First Energy XEL Note

RESEARCH ANALYST:Stephane G. Foucaud, P.Eng.+44-207-448-0213 • sgfoucaud@fi rstenergy.com

RESEARCH ASSOCIATE:David R. van Erp+44-207-448-0243 • drvanerp@fi rstenergy.com

AIM Listed: XELPrice: £3.83 (11/2/2011)

TSX Listed: XELPrice: C$6.30 (11/2/2011)

Opinion: OUTPERFORM12 Month Target Price: £5.10

15 February, 2011

London Offi ce: +44-207-448-0200

REGULATORY DISCLOSURES - PAGE 13www.fi rstenergy.com

Initi ati ng Coverage on Xcite Energy Limited

Making Light of Heavy Oil

Xcite Energy Limited - XEL15 February, 2011

Sources for tabular data and charts are FirstEnergy Capital LLP and Company Reports unless otherwise noted.

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Table of Contents

Initiating Coverage on Xcite ...........................................2Energy Limited ..................................................................2Introduction .......................................................................2Investment Case ................................................................3Heavy Oil – Focus on Viscosity ......................................3Asset & Well Result ..........................................................4Valuation, Funding & Recommendation .......................8Risks ....................................................................................9Board of Directors .............................................................9Management Team .........................................................10

Initi ati ng Coverage on Xcite Energy LimitedWe are initiating coverage on Xcite Energy with an Outperform recommendation and a £5.10 per share target price. Xcite Energy is an AIM and TSX Venture listed (XEL LN, XEL CN), appraisal and development company with a market cap of US$950 mm, which is focused on heavy oil resources in the UK North Sea. In 2003, Xcite was awarded a 100% working interest in the Bentley fi eld in Block 9/3b in the UK North Sea and the Company has since tried to commercialize this large heavy oil asset. In December 2010, the Company tested 2.9 mbbl/d from the 9/3b-6z horizontal well, which signifi cantly exceeded the upper case threshold for commerciality of its core asset, the Bentley fi eld, making Xcite one of the largest resource holders in the UKCS.

Introducti onEver since it was awarded Block 9/3b in the UK North Sea, Xcite has been trying to commercialize the Bentley heavy oil fi eld. With an 11 API, the crude from the Bentley fi eld is much heavier and more viscous than crudes at any fi eld currently in production in the North Sea. This success could therefore mean a breakthrough in UK heavy oil development with the potential of unlocking several hundreds of millions of barrels of 2P reserves offshore the UK. The asset is part of a cluster of heavy oil fi elds, which are all in different stages of appraisal or development by different operators. Most of Xcite’s management has previously worked on the Bentley asset at ConocoPhilips which previously oper-ated the fi eld. The successful testing of Bentley with a recorded fl ow rate of 2.9 mbbl/d, well above the required 1.2 mbbl/d, adds to Xcite’s confi dence that the Bentley fi eld can be developed commercially.

*Front cover photo credit: iStockphoto

3

Asset ValuationUnrisked (US$MM)

EMV (US$MM) £/Share % Total

Net Cash 33 33 0.10 1.7%G&A -17 -17 -0.05 -0.8%Total Core NAV 16 16 0.05 0.8%Bentley (70% CoS) 1,696 1,187 3.77 60.3%Bentley EPS (70% CoS) 564 395 1.25 20.0%Bentley Tie-in Upside (30% CoS) 1,242 373 1.18 18.9%Total Risked Exploration 3,502 1,955 6.21 99.2%

12 Month NAV 2,276 1,598 5.08

Total NAV 3,518 1,971 6.26 100.0%

Unrisked NAV 11.18

P/Core NAV x 100.0%P/NAV x 61.1%P/Unrisked NAV x 34.3%Source: FirstEnergy Capital, Company Reports

Investment CaseXcite is approximately a 200 mmbbl contingent heavy oil resource play. With possible declaration of commer-ciality and fast track development we have initiated coverage with an Outperform recommendation and a target price of £5.10 per share.

Large Resource Base with Signifi cant Upside: Xcite holds 200 mmbbl in contingent resources (company estimate). Following the award of the 9/3c and 9/3d blocks during the 26th UK licensing round, Xcite also has 207 mmbbl in place of potential low cost tie-in upside. We currently carry no value for these tie-in assets in our target price but believe that over time these assets could contribute up to £3.95 per share to the current share price. Signifi cant Early Production: Xcite intends to com-mence early production from the Bentley fi eld through a two to three year pilot production facility that could produce in excess of 15 mbbl/d, with fi rst production as early as Q4 this year or early 2012. This could generate US$197 mm in cashfl ow for Xcite in 2012, increasing to US$416 mm by 2013.

Fast Track: With 100% working interest in the asset, Xcite has the option to manage the development time-line of its assets according to its own objectives without having to depend on a partner.

Oil Price Leverage, Heavy Oil Discount Offset by Tax Relief: Despite the high cost structure of the project in the North Sea, Xcite Energy could substantially benefi t from higher oil prices despite our assumption that the oil commands no more than a 15% discount to Brent (in practice likely to be a lower discount). The discount will be offset by last years’ introduction of the tax relief legislation for heavy oil fi elds, allowing Xcite to claim up to £160 mm in annual tax credits for fi ve years. Additional Funding Required: Given the size of the project we anticipate Xcite will need additional funding. We have used a 50% equity fi nancing (for FPS towards fi rst production) and 50% debt fi nancing (post fi rst production of the FPS) for the project, anticipating that Xcite will need up to US$399 mm in additional funding.

Appealing Valuation: We have based our valuation on the assumption that Xcite will need to raise £120 mm in equity and £120 mm in debt fi nancing to fund the full

development of the Bentley heavy oil fi eld. We have calculated a target price of £5.10 per share post dilution that excludes the upside from the tie-in assets, which could add a further £3.95 per share to the valuation on an unrisked basis (£1.18 per share risked). Our current valuation comprises of the FPS valuation (70% CoS), the main development risked at 70% CoS and our 5p per share core NAV (cash position at year-end 2011 post a £120 mm equity raise). When adding the upside from the tie-in assets (30% CoS) our valuation increases to £6.26 per share (£11.18 per share unrisked).

Heavy Oil – Focus on ViscosityHeavy crude oil is generally defi ned as oil with an API gravity of 22° or less. Crude oil with an API gravity of less than 10° API is referred to as extra heavy oil or bitumen.

While the gravity (degree API) is important in the decision and fi nal technical evaluation whether a fi eld will be economically viable, viscosity is another major component in the commercial and technical ability to deliver a heavy oil fi eld development. Viscosity is measured in centipoise (cP) and can be infl uenced by temperature, which means that as fl uids become cooler, they become thicker and less able to fl ow, hence the viscosity increases. However, if heated, the fl uid can still be made to fl ow.

As the temperature can be a critical factor in whether a well can fl ow, it must be controlled at both reservoir level (downhole, in situ) and above ground (through pipelines and facilities). This implies higher operating cost or higher initial infrastructure cost.

The Bentley heavy oil fi eld has a viscosity of approxi-mately 600cP (in situ) and an oil gravity of 10.5°-11°

FirstFocus • Xcite Energy Limited - XEL • 15 February, 20114

API, which makes it one of the more heavy and most viscous fi elds in the North Sea, but still well within the limits of technology in bringing this fi eld into produc-tion. The Bentley fi eld enjoys the benefi t of very high permeability of up to 7.5 Darcy (perhaps more) and good porosity of approximately 25% which improves the pro-ductivity of the wells. Several heavy oil fi elds have been developed on the UKCS, although viscosity levels were much lower. Interestingly, due to the low viscosity and the high permeability in some of the developed fi eld res-ervoirs, recovery factors have been very similar to lighter crude oil fi elds in the 35% to 45% range.

Asset & Well ResultThe Bentley heavy oil fi eld is located in the Northern North Sea, approximately 160 km east of the Shetlands and was discovered by Amoco in 1977 before operator-ship was transferred to ConocoPhilips. The fi eld is in the vicinity to other heavy oil fi elds such as Bressay, Kraken and Mariner (430 mmbbl, contingent), of which the latter was recently farmed down to Statoil by Nautical Petro-leum, which farmed down a 20.67% interest for gross proceeds of £87.5 mm (US$1.59/bbl). The Bentley fi eld is also located on the edge of the heavy oil belt that runs through the Northern North Sea. The lack of technology, volatile oil prices, its high viscosity and previously less favourable terms have kept investors from developing this heavy oil asset.

Water @ 70 degrees F 1.00 centipoise (cps)Blood 10.00 centipoise (cps)Ethylene Glycol 15.00 centipoise (cps)Motor Oil (SAE 10) 50.00 centipoise (cps)Corn Oil 65.00 centipoise (cps)Maple Syrup 150.00 centipoise (cps)Motor Oil (SAE 40) 250.00 centipoise (cps)Motor Oil (SAE 60) 1,000.00 centipoise (cps)Honey 2,000.00 centipoise (cps)Molasses 5,000.00 centipoise (cps)Chocolate Syrup 10,000.00 centipoise (cps)Ketchup 50,000.00 centipoise (cps)Lard 100,000.00 centipoise (cps)Peanut Butter 150,000.00 centipoise (cps)Source: FirstEnergy Capital, Company Reports

Everyday Consumable Goods in Centipose (CPS)

Block 9/3b, Bentley FieldXcite Energy is operator of Block 9/3b, license 1078, containing the Bentley fi eld (100% WI). The block was awarded to Xcite in 2003 as part of the 21st UK Offshore Licensing Round and is located 160 km east of the Shetland Isles in 113m of water only a few kilometres east of the heavy oil Kraken discovery and south of the Bressay heavy oil fi eld.

The Bentley fi eld is a large four-way dip-closed structure, approximately 15 km by 6 km, within the Upper Palaeocene Dornoch reservoir at an average depth of 3,700 ft depth. Certainty around the size of the fi eld has been enhanced by four appraisal wells which have previously been drilled into the structure, combined with reprocessed 3D seismic.

Heavy Oil Belt in North Sea and Bentley Location

Source: Xcite Energy Limited

Feb-09 Jun-09 Feb-11Post 9/3b-5 well Post 3D Post 9/3b-6z well

OIIP 689 689 750

72 109 120

123 160 200*

166 220 250

Risked Base 85 112 180

CoS (%) 70% 70% 90%

* Best estimate company

Source: FirstEnergy Capital, Company Reports

High

RF Estimates

Resource Base Evolution

Most likely case (MMBbl)

Low

Base

Alba 19.5 7 3,000 1,000 458 46%

Captain 19.1 88 7,000 956 315 33%

Gannet East 20.0 20 870 132 49 37%

Bentley 11.0 600 - 700 7,500 750 200* 27%Bressay 11.5 1,000 10,000 700 NA

* Company estimate


Pro

du

cin

g

Field NameRecoverable

Reserves (MMBbl)Oil in Place

(MMBbl) RFPermeability

(md)Viscosity

(cp)API

5

In December 2010, the 9/3b-6z well tested 2.9 mbbl/d, exceeding the 1.2 mbbl/d threshold guidance to justify commerciality and the 2.4 mbbl/d upside parameters previously modelled. Previous issues such as high skin (altered formation permeability near a well bore as a re-sult of drilling, completion or stimulation that negatively impact the productivity of the well, i.e. thick cement job with narrow perforations) and the occurrence of slug-ging (gas within the oil comes out of solution causing pressure drops, impacting the fl ow capability of a well) was controlled this time and Xcite managed to realize a steady fl ow rate at pump capacity rate of 3.0 mbbl/d.

The 9/3b-6z well has drilled through 500 metres of horizontal section positioned 10ft below the top of the reservoir. The well fl owed for over 36 hours at stabilized multiple fl ow rates reaching 2.9 mbbl/d, exceeding the pre-drill expected pump maximum expectation of 2.8 mbbl/d. The fl ow rate was constrained by the equipment capacity and Xcite believes the well could have fl owed above 3.5 mbbl/d.

The reservoir is characterized by its high net to gross sands (close to 100%) and comprises of several zones. Porosity variations in the sandstones fl uctuate, which could have a positive effect on the water driven reservoir as it will potential-ly slow the water from breaking through, enhancing the overall recovery factor of the fi eld. Zone 2 has an average porosity of 32%, a water saturation of 3% and the previously expected permeability of 7.5 Darcy looks to be too conservative.

The well result confi rms Xcite’s interpre-tation of the results from the January 2008 work programme, where Xcite drilled

and tested the 9/3b-5 well in the central area of the fi eld. The well achieved its primary objectives of sampling the Bentley oil by way of a drill stem test, confi rming the reservoir characteristics (7.5 Darcy and >25% poros-ity) and continuity of the Bentley reservoir. The test also enabled potential fl ow rates under development condi-tions to be established through modeling and by analogy to the nearby Bressay fi eld, 6 km to the northwest. The Bressay fi eld achieved stabilized, vertical well fl ow rates in excess of 3.1 mbbl/d from similar reservoir and heavy oil (higher viscosity of approximately 1000cP, higher permeability of approximately 10 Darcy). Bentley’s in situ temperature is 40.5˚C compared to 30.5˚C at the

Bentley Well Locations and Schematic Geological Overview



9/3b-6 & 9/3b-6z Wells



producing Captain fi eld. As a rule of thumb, the higher the temperature, the higher the recovery factor.

Bentley crude is heavy with an oil gravity of 10°-12° API, analogous to the neighbouring Bressay fi eld, with which there are potential develop-ment synergies. The crude has been assessed by an independent crude oil marketing specialist, and has many valuable attributes, with a large vacuum gas oil (VGO) cut, low sulfur and low metals content. In addi-tion, Bentley crude has a high aromatic and naphthenic content favouring naphthenic lube production and the potential to produce high grade needle-coke.

In February 2009, RPS Energy published a CPR for block 9/3b, assigning contingent resources develop-ment pending to the fi eld with a probability of com-mercial success of 70% and base case resources of 122.5 mmbbl. Subsequent to the CPR, based on reprocessed 3D seismic, Xcite has shown the Bentley East feature to be part of the overall Bentley fi eld. The Bentley fi eld now includes a second drill centre to the south to access Bentley East and the southern areas of the fi eld, thereby adding approximately 40 mmbbl to the base case re-sources. The horizontal 9/3b-6z well also encountered signifi cant thicker sands than previously anticipated. The thickness of the reservoir was anticipated to be 72ft thick but instead proved to be 114ft. Furthermore, the net to gross rate of close to 100% also supports this case. Bentley is supported by a 400ft underlying water driver, although an electrical submersible pump will be needed to achieve commercial production rates.

The Bentley fi eld most-likely contains (P50) resources of around 200 mmbbl, with a low to high range (broad-

Bentley 10 to 12 600 to 700 7,500 750 200 27%Source: FirstEnergy Capital, Company Estimates

Field Name APIViscosity

(cp)Permeability

(md)Oil in Place

(mmbbl)Recoverable

Reserves (mmbbl) RF

Prospect Age CoS mmbbl

Bentley Palaeocene 100% 861.25Bunsen Palaeocene 52% 40.00Bunsen West Palaeocene 52% 10.00Brunel Palaeocene 25% 41.00Bessemer Palaeocene 25% 8.00Boyle North Jurassic 23% 6.00Boyle South Jurassic 23% 12.00

Babbage Jurassic 12% 90.00Bragg Jurassic 12% N/ABragg North Jurassic 12% N/ASource: FirstEnergy Capital, Company Reports

mmbbl Oil in Place

Upside From Potential Tie-in Developments


ly equivalent to P90 to P10) from 120 to 250 mmbbl (company estimates post well result).

In addition to the Bentley fi eld, there is further po-tential in the four-way dip-closed Brunel prospect at Dornoch level, and in two Jurassic leads.

Xcite was awarded the 9/3c and 9/3d licenses to the northwest and southwest, respectively, during the 26th UK Licensing Round in November 2010, adding further upside to the development. In place resource upside outside the Bentley fi eld is approximately 207 mmbbl in place.

Cross section of Bentley and Bressay Fields


7

FSP Schematic


Development of the Bentley FieldThe Bentley fi eld will be developed in two phases with fi rst stage production (FSP) targeted by late 2011 through an initial production facility. This timeline would not allow for any delays and we have therefore based our numbers on fi rst production in December 2011, in line with the CPR. Production from a full fi eld development would commence later, as we believe Xcite is targeting late 2014.

Phase-1, First Stage Producti on (FSP)The fi rst phase of the development involves fi ve wells on the Bentley fi eld and includes a two to three year pilot production facility that could produce approxi-mately 15 mbbl/d from these fi ve wells, and follow-ing the successful fl ow test, Xcite hopes to be able to book between 20 to 30 mmbbl of 2P reserves through this well, which it aims to confi rm through a reserves report in the fi rst quarter of this year.

The RPS report in 2009 that determined 120 mmbbl (P50) resources with a low to high range (broadly equivalent to P90 to P10) from 109 to 220 mmbbl, assumes conventional, cold fl ow recovery, utilizing pumps to lift the oil. There is considerable up-side in the fi eld through application of enhanced oil recov-ery techniques, which has the potential to double the recoverability.

In February this year, Xcite signed a binding agree-ment with British American Offshore Limited (BAOL), part of Rowan Companies, for the N-Class Rowan Norway, a harsh environment, deep water jack-up unit, designed and built for simultaneous drilling and production, which is currently under construction.

The Rowan Norway is expected to be available in Q4 2011 with a view to commence the fi rst stage produc-tion on the Bentley fi eld later in that quarter of 2011.

Phase-2While producing up to 15 mbbl/d from the FSP facil-ity, Xcite will further appraise the larger part of the Bentley fi eld to assign the 200 mmbbl reserves and prepare for the full fi eld development. The FSP devel-opment wells will include on average 800m horizontal sections (ranging between 200m to 1,350m).

The base case facilities are designed to handle up to 466 mboe/d of fl uids as water will over time make up the bulk of the produced liquids. The development

will require signifi cant water separation infrastructure. Oil will be offl oaded to a Floating Storage Unit with a capacity of over 750 mbbl. The water will be re-injected through 12 injectors at the fl ank of the fi eld.

The fi eld will be developed over a signifi cant time pe-riod, well beyond fi rst production. We have assumed fi rst production from the main development com-mences in late 2014, which will allow for construction and installation of the main platform and drilling of the fi rst few development wells to initiate production from the platform. Development drilling will continue to increase production which we expect to peak in 2018 at 65 mbbl/d, which we feel could be conservative as this is only marginally above the previous base case scenario which was based on 120 mmbbl contingent resources.

PartnersPart of Xcite’s strategy to fund the second phase devel-opment, which is expected to cost up to US$1.5 billion net to Xcite is through the creation of partnerships with several contractors. Although this is not a very com-mon way of partly funding a development, Manage-ment has successfully applied this funding mechanism in the past when developing a Conoco fi eld. Due to these experiences, Management feels confi dent that it will be able to partly fund the development through these alliances where the partners will share in the upside of the fi eld.


Xcite will hold all service contracts and will align the contractors with its own interests through a share in the Bentley valuation. The risk capital is provided by the contractors and in return they can share in the value through profi t uplift.

The advantage to Xcite is that it will stimulate part-nerships throughout the fi eld life of the Bentley fi eld, and will motivate contractors to allocate their best people to the work programme while ensuring that Xcite retains its 100% WI.

Xcite has selected AMEC as the engineering group to provide the FPS and full fi eld development hardware. The Company has also signed an agreement with BP for the marketing and offtake of the produced crude. A fl oating storage unit provider could also participate in the partnership.

Valuati on, Funding & Recommen-dati onXcite Energy is currently trading at US$4.75/bbl on EV/2C (200 mmbbl). The Company’s share price has signifi cantly appreciated over the last three months following the successful outcome of the 9/3b-6z well test.

Valuati onWe have calculated a core NAV of £0.05 per share comprising of US$33 mm in cash (assuming a raise in early 2011) minus G&A costs going forward. We have assumed that Xcite will need to raise approximately US$190 mm in 2011 to fully fund the early production system which will allow the Company to commence fi rst production in late 2011 or early 2012, generating

Low Base High

120* 200* 250*64

1,700 2,328 2,406181 245 2561 2 236 56 5626 43 4338 33 339 12 12

* Adjusted for Jun/09 3D seismic data


Side tracksInjectors

Development Scenarios Bentley Field2009 CPR Scenarios Development

RigSlotsMother-bores

Resources (mmbbl)Production (mbbl/d)Capex (US$mm)Abandonment cost

US$1.1 billion in cashfl ow between 2012 and early 2015.

Our calculated risked upside of £6.21 is comprised of an individual valuation of the FPS (15 mmbbl, 70% CoS), a valuation of the main fi eld development based on 185 mmbbl risked at 70% chance of success, and the prospective upside of nearby tie-in potential. Our total calculated risked NAV is £6.26 per share (£11.18 per share unrisked).

FundingWe have projected fi eld development costs of US$3.9 billion, much higher than the US$2.6 billion indicated for the base case in the CPR report. We have also as-sumed opex of US$20/bbl.

The FPS will allow for early cashfl ow which could fund the fi rst part of the main development until fi rst production, after which more wells could be drilled to increase production further. We have used 50% eq-uity and 50% debt fi nancing for the cashfl ow shortfall between FPS and the main development.

We have projected early cashfl ow from the FPS of US$1.1 billion funded by a US$190 mm equity raise in early 2011. We have assumed the shares will be priced at £3.50 per share.

The UK government’s recent fi scal changes in favour of heavy oil assets will allow Xcite to claim up to £800 mm in tax credit spread out over fi ve years. We expect the Company will not pay any tax until 2017.

Shareholder Rights Plan – DefenceXcite has established a shareholder rights plan to encourage the fair treatment of Xcite Energy share-holders, should an unsolicited take-over bid be made for Xcite Energy.

30,000

40,000

50,000

60,000

70,000Main Development

FPS

Xcite Production Profile

0

10,000

20,000

,

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

9

Asset ValuationUnrisked (US$MM)

EMV (US$MM) £/Share % Total

Net Cash 33 33 0.10 1.7%G&A -17 -17 -0.05 -0.8%Total Core NAV 16 16 0.05 0.8%Bentley (70% CoS) 1,696 1,187 3.77 60.3%Bentley EPS (70% CoS) 564 395 1.25 20.0%Bentley Tie-in Upside (30% CoS) 1,242 373 1.18 18.9%Total Risked Exploration 3,502 1,955 6.21 99.2%

12 Month NAV 2,276 1,598 5.08

Total NAV 3,518 1,971 6.26 100.0%

Unrisked NAV 11.18

P/Core NAV x 100.0%P/NAV x 61.1%P/Unrisked NAV x 34.3%Source: FirstEnergy Capital, Company Reports

The Plan must be ratifi ed by Shareholders within six months of the effective date of the Plan (dated 30th November 2010). The rights issued under the Plan will become exercisable only when a person, including any party related to it, acquires or announces its intention to acquire 20% or more of the outstanding shares of Xcite without complying with the provisions of the Plan or without the approval of the Board. Should a Non-com-pliant acquisition occur, each right will, upon exercise, entitle a right holder, other than the acquiring person or any related persons, to purchase shares of Xcite at a substantial discount to the market price at the time.

RisksDecline Rate: Although Xcite has managed to fl ow up to 2.9 mbbl/d during the 36 hour fl ow test, there remains a risk that the fl ow rate is unsustainable over a longer period of time.

Resource Size: Although several wells have been drilled on the fi eld and 3D seismic data combined with the well results suggest that the fi eld could be larger, no guarantee can be given about the resource potential and ultimate recovery rate.

Water Break Through: Water break through could severely impact the recovery factor and hence the reserve factor.

Board of Directors

Roger S. Ramshaw: Chairman and a DirectorFrom 2002 until his retirement in 2003, Mr. Ramshaw was Chairman and Managing Director of ConocoPhil-lips (UK), where he led the Company’s exploration, development and production business on the UKCS. From 1999 to 2002, he was President of Conoco Ven-ezuela, leading the Company’s commercialisation of heavy oil assets. Roger has over 30 years of experience in the petroleum industry.

Richard E. Smith: CEO and DirectorPrior to joining Xcite in 2003, Mr. Smirth was Pro-gramme Director at Granherne, formerly of the Hal-liburton Group of companies. Mr. Smith is a Char-tered Engineer and has over 25 years of experience in engineering and business management in onshore and offshore oil and gas projects.

Rupert E. Cole: CFO and Director Prior to joining Xcite, Mr. Cole was Program Man-agement Business Adviser at Granherne (Hallibur-ton). From 1990 to 1996, he was Finance Director at Harpur, an international downstream service pro-vider to major oil companies. Mr. Cole is a Chartered Accountant and has over 20 years of experience in corporate fi nance.

Gregory J. Moroney: DirectorMr. Moroney is the Founding and Managing Member of Energy Capital Advisors of Greenwich, Connecti-cut, and is also a director of BreitBurn Energy Part-ners.

US$MM 2010 2011 2012 2013 2014Brent Price (US$/Bbl) 79.93 90.77 96.51 112.01 122.03

Opening cash Position 2.7 43.3 32.4 79.1 41.3Capex -51.2 -200.0 -150.1 -500.0 -750.0

Net Financing Cash Flow 91.5 188.5 0.0 46.6 139.3

Net Operating Cash Flow -0.4 0.7 197.3 415.7 640.9

Closing Cash Position 42.6 32.6 79.6 41.5 71.5

Undrawn Facility 0.0 0.0 0.0 46.6 185.8

Closing Net Debt -42.6 -32.6 -79.6 5.1 114.3Credit available 42.6 32.6 79.6 41.5 71.5Source: FirstEnergy Capital, Company Reports


Scott R. Cochlan: DirectorMr. Cochlan is a partner at the Canadian law fi rm of Blakes, Cassels & Graydon in the securities group.

Timothy S. Jones: Director Mr. Jones is a Chartered Accountant, with 20 years experience in professional practice covering a number of industries including oil and gas. He is currently on the board of a number of AIM listed natural resources companies.

Stephen A. Kew: Explorati on and Development DirectorMr. Kew has been a director of 3 Sigma Limited since 1999, a petroleum engineering consultancy company in the upstream oil and gas business. He is a Petroleum Engineer and has over 34 years of development engi-neering and project management experience in the oil and gas industry, including 25 years with Conoco and previous experience in respect of the Bentley fi eld, Block 9/3b.

Management Team

Richard West: Operati ons Director and Pro-gramme Manager for the Bentley FieldMr. West has over 25 years’ experience in the upstream oil and gas business, including Britoil and BP Forties fi eld as well as international operations. Responsible for the delivery of the Conoco MacCulloch development in

the North Sea using a fully tariffed, joint venture FPSO solution, as well as successful delivery of an FPSO solu-tion offshore North Africa.

Charles Lucas-Clements: Director of Strategy and Business DevelopmentMr. Lucas-Clements has over 27 years’ experience through the oil and gas value chain, in both upstream exploration and production and downstream refi n-ing. He was previously with IHS Energy for 12 years in senior roles including VP of Business Application, Managing Director of IHS Consulting, Head of Strate-gic Consulting and Director of Business Development.

Barny Brennan: Director of SubsurfaceMr. Brennan has over 22 years of oil industry expe-rience gained within both major oil company and consulting environments. He was previously with Senergy-PGL for fi ve years and prior to this he spent 15 years with Phillips Petroleum.

Thomas Blystad: Commercial DirectorMr. Blystad has been working for 25 years in the off-shore industry. His experience is within the commercial aspects of marine transportation, offshore drilling and fl oating production segments. After ten years with a private investment company within the offshore in-dustry he was a self-employed broker. For the past six years Mr. Blystad has been a Director with the ship-broking company Simpson, Spence & Young.

11

Year end Dec 31, 2009a 2010e 2011e 2012e 2013e

ProductionOil & Liquids Bbl/d 0 0 252 9,001 15,195Gas Mmcf/d 0.0 0.0 0.0 0.0 0.0Total Boe/d 0 0 252 9,001 15,195Production per Share Boe/Share (000's) 0.0 0.0 0.5 16.3 27.5

% N/A N/A N/A N/A 69%Production per D.A. Share Boe/Share (000's) 0.0 0.0 0.5 16.6 27.8

% N/A N/A N/A N/A 67%

Cash flow US$Mm -1.0 -1.3 0.7 197.3 415.7CFPS Basic -$0.02 -$0.01 $0.00 $1.03 $2.17 Diluted -$0.02 -$0.01 $0.00 $0.98 $2.06P/CF Basic -378.8 -631.2 1,536.6 5.8 2.7 Diluted -397.3 -667.3 1,627.4 6.1 2.9

Earnings US$Mm -1.4 -1.4 0.9 120.4 286.5EPS Basic -$0.02 -$0.01 $0.00 $0.63 $1.50

Diluted -$0.02 -$0.01 $0.00 $0.60 $1.42P/E Basic -278.3 -583.5 1,342.2 9.5 4.0

Diluted -291.9 -616.9 1,421.5 10.1 4.2

Capital DataCapex US$Mm 0.8 51.2 200.0 150.1 500.0Capex vs. Cash Flow % N/A N/A N/A 76% 120%Exit Net Debt US$Mm (2.4) (42.6) (32.6) (79.6) 5.1Entry Debt/CF Years -1,077.4 N/A N/A N/A N/AMarket Cap. US$Mm 451 994 1,219 1,210 1,203Enterprise Value US$Mm 448 951 1,187 1,130 1,208Share DataBasic shares Mm 71.6 157.0 191.3 191.3 191.3Options Mm 3.6 9.3 9.8 9.3 9.3Warrants Mm 0.0 1.4 1.6 1.4 1.4Convertible debentures Mm 0.0 0.0 0.0 0.0 0.0Diluted shares Mm 75.2 167.8 202.6 202.0 202.0Fully diluted shares Mm 78.1 169.1 203.4 203.4 203.4

Year end Dec 31, 2009a 2010e 2011e 2012e 2013e

Share Price Y/E £/Share £0.45 £3.83 $3.83 $3.83 $3.83Net Asset Value £/Share NARisked NAV £6.26Price / NAV x NA

Valuation DataDACFM x -438.8 -617.4 2,479.4 5.7 2.9Target DACFM x -585.1 -831.3 3,324.1 7.8 3.9

EV/BOED US$/Boed NA NA NA NA NATarget EV/BOED US$/Boed NA NA NA NA NA

EBITDA US$Mm -1.9 -2.6 4.3 308.2 646.0EV/EBITDA x -231.8 -372.8 274.2 3.7 1.9

Cash Flow Netback US$/Boed NA NA NA NA NA

PricingBrent $US 62.61 79.93 90.77 96.51 112.01Oil $US wellhd NA NA NA NA NAGas $US wellhd NA NA NA NA NAExchange Rate US$ / GB£ 1.57 1.55 1.57 1.56 1.55

Source: FirstEnergy Capital Corp. and Company Reports

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12 FirstFocus • Xcite Energy Limited - XEL • 15 February, 2011

13

Disclosure Requirements

Is this an issuer related or industry related publication?

Does the analyst, a member of the analyst’s household, associate or employee who prepared this research

report have a fi nancial interest in securities of the subject issuer? If yes, nature of the interest and name:

Is FirstEnergy a market maker in the issuer’s securities at the date of this report?

Does FirstEnergy benefi cially own more than 1% of any class of common equity of the issuer?

Does FirstEnergy or the analyst have any actual material confl icts of interest with the issuer?Explanation:

Does any director, offi cer, employee of FirstEnergy or member of their household serve as a director or of-fi cer or advisory capacity of the issuer? (if so, list name)

Did the analyst and/or associate who prepared this research report receive compensation based solely upon investment banking revenues?

Did the analyst receive any payment or reimbursement of travel expenses by the issuer?

Since July 9, 2002, has the analyst received any compensation based on a specifi c investment banking transaction relative to this issuer?

Has any director, offi cer or employee who prepared this research report received any compensation from the subject company in the past 12 months?

Has FirstEnergy provided the issuer or its predecessor with non-investment banking securities-related services in the past 12 months?

Has FirstEnergy managed or co-managed an offering of securities by the issuer or its predecessor in the past 12 months?

Has FirstEnergy received compensation for investment banking and related services from the issuer or its predecessor in the past 12 months?

Issuer IndustryX

Yes No

Yes NoXYes No

Yes No

Yes NoXYes NoX

Yes NoX

Yes No

Yes No

Yes No

Yes No

Yes NoX

X

X

X

X

X

X

X

The author of this report hereby certifi es that the views expressed in this report accurately refl ect his/her personal views about the subject security and issuer.

The author of this reports further certifi es that no part of his/her compensation was, is, or will be directly or indirectly related to the specifi c recommendations or views contained in this research report.

FirstEnergy Capital may receive or intends to seek compensation for investment banking services from all issuers under research coverage within the next three months.

This report has not been approved by FirstEnergy Capital LLP for the purposes of section 21 of the Financial Services and Markets Act 2000 as it is being distrib-uted only to persons who are investment professionals within the meaning of article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 and is not intended to, and should not be relied upon, by any other person.

Opinion: OUTPERFORM 12 MONTH TARGET PRICE: £5.10

Ranking SystemFirstEnergy’s rating system refl ects our outlook for expected perfor-mance of an issuer’s equity securities relative to its peer group over the next 12 months.

A Top Pick (Buy) rating represents a security expected to provide a return materially higher than the peer group average.

An Outperform (Buy) rating represents a security expected to provide a return greater than the peer group average.

A Market Perform (Hold) rating represents a security expected to pro-vide a return in line with the peer group average.

An Underperform (Sell) rating represents a security expected to provide a return less than the peer group average.

A Speculative Buy (Buy) rating represents a security where the return potential is high, but the risk of a signifi cant loss is material.

A Tender (X) represents a security where investors are guided to tender to the terms of the takeover offer.

Ranking Distribution

% Investment Banking Clients

Top Picks 7% 5%Outperforms 45% 21%Market Performs 25% 4%Underperforms 8% 2%Speculative Buys 9% 6%Under Review 1% 0%Restricted Companies 6% 3%Tenders 0% 0%Not Rated 0% 0%Total 100%

Xcite Energy Limited (AIM: XEL)Ranking and Target Changes 2007 - 2010

£5.00

£6.00

e

Closing Price

Ranking Change

Target Price Change

Feb-15-11 (O) Initiated Coverage

£2.00

£3.00

£4.00

£5.00

£6.00

Dai

ly C

losi

ng

Pri

ce

Closing Price

Ranking Change

Target Price Change

Feb-15-11 (O) Initiated Coverage

£0.00

£1.00

£2.00

£3.00

£4.00

£5.00

£6.00

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep

-08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep

-09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep

-10

Nov

-10

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep

-11

Nov

-11

Dai

ly C

losi

ng

Pri

ce

Closing Price

Ranking Change

Target Price Change

RATING SYSTEM: T = Top Pick (Buy); O = Outperform (Buy); M = Market Perform (Hold); U = Underperform (Sell); SB = Speculative Buy (Buy);R = Under Review; * = Restricted; As of April 15, 2009 X = Tender; NR = Not RatedSource: FirstEnergy Capital Corp. & Bloomberg

14 FirstFocus • Xcite Energy Limited - XEL • 15 February, 2011

15

The informati on contained herein is for informati on purposes only and is not to be construed as an off er or solicitati on for the sale or purchase of securiti es. While the accuracy or completeness of the informati on contained in this document cannot be guaranteed by FirstEnergy Capital, it was obtained from sources believed to be reliable. FirstEnergy Capital and/or its offi cers, directors and employees may from ti me to ti me acquire, hold or sell positi ons in the securiti es menti oned herein as principal or agent. FirstEnergy Capital (USA) Corp., a member of the Financial Industry Regulatory Authority, is a wholly owned subsidiary of FirstEnergy Capital Holdings Corp. and operates as a Broker-Dealer in the United States.

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