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Why the UKOG share price could be about to soar

I’m a cautious investor looking for top dividends these days. But I’m still often drawn to the kind of small-cap growth stories that used to excite a younger me.

UK Oil & Gas Investments (LSE: UKOG) is one such company and its fascinating recent history has sent its shares bouncing up and down enough to caused missed heartbeats among shareholders.

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If you’d have bought in early 2017, you could have seen your shares rocket from less than a penny apiece to as high as 11p, as prospects for the joint Horse Hill operation near Gatwick had the markets excited. But with hindsight, you’d have been canny to sell out back then, as the share price has crashed to today’s 1.6p levels.

The main problem is that flow testing has been disappointing, showing decent flow rates but only for relatively short periods at a time.

Cash is critical

And, as my colleague G A Chester has pointed out, UKOG is in a precarious cash-burn position. That’s led to significant new funding being needed, which has had a big dilutive effect on existing investors’ holdings.

In fact, as recently as 15 June, the company announced the completion of a new share placing which raised gross proceeds of £5.5m. The issue was oversubscribed, but it was at a 12% discount to the market price.

Since that offer was initially made, however, UKOG gained approval from the UK Oil and Gas Authority to commence a 150-day extended flow test at its Horse Hill-1 prospect, subjecting two Kimmeridge Limestone targets to three separate long-term flow tests. Should the testing demonstrate the commercial viability of the discovery, first production could be as early as 2019, with a follow-up Horse Hill-2 appraisal well to come.

On the back of an updated Competent Persons report on the total recoverable oil at the firm’s jointly-owned assets under the Weald Basin, could this finally be the turning point?

Highlights include 21m barrels of Net P50 Recoverable Resources, with 13.2m barrels Net P50 discovered Contingent Resources and 7.7m barrels Net P50 Prospective Resources.

The balance

Fellow Fool Rupert Hargreaves has explained the balance between UKOG’s oil prospects and the problems of having enough cash to see the company through to production and to positive cash flows. 

That is the crux, and I see the latest fundraising as having taken a positive step towards that payback date — albeit at the cost of more dilution. Hopefully, UKOG will have the cash now to see it into 2019, by which time we should hopefully have a firmer idea of a likely production schedule.

But that does, of course, depend on the results of the upcoming flow tests. If the oil really does appear to want to flow, I can see the share price taking off in anticipation of future profits. And it will surely be funded, somehow, if the hardest times and the riskiest phase have passed.

But what about me? Will I be buying any shares? Like Rupert, I would certainly not write off UKOG as an investment and I reckon shareholders have a pretty good chance now. But I won’t be buying, purely because the risk/confidence balance is not good enough for the cautious investor that I am now. 

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Alan Oscroft has no position in any of the shares 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.