The early days of any new onshore resource discovery are largely taken up by seeking permissions, agreements and funding. That goes for an oil and gas explorer like UK Oil & Gas Investments (LSE: UKOG) and its share in the Horse Hill find north of Gatwick, or Sirius Minerals with its phosphate deposit under the North York moors, the early days .
On that front, things appear to be falling into place for UK Oil & Gas (which owns a 32.4% stake in Horse Hill), after a joint update from all the partners in the project was released Tuesday.
Production flow testing and drilling was approved by Surrey County Council in October, and “key contracts and the requisite funding commitments from all participants are in place” to go ahead with that now — with a 150-day production flow test expected to commence towards the end of the winter.
The programme aims to confirm the commercial viability of the Portland and Kimmeridge oil finds, with “first permanent oil production targeted for early 2019“. It is still dependent on the discharge of some planning conditions, but that’s expected to happen in time for the current schedule — and the application for permanent production consent should be submitted in the spring.
Should you buy?
You might have thought you’d missed the boat when the share price spiked to 10p after September’s update, but big ups and downs are typical with such stocks (as we’ve also seen with Sirius), and I wasn’t surprised when the price fell back to today’s 3.55p once investors realised that first profits were still some time away.
This year the company has faced a few technical hitches, and it’s still far from certain that the company’s Broadford Bridge exploration well is fully linked to the so-called Gatwick Gusher. But last time I examined UK Oil & Gas I wasn’t too worried, and I saw the share price dip as a buying opportunity.
I still do, and one thing I’ll stress is that UK Oil & Gas is the only member of the consortium I’d buy — essentially because the other firms involved have very small market caps and low penny share prices. For example, Solo Oil is valued at under £16m and the spread on its 4p shares stands at 13% at the time of writing — so that’s the rise you’d need to just break even.
By comparison, UK Oil & Gas has a £125m valuation, and though its shares are priced at 3.55p, the current spread is a much smaller 3%.
Risk vs reward
Though you might be discouraged by the share price fall since September (especially if you bought near the peak), don’t forget that UK Oil & Gas shares have actually done very well over the whole year — they’re up 140% over 12 months, and that’s a real market-beater.
It’s not a safe investment, especially with no profit on the horizon just yet — and with any speculative oil or mineral resource investment, you need to understand the risks you’re facing. And I do expect plenty more share price volatility.
But I do think 2018 could be a great year for UK Oil & Gas shareholders — with estimates of around 17bn barrels of oil within the Weald Basin licence, it would really only need a relatively small proportion of that to be commercially viable for shareholders to end up smiling.
One way to offset the risk of an investment in UK Oil & Gas would be to diversify your portfolio with stocks in completely different sectors. That doesn't necessarily mean boring old FTSE 100 dividend stocks (though I do like those), as there are plenty of other hot growth candidates out there.
The company analysed in this free report has already seen its share price treble in five years, but it's still on a low valuation and I reckon it looks like a bargain.
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Alan Oscroft owns shares in Sirius Minerals. 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.