UK Oil & Gas Investments (LSE: UKOG) announced the results of a comprehensive reserves report it commissioned Nutech to carry out across eight of its licence areas this morning.
The report confirmed that the gross P50 OIP across the eight licences is estimated at 15.7bn barrels, 3.9bn bbls of which is attributed to company interests in the licence areas. The report also showed that there could be 124bn bbls of oil held in the three Jurassic tight oil plays in the wider Weald Basin.
The Nutech report is probably the most comprehensive reserves report undertaken by UKOG so far. Indeed, the report incorporated the data from 86 wells, along with core analysis and geochemical data.
However, the report is based on petrophysics analysis — the study of physical and chemical rock properties — and as a result, there’s no guarantee that the resource estimates are 100% accurate. Unfortunately, it looks as if the market believes that these results are 100% inaccurate. UKOG’s shares have declined 5% today, despite this relatively positive news.
But despite the market’s lacklustre reaction to the well results, I don’t believe investors shouldn’t abandon UKOG just yet.
Reserve concerns
Many of UKOG’s critics don’t believe that there could be billions of barrels of oil hidden UK soil, and it seems that this negative view is holding down the company’s shares.
Only time will tell if UKOG’s initial reserve figures are correct, but in many respects they don’t need to be. The data suggests that there is indeed oil in Weald Basin, although it’s not possible to tell exactly how much oil there is until production starts.
Back during April, when the prospect was initially discovered, UKOG Chief Executive Stephen Sanderson stated that: “The US analogues have estimated recovery factors of between 3% and 15% of Oil in Place.”
Even if the final proven reserves figure is only 3% of the current estimate across the eight licences, UKOG has the potential to produce 117m bbls of oil.
With this in mind and considering the company’s current market cap of £26m, it looks to me as if the market is severely undervaluing UKOG.
Looking to the future
UKOG’s primary focus now is on a flow test booked in for later this year, which will determine the amount of oil that could be produced from the area. Moreover, this flow test will look at additional areas on the Horse Hill licences where more oil could potentially be found.
So, the next few months will be a critical time for UKOG. If the company’s flow tests prove that there is a substantial amount of oil in the ground, the market should reward the company with a higher share price.
That being said, as with all small oil companies, there is a chance that UKOG could run into unforeseen problems. Only time will tell.
