I will admit I have always been sceptical that UK Oil & Gas (LSE: UKOG) can live up to the hype surrounding the company. However, last month the business took one step closer to proving to investors that it is a viable enterprise when it declared its Horse Hill Portland oil field commercially viable following an extended well test.
Big step forward
It is fair to say that most analysts had written off the Horse Hill well, nicknamed the Gatwick Gusher, after several high profile failures to produce oil from a prospect. But now the company has confirmed that there is real, recoverable oil in the ground. This, says CEO Stephen Sanderson, “transforms” Horse Hill and UKOG’s outlook. Following the initial announcement that the prospect was commercially viable back in October, on Thursday, another press release announced that total production from the test wells had reached 13,920 barrels, “with gross oil sales revenues of approximately $1.1m.”
Sustained oil production and revenue is a huge step forward for UKOG and its partners. But the group of oil prospectors working near Gatwick are not out of the woods just yet. There is still a long way to go before UKOG can rely on a predictable revenue stream from the prospect. Even though the results of the extended well test were better than directors initially expected, Horse Hill Developments, the firm that owns the prospect (of which UKOG holds 47%) plans to start drilling its first permanent horizontal well in early 2019, which management reckons could produce 720 to 1,080 barrels of oil per day (bopd) in the best case scenario.
After this first well is drilled, two more are planned along with two pressure support wells, assuming all of the regulatory approvals required are granted. Full-time production is not expected to commence until the end of 2019/20. This can’t come soon enough for UKOG. As I covered the last time I wrote about the business, it is running dangerously short of cash and has been relying on placings to raise the funds required to keep the lights on, diluting existing shareholders significantly.
Over the past five years, UKOG’s number of shares outstanding has increased from 83m to somewhere in the region of 4bn. The result of this is that even though the market capitalisation has risen more than 400% since the end of 2013, shareholders have seen a gain of only 100% as each share is now worth a smaller percentage of the business than it was five years ago.
As UKOG is unlikely to receive any significant revenue until the end of 2019, I think it is highly likely there will be more fundraising over the next 12 months, diluting investors further. And with this being the case, even though news flow over the past two months has been significant, I am in no rush to buy the stock. In my opinion, the risk still outweighs the reward here.