UK Oil & Gas Investments (LSE: UKOG) has racked up the best performance of any AIM stock this year. After starting the year trading at around 1.6p, by the beginning of September, investors were sitting on gains of 480% as excitement about the firm’s prospects began to build.
Unfortunately, since reaching this high point, the shares have since fallen back. Still, even after this decline, the shares are still up 140% year-to-date, and over the next few years, even more significant gains could emerge.
Investing in the future
The last time I covered UKOG, the company had just suffered its second significant setback in as many months. The latest problem was related to the cement bonding within the Broadford Bridge well at its Kimmeridge play, which indicated that the well was not connected efficiently to “much of the best open natural fractures” in the Kimmeridge. This issue followed a notification that the firm had abandoned its first Bradford well after sections were washed out.
These issues, while not terminal, have been costly to fix and have set back the firm’s drilling timetable.
Overall, 2017 has been something of a washout for the group, although it has by no means been a disaster. Next year, management plans to build on the firm’s successes (and failures) and push ahead with drilling.
Last month, the company raised £10m from a group of investors fully funding it to deliver the “planned drilling and testing programme through 2018.” Following this fundraise, UKOG has raised a total of £16.5m during 2017, which should be enough to take it to first commercial oil production by 2019.
High risk, high reward
There’s speculation that UKOG’s Broadford Bridge site in the Weald Basin 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. And if this is the case (and if the company can extract these resources) then I believe the shares could produce enormous returns for investors during the next few years as drilling taps this vast resource.
But UKOG is not a risk-free play. Dilution is the most prominent risk investors face. The recent £10m loan attracts 0% interest but can be converted into new ordinary shares in tranches of not less than £250,000, with a limit of £3m per quarter. Since the loan was announced in mid-November, £2m worth of ordinary shares have already been converted.
This dilution is concerning, but in the grand scheme of things, if UKOG does strike oil, it’s not the end of the world. In fact, if the company can extract just a fraction of the 17.1bn barrels of oil it believes are hidden within its Weald Basin licence interests, the shares could be worth multiples of their current value.
If everything goes to plan, shareholders should have much more clarity on the company and its outlook by the end of next year, as management targets production in 2019.
