I continue to wonder whethere UK Oil & Gas (LSE: UKOG) is reaching a make-or-break point.
The most recent Horse Hill-1 production test update in May reported “significantly better than expected results” from the latest pressure build-up test.
Total Portland oil production now stands at more than 20,500 barrels, with a reported stable rate of 220 barrels per day with “modest reservoir pressure draw-down.” And when Kimmeridge test results are added, total production exceeds 45,500 barrels.
Profits?
These updates are good, but we’re still talking of tiny amounts compared to claims that there could be up to 100bn barrels beneath the Weald Basin. At an average price of, say, $65 per barrel, total test production so far is worth around £2.3m, which is peanuts for a firm that reported an operating loss last year of £3.76m. Sure, it’s only test volumes right now, but we still don’t have much of an objective handle on likely production flow rates.
Chief executive Stephen Sanderson said: “The Horse Hill oil field and its associated significant future cash flow stream is of paramount importance to UKOG and will, therefore, continue to be the company’s prime short-term focus.“
That’s clearly the way it should be, but I’m becoming increasingly concerned at the company’s purchases of further interests in other resources. The latest target is the “highly prospective PEDL143 exploration licence,” eight miles to the east, which we are told is a “direct geological look-alike” to the Horse Hill field.
Acquisitions
UKOG has acquired Europa Oil and Gas‘s 20% interest and Union Jack Oil‘s 7.5% of the field, for £300,000 and £112,500 respectively, to give UKOG a 67.5% interest in PEDL143. The acquisition has been funded by issuing of approximately 35.7m new UKOG shares, so it doesn’t use up any of the firm’s precious cash balance, but it does add to a particular concern for me.
And that is UKOG’s proclivity towards issuing new shares, especially coming shortly after a £3.5m issue in March. That issue had to be placed at a 12.5% discount to the market price at the time, and the cash is to be “utilised in the assessment and acquisition of new opportunities, both in the UK onshore and elsewhere.”
It’s all, apparently, in line with the firm’s strategy, but I do get twitchy when I see an oil explorer pursuing more and more high-risk prospective acquisitions when the supposed jewel in its crown — in this case Horse Hill 1 — has yet to be progressed beyond tiny test trickles.
Gamble
Even if UKOG should come good and start pumping out big profits, we still have to get past that dirty word — dilution. How much of UKOG’s future profits will still be attributable to current shareholders and how much will go into the pockets of new investors subscribing for new shares at knockdown prices? I have no idea, and that’s the problem.
The market seems to share my concern. Though there’s been a small uptick in June, the UKOG share price has fallen 44% since February’s 2019 high — and by 88% since the height of September 2017’s optimism.
I’ve no idea whether shareholders will end up rolling in cash or being wiped out — and I’m too old for that kind of risk.