UK Oil & Gas (LSE: UKOG), an explorer and developer focused on the Sussex Weald, continues to be a hot topic of debate among investors. For me, it’s a puzzle of contrasts and contradictions.
The company’s developing conventional assets (currently the Portland level at Horse Hill) that could enable it to become a small and modestly profitable producer. But, in parallel, it’s throwing considerable cash and resources at the potentially richer — but far more problematic — Kimmeridge levels. (Q. Is this the best strategy for a loss-making company, with currently next to no permanent production?)
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UKOG has claimed the Kimmeridge is a discovery of “national significance” and a “world class potential resource.” (The numbers bandied about are equivalent to the proven reserves of Iran.) Yet no large oil company has competed for the licence interests that numerous small players have been happily selling to UKOG for a relative pittance. (Q. Has the company, as some experts claim, exaggerated the potential?)
UKOG has had multiple dilutive share placings, in some of which “institutional” investors participated. Yet no institution has appeared as a major shareholder. (Q. Have institutional investors no faith in the company but been happy to turn a quick buck by forward-selling discounted placing shares to unworldly retail punters?)
UKOG chief executive Stephen Sanderson has trumpeted the company as grossly undervalued, even when the share price was significantly higher than the current 1.125p (£68m market cap). Yet in four-and-a-half years, he hasn’t bought a single share or exercised a single option. (Q. Is Sanderson, who draws a generous cash salary — £275,000 last year — fully aligned with the interests of shareholders?)
Portland and Kimmeridge progress
I last wrote about UKOG in December. Have developments in 2019 gone any way towards resolving any of the above conundrums?
Last autumn, UKOG announced that an Extended Well Test (EWT) for the Portland level of the HH-1 well had been “successfully completed,” and that the Competent Persons Report (CPR) “will be updated to include recoverable reserves and net present values of cash flows associated with the envisaged Portland oil field development.”
The CPR is important, because UKOG might be able to raise conventional borrowings against the Portland asset (reducing the need for more dilutive share placings). However, an updated CPR has yet to appear.
Meanwhile, I wasn’t impressed by the flow news coming from the EWT programme for the Kimmeridge level. Or by a surprise announcement in February that it had been shut-in for a long-term pressure build-up test. Comparable geological formations have typically displayed extremely steep decline rates, so the jury’s still very much out on the Kimmeridge.
UKOG’s continued to acquire interests in Weald Basin licences. Still at low prices, and still with no one else apparently interested in this “world class potential resource.” It’s funded these acquisitions largely by issuing more shares, despite having raised £2m in one of last year’s placings specifically for “consolidating and expanding its asset base in the Weald Basin.”
And we’ve had another placing already this year (£3.5m). Bizarrely, to my mind, given how stretched the company is, this is to pursue “new opportunities, both in the UK onshore and elsewhere.”
Finally, CEO Sanderson still owns no shares, and no institutional investor graces the register of major shareholders. UKOG remains a stock to avoid, in my view.