current development-ready status of Bentley, with the potential returns driven by the size and longevity of the field and the limited number of major development opportunities available in the North Sea, has encouraged a number of the major industry service providers to actively engage with the company.

As these discussions have matured, Xcite has identified what Xcite believes to be a flexible and cost-effective commercial operating structure, in which these potential development partners would provide their respective assets and services in return for long-term contracts with Xcite Energy, and the opportunity to participate in performance-related upside. The costs of key components of the project such as the FSO, platform and topsides, project management, drilling rig and drilling management services, could potentially be phased to align with the cash flows generated by the first-phase development. Importantly, Xcite believes this structure remains compatible with any future farm-out of Bentley and, as the company continues to define and reduce the front-end cash requirements, may enable Xcite to re-engage with parties which currently have material capital constraints.

Outlook

Over the coming months, Xcite plans to select its key preferred development partners and commence engineering programs to more accurately define the development concept with a view to signing binding contracts with them for the project execution phase following approval of the FDP. In addition, Xcite shall continue to work to clarify the financing requirement for the Bentley development, taking into account the relevant contributions from each partner in the development group, and evaluate the available financing options to take advantage of the cash flows generated during the first-phase development, with the emphasis on debt finance.

At each step in the appraisal of Bentley since 2007, Xcite has faced market disruption and economic challenges. In spite of this, Xcite has delivered Bentley as a strategic, derisked, development-ready North Sea asset with 257 million stock tank barrels of 2P reserves. It is clear to the company that innovation has always been core to Xcite's business, its team and its success, and the company intends to continue this approach with a view to securing a financed development plan for Bentley.

                         INCOME STATEMENT INFORMATION
          (in millions of British pounds, except per share amounts)

                                          Year ended  Year ended  Year ended
                                             Dec. 31,    Dec. 31,    Dec. 31, 
                                                2013        2012        2011

Revenue                                            -        13.3           -
Other income                                    11.4           -           -
                                               ------      ------      ------
Net (loss) profit                                6.6        (1.7)        0.1
                                               ======      ======      ======
(Loss) earnings per share (basic)               2.3p       (0.7p)       0.1p
(Loss) earnings per share (diluted)             2.0p       (0.7p)       0.1p

We seek Safe Harbor.

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