I have been catching up on my reading for Xcite Energy over the past few months, trying to determine if there is an substantial upside to this stock over the next 12 months, and I guess the least I can say is that it is bound to be better than 2011.

And with a DECC approval some time in the next 2 or 3 months, we may start to see some action, but there appears to be a substantial number of challenges that Xcite has to address in 2012.

I have attached part of an article on Xcite which provides some extensive background, and I think I will start watching Xcite a little more closely over the next few months (and you correct, that chat Board in the UK is a circus, makes us on this side of the Pond look positively civilized)

Xcite Energy, through its wholly owned subsidiary, Xcite Energy Resources Limited (“XER”), is an oil exploration and development company,which is focused on the exploration and development of heavy oil resources in the North Sea on the United Kingdom Continental Shelf.

Xcite Energy is incorporated and domiciled in the BVI under the BVI Business Companies Act, 2004 with its registered office in Tortola, BVI.As such, the rights of shareholders may be different from the rights of shareholders in a UK incorporated company.The Company is listed on AIM in London and the Toronto Stock Exchange – Venture Division in Canada.[1]

In 2003, XER was awarded its 100% working interest in the Bentley field in Block 9/3b in the UK North Sea. All of the Company’s current material assets are held through XER.

Company History

• 2002 – Company formation
• 2003 - Awarded Bentley field during the UK 21st Licensing round
• 2007 - Listing on AIM & TSX-V to raise $50MM including $30m from IPO
• 2008 – Drilled and successfully tested the 9/3b-5 well
• 2009 – Completed Competent Person’s Report (“CPR”),3D-seismic update, $3.8MM funding and Fugro as first Alliance partner.
• 2010 – Brought in BP, AMEC, Transocean (rig), ADTI,Minerals (farm-in)
• 2010 - Successful Completion of 9/3b-6z Well Flow Test

Investor Information

Number of Shares in circulation

The total issued share capital of Xcite Energy comprises 175,591,947 Ordinary Shares of nil par value.[2]

Major Shareholders

• Fidelity Investment Services (UK) 12,000,000 (7.6%)
• Third Point LLC 7,070,000 (4.5%)
• Standard Life Investments 6,663,065 (4.2%)
• Sprott Asset Management 6,022,600 (3.8%)
• Stephen A. Kew 5,212,619 (3.3%)
• Richard E. Smith 5,198,334 (3.3%)
• Rupert E. Cole 5,198,334 (3.3%)
• Ignis Investment Services 4,634,494 (2.9%)
• J.M Finn & Co Ltd 4,593,059 (2.9%)

Approximate percentage of Xcite Energy shares not in public ownership 10.1%[3]

Projects

Bentley Oil Field

North Sea heavy oil has garnered increased attention in recent years as heavy oil assets that were once deemed uneconomic to produce are now highly profitable as a result of new technology,higher oil prices, and attractive government incentives. With an estimated 9billion bbls of heavy oil resources-in-place (UK Department of Energy and Climate Change) the North Sea currently produces approximately 250,000 bopd of heavy oil (21 degree API or less) production which accounts for ~20% of the total oil production currently produced from the UKNS. [4]

Overall, the North Sea exposes investors to 25 Billion boe (UK 2010 Activity Survey) of yet to be produced and 18+ Billion boe of yet to be discovered resource potential (DECC).Not unlike many regions around the world today, we predict heavy-oil will become a greater focus for UK North Sea producers as technology (i.e. like horizontal drilling) is applied to increase recovery factors, enhance production rates, and lower per bbl “extraction” costs.[5]

In 2003 Xcite Energy (Xel) acquired full ownership of the Bentley oil field, a prospect approximately 100 miles to the east of Shetland.The Bentley oil field is located 3.7 miles away from the Statoil operated Bressay field.

"Bentley Oil Field"

The Bentley field is a heavy oil accumulation discovered by Amoco in 1977, subsequently operated by Conoco until 1993, and then acquired by Xcite in 2003. It is located 160km east of the Shetlands in around 113m of water and sits in an area of heavy oil discoveries, with both Statoil’s Bressay and Nautical’s Kraken fields in adjacent blocks.[6]

Xcite holds a 100% working interest and is operator of the field, which contains best estimate contingent resources of 160mmbbls.

"Drilling Points"

Six wells have been drilled in Bentley to date. Following Amoco’s discovery well, Conoco drilled 9/3-2A in 1983 which was tested inconclusively due to equipment problems, 9/3-3 in 1986 which was dry, and 9/3-4 in the same year which had oil shows but was not tested as it was not considered economic due to the low oil prices at that time.[7]

Drilling

9/3b-5 Appraisal Well Spudded on December 27, 2007, the well was drilled to a total depth of 4105ft [8]. It encountered heavy oil which Xcite reported as bearing Palaeocene Upper Dornoch Formation sands at 3712ft with 87ft gross (86 ft net) hydrocarbon column. During the drill stem test, 100% crude oil production was demonstrated at rates of up to 150 bopd from the 50ft section of the oil column that had been successfully perforated.[9] After Successfully encountering hydrocarbons the company announced in April 2008 it would be is re-processing the 3D seismic data over the Block to confirm the results of its recent 3D interpretation.

In May 2008 Xcite Energy announced that they will be trading well data with StatoilHydro (a arm of Statoil). This data trade was conducted to better understanding the heavy oil in North Sea.Statoil own the Bressay field which is located principally in Blocks 3/27 and 3/28, adjacent and to the north-west of Block 9/3b. By the end of the Q2 things weren't looking good for Xcite Energy and for many small oil exploration company because of the markets crashing and it become difficult to attain financing for oil exploration.

Interpretation of 3D Seismic Data was released in June 2009 which provided confirmation of significant recoverable resources in the Bentley field.The Seismic data increased the stock tank oil initially in place to nearly 690 million barrels of oil and reportedly a upside of 890 million barrels of oil.However the likely aggregate contingent and prospective stands to 160mil of oil using conventional recovery methods.

3D Seismic

• Results of 3D Seismic

In July 2010 the company announced it had secured Ocean Normad for Drilling well 9/3b-R they expected spudding of this well in September 2010.Ocean Normad arrived on site of the well at the end of September 2010 and Xcite Energy announced the drilling campaign would last 65 days with Betty Kusten oil tanker providing storage facility.

In December 2010 horizontal well section was delayed due to the weather and operational difficulties which caused the delay of the test phase. An operational issue with the export hose occurred and alternative testing procedure was identified. On 21st December 2010 announced it had successfully completed the flow test of the well.

Key flow test results were:

• Total flow test of 36 hours including clean-up of 9 hours, with cumulative production to tote tanks of over 2,000 barrels.

• Multi-rate flow tests were conducted, culminating in a final stabilised flow rate of 2,900 stock tank barrels of oil per day.

RAR

On 10 May, 2011, Xcite Energy Limited announced the results of an independent evaluation of its reserves and resources this RNS caused a major drop in share price.Full report can be download here

The highlights from the report were :

• NPV10 (after tax) of approximately $229 MM, $396 MM and $558 MM for the 1P, 2P and 3P reserves in the area constituting the First Stage Production (“FSP”)

• Reserves of the type 1P, 2P and 3P in the FSP of approximately 22 MMstb, 28 MMstb and 35 MMstb, respectively.

• Contingent resources for the SSP (which are in addition to the reserves in the FSP stated above) of approximately 73 MMstb, 87 MMstb and 101 MMstb on a “low estimate”,“best estimate” and “high estimate” basis, respectively.

• The RAR assigned a NPV10 (after tax) value per barrel for the 1P, 2P and 3P reserves in the FSP as approximately $10.40, $14.20 and $16.00, respectively.

• The RAR assigned a NPV10 (after tax) value per barrel for the “low”, “best” and “high” estimate of contingent resources in the SSP as approximately $9.10, $11.00 and $13.00,respectively.

• Based upon the 2009 CPR, the NPV (after tax) can be calculated for the “low”, “best” and “high” estimate of contingent resources as approximately $2.50, $6.40 and $9.20, respectively. If risked at the 70% chance of commercial success, as in the 2009 CPR,these values per barrel would be $1.80, $4.50, and $6.40, respectively.

• No EOR is taken into account for the figures

XCITE ENERGY