Shares in oil company Xcite Energy are under pressure after the announcement of first quarter results did little to allay fears surrounding its debt obligations that mature at the end of next month.
The firm remains engaged in discussions with its bondholders ahead of the bond maturity on June 30, and is hopeful that terms can be agreed upon to provide fresh financial flexibility.
This issue is causing concern for analysts and investors alike with the cash balance of $14.13million at the end of the quarter paling in significance to the $141million of current liabilities.
The AIM-listed independent is seeking to bring onboard a new partner for the funding of its planned Bentley heavy oil field development in the North Sea and with commercial terms for development funding proposals now finalised, the firm is aiming to submit a development plan to the authorities this year.
A failure to secure revised terms for the current bond debt could potentially scupper this agreement and would deal a major blow to the company, possibly opening up the dreaded path of insolvency.
The high leverage employed by many firms can be a risky strategy. Xcite’s admission there was “no certainty” funding would be secured by the company and that it may therefore be unable to realise its assets will have done little to calm jittery investors worried about a default.
Despite the board stating it has “a reasonable expectation the group will have adequate resources to continue in operational existence for the foreseeable future”, until there’s significant development and tangible progress on this then the stock will remain at depressed levels as the possibility of insolvency remains worryingly high.
Whilst the addressing of these concerns directly by the board has failed to ease the worries surrounding insolvency and with the stock off by almost 14% on the day, the reaction in the market speaks for itself.
It is a further blow and whilst a discount reflecting the possibility of insolvency may already largely priced-in to a certain extent there could be further downside in the coming weeks.
With the current price of just over 11p a share the scope for further moves lower are limited by a zero lower bound, and whilst there is a very real possibility this could end up going the way of other highly leveraged juniors in being a victim of the persistent slump in oil prices, it could still present an attractive opportunity for brave investors.
If – and it’s a big if – the firm can successfully renegotiate terms with its debtors, then we could see a sharp relief rally in price.
The remarkable resurgence in oil benchmarks after posting 13-year lows in January suggest that if Xcite can ride out the current storm then there’s a good chance that calm seas and smooth sailing lie ahead.
David Cheetham is an analyst with XTB.com