The UK Oil & Gas (LSE: UKOG) share price closed at a new multi-year low of 0.83p on Wednesday 7 August. However, by the end of the week, it had climbed to over 1p and it’s kept its head above that level at the end of every trading day since.
Is the market regaining faith in the prospects of this AIM-listed company, whose flagship asset is the ‘Gatwick Gusher’ at Horse Hill? Furthermore, with the shares having previously traded north of 8p in more optimistic times, could the current price of 1.1p represent a brilliant opportunity to buy?
Increased stake
The recent share-price action follows an announcement from the company on 7 August that it’s acquiring a significant further interest in Horse Hill. As already noted, the shares closed at a new low on that date. So investors appear to have quickly moved to a more positive view.
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UKOG has agreed to buy Tellurian-owned Magellan Petroleum’s 35% interest in Horse Hill for a total consideration of £12m — £5m in cash and £7m in UKOG shares. This will take its stake in the Gatwick Gusher from 50.6% to 85.6%. There are some obvious positives to this, notably a significant increase in the proportion of future Horse Hill revenues to which it will be entitled.
Dilution
However, it’s not all good news. UKOG’s had to take out a convertible loan of £5.5m. This is because while its increased stake in Horse Hill will give it a much higher proportion of future revenues, it has to bear a much higher proportion of the costs to develop the field.
The result of the acquisition and loan is that there’s a potential £12.5m worth of new shares to be issued. Exactly how dilutive this will be for existing shareholders remains to be seen, but history tells us to expect the worst.
UKOG previously took on a £10m loan from the same providers. Its share price was 4.9p the day before the loan was announced on 15 November 2017. The price began to fall as the lender began converting and selling its shares, ending at 2.3p by the time of the last conversion eight months later.
UKOG’s history as a serial diluter is chastening. When it first acquired an interest in Horse Hill over five years ago, it had 853,396,843 shares in issue. Today, there are 6,083,289,907. Put another way, 853,396,843 shares that once represented 100% ownership of the company now represent just 14%.
Unswayed
Since the Gatwick Gusher first gushed, news on flows from the Kimmeridge level (once routinely described by the company as “North Sea-like”) has not been very good. Indeed, UKOG has abandoned plans to drill a horizontal well in the Horse Hill Kimmeridge in the immediate future, in favour of bringing the smaller conventional Portland level into production.
Tellurian’s sale of its 35% stake in Horse Hill for £12m, gives an implied total value for the asset of £34.3m. In turn, this suggests UKOG’s 85.6% stake is worth £29.4m. This compares with the company’s market capitalisation of £66.9m at the current share price and with the current number of shares in issue.
How much further dilution is to come before UKOG’s funded by its own cash flows (if it ever is) is anybody’s guess. As such, the recent mini-rally in its share price doesn’t sway me. It’s a stock I’m continuing to avoid.
