Whenever I’ve covered UK Oil & Gas (LSE: UKOG) in the past, I’ve always tried to make it clear that this stock isn’t for the faint-hearted.
I believe only the most experienced investors should dabble in early-stage oil/mining companies, because there’s so much that can go wrong, and if you don’t know what you’re doing, you could see your hard-earned money evaporate very quality. Indeed, over the past 12 months, the UKOG share price has declined by more than 60%, mainly thanks to a series of disappointing testing updates at its huge Horse Hill asset.
However, I’m starting to see some light at the end of the tunnel for the UKOG share price. After years of watching and waiting, it now looks as if the company is firmly on track to report a profit. And when the funds start flowing, the shares could pop.
Profit potential
For the past few years, I think it is fair to say that UKOG has really struggled to realise its ambitions. The company owns an interest in several potentially high-quality oil prospects, but unlocking the potential of these assets hasn’t been as easy as many investors and management might have liked.
Luckily, after many disappointments, last year the company’s subsidiary struck oil — quite literally — during testing at its HH-1 oil well. Since then, the subsidiary has been testing the well, and this extended well test has yielded over 25,000 barrels of “dry oil and solution gas.” UKOG now wants to capitalise on this success.
Earlier this week it published its 2019-20 strategy and drilling plans document, which sets out the goal of moving “Horse Hill’s ongoing test-based oil production into permanent production by the end of 2019 via two new horizontal production wells.” Based on an independent analysis, management reckons the first of these horizontal wells could yield 720-1,080 barrels of oil per day (bopd). If successful, UKOG is planning further wells with the goal of boosting “gross production to over 2,000 bopd.“
It’s for real this time
We’ve seen forecasts like this from the company before, and so far, UKOG has disappointed. However, this time around, I think the odds are in the firm’s favour. Production is under way, and the enterprise is already selling production, generating at least some cash to reinvest back into operations.
That being said, there’s still a lot to be done here and dilution remains a significant threat to investors’ holdings. For example, the firm recently issued a further 18m shares to acquire an additional 30% interest in the PEDL331 onshore Isle of Wight licence from Solo Oil.
Still, profit forecasts are starting to emerge. Based on the company’s own production targets, analysts have pencilled in a potential net profit of £13.4m for 2019, a substantial figure for a business that has generated nothing but losses. Based on these estimates, the stock is trading at a forward P/E of just 3.
Of course, there is still plenty that could go wrong between now and the end of 2019 when production is expected to be in full swing, but UKOG’s profit potential is starting to get me excited. If it does meet these forecasts, I reckon the stock could be worth three times more than it is today as the rest of the oil sector trades at an average forward P/E of just under 9.
