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.
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.