Oil explorers are the investor’s great temptation. If you strike it lucky, the profits will gush. However, all too often excitable talk of major oil finds are crushed by disappointing exploration results.
Beyond the shale
That happened to domestic shale explorer UK Oil & Gas Investments (LSE: UKOG). The AIM-listed company was riding high one year ago, its share price more than tripling in six months on promising early tests in the Weald Basin in southern England, and planning permission success at West Sussex County Council. Its stock peaked at 11p. Today it trades at 3.25p.
UK Oil & Gas lost a quarter of its value on 17 December after it admitted a zone at its Weald Basin operation was probably not economically viable due to low reservoir productivity. Investors stopped their ears to executive chairman Stephen Sanderson’s positive talk about encouraging analysis on its BB-1 Kimmeridge clay well, and fled for the exits.
Wight out
Last month, the firm announced it would not be seeking a further extension to its P1916 licence offshore of the Isle of Wight, as the “low geological prospectivity [and] high environmental sensitivity” of the site made drilling too expensive. It has now switched its focus to the onshore PEDL331 Arreton oil discovery, also on the Isle of Wight. This time, investors largely kept their heads.
UK Oil & Gas is far from finished, even though investor interest has waned. Temptingly, the share price is far cheaper than it was. However, recent results show the scale of the challenge facing the company. Worse, the oil price is sliding again, which could frighten away backers unless it has a positive story to tell. My foolish friend Peter Stephens rightly says it could still triple your money, but you have to balance that against the risk that you could lose all of it.
Storm warning
Another UK-based oil and gas explorer, Hurricane Energy (LSE: HUR), is also sharply down from its 52-week high of 67.7p, halving to around 34p. It was punished by ill-timed accusations of poor corporate governance as the group sought a main market listing. This more than offset the surge in the oil price, which was boosting sentiment across the sector at the time.
Hurricane’s prospects look better today, as it works hard to comply with the UK Corporate Governance Code ahead of a premium listing. The share price is reviving, up 13% in three months.
Reap the whirwind
Its Lancaster field, west of Shetland, is expected to start producing oil as soon as Q1 next year, which could deliver an anticipated 17,000 barrels of oil per day. Lancaster’s reserves could total 523m stock tank barrels of oil equivalent and success here could have a positive effect on the long-term share price performance.
Two other discoveries, Halifax and Lincoln, have 2C Contingent Resources of 1.84bn barrels. Its Warwick and Whirlwind assets could add another billion or so barrels, best case. Now could be a good entry point, but please, do your due diligence, and beware of the risks.