Xcite Energy - Over Xcited?

Wednesday, Dec 08 2010 by
Xcite Energy  Over Xcited

Bear with me, I'm thinking aloud here. And I'm trying to improve my investment management skills - which requires me to break well entrenched attitudes and behaviours, so it is painful. For the sake of transparency I'm disclosing that I've just sold the remainder of my shareholding and am now out of Xcite Energy (LON:XEL) for the time being.

I remain of the opinion that the flow tests being conducted at the time of writing are highly likely to succeed and attribute a COS of 80-90%. In the event that success is announced, I'd expect the share price to rise to £5 -£6 almost immediately. Furthermore, if the flow test succeeds, then the story will not end with a short term rise to £5-£6. The long term potential for Xcite Energy (LON:XEL) would be £10-£20 and possibly much more. However, if the flow tests fail without there being a simple and very compelling explanation that can be understood even by members of the muppet investor community, then I'd expect the share price to collapse.

The logic behind my decision to sell is that, although the chances are very good indeed, there is no downside protection so there is a risk - however small - of significant loss - and there is no way that loss can be mitigated. The key point to me is that the opportunity to benefit from most of the remaining long term upside will still be available after a successful flow test. If the test succeeds and the price rises to £6 then it will be possible to buy in at that price and benefit from the longer term rise to £10 - £20 and beyond.

So staying in at this time incurs a risk of significant loss in exchange for say a quick 100% gain. However selling now still leaves most future gains accessible via a post test result repurchase. It goes completely against the grain for me to sell. I invest in E&Ps precisely to gain exposure to exploration success. But in this case, having made a profit of 350% in a few months (on a non-trivial original stake) I'd rather protect the gain I've made to-date than punt on a coin toss - even if the coin is loaded in favour of…

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The author may hold shares in this company. All opinions are his own. You should check any statements that appear factual and seek independent professional advice before making any investment decision.

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23 Comments on this Article show/hide all

tournesol 8th Dec '10 4 of 23

Hi Repo

is that a typo or did you really sell XEL at £5?

if so how?


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Lionel Messi 8th Dec '10 5 of 23

I think you show a distinct lack of investing skill to be honest, you could have protected the upside by selling your original stake and leaving the free shares to ride. Comparing this investment to a coin toss confirms you have not conducted any proper research or are incapable of doing so.

Selling EO at 18p would appear to back up my opinion.

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repobear 8th Dec '10 6 of 23

In reply to post #51241

Oh Canada.


Some of us have shares there;-)


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Lionel Messi 8th Dec '10 This post has been moderated
tournesol 8th Dec '10 8 of 23

Mr Messi

This is a forum for civil discussion - the rudeness displayed in your first comment above is entirely out of place and reflects badly on you. Please argue your case in a polite fashion without being abusive or you won't be welcome.



Messi makes the suggestion that I could have protected myself from the downside by selling enough shares to recover my original stake and leave the remaining "free" shares to run.

This idea is popular but utterly misguided. Say, for the sake of argument, that I invested £10k. The investment grows to £45k. According to Messi, if I then sell £10k worth of shares I have recovered my original investment and am then left with protection against the downside. WRONG! What I am left with is an investment worth £35k which is fully exposed to any downside risk. If I lose that £35k it hurts just as much as if I had "originally" invested £35k and lost the lot. In both scenarios I am £35k down. The idea that the above approach offers protection is based on the notion that the £35k of profit money is somehow different in kind from the £10k of original investment money. Of course it isn't. It's all money.

What I actually did - as reported here previously would in its early stage have appealed to Mr Messi. A few months ago I invested £X at about 70p/share. The price rose to about £3/share valuing my holding at £4X. Last week I sold shares to the value £2X. As of this morning I was still holding the remaining £2X worth. It is that second slice that has been sold today.

When I sold this morning what I was intent on avoiding was the loss of the £2X that was still invested. I have now done that. So my original £X has been transmuted into £4X ( a little more, actually, but who's counting?).

If the flow test is successful I have no doubt I will be back into XEL - but then the risk/reward balance will have changed - the risk of downside will have been reduced or eliminated and the investment logic will be different.

Basically you don't have to be in it today in order to be in it next week or next month or whenever. That's the point.

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bogie 8th Dec '10 9 of 23

Hi, my first post here btw,

Good to see you erring on the side of caution after the apocalypse over as DES! I don't blame you.

I am looking to get into RRL and XEL. I am about to sell £27k of BP that is in an ISA for around £4.60 a share and do a split on these two. Will be happy to hold up to summertime.

Was thinking of £17k on RRL and £10k on XEL

Would anyone like to offer any advice please?

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tournesol 8th Dec '10 10 of 23

In my opinion XEL is almost a binary bet right now.
Good flow rate = share price rises 100%.
Bad flow rate = sshare price crashes and burns.

There are intermediate scenarios - but the above represent 80-90% of the possible outcomes.

If there is a bad flow rate without some very strong mitigating circumstances then there just isn't any downside protection. Most E&P's have a portfolio of assets so failure of one does not wipe them out. (Even when its a big failure like macondo) . So in other words the downside is protected first by the diversification of value between assets. Second by the opportunity for recovery that comes with ongoing operations elsewhere. Encore is a good example. The shares rose from 18p to 60p + on the back of gas storage. Then cratered and fell all the way back to 8p when gas storage fell apart. But then a year or two later they were still in the game and were able to benefit from this year's discoveries.

XEL is much less capable of coming back from a major setback.

So IMHO the most likely outcome (90%?) of investing £10k in XEL at this time is that you make a 100% return in the space of a week or two. But there is a possibility (5%) that you lose most of it without any realistic prospect of timely recovery.

That's the game. You have to decide for yourself whether you wish to play it.

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bogie 8th Dec '10 11 of 23

Thanks for help, perhaps i'll go for £5k now and £5k on release of posttive flow info. Seems a healthy balance.

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Lionel Messi 8th Dec '10 12 of 23

tournesol you come across a bit pompous, preaching to people that your way is the correct way, are you qualified to give advice ?

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Lionel Messi 8th Dec '10 This post has been moderated
peterg 8th Dec '10 14 of 23

In reply to post #51249

tournesol you come across a bit pompous, preaching to people that your way is the correct way, are you qualified to give advice ?

I wouldn't normally answer such a post, I know you are just a troll trying to stir us up, but I'm not going to let that remark go unanswered

Your suggestion that T's post is pompous is really a bit rich coming from someone who has just given the most pompous, and naively simplistic, advice. Is T qualified to give advice? Yes of course he is. Anyone can can contribute here. The issue is will anyone pay any attention? Given T's track record here and elsewhere over many years the answer is a clear yes. I don't always agree with his posts but they are always well worth reading. On the other hand your track record to date means that few people will be paying any attention to what you think.

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romski999 8th Dec '10 15 of 23

theres nothing wrong with taking a profit even if you take it too early or too late,

you have done 350% thats fantastic, well done

that does seem to be a tatic with Oil N Gas to buy upto drill and the sell before the news regardless,

the downside here i would expect to be around 50% i would say the SP falls to around 150p if flow tests are poor, but then again £5 if they are good

i would then expect reserve upgrades and further tests on the other 2 fields will see this £10 i believe,

so far the management have been excellent in communication and even if they do have problems its been a pleasure to work with them

for an example of how things cna go wrong

DES - truly awful


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Nothingventured 8th Dec '10 16 of 23

Hi Romski,

Another tactic, which I've just tried with Bowleven (LON:BLVN) , is to buy after good news, but hopefully before the market has digested it. In this case it worked well. Admitedly you miss out on the big hit when a discovery is announced, but given that new exploration is a very risky bsuiness it's worth concidering.

It occurs to me that if one adopted the approach you suggest (which I already do to some extent - so for example, I have 25% left of what I started with for Xcite Energy (LON:XEL) ) this might turn out to be a very successful strategy overall.

Another observation; I much prefer companies who have found something, but then are in the business of proving it up. The market seems to give very little credit for potential, even if it is quantifying a new discovery. So, in the case of the Falklands, I much prefer Rockhopper Exploration (LON:RKH) over Desire Petroleum (LON:DES) .

Cheers and fingers crossed for the XEL flow test!


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Sorcery 8th Dec '10 17 of 23

Can't get Xcite'd anymore about these oil companies with innuendo names, Desire is another one.
Its as if a group of directors got together and said what can we call this boring old piece of crap that we know is never going to do anything but if we give it a sexy name will pull in the mug punters.

If it sounds like a knocking shop, it may as well be imho.

Of course I could be getting old, but what's wrong with a name that is what it says it is, such as Boring Drills Ltd ?

Probably just prejudice ...

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Olivanders 8th Dec '10 18 of 23

Thanks for all the contributions here - interesting reading. Mr T, your analysis makes a lot of sense. The only thing I really disagree with is how extreme you see the down side to be. Personally I think that the share price will dip to around 150p if the flow tests are awful. But if they are commercial at around 1,200 bopd, then this represents success. Even if the flow tests are awful, Xcite are committed here and they will stick around and drill again to make sure that they can get the oil from a different well.

The Bressay field, operated by Statoil, 6km to the Northwest of Bentley managed to generate flow test results of 3,100 bopd, and the oil there is as heavy, if not heavier than the Bentley oil.

I think the share price has ballooned by about 50 points above where it should currently be, as a huge number of punters have tried to get into Xcite before the flow test data is released, on the presumption that it will be good news and we will get a quick 50% or larger gain for a few days work. The delay on the release of the results may have lead to some of these punters going else where (hence the dip in sp on Monday and Tuesday).

I am by no means an experienced investor and I am in fact at the opposite end of the spectrum to Mr T, having only been in full time work for a few years. Xcite are my first investment (I did not want to put it in a savings account and get a interest rate barely covering inflation...). I have a small amount in Xcite compared to many and I can afford to lose what I have in there, but I equally understand it's better not to lose money at all.

I bought Xcite at 114p and have considered selling my original stake to leave just profit behind, however when I look at the potential upside and weigh things up, I genuinely think that Xcite will do well. They have a very competent BoD and they have been thoroughly sound thus far, so I put my faith in them. The long term looks good here too with a high potential for Statoil to buy Xcite out (and that will be for around £20 per share from what I have read).

I also think it is very harsh to put Xcite and Desire in the same sentence - their boards have behaved very differently and I cannot see Xcite being reported to the FSA like Desire have the utter shambles they have been running in the far southern Atlantic.

I look forward to reading more opinions on here soon.

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emptyend 8th Dec '10 19 of 23

I've not followed this situation in any detail, but I must say I'm a bit confused.

In February, XEL was trading at under 40p. And from May to mid-September it traded in the 60-80p range. Now it is over £3......

....so what has happened?

AFAICT they have drilled a well on a very well-known deposit of (heavy) oil at Bentley and discovered that there is more oil there than they thought....which is great. BUT they haven't shown yet that the oil can be moved, let alone recovered at commercial rates.

I am reminded of the recent disappointment incurred by SOCO on TGD - whose failure to move an impressive column of hydrocarbons in commercial quantities came as an unwelcome shock to all concerned.

Unless I am missing something (which is entirely possible, given the cursory examination I have done) it seems to me that the flow test is everything for Xcite. A great result will clearly prompt some fancy value estimates - but a non-commercial outcome could trash the shares (given the lack of downside protection from other assets). Surely a return to where the shares were a few months ago cannot be ruled out?

I only wish that some other shares had quintupled before getting to the flowtest result!!  ;-)

Tournesolf's approach looks wholly understandable in the circs.


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tournesol 8th Dec '10 20 of 23


AIUI the previous flow test done in 2008 (?) did demonstrate that the oil flowed satisfactorily - but was of limited value - bottom 50' of a vertical well bore - well bore probs - sand inflow problems - bad weather leading to premature termination etc etc etc

The current flow test is being done on a horizontal well section which is 1500-1800' with better designed sand screens. There is enough time for it to deliver sensible results. And in the interim between the last test in 2008 and the current one a lot of work has been done on the refinability and marketability of the oil. So there is actually some reason for excitement/enthusiasm/optimism. And like I've said several times already, I think the most likely outcome is a good test which allows management to declare commerciality and book reserves before getting on with development.

But there remains scope for diappointment and if that occurs the price heads south for the winter.

So my strategy is to read the 7am RNSs and hope there will be an announcement before the market opens on a day when I can sit in front of the screen and rebuild a reasonable sized holding. My thinking is not that I am sceptical of the result at all = it's just that I don't want to have a gun at my head when the trigger is pulled - even if the chance of a bang is only 5%. I'd rather wait until we find out if the gun is loaded and then take a decision based on the risk/reward situation that emerges following the announcement.

And if I miss a 100% gain or even a 200% gain from here - that's perfectly OK by me. I don;t need to take on the risk required to get access to that slice of the gain. I've been fortunate in getting the recent slice and I can easily get the next slice but one. So missing the next slice isn't too problematic.

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repobear 8th Dec '10 21 of 23

In reply to post #51262

Those are the words of a mature investor and someone who knows the downside of these nearly nailed on certainties, aka CoS=+/- 90% dare I say someone with a fair bit on Soco pre the TGD result.

I say 'Well done that man'.
We live and learn;-)

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tournesol 8th Dec '10 22 of 23

In reply to post #51264


actually Soco is my biggest holding

remember that I went 100% into cash back in May/June. After the threatened eartquake receded from the futureoscope I started to trickle cash back into the market. I saw Soco as a very safe haven pre TGD so quickly built a relatively large position. Having suffered TGD, it isn't quite so large these days in absolute terms and it is smaller in relative terms too, simply because literally every other stock in my portfolio is going strong.

However Soco is still 13% at time of writing.

The thing that makes Soco very different from XEL is the downside protection that comes from a diversified portfolio of assets at different stages of the E&P lifecycle, coupled with strong financial resources and a lot of upcoming exploration and development activity. I am 100% confident that Soco will recover from the TGD induced weakness and will deliver a decent return on iinvestment within a year or two, so I am quite happy to hold in the meantime.

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romski999 10th Dec '10 23 of 23

XEL I have reduced my holding by 75% and leaving 25% for flow test results, upon flow test results I would expect
1.re-rating by brokers
2.further information on bently which no doubt will be positive
3.FSP thereby Bently generating revenue
4.additional updates from the other 2 wells

regarding falklands oil, I would only consider RKH

what DES did was unacceptable, I would never trust DES management again,

but there will be opportunities with that share for quick trades in and out, they do have 75m odd in the bank and further drills to go but my advice which i am not going to be taking myself is to sell before drill results, and overall you really dont need to invest into DES, there are easier returns from far more respectable management teams,

even if DES do hit oil it will be a long time before they are taken seriously !

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About tournesol


I'm an active private investor specialising in the oil and gas sector. I decided to focus on this area after having a disastrous experience 10 years ago when I naively delegated investment to a "professional" who subsequently lost most of my life savings and my pension. That experience taught me that it was foolhardy to invest in industries/companies you don't understand properly and that many "professionals" are doing just that, often based on the most superficial analysis and the most inadequate understanding of the underlying business. I decided that I'd take my financial destiny into my own hands.   I chose oil as a specialist focus partly because it was the industry I'd spent most of my career in over many years in >25 countries all over the world. That prior experience gave me a good  understanding of E&P from an operational perspective and I've subsequently leveraged that into an appreciation of the sector from an investment perspective - quite a different thing. But the one really helps the other.   I find that my background and my specialist focus help me get access to management and help me talk to them when I get in.  I've been seriously astonished at the open-ness and responsiveness of many top managers in this industry. Sensible questions, asked in a sensible manner almost always receive a very full response. (I have to single out Tom Cross of Dana for his readiness to go the extra mile to help small PI's understand his business).   Of course the other reason I chose to specialise in oil was that ten years ago it was very easy to figure out that the price was going to rise in a sustained manner over a long period. I still find it hard to believe that everybody else didn't see that coming at that time. I certainly can't claim any credit for doing so. It was just too obvious to miss - provided that is you looked at things from the right perspective. (there's an article to be written on this topic when I can find time........) more »

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