By Gary Newman | Thursday 13 July 2017
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.
I haven’t looked at UK Oil and Gas (UKOG), and more specifically the Horse Hill oil field, for quite a while and a lot has changed in the meantime, so I thought it about time that I revisited it.
There is no doubt that it has been a great story so far and one that has really caught the attention of PIs, not to mention the press, given that it involves UK onshore oil and gas reserves, and depending on how it plays out it could even one day end up being made into a film!
What remains far less clear is how this story is ultimately going to play out and whether the current valuations of the companies involved in Horse Hill will prove to be justified – personally I see them as being very much on the high side at this stage and carrying a fair amount of risk from this sort of share price level.
Some will already have made a fortune from trading UK Oil and Gas at various points along the way, as well as shares in the other companies which hold a share of Horse Hill Developments Limited - which in turn holds 65% of the PEDL 137 and PEDL 246 licences on the northern side of the Weald Basin. In the future I would expect plenty more opportunities to make money as the share price here is bound to experience further large amounts of volatility, with big swings up and down, as the story unfolds.
But if we look at it from purely a longer term investment point of view I must admit that I find it hard to see value here and certainly wouldn’t be rushing to put money into UK Oil and Gas shares at its current market valuation of around £108 million (3.2p to buy), as I feel that is pricing in far too much unproven future potential at this stage, and is reliant on a lot of hype to keep it there.
Of course that isn’t anything unusual on the AIM market, and there are plenty of other examples of companies that have seen large sustained rises as the market falls in love with the story, but ultimately in the majority of cases that all tends to come crashing back down to earth at some stage in the cycle.
There is no doubt that the numbers look impressive when considering the independent reports for stock tank oil initially in place (STOIIP), but ultimately the profitability of companies involved will depend on how much of it can be extracted and how quickly that happens – ultimately the combined flow rates across the field need to be equally as impressive once a field development plan is put in place and production starts, whenever that may be.
Currently Schlumberger’s gross STOIIP estimates for the two licences is nearly 11 billion barrels, which is clearly huge for a company of this size even if the recovery factor turned out to be low, and taking into account its other shares of licences within the Weald Basin, that rises to over 17 billion P50 barrels gross. Although in terms of actual resources, for instance gross 2C contingent resources for the Horse Hill-1 Portland discovery are a far more modest 1.5 million barrels. A significant amount of the oil-in-place is from the tight Jurassic shales.
Indications so far suggest that both the Kimmeridge limestones and the Portland discoveries will flow at decent rates – Portland achieved a test rate of 323bopd – but as yet commercial viability hasn’t been confirmed, and it will take a production test to prove the concept.
A planning application to production test the HH-1 Portland, KL4 and KL3 zones was made to Surrey County Council last October, and a decision on this is due by July 31, so that could have a big impact on the share price one way or another and is something to be aware of. The company is hopeful of being in production by late 2018 or early 2019, but I see that as somewhat optimistic given how long the various permissions required to date have taken to secure.
It certainly doesn’t help that the discovery is in a more affluent part of the UK and there are sure to be major objections – especially when it comes to drilling enough wells over the site to produce the sort of amounts of oil which you would expect from a field of this potential size, and which would enable the company to make the large profits which are being predicted by some when production is reached.
It still remains to be seen whether, in the short term at least, this field will be hampered in terms of the daily production it is able to reach.
What is also interesting is that Regency Mines (RGM) has just sold a 1.9% share in HHDL (1.235% of the Horse Hill licences) for £323,000 – just over £54,000 in cash and the rest in UK Oil and Gas shares. That would actually value the whole of Horse Hill at around £26 million on that basis – although you could argue that Regency is simply de-risking and still has exposure via the shares it took as part of the deal.
All of the ongoing work on these licences isn’t cheap and the company has continued to raise funds, and there is little doubt that those taking part in the placings have done very well in general – most recently £6.5 million was raised at 0.8p.
Of course there is more to UK Oil and Gas than just Horse Hill, even though that tends to grab a lot of the attention, and the company is about to carry out a flow test of its recent Broadford Bridge-1 discovery, on the 100% owned PEDL234 licence, and the company now sees this as having even more potential than Horse Hill. But ultimately it needs to show that it can bring one of these licences into full production in a way that is profitable.
On the positive side, if any one of these licences with large amounts of oil-in-place is able to produce in the sort of quantities that would support the paper valuation of that oil, then the company would ultimately end up at many multiples of its current valuation, even allowing for some of that being priced in already.
But for me it is still incredibly early days in terms of proving that it can actually reach the potential that the headline figures would suggest, and I would be cautious of investing at this stage unless you have a very high tolerance for risk and are prepared to see a big chunk of your capital disappear – even if just during any temporary blips along the way.
Never miss a story.
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