Whenever a smaller oil company is drilling a well these days you pretty much have to expect the share price to get hammered unless it announces a substantial find that exceeded market expectations...
Union Jack Oil (UJO) this week announced the result of the West Newton B-1 appraisal drill on its 16.665%-owned PEDL183 licence. Previous drilling at West Newton had discovered a 20m gross gas column and 45m gross oil column in the Kirkham Abbey formation and although this wasn’t able to be tested - due to the oil being an unexpected bonus and the pre-approved and permitted extended well test programme only being for gas - it did mean that base case STOIIP (stock tank oil initially in place) was upgraded to 146.4 million barrels of liquids plus 211.5bcf of gas. That meant that hopes were very high for the B-1 appraisal well, especially as it was also targeting the Cadeby formation lower down and the potential for significant amounts of oil there. So an announcement stating that Kirkham Abbey was hydrocarbon charged based on wireline logs, cuttings and mud gas readings and that the reservoir in Cadeby was insufficiently developed was far from what investors were hoping for, especially as no further details were released on Kirkham.
The drill was carried out a couple of kilometres or so to the south of the successful A-1 and A-2 drills and, from the reservoir modelling diagrams that I’ve seen published previously, it suggests that it was targeting Cadeby at the optimal location and where it expected there to be improved reservoir quality and porosity, but potentially a thinner part of Kirkham and towards the outer extremity of that formation. So that left question marks about exactly what had been found in the Kirkham, and disappointment about the Cadeby result, but the update also included news that a side track would be drilled and that operations had already commenced. This WN B-1z drill is stated as being used to further appraise a ‘structurally superior location’ in the Kirkham and will target ‘enhanced reservoir quality’. Now, we can only guess from the information available in the public domain, but it appears to me as though the operator and companies involved in the B-1 drill weren’t completely surprised by the outcome, as for this side track to go ahead so quickly, all of the necessary permitting would have already had to be in place and as part of the B-1 permissions. The original plans for the WN B drilling also appear to show that it was expected that a side track would be made into the Kirkham in roughly a northerly direction back towards the A1/A2 location. The RNS released by one of the other drill partners - Reabold Resources (RBD) - also states ‘the WN B-1z location is believed to be suitable for a subsequent flow test’, so once the side track is completed and tested we can reasonably expect some sort of flow data to ultimately be released as well. This side track will also penetrate into the Cadeby, so the operators must still see some potential for that structure, although I certainly wouldn’t be getting my hopes up about that.
So in conclusion, it certainly isn’t game over for West Newton, as some would have you believe, but it does need a good result from B-1z. For me, the drill result that has just been released doesn’t diminish the potential for West Newton to be developed, but of course the risk now is that the side track could also fail to live up to expectations, at which point it would seriously question the modelling of the Kirkham Abbey formation here and the volumes of hydrocarbons in place. Whatever some people may claim, I believe that Union Jack needs West Newton to be a success, given that its market cap is around £24 million at the current share price of 0.12p to buy. People will point out that the company also has a 40% stake in Wressle, which is in the process of being brought into production, and news on that front could come at any time. That is of course a positive, as once in production it will be yielding around 200bopd net to Union Jack, and a very welcome income stream with a breakeven price of less than $18/barrel, on a full cycle basis. It also gives the company net 2P reserves of roughly 250,000 barrels of oil and 40MMcf, with a further 600,000 barrels or so in 2C contingent resources. Whilst that is very useful, and there is also potential from its other less developed projects such as Biscathorpe, North Kelsey etc, none of it really justifies the current market valuation, even when you take into account the cash that the company also has from the recent £7 million placing at 0.16p, and reaffirms how important West Newton is. I have a small position in Union Jack myself – some of which I bought prior to drilling and the rest purchased after the share price crashed this week. But for me personally it is only a trade looking for some sort of rise on good news from the West Newton side track and Wressle entering production. That doesn’t mean though that I don’t see longer term potential here if West Newton does come good, as the sort of volumes of hydrocarbons in place are very significant for a company the size of Union Jack, and I can certainly see why some people are treating this as an investment and are happy to continue to hold the shares.
Filed under: Union Jack Oil, Powerhouse Energy, Fulham Shore, TomWinnifrith.com, Xeros Technology
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