Three of the UK’s most popular small-cap oil and gas stocks, LGO Energy (LSE: LGO), UK Oil & Gas Investments (LSE: UKOG) and Faroe Petroleum (LSE: FPM), issued updates this morning.
Does today’s news make any of these stocks a compelling buy?
LGO Energy
LGO Energy reported a 60% increase in proven and probable (2P) reserves and said it plans to accelerate its drilling programme.
The Trinidad-focused firm said that 2P reserves in the Goudron field had risen by 60% to 11.3m barrels since 2012. Proven reserves rose by 110% to 1.54m barrels, while best estimate oil-in-place has risen over five-fold to 805m barrels.
The new reserves bring LGO’s enterprise value to reserves ratio, a key industry valuation metric, down to around $15 per barrel. This is quite reasonable, although not obviously cheap.
However, after an initial spike, LGO shares edged lower this morning.
One possible reason for this is that today’s update warned that “additional capital” may be required “to ensure full access to proved and probable reserves”, and to carry out the work necessary to convert contingent resources into new reserves.
LGO appears to be a victim of low oil prices. Shareholders are at risk of further dilution or costly new debt. For these reasons, I wouldn’t buy LGO today.
Faroe Petroleum
North Sea-focused Faroe issued an operational update today.
Production is running at 11,324 barrels of oil equivalent per day, ahead of forecasts. Faroe’s average operating cost per barrel has fallen to $22 this year, below the full-year forecast for operating expenditure of $30 per barrel.
More than half of the firm’s oil production is hedged at $89 per barrel this year. This means cash flow remains strong — net cash rose by £14m to £84m during the first five months of 2015.
Faroe is currently drilling follow-up wells to last year’s Pil and Blue oil discoveries, which are expected to add recoverable resources of 20-50 mmboe to the firm’s portfolio.
Trading at around $10 per barrel of reserves, I believe Faroe remains one of the top buys in the small cap oil sector.
UK Oil & Gas
The UK Oil & Gas share price has risen by 420% so far this year, thanks to speculation that the Horse Hill field, in which UKOG has a 20% interest, could contain billions of barrels of oil.
The firm issued its interim results today. UKOG received oil production revenue of £200,000 from its stake in the producing Horndean and Avington oil fields, and confirmed that it has just over £12m of cash available to fund further investment.
The majority of the report, however, was devoted to a recap of the recent Nutech and Schlumberger reports, which estimate oil-in-place at the Horse Hill-1 discovery of 158m or 271m barrels per square mile, respectively.
That sounds pretty amazing, given that the licence area is 55 square miles — Nutech’s best estimate oil-in-place for the two Horse Hill licences was 9.2bn barrels!
However, without further drilling, it’s not clear how much of this is commercially recoverable. More significantly, it’s not yet known how much of this oil can be extracted without fracking.
For me, the UKOG’s £45m market cap is too much. But if you believe in the potential of Horse Hill, it could be a bargain.
