UK Oil & Gas (LSE: UKOG) has a two-pronged strategy. That’s to develop low-risk, but small-time, conventional assets alongside a large, less-well-understood asset it reckons has extraordinary potential.
Back in 2016, its flagship Horse Hill well flowed oil from the shallow conventional Portland level but, more excitingly, from the deeper Kimmeridge layers. High initial rates were recorded over only a few hours. But it was enough for the well to be dubbed the Gatwick Gusher, and the company to talk of 100bn-barrel potential in the Kimmeridge across the wider Weald Basin.
UKOG’s shares climbed to over 8p at the height of investor excitement, but closed yesterday at 0.975p. Could they now be the bargain of the decade?
‘Fault-zone’ critics
From the outset, critics claimed UKOG had drilled into a fault zone at Horse Hill. They suggested it had tapped a relatively small Kimmeridge oil pool — a quirk of the local geology — and that the high initial flow rate would decline rapidly. Furthermore, that extrapolating from Horse Hill to the rest of the Weald was nonsense.
Attempts to replicate another Horse Hill
Between May 2017 and March 2018, UKOG tested its well at Broadford Bridge — around 20 miles southwest of Horse Hill — where it said the Kimmeridge was “a mirror image geological look-alike” to the Gatwick Gusher. Broadford Bridge didn’t gush. Indeed, it did nothing much at all.
Furthermore another Weald oiler, Angus Energy, testing at Brockham six miles northwest of Horse Hill, announced just 11 days ago that “it is extremely unlikely that commercial hydrocarbon flow can be established from the Kimmeridge layer at Brockham.”
Return to Horse Hill
After the Broadford Bridge disappointment, UKOG returned to Horse Hill last June to conduct an extended well test (EWT) with a view to bringing both the Portland and Kimmeridge into production.
By October, the Portland EWT had been “successfully completed” and the company moved on to the Kimmeridge. However, in February, it announced the Kimmeridge had been shut-in to conduct a “long-term pressure build up test,” the outcome of which we don’t yet know.
Even more disconcerting, UKOG announced in its recent half-year report (on the same day as Angus Energy’s disappointing Brockham Kimmeridge news), the Horse Hill Kimmeridge development has been put on hold.
UKOG said it remains “very positive on the future commercial potential of Kimmeridge,” but that “for risk mitigation purposes” development will “likely” (no promises, mind), “follow the start of full-scale Portland production from Horse Hill.”
In addition, it announced it no longer intended to produce an updated 2018 Competent Persons Report, which it had promised would detail “recoverable reserves and net present values of cash flows associated with the envisaged Portland oil field development.”
Bargain of the decade?
In view of all the above, together with a poor record of meeting operational timetables and constant share issues to raise new cash, I think it would be generous to value UKOG at anything above its tangible net asset value (TNAV).
At the latest period end (31 March), TNAV stood at £33.6m, with 5.7bn shares in issue, giving TNAV per share of 0.59p. As such, I think the current share price of 0.975p — a 65% premium to TNAV — is far from a bargain at all, let alone the bargain of the decade. It’s a stock to avoid for me.
