The UKOG share price has plummeted 22%. Is it now a steal for investors?
The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.
Last month, shares in oil minnow UKOG (LSE: UKOG) added more than 20% as the company continued to move forward with its growth and profitability plans.
Over the past two months, the company has announced a string of positive trading updates and drilling reports. These seem to confirm the business is finally moving towards the stage where its operations can be self-sustaining.
Indeed, in a 12 September trading update, UKOG Informed the market it had produced a total of 36,559 barrels of oil (bbl) from testing the Horse Hill-1 Kimmeridge oil pool. Production hit an average rate of 313 bbl/d in the 48 hour test period before the well was shut-in.
The shut-in was required to relocate oil storage tanks and flowlines before testing started on the next prospect, the new Horse Hill-2/2z Portland horizontal well. In total, UKOG claims to have produced 66,127 bbl from test production at its Portland and Kimmeridge prospects.
Further progress
Since that update, UKOG informed the market at the end of last month drilling of the Horse Hill-2/2z prospect has started.
The market is now waiting with bated breath for the results from this prospect. Management claims it could be “capable of delivering flow rates significantly higher” than the HH-1 vertical Portland discovery well.
When drilling and testing of Horse Hill-2/2z is complete, the company’s latest trading update reports “both HH-2z Portland and the HH-1 Kimmeridge well are expected to be put into long term production by the end of 2019.“
As long as everything goes to plan, it looks as if UKOG’s net oil production and associated revenues will jump substantially by the end of the year. That implies the fourth quarter could be a landmark year for the business and could completely change its outlook. And based on that, it would appear the recent decline in the oil group’s share price could be a good entry point for risk-tolerant investors.
One key risk
Having said all of the above, shareholders are still at risk of dilution. This is something that’s been weighing on the share price for the past few years.
Only a few days before the company announced it had started drilling at its second Horse Hill prospect, a further 37,362,227 new ordinary shares were dumped on the market to satisfy part of a £5.5m loan put together in August.
I don’t expect this to be the last time the company issues shares to satisfy loan obligations, or raise additional cash. UKOG has a lot of drilling and test work to do and, so far, it’s not self-funding. While the increased production that’s expected to come onstream during the next few months might help improve its financial position, until this is confirmed, I think it might be worth sitting on the sidelines for the time being.
UKOG’s future looks bright if everything goes to plan. But if the company stumbles, shareholders will have to foot the bill.
Is this little-known company the next ‘Monster’ IPO?
Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.
Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.
The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.
But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.
Click here to see how you can get a copy of this report for yourself today
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.