AIM-listed UK Oil & Gas (LSE: UKOG) thrust itself into the limelight in 2016 when initial flow tests at Horse Hill led the well to be dubbed the ‘Gatwick Gusher’. This sent many investors flocking to UKOG, due to its interest in the Horse Hill licence and other licences in the Weald basin.
An extended well test is now in progress at Horse Hill. Some dedicated shareholders seem to virtually live by the site and have been tweeting about tanker movements and pump-stroke rates at the wellhead. Is UKOG on the brink of declaring commerciality and is its share price primed to rocket?
Portland
Testing is currently focused on the Portland Sandstone level, which flowed 323 barrels of oil per day (bopd) for 8.5 hours in 2016. Higher rates have been recorded over shorter periods during the current testing, but investors are awaiting news of a lengthy stabilised flow test. This seems to be in progress, based on the observations of the Twitterati.
A Portland well at nearby Brockham has been a marginal producer for many years. In its peak year (2005) it averaged 98 bopd. While Horse Hill may prove higher, UKOG’s interest in the licence is only 37%, so I view the value of the Horse Hill Portland in isolation as only a fraction of the company’s current market cap of £122m at a share price of 2.3p.
Kimmeridge
I’d say much of the current market cap reflects hope value for the Kimmeridge Limestone (KL) levels. In 2016, KL3 flowed 464 bopd (for 7.5 hours) and KL4 flowed 901 bopd (for four hours). A lengthy stabilised flow test of these levels will follow that of the Portland.
Between the 2016 initial tests and the current extended tests, UKOG shifted attention to its 100%-owned Broadford Bridge well — described by the company as a geological lookalike to Horse Hill, where it hoped to replicate the Gatwick Gusher. Unfortunately, despite many months of trying, it was unable to get oil to flow from any of Broadford Bridge’s six Kimmeridge horizons, which is why the focus has shifted back to Horse Hill.
As well as the disappointment at Broadford Bridge, there are a couple of other reality checks I note about the Kimmeridge. First, cutting through a much-touted 100bn+ barrels of oil in place across the Weald is a statement by UKOG boss Stephen Sanderson in a recent podcast with Vox Markets (20 July at 12 mins, 30 secs): “We think that we have 100 million barrel net reserve potential to UKOG over the coming years, if it all pans out” (my emphasis).
Mr Sanderson has also spoken in the past about how flow from Kimmeridge-type deposits can generally decline 60%-70% over a year, meaning you have to drill a lot of wells almost back to back to maintain a certain level of production. I’d say this industrialised process could be problematic in the Weald basin, as well as requiring relatively high capital investment.
Price and value
I’m expecting the Portland to be declared commercial and because the company’s shareholder base is largely small retail investors, the share price could spike higher on sentiment and momentum trading. However, I believe UKOG’s current valuation is too rich on a fundamental basis as things currently stand. Like the institutional investors who are noticeable by their absence from the company’s list of major shareholders, I’m avoiding the stock for the time being.
