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Two weeks ago I commented on xCite Energy and the likely imminent equity wipe out. At the time I predicted shareholders would get between 2.5%-5% of the restructured company and on that basis I set a SELL target of 0.5p.
Today the RNS I have been expecting has finally been announced, here. The key terms are a debt for equity swap with the Secured Bond Holders taking 98.5% for their $140m face value of Secured Bonds and $9m of accrued interest due, i.e. $149m debt in total. I was clearly far too generous with my target above. Shareholders are to get just 1.5% of xCite Energy and its Bentley Asset.
The shares have cratered today, falling 0.9p to 1.25p, a 41.86% drop. This values the company today at £3.9m.
Are the shares at 1.25p still a sell?
Slam Dunk Sell in my opinion. The deal with the bondholders values the equity at 0.55p a share, with the calculation behind this price below. In summary this means theoretically the shares have a further 55% to fall from todays closing price of 1.25p.
To run through the calculation in detail:
Part a) simply shows the expected number of shares to each party post the restructuring. This information is calculated based on the XEL restructuring RNS.
Part b) shows the deal value. The RNS indicates no haircut for the bondholders, this therefore values 98.5% of the company at $149m, applying a 1.5% markup gets you to a valuation of 1o0% of the equity, i.e. $151m. The delta being the valuation of $2.27m, applying an FX rate of 1.32 this is £1.72m. The current share price of 1.25p values the company at £3.87m, so to get to the valuation of £1.72m the share price would be 0.55p
Part 3) this is the most interesting calculation but in essence the same calculation as part b). It is looked at from a different angle but the conclusion is that the noteholders can keep selling their shares all the way down to 0.55p and still be in the money, i.e. fully recover the debt that has been converted to equity. N.B. If the noteholders can sell tranches of shares above 0.55p, they may well settle for selling some tranches below 0.55p.
Can the shares really fall to 0.55p?
It is terrible to see private investors lose so much here. The above calculation is purely theoretical but it does set the context. Bondholders are unlikely to want to hold equity investments for very long, you can imagine they are already working behind the scenes to look for buyers.
I mentioned in my previous article that whilst the Bentley field has an NPV of $2.3bn I don’t see the asset being excessively attractive. The $2.3bn is an unrisked NPV and you have to consider there is a long way to go with this development. To apply a 50% risking given the known and unknown risks is perfectly rational, this would give a £860m valuation. This does compare very favourably to the restructuring valuation of £115m, but this risked NPV of £860m is heavily sensitive to the oil price, the break even oil to get NPV$0 is $41, per the Bentley Independent Reserves Report.
I do think Bentley could be a valuable asset at some point, but I can’t see it being developed in this oil price environment. There is also the matter that whilst xCite does now have zero debt it also has zero cash to fund the development of Bentley itself. I therefore maintain my view that all things considered xCite is most likely to find itself acquired by a company that can continue to work up the FEED, i.e. engineering studies towards a FDP in 2019/2020, by then the oil price may have recovered.
And what price would any acquisition be?
As mentioned above I believe the bondholders would be happy to recover their investment and accrued interest and walk away, so anyone offering 0.55p or above will likely have their hands snapped off. Under UK Takeover law only 75% of shareholder support is needed so there is very little the existing shareholders can do about it.
This is a sad day for many private investors and I take no joy from anticipating this one.
SELL – New Target 0.65p, probably generous.
Disclaimer – I have no positions in this stock and to my knowledge nor do any close family, friends nor associates. This post is purely my opinion and should not be taken as financial advice. I welcome any alternative comments and will consider adjusting posts based on information made available to me.