UK Oil & Gas - another 50 percent share price fall the best case scenario? Peter Brailey reviews...

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UK Oil & Gas (UKOG) issued its 2019 year end accounts at no-one is watching O'Clock on Tuesday, which updated us on its cash guzzling to the end of September. Plenty of waffle in true UK Oil & Gas style, and the numbers are of course 6 months out of date. But a little digging into the detail and applying common sense leads me to a simple conclusion – this company will need significant amounts of cash to keep going. So it’s more confetti and a little bit of loss-making oil...

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It is always the case with small AIM companies that the first focus has to be on cash and cash flow, even more so at the current time. The company declares a cash balance at the year-end of £6.9 million. Since then the company raised a further £2 million from a placing in December 2019 – let’s call that around £1.9 million net. So I make it around £8.8 million of available cash. The cash burn on G&A over the 12 months was some £4.2 million (around £350,000 per month). But some of that was non-cash charges – for example share based payments of £693,000 (around £58,000 per month). So that nets to around £292,000 cash per month. Capex on assets, primarily Horse Hill I would suggest, amounted to some £6.15 million (around £542,000 per month). This was off-set by oil sales to the tune of £2.4 million (around £200,000 per month). The company has booked some sales from the itty bitty non-Horse Hill assets, which provided some £10,000 per month contribution to overheads. My key interest is trying to establish where the company is today...

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It is difficult to estimate what the cash outflow is on capex given the various operations at site, but I would suggest the level of activity will have seen expenditure at least equal to the reported 12 months at some £542,000 per month. The G&A would equally have been at least equal to the prior 12 months at £292,000, but given the increase is staff numbers I would suggest this is an under-estimate. That figure of £292,000 per month includes the cash impact of the bonus paid to Steve Sanderson, the CEO at £300,000 for the 2019 year, on top of his not inconsiderable £314,000 salary. I find it difficult to see what he has done to earn this bonus, and will assume he will not be paid similarly this year and have left out any such bonus for the purposes of assessing where the company now is. On that basis I see expenditure running at around £809,000 a month. Of course the company has remained producing oil, sending tankers to Hamble. I am going to assume the production has roughly equalled the 2019 reported year, and averaged over the last 6 months has been around the same revenue. So that gives me a cash credit of around £210,000 per month. It is worth noting the cash received for the 96,000 barrels produced equalled some £22.30 per barrel, which is approximately $29 a barrel. That looks to me to be a very steep discount to the prevailing Brent oil price over the period. On that basis I would predict the current position at around £5.2 million in cash. Looking forward I would suggest the expenditure would remain largely unchanged but the revenue from oil sales will reduce to around say 50% at best. That discount to Brent oil price for the reported period produced oil is interesting – does this reflect the costs of transport as well as buyer discount? I suspect it does, and one could expect the transport costs and buyer discounts to remain largely unchanged, implying a larger % decrease in net revenue per barrel to the company going forwards.

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I have expressed my view that oil prices will go lower and remain low until the impacts of Covid19 to the real world economy start to lessen. I would suggest that 50% loss of income is generous. I note that company claims the use of an operating cost KPI of £18 per barrel. I cannot see how operations at Horse Hill will be anything other than cash burning at current oil prices, even at the operating level. Based on the above assessment I can see the company may have cash to see it through to the year end. That of course is on the basis the capex remains comparable to last year. I think this is a best case scenario and in practice the company is expending capital drilling and also putting in place the production facilities, including gas handling facilities. I can readily see the costs of the kit and operations at site consuming considerably more cash than this time last year. I would hence conclude that the need for further cash will come much sooner than year end. With no material reserves, I do not see any chance of an RBL facility or similar funding being available. Horse Hill has some 1.3 million barrels of 2C resource, but declaring this as reserves does not materially alter my view. The very idea that a bank would lend cash to a company making a loss at the opex level is to me preposterous. Of course the company remains with convertible death spiral loan notes to the tune of £2.4 million outstanding, of the original £5.5 million facility. Those notes are slowly being converted and shares sold. It has also settled its remaining purchase consideration for the Tellurian owned equity of the Horse Hill licence, issuing a further 255 million shares. As expected, the authorisation to issue a further 3 billion shares obtained in February 2020 is being used and will continue to be as CLN’s are converted. The number of shares in issue now stands at 7,821,571,059, up some 21% since the reported year end and I see no sign of share issuance abating anytime soon.

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The results also confirm that the various transactions that have seen goodwill increase by over £11 million – I would suggest this is one measure of just how much he company has over-paid for increasing its equity holding in the Horse Hill scheme. I put this company into my Vomit list as a result of over valuation and lack of technical merit together with the expected dilution. That dilution continues unabated and I have every reason to see that situation continue. With the share price down over 50% since the start of the year, the company remains with a market cap of some £30 million. I think that is far too high and would suggest the share price will half again in the foreseeable future, and then most likely fall further. While this company has a large number of retail investor advocates, there are of course no institutional investors, I can see a situation where the share price will collapse under the weight of share issuance and oil price decline removing hope. I can only conclude SELL.

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