Since my previous article about UK Oil & Gas (LSE: UKOG) in early November, the share price has dropped around 37%. But will 2019 be the year it shoots up again, perhaps back to the heady heights it achieved during 2017?
In mid-December, UKOG agreed to buy Solo Oil’s 30% shareholding in the PEDL331 onshore Isle of Wight licence, which includes the Arreton conventional oil discovery. The deal completed last week and UKOG has a 95% operated interest in the licence. UKOG paid just over £90k in cash and issuing more shares to cover the balance of the £350k total consideration. So that’s more dilution for existing shareholders, which is something we’ve become used to from the firm following a long line of similar transactions as it built up its assets.
Chief executive Stephen Sanderson said in the news release the first Arreton appraisal well is scheduled to be “drilled, cored and tested in the first quarter of 2020.” Meanwhile, the extended well test going on at Horse Hill has continued to produce oil. In an update on the 16 January, UKOG told us it has exported 114 road tankers full of the stuff to Perenco’s Hamble oil terminal and sold it at prevailing Brent crude oil prices, “less a small deduction for handling and marketing.” The company announced its exciting development and production schedule last Wednesday.
Cash flow versus expenses
However, I’m sceptical that UKOG’s near-50% financial interest in Horse Hill will deliver enough incoming cash flow to offset the development and drilling expenses it will face on all its licences. It takes a lot of money to develop an oil field, and UKOG is a serial fundraiser. It has a history of coming back to the stock market repeatedly for more money to cover trading expenses and to buy into exploration and development licences. Every time it issues more shares, existing shareholders see their interests diluted.
Despite the firm’s fledgeling revenue from oil production, my Foolish colleague G A Chester pointed out in December that the current share price could already be over-valuing the company by more than 100%, based on the prices it paid for its oil assets. I reckon the firm has a long way to go and must invest a lot more capital before revenue from oil production will be capable of funding ongoing operational expenses.
We could see fast multi-bagging of the share price again if ongoing drilling and operational activity shows up oil reserves or gets the black stuff flowing faster to the surface. But, set against that possibility is the firm’s ongoing need for cash to keep things running, and I believe there’s a lot of pressure to the downside for the share price right now. So, for me, the stock is highly speculative and risky and that’s why I’d avoid the shares and look for growth opportunities elsewhere.
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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.