UK Oil & Gas (UKOG) has updated the market on its prodigious ability to issue shares. After adding almost 1.5 billion over the last year, it now wants authorisation for 3 billion more. If only it could produce increasing levels of oil with a similar consistency, I perhaps would see the investment case more positively... We all know that most small company’s burn cash while trying to achieve a positive cash flow business case outcome. Unfortunately, I have never believed this company has articulated a coherent business plan. I most recently questioned what the plan was in early December 2019 – it was as clear as mud to me. Now we know the plan – it’s to bring the field into formal production later this year using the HH-1 well, with a proposed dual completion to produce from both the Portland and Kimmeridge accumulations.
The HH2-z will follow subject to resolving the water production from this well. On December 23rd we were told “HH-2z achieved initial rates of up to 1,087 barrels of fluids per day and oil cuts of up to 60%, demonstrating the horizontal's ability to flow at rates significantly greater than the HH-1 vertical well”. Typical of UKOG, that is a rather meaningless statement regarding oil flow rate other than to note most of the time the well was producing lots of water. Now we are told the kit required to (hopefully) resolve the water production issue is not available until next month. Interestingly the company describes the required work as “..planned routine intervention”. With no water disposal well and the costs of trucking water from the site, that is not my view of the significance of stopping the water ingress! Of course the company did tell us the water was likely from the toe of the well back in December. Now it appears it has to locate the source of water ingress. I do find it interesting that the seismic coverage of the area comprises vintage 1960’s and 1980’s 2D which has been combined with VSP logging of the well bores. VSP does provide a means of seismic calibration but it only provides data very local to the well bore. The Portland CPR identified risk associated with oil down to depth, with the company being more optimistic than the CPR authors. I have to wonder if the water ingress reflects the absence of modern 3D seismic data to properly map the oil accumulation. As a result I have real concerns that water ingress to the HH2-z well will be resolved without further impact on the business plan.
Regardless of these technical matters, the real issue of the latest announcement is the confirmation the company wishes to issue up to three billion more shares. This is double the number requested last year, which have - of course - been largely duly issued. The company remains with £3.35 million of outstanding convertible loan notes, to be settled by share issuance and a further £1 million due to Tellurian Investments LLC which will be settled by share issuance in March. Tellurian has, of course, been selling shares previously issued to it as part of the licence purchase consideration. I see no reason why the share sales would not be continuing. Assuming the share price does not decline further from its 0.675p in the middle as I type, which frankly I would see as minor miracle, that would see some 670 million new shares to settle these outstanding debts. We are due the company accounts to the end of September 2019 by the end of March. These will include the consolidation of Horse Hill Developments Ltd as a subsidiary. Currently we only have rather out of date financial information to form a view on the current cash position. I would suggest the company is not awash with cash with ongoing operational costs, and of course the overhead costs, only partly offset by some oil sales revenue. This is compounded by partners declining to fund further activities at Horse Hill. The issue of shares to settle CLN and Tellurian debt does not of course provide any cash to fund operations and capex, as well as corporate overheads. In my view the need for further cash to fund operations will see more significant placing and/or an extension and expansion of the existing CLN facility in the near term. I read the latest RNS as not being at all helpful to the funding situation, and I rather suspect the company has been forced by the OGA to transition the EWT phase into formal production. This means the company has to fund the capex of the gas engine generators and associated works rather than simply flare the gas as it has done to date. I would suggest the net revenue from power sales will be negligible, after site electrical consumption, so it is simply a further drain of limited or non-existent cash, or importantly results in the need for further share issuance.
The company mentions the potential for reserves based lending following establishing commercial production. I see this as a red herring. The current CPR (which covers the Portland only) would need to be updated and that will take time. I see little reason to expect any increase in the Portland oil in place or recovery factor. There is no CPR for the Kimmeridge at the current time. I would therefore expect any resulting reserves base lending potential to be small in the foreseeable future, and nowhere close to funding the capex of the planned future wells and facilities. Regardless current operations and capex have to be funded in the meantime. So I would see that authorisation to issue a further 3 billion shares as very likely to be used, within the next 12 months, and most likely sooner. I remain of the view the current market cap of £53 million and a share price of 0.675p as grossly overvaluing this company, even before considering the dilutive effect of 3 billion more shares. I put this company into my Vomit list as a result of over-valuation and lack of technical merit together with the expected dilution – the latest RNS only reinforces that view. I fully expect the share price to properly reflect reality in due course. SELL.
Filed under: UK Oil & Gas, Eurasia Mining, Future plc, Quixant, Tern, Bulletin Board Moron of the week
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