It’s been a rough week for UK Oil & Gas Investments (LSE: UKOG). Since Monday, shares in the shale oil company have fallen by 28% due to problems at its Kimmeridge play.
On Wednesday, the company revealed that it had encountered problems related to cement bonding within the Broadford Bridge well at the Kimmeridge play. These issues indicate that the well is not connected efficiently to “much of the best open natural fractures” in the Kimmeridge. “Therefore, the testing to date has not properly evaluated the full flow potential of the overall Kimmeridge reservoir sequence,” UKOG said in a statement.
As a result, the company is having to conduct an unplanned workover to fix the problem. Management hopes that after the work is complete, the company will be able to get back on track.
This is the second major setback for UKOG in as many months. Indeed, two months ago the company confirmed that it had permanently abandoned the first Bradford well after sections were washed out and it had drilled a sidetrack well, called BB-1Z.
The company had been expecting to be testing oil flows by now, and while some light oil has been produced, it’s nowhere near enough to be able to accurately evaluate the full flow potential of the overall Kimmeridge reservoir sequence.
Time to bail out?
This week’s negative newsflow has clearly shocked investors. It was only four weeks ago UKOG was riding high on the news that it had struck oil at its Broadford Bridge site in the Weald Basin. It was believed that this find is linked to the high profile well at Horse Hill (nicknamed the “Gatwick Gusher” with reserves of as much as 100bn barrels of oil projected), near Gatwick Airport. The shares rallied to an all-time high of just under 9p off the back of this news.
The one thing the market hates most is uncertainty. Right now, UKOG’s future is extremely uncertain. Problems at the well-head have raised the question of whether the company will have to ask shareholders for yet another round of funds to keep the lights on.
The last time the firm raised funds was in May. Managment raised £6.5m through the placing of 812,500,000 new ordinary shares at 0.8p.
There’s been no mention of the cash burn rate within reports issued over the past few months but its likely that drilling activities have already consumed most of these balance.
High risk, high reward
Despite all of UKOG’s problems, I believe that the company could still produce enormous returns for investors. It’s all a question of risk and reward.
Oil & gas exploration and production is a risky business and companies often go under chasing relatively small, high-cost projects. UKOG, on the other hand, is pursuing a low-cost, high-reward project. If only a fraction of the estimated barrels are recoverable from its prospects, the rewards could be enormous for the £171m market-cap company.
