Does Chinese Rig Deal Make Xcite Energy Limited A Buy?

All the pieces are in place for Xcite Energy Limited (LON:XEL) to develop Bentley, but a key player remains missing.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares in Xcite Energy Limited (LSE: XEL) rose sharply this morning, following news that the North Sea firm has signed a memorandum of understanding (MoU) with China Oilfield Services Limited (COSL) for the provision of a new-build drilling rig, plus equipment and personnel for Xcite’s Bentley field.

Today’s announcement is the latest in a flurry of recent good news from Xcite, and also suggests a possible solution to the biggest problem facing the firm’s long-suffering shareholders.

Desirable asset

It’s worth reiterating that Bentley boasts 2P reserves of 257 million barrels of oil and has a net present value of $2.1bn — this is a potentially significant field for the North Sea, and is expected to have a 35-year lifespan.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Bentley’s proven reserves have enabled the firm to strengthen its finances this year, with a new $135m two-year bond issue and a small equity raise, which enabled the company to repay previous loan notes, and have left a cash balance of £41.5m, as of June 30.

Here’s the problem

Xcite’s cash balance means that it should have no short-term funding problems, but it’s clear that the firm won’t be able to fund the Bentley development alone — new jack-up rigs cost north of $200m, for example.

For a long time, Xcite has been in obvious need of a farm-in partner and despite today’s good news, nothing has changed — or has it?

Chinese whispers

This is only a guess on my part, but Xcite’s choice of COSL to provide its drilling rig could be significant: COSL is a subsidiary of China’s state-owned oil giant, CNOOC.

China’s activities in the global oil and gas market are often aimed at securing future supplies of oil and gas, rather than maximising profits.

It’s possible that Xcite’s MoU with COSL is the precursor to news of a full-blown farm-out deal with CNOOC, which could mean that COSL will foot the bill for providing the new rig, in exchange for its parent firm, CNOOC, enjoying a fat slice of Bentley’s eventual production.

Given that Xcite’s market cap is currently just £150m, this could be a good deal for shareholders, but it’s worth noting that such deals often involve very high levels of dilution; I think that Xcite shareholders should be targeting a share price of 100p, at most.

As a result, my view is that Xcite remains no more than a speculative buy, until it announces a farm-out deal.

Our analysis has uncovered an incredible value play!

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

These 5 stocks could earn £1,600 of annual passive income in a £20,000 ISA

Harvey Jones shows how to generate a high and rising passive income by buying a balanced mix of high-yielding FTSE…

Read more »

Young woman holding up three fingers
Investing Articles

3 things I like about Greggs shares

Greggs shares have tumbled by more than a third over the past year. But this writer has no plan to…

Read more »

artificial intelligence investing algorithms
Investing Articles

Nvidia stock: beware the bear market rally

Andrew Mackie argues that investors should tread carefully before investing in Nvidia stock, as the worst of the sell-off could…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

Up 73% in one year, is this the best value stock in the FTSE 100?

A brilliant run of form suggests this FTSE 100 giant should no longer make the cut as a value stock.…

Read more »

Investing Articles

The best could yet be to come for UK shares! I’m buying these ones

Amid ongoing stock market turbulence, this writer's been adding selected UK shares to his portfolio. Here's why and what he…

Read more »

Top Stocks

4 UK stocks trading well below book value to consider buying

Sometimes, it pays to be contrarian: who says the UK market has priced a stock precisely right, anyway?

Read more »

Investing Articles

The S&P 500’s 12% off its highs. Is now a good time to buy US shares for an ISA?

Right now, a lot of British investors are wondering whether it’s a good time to buy US shares. Here, Edward…

Read more »

Investing Articles

2 stocks that could help investors earn £2,516 of passive income per year from a £20k ISA

Our writer selects two high-yield UK dividend shares for investors to consider that could turbocharge a passive income portfolio.

Read more »