I recently asked whether the UK Oil & Gas (LSE: UKOG) share price is likely to fall all the way to zero. The firm’s financial situation has looked perpetually precarious to me, and I was especially disturbed by the way what cash it did have was being used.
I’d have expected all efforts directed at the Horse Hill prospect, drilling, surveying and getting a Competent Person’s report published to provide evidence of commercial reserves, and getting as much oil flowing as quickly as possible.
Lack of progress
But no, we kept seeing new cash raised, but used for acquisitions rather than to develop the flagship prospect that is supposed to be capable of making its shareholders super-rich. Existing shareholders have been seeing their holdings consistently diluted — but perhaps not for good reasons?
As for all the other milestones we’d usually expect from an oil explorer sitting on an exciting discovery, my colleague G A Chester recently examined the firm’s record of those things not happening.
Amid updates on the rate of oil trickling from the Horse Hill-1 well, we’ve just heard of… another acquisition.
Upping the stake
But this time, chief executive Stephen Sanderson says it’s “transformational,” as the firm acquires the 35% of Horse Hill held by Magellan Petroleum, a subsidiary of Tellurian Investments. The headline significance is that it will take UKOG’s interest in Horse Hill from 51% to 86%.
The acquisition is worth £12m, though only an initial £5m of that is in cash, “funded primarily by current cash reserves and partly by a convertible loan, which the company has entered into today, but has not yet drawn down.”
The rest, staggered over a period to 31 March 2020, will be in UKOG shares. Actually, it can be paid in cash at the discretion of UKOG, presumably in the event of a huge drilling success leading to UKOG shares soaring. Oh, did I mention that the price has fallen further since I last examined the company, and the loss since September 2017’s peak now stands at 91%?
Control
UKOG says the deal gives it “full control over the forward Horse Hill drilling programme and production schedule, together with sole ownership of the Horse Hill oil field site lease“, adding that as a consequence “drilling of the much-anticipated HH-2/2z Portland horizontal well will follow very shortly after completion of the SPA.”
Now, my memory might be faulty, but I don’t recall any previous suggestions that Magellan Petroleum had been holding anything up.
Questions
There are two big questions for me. If the Horse Hill prospect really holds such great potential, why aren’t the big oil companies queueing up to buy into it? Something counted in billions of barrels would surely be big enough to interest even BP or Shell, wouldn’t it?
And why would Tellurian Investments sell such a large stake of it for the trifling sum of £5m (plus whatever the allocation of UKOG shares might be worth)? Tellurian, presumably, thinks it’s got a good deal for what it reckons is the real value of the asset.
The market reacted as if nothing had happened, with UKOG shares down a further 3% at the time of writing. No, UK Oil & Gas remains a stock from which I’m maintaining a good bargepole’s distance.