Shares in UK Oil & Gas (LSE: UKOG) fired the imaginations of investors after the company’s so-called ‘Gatwick Gusher’ resource at Horse Hill, West Sussex, showed early promise of very substantial reserves.
The shares spiked in 2017. But since then, a combination of disappointing flow test results and a lengthening timescale before any profits look like coming in, have conspired to seriously damage confidence, and the shares have slumped. They’ve lost around 50% so far in 2018 alone, even from a depressed start to the year.
And then, just after further investigation allowed the AIM-based oil explorer to declare that its Horse Hill prospects are commercially viable, the oil price has taken a renewed turn for the worse. A barrel of Brent Crude, from a high of more than $85 in early October, has fallen all the way back to $60, as I write.
There’s no revenue on the horizon this year or next, so what’s the biggest risk if you invest in UKOG shares now? It’s clearly that the longer things go the more likely it is that new funding will be needed to get the company to turning its first profit. And the further the oil price falls, the lower the valuation of the firm’s assets, and the cheaper the entry point will need to be for new investors to be tempted in.
As Rupert Hargreaves has pointed out, UKOG’s shares have been massively diluted in the years it’s taken to get this far, and the earliest shareholders now own a much smaller stake in the firm than they did. We could well face more of the same.
Frankly, right now, I can’t rate UKOG’s chances of success at any more than 50/50, and that’s nowhere near good enough for me.
Make or break?
Meanwhile, shares in Frontera Resources (LSE: FRR) have been reversing their recent gains since the start of the month, and the firm’s erratic year-to-date share price chart has been on a slide again. It’s down 27% so far in 2018.
If a tough oil business wan’t enough, Frontera is taking legal action against director Stephen Hope over accusations of a breach of his fiduciary duties related to the Outrider Master Fund. The company is claiming damages of around $56m, which could make a significant difference to its balance sheet.
On Monday, the company announced “the mobilization of a workover rig to T-16 well” as part of its Taribani onshore field at Block 12 in Georgia. Frontera says it “has successfully completed a technical study of Taribani wells drilled by a previous operator,” and the T-16 well, along with T-24 and T-31, have been selected for workover operations which will clean and check them for future sidetracking/drilling operations.
The big risk, as Rupert suggests, is that Block 12 could be all or nothing for Frontera which, in many ways, echoes the Horse Hill situation at UKOG. Similarly too, Frontera is battling to keep its balance sheet healthy and is focusing on cutting operating costs as it, also, has no forecast profits on the horizon.
As it stands, Frontera could well be at a pivotal point in its existence, and I see it as another 50/50 gamble, like UK Oil & Gas. I wouldn’t touch either.
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.