After the early enthusiasm and share price climb subsided, the question has been whether UK Oil & Gas (LSE: UKOG) would ever get oil from the so-called Gatwick Gusher… well, gushing?
The UKOG subsidiary and operator at the Weald Basin project, Horse Hill Developments (HHDL), had earlier released short-term flow test results, which had disappointed investors and added to the share price volatility. The shares have swung between less than 1p and more than 2.5p over the past six months, and that’s not my idea of a nerve-calming investment.
Early tests were followed by an extended well test (EWT) programme, which concluded this month. And the latest update on Thursday, speaking of the Portland and Kimmeridge targets, tells us that HHDL “now considers the Portland oil field to be commercially viable.” The company aims to begin long-term production during 2019.
The project could see the development of up to three production wells, and up to two pressure support wells, but what production volumes should we expect?
Flow rates
Being understandably cautious, HHDL says its HH-2 horizontal well “has a targeted sustainable daily Portland production rate of 720 to 1,080 bopd“, which is two-to-three times the “calculated sustainable vertical well rate of 362 bopd derived from the EWT programme.”
The company (wisely, I think, considering the ebullience that followed the initial news of its discoveries), adds a caution: “There can be no absolute guarantee that forecast, targeted or calculated rates of production will be achieved.”
The share price responded with a 3.7% rise by mid-morning, but that needs to be tempered by its penny share nature and the high spread. At the time of writing, we’re looking at a spread of 2.5% between buying and selling prices, which is what you effectively lose the moment you buy the shares.
Still positive?
When I last looked at UKOG, shortly after the earlier flow test results were in (but before the EWT programme), my conclusion was that “the signs are indeed turning positive for UKOG.” So what’s my take now?
This positive move on the commercial viability of the project comes after several updates in the EWT programme progress over the past couple of months, and anything the reduces the uncertainty has to be a good thing. And after a year or so of frustration, I can see how sentiment towards UKOG really could start shifting. And if we do see commercial pumping in 2019, the share price could spike back up again.
But for me, UKOG is still very highly speculative and a lot could still go wrong, so I’m really not keen on shares with this level of risk.
Lower risk
If you want to go for an oil explorer, I think there are lower risk options out there. My personal pick is Premier Oil, which itself has been a ride to whiten my knuckles a bit.
For smaller companies, I’d prefer Enquest, which is already expected to turn a profit in 2018 and which my colleague Roland Head likes the look of. Or perhaps Cairn Energy, which is forecast to make a loss this year, but bounce back to profit in 2019.