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Buy Union Jack Oil - c40% short term upside

By HotStockRockets | Thursday 6 October 2016


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.


The world still hates small oil stocks. We are not sure when that will change but given how many of the mid caps are collapsing either entirely (Afren) or surviving only via schemes that see shareholders almost wiped out ( XCite, Gulfsands, Gulf Keystone, IGAS, LGO, etc, etc) we feel we could be at a Burmah Castrol moment. Do a google search if you are too young to understand the reference!

The point is that sentiment is so grim that it could snap at any time. Our share tip of the month is thus Union Jack Oil (UJO) at a 0.19p offer and at up to 0.21p with a target to sell of closer to 0.3p.
 
Some brokers who cover this UK onshore play are far more bullish. SP Angel this week increased its target price from 0.65p to 0.7p. It gets to that target by risk weighting all the assets, working out an NPV for each and then coming to a sum of the parts valuation. We can see the logic but are a bit more cautious.
 
So what is the appeal?
 
1. Cash. There is £2 million in the kitty and no debt. That underpins a good part of the current £5.5 million market cap.
 
2. Near term production. By Q1 2017 the Wressle field will be producing 500 bopd and Union jack gets 11.67% of that. This is a low cost onshore site and so even at $50 oil this is throwing off material cashflows which easily cover all PLC costs as well as drilling elsewhere.
 
3. There are a raft of exploration assets notably a 7.5% stake in block PEDL 143 which is next to Horse Hill. If, no when, that asset starts getting promoted again then investors will start to work out an implied value of 143 using "nearology"
 
What will kick a re-rating?
 
1. Union Jack has net cash and just completed a placing ( to allow it to increase its Wressle stake). When sentiment towards small oil E&P plays improves, punters will look for low risk plays which are not at risk of dilutive fundings and have cashflows coming in.
 
2. The start of production at Wressle will make people realise that this company is a real company with an attractive asset.
 
3. Union Jack has a number of interesting exploration drill ready targets. Broker valuations are heavily risk weighted so any drill success will see those weightings fall and thus target prices increased.

4. Any Horse Hill hype will have a spill over effect. Can someone call David Lenigas and get him on the case?

5. We do expect the oil price to tick up in 2017 and that will improve the maths of Wressle One and so increase its NPV
 
The Trade: Buy at 0.19p and at up to 0.21p - target to sell 0.275p

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