A significantly bullish assessment of Xcite Energy's (XEL:AIM) Bentley heavy oil field in the North Sea gives investors greater certainty the development will proceed. The market welcomed the announcement, pushing up the shares by 7.4% to 117p.

An independent audit of Bentley by industry consultant TRACS has seen proved and probable (2P) reserves more than double from 116 million barrels of oil (mmbo) to 250 mmbo making the field a strategic asset in the North Sea with an estimated net present value upwards of $2 billion.

The next step is likely to include a farm-out deal to help Xcite meet the estimated $700 million costs of getting the project to positive cash flow.

XEL - Comparison Line Chart (Rebased to first)

Heavy oil is more expensive to produce and typically sells at a discount to other types of crude. However, thanks to its increased scale, chief executive officer Rupert Cole explains to Shares the break even point for Bentley is a Brent price of $46 a barrel (based on discounted cash flow). 'That is pretty robust,' he adds.

As well as bringing in a partner, the £339.7 million cap is looking to enhance its current $155 million reserve-based lending facility. The original loan was based on proved reserves (1P) of 22 mmbo but these have increased in the updated assessment to 198 mmbo. Cole says this should allow the group to increase its borrowing base capacity to a 'multiple' of what it was before.

Broker Liberum Capital, which puts a per share value on Bentley of 340p, has a 'buy' recommendation on the stock. It says: 'We expect further positive updates as DECC (Department of Energy & Climate Change) approves the development plan, partners are brought into the project and debt facilities are confirmed. These should provide more catalysts to move the share price closer to our value of 2P reserves.'

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Issue Date: 08 Apr 2013