Are Xcite Energy Limited, Soco International plc And Madagascar Oil Ltd Worth Buying Following Recent Updates?

Photo: Renata. Licence: Public Domain.

Shares in Xcite Energy(LSE: XEL) were given a boost today with the announcement that the company has extended its P.1078 licence, which contains the Bentley field, until 30 June 2017. This should help Xcite secure the financing required for the approval of its Bentley Field Development Plan, and also repay its outstanding senior secured bonds, which are due to be repaid in June 2016.

While Xcite also states in today's update that it has received indicative proposals for development funding, it goes on to say that there can be no guarantee that they will lead to funding being secured by the company. But, having undertaken a cost review, Xcite's new forecast for development costs to be reduced to $30 per barrel is a major step in the right direction and has the potential to improve the company's long term outlook in a low oil price environment.

Although Xcite has clear long term potential and the Bentley field is a highly appealing asset, it seems prudent to wait for confirmation regarding funding. That's because investor sentiment towards the oil and gas sector remains relatively weak, which means that even after today's update Xcite may find it challenging to obtain the cash required to make further progress.

Also reporting positive news flow recently was Soco International(LSE: SIA). Its update released last month highlighted the relatively strong position which the company is in, with it having no debt, a strong net cash position and very low cost base. In fact, Soco reported cash operating costs of less than $10 per barrel in the 2015 financial year and this bodes well for the business in what could prove to be a prolonged period of low oil prices.

With Soco's bottom line forecast to rise by 54% in 2016, the company's shares trade on a price to earnings growth (PEG) ratio of only 1.2. Clearly, there is the potential for downgrades to this growth rate, but with a fully funded drilling programme for 2016 and a wide margin of safety, Soco seems to be a very appealing buy for the long term.

Among the major fallers today are shares in Madagascar Oil(LSE: MOIL), which are down by over 50% after the company stated in an update that it may be forced to delist from AIM in order to gain access to funding.

In today's update it says that following discussions in the last two months its lenders were unwilling to provide further cash and that with its cash balance standing at just $2.8m as of 31 December 2015, it urgently requires funding to continue its operations.

As such, Madagascar Oil has approached its major shareholders to request further funding and while there is no guarantee that any cash will be made available, a condition which could be imposed on the company by its major shareholders is that it delists from AIM. The approval of 75% or more of the company's shareholders would be needed to effect this at a special general meeting, with the alternative being insolvency should further efforts to find funding be unsuccessful.

Clearly, Madagascar Oil is enduring a highly uncertain period and it seems wise to avoid buying shares in the company since there is a realistic prospect of either a delisting or insolvency in the short run.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.