Of all the possible investments I’ve considered in recent years, UK Oil & Gas (LSE: UKOG) is the one that has caused me to scratch the most hairs off my head.
The so-called Gatwick Gusher, more officially known as the Horse Hill project at the Weald Basin in Surrey, has been estimated by some to hold huge reserves of hydrocarbons. We’ve heard claims that there could be up to 100bn barrels of oil down there.
The UKOG share price soared on initial hopes, peaking in September 2017, but since then we’ve seen no actual oil production and a collapsing share price. Those who bought at the peak are today nursing an 88% loss.
Dilution
Part of the problem for early shareholders has been the dilutive effects of multiple rounds of fundraising though new equity placings, with the most recent having been only around a month ago. On 27 March, the company reported the placing of more than 300m new shares at 1.05p apiece to raise £3.5m. That was below the price on the day, and the shares have actually ticked up a bit in the following weeks, to 1.175p as I write.
My colleague G A Chester has raised some thought-provoking questions about UK Oil & Gas, including a bit of a puzzle about the institutional investors who have been snapping up these new share issues.
Loss
In the firm’s full-year results statement in March, I had to scroll a long way down before I found any actual figures, past reams of text telling us how fruity tomorrow’s jam might be.
But the bottom line was an operating loss of £3.76m, up from a loss of £2.4m a year previously. On top of that, exploration and write-off charges of £11.56m resulted in a reported pre-tax loss of £16.75m.
During the year, the company raised a total of £21.63m (net of costs) to fund its activities. At that rate, the £3.5m from the latest share placing isn’t going to last long, and UKOG will surely need to seek more cash soon if it doesn’t get the gusher at least flowing profitably.
Flow
If oil isn’t exactly gushing at the moment, the latest production test update reported a “stable rate of over 220 barrels of oil per day” from the Portland reservoir at the Horse Hill oil field. And while that’s at least somewhat positive, and preparations are proceeding to drill two more wells in the second quarter of 2019, it’s obviously nowhere near the commercial levels of production the firm will need.
Acquisition?
Meanwhile, UKOG has spent £412,500 in acquiring further “highly prospective” assets from Europa Oil and Gas and Union Jack Oil, and I can’t help wondering if that’s maybe not the best use of cash right now.
If I owned UKOG shares, I’m sure I’d be wanting to see the company putting 100% into getting the oil flowing from its proven reserves rather than spending more cash on more future jam potential.
If the oil does finally flow this year, UKOG shares could climb again. But I reckon we could well be looking at a knife-edge situation here.