Thinking about buying the UKOG share price? Here’s what you need to know

What’s behind the UK Oil & Gas plc (LON: UKOG) share price’s recent rally?

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Shares in oil & gas minnow UKOG (LSE: UKOG) jumped in early deals today. Investors rushed to buy shares in the business after it announced the completion of the acquisition of a further 35% in its flagship asset.

Specifically, UKOG has completed the acquisition of Magellan Petroleum (UK) Investment Holdings Limited from Tellurian Investments LLC.

Acquisition detail

Magellan’s 35% direct interest in the Horse Hill oil field is held through the PEDL137 and PEDL246 licences. This significantly increases UKOG’s holding in its flagship Horse Hill oil field asset from 50.635% to a controlling 85.635%.

The firm also notes that this gives a 69% increase in UKOG’s associated Horse Hill net asset value and net reserves/resources.

Following the deal, the company is now poised to crack on with further drilling and testing operations. UKOG is planning to commence simultaneous Horse Hill-2/2z Portland drilling and HH-1 Kimmeridge test operations before the end of September, which should give shareholders some positive news before the end of the month.

Commenting on the conclusion of the deal in today’s press release, CEO Stephen Sanderson said: “The remainder of the year at Horse Hill looks set to be highly eventful and, hopefully, financially transformative, as we drive to seek to establish permanent oil production by year-end.

Pushing ahead

UKOG’s latest deal gives the company a solid base to grow and develop from over the next few months, and I am excited to see the development of the business from here. Oil is already flowing, and further success at the wellhead could put the enterprise firmly on track to becoming a profitable, self-sustaining business.

However, in the meantime shareholders need to keep an eye on dilution. The company has historically relied on issuing new shares to fund its operations, eroding shareholder value. The Magellan the deal has been partly funded using this method.

UKOG has issued £3m or 275,988,960 new ordinary shares to satisfy part of the £12m purchase price. The balance was settled in cash. Following this issue, the company’s enlarged share capital stands at 6.4bn ordinary shares, up from around 2bn ordinary shares at the end of March 2016.

Until UKOG stops issuing new shares to fund its operations, it is going to be challenging to try to compute the value here. Issuing new shares dilutes existing shareholders and per share valuation metrics.

Turning point

The good news is that if UKOG can ramp up its drilling and production activities over the next few months, then this risk should start to dissipate. In my opinion, that would mark a turning point for the business.

If UKOG can become self-sustaining with cash generated from operations, and break its reliance on shareholders to keep the lights on, I reckon there is a good chance the stock could rise substantially from current levels. But until the business reaches this point, I think uncertainty will continue to weigh on the shares. That’s something to consider if you are thinking about buying the UKOG share price today.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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