I turned cautiously bullish on the UKOG (LSE: UKOG) share price in the second half of 2019 as the company’s plan to become one of the UK’s largest onshore oil companies started to gather steam.
And considering the progress the business has made over the past few months, I reckon 2020 could finally be the year that UKOG’s shareholders are rewarded for their patience.
Over the past 12 months, it has graduated from being an oil explorer to an oil producer. As my Foolish colleague Alan Oscroft recently noted, total test production was 77,200 barrels in mid-November, and it has risen further since.
While these numbers do not tell us much about daily production volumes, in my opinion, this level of production is still a big deal. UKOG is producing oil and that means the company is also generating revenue. It might not be a huge revenue stream, but the business needs all of the money it can get while it pushes ahead with development plans.
This production has given it some much-needed cash flow. For the six months ended 31 March 2019, the company booked £1.6m of receipts from the sale of test volumes. This helped reduce the overall net cash outflow from investing activities from £5m for the six months ending March 2018 to £1.7m for the 2019 fiscal period.
Since these numbers were published, UKOG has continued to produce and sell oil. Therefore, I expect the company to reveal a big jump in cash flow figures when it reports its final results for the year ended 30 September 2019 next year.
And the company should report further progress in its interim figures for the period up to 31 March 2020.
The third and final reason why I think the UKOG share price could jump in 2020 is the company’s improving financial position. I’ve already covered the firm’s growing cash flows above, and it is also reducing debt.
At the beginning of August, UKOG agreed a £5.5m financing package with Riverfront Global Opportunities PCC Limited and YA II PN Ltd with an interest rate of 0% and maturity date of 16 August 2021. Over the past few weeks, the lenders have been converting sections of the loan into shares, which has reduced the outstanding balance to £3.8m.
Unfortunately, these conversions have diluted existing shareholders, but I think UKOG made the right decision by agreeing to borrow the money on these terms to fund its well development.
Now that cash is flowing into the firm’s bank accounts from oil production, it might be able to agree some funding from a more traditional lender, reducing the risk of further dilution. To do that, the company will first have to pay down the £3.8m liability, but that is already happening.
The bottom line
All in all, 2019 has been a transformational year for UKOG and 2020 could be another year of significant progress if the business manages to push ahead with its drilling and production plans for the year.
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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.