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The UKOG share price is flying. Time to buy?

The UK Oil & Gas (LSE: UKOG) share price has been on a tear over the last couple of months. It gained 13% in August and has gushed over 20% higher so far in September.

Despite the rise, the current price of 1.3p remains a long way below its highs of over 8p this time two years ago. What’s behind the market’s rekindled enthusiasm for the stock? And could now be the time to jump aboard for a new run-up to the old highs and perhaps beyond?

Good news

It’s been just over five years since drilling commenced at Horse Hill — a test well (HH-1) that produced high initial flow rates and was dubbed the ‘Gatwick Gusher’. However, while there’s been some ad hoc revenue from further testing, a permanent producing well has yet to be established.

The revenues from such production are important because, since the Gatwick Gusher was first drilled, UKOG has been raising cash — and burning through it at a rate of knots. Up to the end of 31 March this year, it had raised a total of £41m and burnt through £34.7m.

Investors have had their pips well and truly squeaked, with the company having issued 4.7bn new shares over the period, taking the number of shares in issue from 1.3bn to 6bn. And there’s been further fundraisings (and cash burn) since 31 March. Shares in issue are up to 6.4bn at the latest count.

The good news — and the reason I think market excitement about the stock has been reignited — is that a permanent production well finally appears to be within touching distance. On 12 September, the company announced a rig is scheduled to arrive by the end of the month to drill “the much anticipated HH-2/2z Portland horizontal well, a key step towards establishing significant long-term production and cash flow from Horse Hill by the end of the year.”

Hothouse stock

When I say market excitement about the stock has been reignited, you need to understand what the market for UKOG stock is. Like a lot of loss-making AIM-listed oilers, there are no institutional investors among the company’s major shareholders.

Price action is driven entirely by retail investors, some of whom are in for the long haul. But many hop from oil stock to oil stock as company news and sentiment waxes and wanes, or are speculative day traders, following wherever there’s volume and momentum, and adding to it.

In this hothouse environment, share prices — and the valuations of the companies — can move out of all proportion to the underlying fundamentals of the business, which is what investors should be focused on.

Fundamentals

It’s looking like the Portland producing well is finally going to happen, having been originally scheduled for late 2018/early 2019. While the cash flow will be welcome, there’ll still be a need for further dilutive fundraisings to develop the field, even in the best case targeted rate of production, which there’s no guarantee will be achieved.

Furthermore, UKOG has yet to publish a promised updated independent Competent Persons Report (CPR) with recoverable reserves and net present values of cash flows associated with the envisaged field development. Based on the existing CPR, I think the company’s £83m market valuation is much too high. As such, I’m avoiding the stock at this stage.

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G A Chester 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.