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Xcite Energy Limited Announces Results for the Year Ended 31 December 2013

ABERDEENSHIRE, UNITED KINGDOM -- (Marketwired) -- 03/27/14 -- XCITE Energy Limited (TSX VENTURE: XEL) (LSE: XEL)

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN WHOLE OR IN PART DIRECTLY OR INDIRECTLY IN, INTO OR FROM ANY JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OR REGULATIONS OF SUCH JURISDICTION

Xcite Energy Limited
("Xcite Energy" or the "Company")

Results for the Year Ended 31 December 2013

Xcite Energy announces its results for the year ended 31 December 2013.

Highlights

  • Material uplift in Bentley 2P oil reserves from 116 MMstb to 250 MMstb in April 2013, subsequently revised to 257 MMstb of 2P oil reserves in February 2014.

  • Signing of a memorandum of understanding with AMEC, setting out commercial principles for future cooperation to support the development of the Bentley field.

  • Sale of technical well data for US$15.0 million (£ 9.8 million) to a third party, contributing to an overall profit for the year of £ 6.6 million.

  • Strengthened balance sheet, with new debt financing of US$80 million unsecured 12.5% loan notes, with repayment in full of the existing US$60 million unsecured 14% loan notes. Cash balance at year end of £ 21.9 million.

  • Continuation of the process to secure a development partner for the Bentley field.

  • Development of commercial principles with industry service providers to share the financing, risk and reward of the Bentley field development.

  • Received confirmation of extension to Licence P.1078 from the Department of Energy and Climate Change on the Bentley field until 31 December 2016.

Commenting on today's announcement Rupert Cole, Chief Executive Officer, said:

"2013 has been another year of significant effort and progress for Xcite, as we have adapted to challenging market conditions and remained innovative in pursuit of a viable development plan for Bentley. I am equally pleased with the start of 2014 following confirmation of a material licence extension from DECC, which will support our plans, together with important industry interest, to bring them to fruition. Our substantial Bentley asset value remains and I believe that we shall now be able to leverage that value to commence development of the field."

Chairman's Review

2013 was another successful year for Xcite Energy, with steady progress towards development of the Bentley field. It may not have had the overt excitement generated by the pre-production extended well test ("EWT") completed in 2012, but it represented another milestone for the Company, as the analysis and evaluation of the information gathered during the EWT led to material upgrade of 2P reserves from 116 MMstb to 250 MMstb, early in the second quarter of the year and subsequently to 257 MMstb in early 2014.

If I put Bentley into some context, the average UKCS discovery size over the past ten years has been 25 million barrels of oil equivalent and 90% of current fields in production on the UKCS are producing less than 15,000 barrels of oil equivalent per day(1). At ten times the average size of a UKCS discovery, Bentley is currently expected to have an economic field life of 50 years and modelled to produce approximately 15,000 barrels of oil per day after 17 years of production and approximately 8,500 barrels per day after 35 years of production. As such, Xcite Energy believes Bentley is a major development-ready asset of significant importance to the UK North Sea.

Offshore heavy oil remains a relatively new development concept in the North Sea and, as an independent company, we need to focus on being able to deliver a cost effective and robust development plan. The main purpose of the EWT was to achieve the key technical and commercial objectives, which would provide us greater certainty around that plan and enable us to materially reduce the overall project risk. Following the successful EWT, we can now demonstrate that the reservoir can be drilled and completed successfully, that water production is predictable and manageable and that the oil will flow to surface at sustainable commercial rates. We have proven the methodology to dehydrate the oil to export quality on a floating storage vessel which, together with an effective in-field blending strategy, will allow the Bentley crude to be exported directly to the market. The EWT data also allows us to continue optimisation of the development plan and undertake further enhanced oil recovery ("EOR") work programmes. This greatly increased knowledge was also important to help address a changing industry environment, which has seen a shift in the allocation of development budgets and a tightening of available human resources, both of which have had a clear impact on major new development projects.

A changing environment in the UK North Sea

As we engaged with potential development partners from the middle of 2013, we have confirmed the value of the EWT and validated our understanding of the Bentley field. We believe the EWT was a well-planned and thorough project, which produced high quality data and supported an efficient development plan. The reservoir successfully withstood technical diligence and the phased development plan, we believe, remains the most appropriate approach to develop the field. Overall, the EWT supported management's belief that Bentley is a substantial oil field, with a long field life and a high quality reservoir; there are few such opportunities available in the North Sea.

During the course of this past year we have seen a reduction in resource allocation in the North Sea, as many major oil companies have come under pressure to restrict their development spend. This, combined with escalating costs, has recently led to delays to a number of major projects. Human resources, as already noted, has continued to be a constraint in the basin, with many oil companies having full project pipelines and limited spare capacity to manage new projects. Furthermore, both existing participants and new entrants to the North Sea appear to be seeking existing production or developing fields through existing infrastructure, rather than making new capital commitments to large, standalone developments.

Against this market backdrop, it was important to provide potential development partners with as much data and information as possible and to pursue a range of potential funding routes in order to be able to continue moving Bentley towards development. These included discussions beyond oil companies to major industry service providers, for whom the size, long field life and predictability of Bentley offer the opportunity to participate in material, long term contracts.

Progress through innovation

Discussions with industry service partners are progressing and, while a number of farm-out discussions continue, progress is slow, and our emphasis is now moving in favour of a development partner solution which we can influence and direct. This approach would engage key industry service providers to help fund and supply key resources for the development plan, such as the floating storage and offtake vessel, project management, drilling rig and drilling management services, in return for incentivised contracts which would potentially deliver enhanced returns based on agreed performance targets. In the current market, we believe that this approach enables us to progress Bentley without compromising any farm-out discussion.

We remain focused on monetising the inherent value of Bentley and nothing we have learned has undermined our confidence in the field or in our development plan. Our conviction remains that we have a viable, cost effective and efficient approach to developing Bentley in the current environment and we shall maintain our flexibility and innovative approach to progress the field development plan.

In 2013, your management team worked hard to develop a range of options and to create a strategy that accommodates all our potential development partners. We look forward to evolving this strategy and will update the market as we show material progress.

(1)Source: Wood Mackenzie submission to the Wood Review, September 2013

Chief Executive's Review

Overview of 2013

2013 saw further progress for Xcite Energy as we expanded our resource base, secured an extension for the Bentley licence into 2014, substantially increased reserves, advanced the development plan of the Bentley field, provided short term financial stability and progressed the longer term financing options for the Company. 2014 has commenced with real purpose, with confirmation of our existing reserves and field economics despite an increasing cost base and reduction in the near term future oil price assumptions. We have also received confirmation of a material licence extension on Bentley until the end of 2016.

In March 2013, we were formally awarded licences over blocks 9/4a, 9/8b and 9/9h, through the 27th Licensing Round. These prospects lie to the east and south of Bentley and are a deeper oil play in the Lower Palaeocene, Maureen Sandstone which we believe may contain a lighter crude. In the event that these prospects prove to be commercial discoveries, they are close enough to be tied back into Bentley and would support Xcite Energy's current strategy to use the Bentley infrastructure as a hub to develop the surrounding prospects in a cost effective manner during the phased development programme. This lighter crude could be used as a diluent for the Bentley crude during production. That same month, we also received an extension over the Bentley licence until 30 September 2014. We have worked closely with the Department of Energy and Climate Change ("DECC") in recent months, and have received confirmation of a material extension to the Bentley licence until 31 December 2016, in order to facilitate the continued progress of the Bentley field towards production.

April 2013 saw the release of our independent reserves assessment report ("RAR") after the successful extended well test ("EWT"), effective as of 31 December 2013, which upgraded our 2P reserves from 116 MMstb to 250 MMstb over a 35 year facilities life, with an additional 46 MMstb mean contingent resources assigned to production beyond the first 35 years, and mean unrisked aggregate prospective resources of 97 MMstb in our nearby prospects. This was recently updated in our independent RAR dated 25 February 2014, with a small increase in 2P reserves to 257 MMstb and mean contingent resources to 48 MMstb. These increases arose from preliminary optimisation to increase offshore fluid handling capacity, offset by costs being inflated by approximately 3.5% and the forward assumed oil price decline of approximately 2%, to deliver an NPV10 (after tax) value for 2P oil reserves of approximately $2.1bn. Prospective resources remained unchanged in the current RAR.

Over the year we have been optimising the field development solution, with a view to maximise economic recovery and reduce the risks associated with the development plan. This work continues and covers all technical and commercial aspects of the project development; from the reservoir, focusing on optimal spacing and positioning of wells, up to the pump where capacity and multi-lateral well configuration will have an impact on flow rates, then on to the platform where fluid handling and processing equipment will influence production, and finally to the floating storage and offtake vessel ("FSO") where dehydration, diluent and market offtake requirements were demonstrated by the EWT. Early results from the initial enhanced oil recovery ("EOR") laboratory studies have been encouraging and have supported the potential for EOR to play an important role in the ultimate recovery from the Bentley field. An EOR pilot programme has been included in the First Phase Development plan to further assess and quantify the EOR opportunity.

The success of the Bentley EWT enabled the sale of the associated data in May 2013 for $15 million. The value of this data was further highlighted when Statoil referred to its interpretation of the EWT data from Bentley in its decision to re-evaluate the development concept for the Bressay field, the neighbouring analogue to the north of Bentley, and to delay its field development decision. Statoil stated that the data had given positive indications that there was potential to simplify the concept and investigate alternative development solutions. We continue to work with them to support analysis of the data and its application to Bressay, as we believe that there are significant potential benefits from collaboration in any future wider area development.

In June 2013, we signed a memorandum of understanding ("MoU") with AMEC, setting out commercial principles for future cooperation to support the development of Bentley. AMEC's expertise and track record in delivering major UKCS offshore and heavy oil projects will, we believe, complement Xcite Energy's own skillset to deliver a best-in-class development solution.

During the summer, we submitted an Environmental Statement ("ES") to DECC for public consultation. The feedback received will be addressed in due course, but we do not consider that it will have a material impact on the current development concept. The ES is one of the key components of the overall Bentley field development plan ("FDP") and will be finalised prior to the final submission of the formal FDP for approval, which will include a demonstration of the technical capability and financial capacity of the development partners.

Towards the end of 2013, we concluded a re-financing of the outstanding loan notes, replacing them with $80 million unsecured 12.5% loan notes, with a term of 360 days.

We have also been working with existing and new banks on an increased reserves based lending ("RBL") facility, founded on the 2013 development plan and increased reserves base to replace the existing facility, which was based on the 2012, pre-EWT development plan and reserves base. We do not currently intend to enter into a new facility agreement until we have progressed the farm-out and development partner discussions, which would enable us to more accurately assess the overall financing required.

The commercial development model

A substantial part of this past year has been devoted to preparing Xcite Energy and the Bentley field for the process to find a development partner, as explained in the accompanying Chairman's Review. We were diligent and thorough in our preparation of the information to be used and maintaining flexibility and generating viable options were key priorities. We have also been conscious of the clear and significant changes in the market environment and have sought to adapt to those as we progressed.

With the promoting of Bentley within our control, and external market forces outside of it, we saw benefit in extending our discussions beyond conventional oil companies into the major industry service providers. A number of these organisations have expressed an interest to work with us, based on a risk/reward based commercial structure, with the catalyst from our perspective being the successful EWT outcome. We believe that combining the current development-ready status of Bentley, with the potential returns driven by the size and longevity of the field and the limited number of major development opportunities available in the North Sea, has encouraged a number of the major industry service providers to actively engage with us.

As these discussions have matured, we have identified what we believe to be a flexible and cost effective commercial operating structure, in which these potential development partners would provide their respective assets and services in return for long term contracts with Xcite Energy, and the opportunity to participate in performance related upside. The costs of key components of the project such as the FSO, platform and topsides, project management, drilling rig and drilling management services, could potentially be phased to align with the cashflows generated by the first phase development. Importantly, we believe this structure remains compatible with any future farm-out of Bentley and, as we continue to define and reduce the front-end cash requirements, may enable us to re-engage with parties who currently have material capital constraints.

Outlook

Over the coming months, we plan to select our key preferred development partners and commence engineering programmes to more accurately define the development concept with a view to signing binding contracts with them for the project execution phase following approval of the FDP. In addition, we shall continue to work to clarify the funding requirement for the Bentley development, taking into account the relevant contributions from each partner in the development group, and evaluate the available financing options to take advantage of the cash flows generated during the First Phase Development, with the emphasis on debt finance.

At each step in the appraisal of Bentley since 2007, we have faced market disruption and economic challenges. In spite of this, we have delivered Bentley as a strategic, de-risked, development-ready North Sea asset with 257MMstb of 2P reserves. It is clear to us that innovation has always been core to our business, our team and our success, and we intend to continue this approach with a view to securing a funded development plan for Bentley.

I would like to add my thanks to the entire Xcite team, who have once again demonstrated outstanding commitment and skills in the last twelve months.

The following tables summarise the Group's performance in the year ended 31 December 2013 and the comparatives for the years ended 31 December 2012 and 31 December 2011.

----------------------------------------------------------------------------
                                          Year ended  Year ended  Year ended
                                         31 December 31 December 31 December
----------------------------------------------------------------------------
Income Statement Information                    2013        2012        2011
----------------------------------------------------------------------------
                                                 £ m         £ m         £ m
----------------------------------------------------------------------------
Revenue                                            -        13.3           -
----------------------------------------------------------------------------
Other income                                    11.4           -           -
----------------------------------------------------------------------------
Net (loss)/profit                                6.6       (1.7)         0.1
----------------------------------------------------------------------------
(Loss)/earnings per share (basic) in
 pence                                          2.3p      (0.7p)        0.1p
----------------------------------------------------------------------------
(Loss)/earnings per share (diluted) in
 pence                                          2.0p      (0.7p)        0.1p
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                          Year ended  Year ended  Year ended
                                         31 December 31 December 31 December
----------------------------------------------------------------------------
Cash Flow Information                           2013        2012        2011
----------------------------------------------------------------------------
                                                 £ m         £ m         £ m
----------------------------------------------------------------------------
Net cash flow from operations                  (0.6)       (9.5)      (12.6)
----------------------------------------------------------------------------
Net cash flow from investing activities        (6.3)     (127.5)      (22.0)
----------------------------------------------------------------------------
Net cash flow from financing activities          3.2        98.4        62.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                               As at       As at       As at
                                         31 December 31 December 31 December
----------------------------------------------------------------------------
Balance Sheet Information                       2013        2012        2011
----------------------------------------------------------------------------
                                                 £ m         £ m         £ m
----------------------------------------------------------------------------
Total assets                                   269.5       251.8       152.8
----------------------------------------------------------------------------
Current liabilities                             49.0        45.6         9.5
----------------------------------------------------------------------------
Long term liabilities (deferred tax)             3.5         0.5         0.5
----------------------------------------------------------------------------
Total net assets                               217.0       205.8       142.7
----------------------------------------------------------------------------

The Company's full Financial Results for the Year Ended 31 December 2013 can be found at the following link:

http://www.rns-pdf.londonstockexchange.com/rns/2976D_-2014-3-26.pdf

The Company has filed copies of its audited financial statements and management discussion and analysis in respect thereof for the year ended 31 December 2013. These documents can be found for viewing by electronic means on the System for Electronic Document and Analysis Retrieval at www.sedar.com

Glossary

"2P" means proved plus probable reserves.

"MMstb" means millions stock tank barrels.

"NPV10" means net present value in money of the day using a 10% forward discount rate, which values do not represent fair market value.

Forward-Looking Statements

Certain statements contained in this announcement constitute forward-looking information within the meaning of securities laws. Forward-looking information may relate to the Company's future outlook and anticipated events or results and, in some cases, can be identified by terminology such as "may", "will", "should", "expect", "plan", "anticipate", "believe", "intend", "estimate", "predict", "target", "potential", "continue" or other similar expressions concerning matters that are not historical facts. These statements are based on certain factors and assumptions including expected growth, results of operations, performance and business prospects and opportunities. While the Company considers these assumptions to be reasonable based on information currently available to us, they may prove to be incorrect. Forward-looking information is also subject to certain factors, including risks and uncertainties that could cause actual results to differ materially from what we currently expect. These factors include risks associated with the oil and gas industry (including operational risks in exploration and development and uncertainties of estimates oil and gas potential properties), the risk of commodity price and foreign exchange rate fluctuations and the ability of Xcite Energy to secure financing. The Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required under applicable securities regulations.

Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

This information is provided by RNS
The company news service from the London Stock Exchange

ENQUIRIES:

Xcite Energy Limited
Rupert Cole / Andrew Fairclough
+44 (0) 1483 549 063

Liberum (Joint Broker and Nomad)
Clayton Bush / Tim Graham
+44 (0) 203 100 2222

Morgan Stanley (Joint Broker)
Andrew Foster
+44 (0) 207 425 8000

Bell Pottinger
Mark Antelme / Henry Lerwill
+44 (0) 207 861 3232

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