Over the past 12 months, shares in UK Oil & Gas (LSE: UKOG) have plunged a staggering 22%. The stock’s performance did pick up slightly in early 2019 when, following the publication of the company’s 2019 strategy and drilling plans, investors rushed to buy into its growth story.
Indeed, as I commented at the time, if management can successfully execute UKOG’s published 2019-20 strategy and drilling plans, 2019 could be a transformational year for the company.
A transformational year
If the group manages to move Horse Hill “into permanent production by the end of 2019 via two new horizontal wells,” UKOG could exit the year producing as much as 1,000 barrels of oil per day — that’s not much in the grand scheme of things, but it will be a landmark for the firm.
Most importantly, if the company does manage to get production going, then it could become self-sufficient over the next 12-24 months, negating the need for further share issues.
Over the past few years, UKOG has been able to keep the lights on by issuing new shares to investors. For example, even though UKOG’s book value (the total value of shareholder assets minus liabilities) has increased tenfold over the past 10 years, the share price has only risen around 200% as the number of shares in issue has ballooned, from under 100m to more than 5bn.
Unfortunately, it doesn’t look as if the business is going to stop issuing shares to fund its operations anytime soon.
At the end of last month, the company announced it had completed the acquisition of a 6% shareholding in Horse Hill Developments Ltd for £2.1m, which was funded by the issue of 130m new shares. Following the issuance of these new shares, UKOG has a total of 5.71bn shares in circulation.
Buy, sell or hold
So, how should investors trade the UKOG share price over the next 12 months? Well, I would be lying if I said I didn’t see further weakness ahead for the shares as the company progresses towards its goal of commencing production this year. Any delays will be costly, and it’s likely that shareholders will be asked to foot the bill for any cost overruns.
That being said, when oil does eventually start flowing from the company’s acreage, I believe investors will be well rewarded for their patience.
Using a back of the envelope calculation, we can see the potential here. If the group manages to produce 1,000 barrels of oil per day for $50 a barrel, it has the potential to generate revenues of £13.8m a year. The rest of the UK oil & gas industry is trading at a price-to-sales multiple of just under three, implying the company could attract a market capitalisation of £42m in the best-case scenario.
That might not seem like much compared to UKOG’s current market-cap of £76m, but once the firm has started production, I don’t see much that will hold it back. Doubling production to 2,000 barrels of oil per day could justify a market capitalisation of £90m-£100m.
With this being the case, even though there could be further volatility ahead for the stock over the next few months, I think it’s worth owning a few shares in UKOG as a speculative investment and bet on the group’s success later this year.