How the Debt Monster Ate Their Company

Or should I say, might eat their company. To say that the company has been eaten would involve making a prediction about the future and I steadfastly refuse to make predictions about what another company might do and what might happen to their share price. So this is all just analysis of what has already happened and what has already happened is that the debt monster has nearly eaten Xcite, or more precisely, Xcite's shareholders.

There is still time for something to happen which means that Xcite's shareholders are not wiped out, but the odds are lengthening all the time.

But that's all in the future and I promised I would analyse the past. The past is a matter of record not a matter of opinion and it is a matter of fact that Xcite's shareholders have been on a wild ride.

The Xcite share price soared from 37p in February 2010 to about £4 at the end of 2010, only to fall to not much more than £1 when a somewhat disappointing reserve report was published in the middle of 2011. The share price hovered around that pound until Xcite announced their plan to finance the development of Bentley with debt and funding from development partners. Like the dog that didn't bark in the night it was the lack of mention of a bid from a big oil company that was important. The share price fell to about 60 pence. Since then the share price has ebbed away until it hit a low of about 5 pence per share at the end of July. There has been a rally just recently, perhaps a portent of redemption, or maybe just the proverbial dead cat bounce.

Xcite's shareholders bemoan the vagaries of the AIM market and the evil shorters.

But they aren't right to do so. Over the last four years the market has hardly altered its opinion of the relative worth of Xcite's main asset, the Bentley oilfield. There is (in the parlance of every trashy website across the world wide web) one weird valuation metric which has been almost constant throughout that time.

The metric is this, the enterprise value divided by the oil price.

The enterprise value is the market capitalisation (share price x the number of shares in issue) plus the net debt (that's debt and short term liabilities less cash).

For more than 90% of the time since Xcite's successful EWT at the end of 2012 this metric has ranged between 3.5 and 5.5. It has averaged 4.4 over that period of time. Even today this metric is about 3.8.

So how come a shareholder who bought the dip back at the end of 2011 could have lost over 90% of their investment. Well, it's that aforementioned debt monster. Rather than financing the company with equity the Xcite board issued a series of different debt instruments and the trouble with debt when you don't have cash flow is that the interest rolls up and the debt gets bigger and bigger as time passes.

The red on the chart below shows the net debt which Xcite owed and owes, and it is that debt monster which is on the verge of eating Xcite's shareholders investment in their company. The evil shorters are exonerated.

Chart updated 14th August to show enterprise value in dollars rather than sterling and to show cumulative finance raised by the company. Finance raised is gross equity issues (incl exercise of options and warrants) plus debt plus interest paid in kind.

Chart updated 14th August to show enterprise value in dollars rather than sterling and to show cumulative finance raised by the company. Finance raised is gross equity issues (incl exercise of options and warrants) plus debt plus interest paid in kind.