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Does the UKOG share price make it a bargain?

At the time of writing, shares in oil and gas minnow UK Oil & Gas (LSE: UKOG) are trading at 1.1p, which looks cheap compared to where the stock was 12 months ago.

Indeed, at the end of August 2018, investors were willing to pay as much as 2.45p per share to invest in the business. Two years ago the UKOG share price was more than 8p, 700% above current levels.

So, looking at the company’s historical share price, it appears as if the stock is cheaper today than it was two years ago. However, this isn’t the case. The share price doesn’t tell us much about the underlying business. It only gives us a rough gauge of market sentiment.

We need to take a look at the underlying fundamentals of UKOG to establish whether or not this stock is a bargain at current levels.

Growth on the cards

One of the reasons why the UKOG share price has been on a downward trajectory over the past 24 months is the fact that the company has been issuing new shares at an alarming rate.

For the six months ended March 2019, the weighted average number of ordinary shares was 4.2bn, compared to 2.2bn at the end of 2016. By issuing new shares, the company has been able to keep the lights on and use the new capital to acquire additional interests in existing and new oil prospects around the UK. This investment is beginning to pay off.

At the beginning of June, the company announced that aggregate Portland and Kimmeridge test oil production from the Horse Hill oil field reached a significant landmark of 50,000 barrels of oil. UKOG owns 50.7% of the Horse Hill field. A month later, following additional testing and drilling, total production from the Horse Hill oil prospect hit 60,000 barrels.

Oil production is giving UKOG the most important thing in business, cold hard cash. Management is already deploying some of this capital to improve the group’s position.

Further investment

On August 7, UKOG announced that it had signed an agreement to acquire an additional 35% interest in the Horse Hill oil field. Under the terms of this key acquisition, UKOG’s share of Horse Hill’s net oil sales revenues, net reserves and recoverable resources will increase to 85.7%.

UKOG has agreed to pay £12m, of which £5m is payable in cash on completion, with a further £3m in shares. On top of this, there will be £4m of deferred payments in UKOG shares.

In my opinion, this deal, coupled with UKOG’s rising oil production indicates that the business has reached an inflection point. It is no longer a minority owner in its primary asset, and it is no longer just an exploration company.

However, at this early stage, I think it is still too early to tell if the shares are cheap. We do not have any facts on profitability and cash flow at this point. It is likely we will have to wait until the company publishes its results for the year ended 30 September 2019 in the first quarter of next year for more colour on this.

So, for the time being, it might be better for investors to sit on the sidelines and wait for more information.

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Rupert Hargreaves owns no share 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.