North Sea oil play Xcite Energy (XEL:AIM) loses two thirds of its value as it reveals a restructuring of its balance sheet is likely to leave very little on the table for existing shareholders.
The shares are down 66.7% to 2.75p. Xcite drilled a successful appraisal well on the Bentley heavy oil field in 2008. Having struggled to find a partner to meet the costs of developing the asset it launched a $135 million bond issue in June 2014.
These bonds, secured against its asset base, matured in June of this year but Xcite was forced to look for an extension as it did not have sufficient funds to repay its creditors.
Xcite is just the latest in a growing collection of E&P companies whose precarious financial position has been exposed by the decline in oil prices.
Writing in May Edison Investment Research had spelled out the stakes for the company in pretty stark terms. ‘With improving fiscal terms, the Bentley project is potentially more robust than ever before and is resilient across a wide range of commodity prices. However, with depressed equity and debt markets and cautious industry sentiment, securing development funding in addition to the refinancing of the bonds remains a daunting challenge.
‘Our risked NAV of 74p/share, reflecting a farminee earning a 25% IRR, dramatically deteriorates towards zero if funding partners require better returns or if substantial equity is required to refinance the current bonds.’
As we have previously observed, investing in indebted E&Ps does provide leverage to a potential oil price recovery but with a number of opportunities in the sector it is not necessary to take on board this level of risk.