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Is it finally time to return to the UKOG share price?

Something momentous happened last month. UK Oil & Gas  (LSE: UKOG) declared its Horse Hill Portland oil field – the so-called Gatwick Gusher — commercially viable following an extended well test. The firm even transported several tankers of crude oil to Fawley refinery during the test – this is real oil we are talking about, in Surrey, under the Weald Basin. Amazing.

Preparing for field development

Are the Home Counties set to become a new Texas? Will we see the gentle English landscape covered with a forest of nodding donkey oil pumps, just as the highlands of Scotland have sprouted acres of wind generators? I hope not, and with a bit of luck, that vision is just me getting carried away with my imagination. In any case, I think technology has moved on since the days of the nodding donkey so that oil wells can be less visually obtrusive.

However, the company did say Horse Hill Developments, which is the operating company, plans to begin long-term Portland oil production during 2019, as long as it gets the necessary regulatory consents. The directors’ current vision is to develop three production wells and two pressure support wells. UKOG owns around 47% of the project.

UKOG’s chief executive, Stephen Sanderson, said in last month’s update that the declaration of Portland commercial viability “is a significant milestone for the company.” He pointed out that it “transforms” Horse Hill from an exploration endeavour into a “fully-fledged field development.” Indeed, UKOG could become a producing oil firm with significant cash inflows ramping up during 2019 if all goes well. The results of the extended well test were better than the directors expected and they now think the first planned horizontal producer well, HH-2, could deliver sustained oil rates of 720 to 1,080 barrels of oil per day (bopd). The company plans to spud (start drilling) the well in early 2019.

Potential long-term production

Looking forward, Stephen Sanderson anticipates“the possibility of combined long-term production” from both the Portland and nearby Kimmeridge prospects, which he said would be a “potentially transformational prospect for Horse Hill and the company.” However, the firm noted in the announcement that there is no absolute guarantee that forecast, targeted or calculated rates of production will be achieved. Perhaps that’s why the stock market’s reaction to the news has been so muted.

Indeed, the share price has barely budged since the announcement last month, which is a far cry from the big jumps and plunges it has been making over the last few years. But I think there are good reasons for that. Firstly, there’s still a long way to go operationally before oil starts flowing and cash starts rolling in. Secondly, the firm has been back to the market repeatedly for funds with the consequence that long-standing shareholders have been diluted. When I first wrote about the company four years ago, the market capitalisation stood at around £17m. Today it’s at almost £106m, so the stakes are a lot higher. Finally, with UKOG as a producer, will it be valued more like a producer by the market than like an explorer? I think we’ve seen something like that happen with Soco International,for example, where a lower valuation has depressed the share price to a shadow of its former self. In summary, I think UKOG today is interesting, but still highly speculative.

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Kevin Godbold 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.