UK Oil & Gas (LSE: UKOG) has built interests in several UK onshore assets since it was established towards the end of 2013. However, only one asset, in which it owns a very small stake, currently has proved oil reserves. The remainder have contingent resources (harder to value) or prospective resources (less certain still).
With so little proved reserves (just 39,000 barrels net to UKOG), I think a useful starting point for considering the valuation of the company is the price it has paid for its various assets. Or, put another way, the price at which knowledgeable trade parties have been happy to sell.
The table below summarises UKOG’s current interests and the valuations I’ve assigned to them. Following the table, I discuss the trade deals from which the valuations are derived, before going on to consider whether the company’s shares offer good value at their current level.
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| Asset | Licence | UKOG interest | Value of UKOG interest | Total value of asset | |
| (1) | Horndean/Avington | PL211/PEDL070 | 10%/5% | £1.3m | £17.3m |
| (2) | Markwell’s Wood | PEDL126 | 100% | £0 | £0 |
| (3) | Horse Hill | PEDL137 & PEDL246 | 46.735% | £21.6m | £46.2m |
| (4) | Broadford Bridge | PEDL234 | 100% | £3.5m | £3.5m |
| (5) | Holmwood | PEDL143 | 40% | £3m | £7.5m |
| (6) | Isle of Wight | PEDL331 | 95% | £1.1m | £1.2m |
(1), (2) UKOG announced its acquisition of interests in the Horndean, Avington and Markwell’s Wood licences on 24 July 2014. It paid £1.3m. I assign this value to its 10% interest in Horndean and 5% interest in Avington. These are currently UKOG’s only production assets, albeit Avington is temporarily shut in, with it believed an oil price of over £90 a barrel is needed to give confidence economic production could be restarted. I assign no value to exploration site Markwell’s Wood. Interests in the Markwell’s Wood licence have only ever changed hands for a nominal sum (e.g. £1). Furthermore, UKOG said this week that the future of Markwell’s Wood is “under internal review,” although an oil news website reported last month that the company has already informed local residents it’s abandoning the site.
(3) It has done a number of deals that have increased its interest in the Horse Hill licences to 46.735%. The latest of these was announced on 30 August this year and values its interest at £21.6m.
(4) The company announced its acquisition of a 100% interest in the Broadford Bridge licence for £3.5m on 13 June 2016. A minority interest in an offshore licence was included in the deal but I attribute the full value to Broadford Bridge. Interests in the offshore licence only ever changed hands for a nominal sum and UKOG subsequently allowed it to lapse.
(5) UKOG built its 40% interest in the Holmwood licence via three deals. The latest of these was announced on 25 September 2017 and values its interest at £3m.
(6) It has done a number of deals that have increased its interest in the Isle of Wight licence to 95%. The latest of these was announced on Wednesday this week and values UKOG’s interest at £1.1m.
Valuation
UKOG has been a willing buyer, and numerous trade parties have been willing sellers, of assets totalling £30.5m, which equates to 0.55p a share. How does this compare with its current market valuation? Well, the market cap is £74m at yesterday’s closing share price of 1.325p.
It does have prospects of adding to its proved oil reserves, with an extended well test in progress at Horse Hill. However, it remains a highly speculative proposition. I might consider it at nearer 0.55p but at 1.325p, I’m happy to avoid.
