Why I think the UKOG share price will make a comeback in 2019

Over the past year, the UK Oil & Gas (LSE: UKOG) share price has taken a hammering. As the company has struggled to win over investors, the stock has slumped 63% since the end of December 2017. Virtually all of these declines came at the beginning of 2018 when the enterprise published a disappointing update on progress at its Broadford Bridge-1 prospect. 

The stock slumped on the news that further work would be required after several months of drilling activity, which had yielded almost negligible results.

However, after this set-back the company re-grouped, and management has spent the rest of 2018 working on re-focusing drilling efforts. A huge breakthrough occurred in October when it declared its Horse Hill Portland oil field commercially viable following an extended well test.

One step forward…

As I wrote when last I last covered UKOG, this discovery “transforms” Horse Hill and the firm’s outlook. Further testing work saw the production of 13,920 barrels from the well, “with gross oil sales revenues of approximately $1.1m.“

While this is a huge step forward for UKOG, as my Foolish colleague Alan Oscroft recently pointed out, the company is not expected to generate any revenue from production “this year, or next.“

With this being the case, the biggest problem the group now faces is funding. Finding enough money to keep the lights on is one of the most significant headwinds all small-cap companies face — especially in the resource space. UKOG is no different. Finding funds to proceed with the development of its assets has consumed a considerable amount of management’s time and effort.

Funding efforts 

So far, shareholders have been happy to fund the business. UKOG has been issuing shares to investors, who’ve been more than happy to pay up. This process has kept the firm alive, but shareholdings have been diluted. 

As I’ve covered previously, over the past five years, UKOG’s number of shares outstanding has increased from 83m to somewhere in the region of 4bn. While there’s a chance that this damaging theme could continue, I think that now the company has proven to the market that it has a viable oil prospect, management will have other funding options available to them.

Funds produced from early oil production will also likely be reinvested back into the business, taking the burden off investors. 

Big catalyst 

I think this could be the most significant catalyst for UKOG’s share price over the next 12 months. 

If the business can prove that it’s a self-sustaining entity, then the investment thesis will change entirely. The company will no longer be labelled as a small-cap startup, but a fully-fledged oil producer, which should result in a re-rating of the shares. 

Having said that, there’s no denying that there are still plenty of other risks to the UKOG investment thesis — oil & gas exploration is one of the most uncertain businesses around. But if the group can show investors that it’s moving forward on a sound financial footing, much of the risk surrounding the stock should evaporate. Put simply, 2019 could be the year that the UKOG share price makes a comeback.