Despite the rise, the current price of 1.3p remains a long way below its highs of over 8p this time two years ago. What’s behind the market’s rekindled enthusiasm for the stock? And could now be the time to jump aboard for a new run-up to the old highs and perhaps beyond?

Good news

It’s been just over five years since drilling commenced at Horse Hill — a test well (HH-1) that produced high initial flow rates and was dubbed the ‘Gatwick Gusher’. However, while there’s been some ad hoc revenue from further testing, a permanent producing well has yet to be established.

The revenues from such production are important because, since the Gatwick Gusher was first drilled, UKOG has been raising cash — and burning through it at a rate of knots. Up to the end of 31 March this year, it had raised a total of £41m and burnt through £34.7m.

Investors have had their pips well and truly squeaked, with the company having issued 4.7bn new shares over the period, taking the number of shares in issue from 1.3bn to 6bn. And there’s been further fundraisings (and cash burn) since 31 March. Shares in issue are up to 6.4bn at the latest count.

The good news — and the reason I think market excitement about the stock has been reignited — is that a permanent production well finally appears to be within touching distance. On 12 September, the company announced a rig is scheduled to arrive by the end of the month to drill “the much anticipated HH-2/2z Portland horizontal well, a key step towards establishing significant long-term production and cash flow from Horse Hill by the end of the year.”

Hothouse stock

When I say market excitement about the stock has been reignited, you need to understand what the market for UKOG stock is. Like a lot of loss-making AIM-listed oilers, there are no institutional investors among the company’s major shareholders.

Price action is driven entirely by retail investors, some of whom are in for the long haul. But many hop from oil stock to oil stock as company news and sentiment waxes and wanes, or are speculative day traders, following wherever there’s volume and momentum, and adding to it.

In this hothouse environment, share prices — and the valuations of the companies — can move out of all proportion to the underlying fundamentals of the business, which is what investors should be focused on.

Fundamentals

It’s looking like the Portland producing well is finally going to happen, having been originally scheduled for late 2018/early 2019. While the cash flow will be welcome, there’ll still be a need for further dilutive fundraisings to develop the field, even in the best case targeted rate of production, which there’s no guarantee will be achieved.

Furthermore, UKOG has yet to publish a promised updated independent Competent Persons Report (CPR) with recoverable reserves and net present values of cash flows associated with the envisaged field development. Based on the existing CPR, I think the company’s £83m market valuation is much too high. As such, I’m avoiding the stock at this stage.

The post The UKOG share price is flying. Time to buy? appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Is the market regaining faith in the prospects of this AIM-listed company, whose flagship asset is the ‘Gatwick Gusher’ at Horse Hill? Furthermore, with the shares having previously traded north of 8p in more optimistic times, could the current price of 1.1p represent a brilliant opportunity to buy?

Increased stake

The recent share-price action follows an announcement from the company on 7 August that it’s acquiring a significant further interest in Horse Hill. As already noted, the shares closed at a new low on that date. So investors appear to have quickly moved to a more positive view.

UKOG has agreed to buy Tellurian-owned Magellan Petroleum’s 35% interest in Horse Hill for a total consideration of £12m — £5m in cash and £7m in UKOG shares. This will take its stake in the Gatwick Gusher from 50.6% to 85.6%. There are some obvious positives to this, notably a significant increase in the proportion of future Horse Hill revenues to which it will be entitled.

Dilution

However, it’s not all good news. UKOG’s had to take out a convertible loan of £5.5m. This is because while its increased stake in Horse Hill will give it a much higher proportion of future revenues, it has to bear a much higher proportion of the costs to develop the field.

The result of the acquisition and loan is that there’s a potential £12.5m worth of new shares to be issued. Exactly how dilutive this will be for existing shareholders remains to be seen, but history tells us to expect the worst.

UKOG previously took on a £10m loan from the same providers. Its share price was 4.9p the day before the loan was announced on 15 November 2017. The price began to fall as the lender began converting and selling its shares, ending at 2.3p by the time of the last conversion eight months later.

UKOG’s history as a serial diluter is chastening. When it first acquired an interest in Horse Hill over five years ago, it had 853,396,843 shares in issue. Today, there are 6,083,289,907. Put another way, 853,396,843 shares that once represented 100% ownership of the company now represent just 14%.

Unswayed

Since the Gatwick Gusher first gushed, news on flows from the Kimmeridge level (once routinely described by the company as “North Sea-like”) has not been very good. Indeed, UKOG has abandoned plans to drill a horizontal well in the Horse Hill Kimmeridge in the immediate future, in favour of bringing the smaller conventional Portland level into production.

Tellurian’s sale of its 35% stake in Horse Hill for £12m, gives an implied total value for the asset of £34.3m. In turn, this suggests UKOG’s 85.6% stake is worth £29.4m. This compares with the company’s market capitalisation of £66.9m at the current share price and with the current number of shares in issue.

How much further dilution is to come before UKOG’s funded by its own cash flows (if it ever is) is anybody’s guess. As such, the recent mini-rally in its share price doesn’t sway me. It’s a stock I’m continuing to avoid.

The post Should I buy UKOG shares? appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Back in 2016, its flagship Horse Hill well flowed oil from the shallow conventional Portland level but, more excitingly, from the deeper Kimmeridge layers. High initial rates were recorded over only a few hours. But it was enough for the well to be dubbed the Gatwick Gusher, and the company to talk of 100bn-barrel potential in the Kimmeridge across the wider Weald Basin.

UKOG’s shares climbed to over 8p at the height of investor excitement, but closed yesterday at 0.975p. Could they now be the bargain of the decade?

‘Fault-zone’ critics

From the outset, critics claimed UKOG had drilled into a fault zone at Horse Hill. They suggested it had tapped a relatively small Kimmeridge oil pool — a quirk of the local geology — and that the high initial flow rate would decline rapidly. Furthermore, that extrapolating from Horse Hill to the rest of the Weald was nonsense.

Attempts to replicate another Horse Hill

Between May 2017 and March 2018, UKOG tested its well at Broadford Bridge — around 20 miles southwest of Horse Hill — where it said the Kimmeridge was “a mirror image geological look-alike” to the Gatwick Gusher. Broadford Bridge didn’t gush. Indeed, it did nothing much at all.

Furthermore another Weald oiler, Angus Energy, testing at Brockham six miles northwest of Horse Hill, announced just 11 days ago that “it is extremely unlikely that commercial hydrocarbon flow can be established from the Kimmeridge layer at Brockham.”

Return to Horse Hill

After the Broadford Bridge disappointment, UKOG returned to Horse Hill last June to conduct an extended well test (EWT) with a view to bringing both the Portland and Kimmeridge into production.

By October, the Portland EWT had been “successfully completed” and the company moved on to the Kimmeridge. However, in February, it announced the Kimmeridge had been shut-in to conduct a “long-term pressure build up test,” the outcome of which we don’t yet know.

Even more disconcerting, UKOG announced in its recent half-year report (on the same day as Angus Energy’s disappointing Brockham Kimmeridge news), the Horse Hill Kimmeridge development has been put on hold.

UKOG said it remains “very positive on the future commercial potential of Kimmeridge,” but that “for risk mitigation purposes” development will “likely” (no promises, mind), “follow the start of full-scale Portland production from Horse Hill.”

In addition, it announced it no longer intended to produce an updated 2018 Competent Persons Report, which it had promised would detail “recoverable reserves and net present values of cash flows associated with the envisaged Portland oil field development.”

Bargain of the decade?

In view of all the above, together with a poor record of meeting operational timetables and constant share issues to raise new cash, I think it would be generous to value UKOG at anything above its tangible net asset value (TNAV).

At the latest period end (31 March), TNAV stood at £33.6m, with 5.7bn shares in issue, giving TNAV per share of 0.59p. As such, I think the current share price of 0.975p — a 65% premium to TNAV — is far from a bargain at all, let alone the bargain of the decade. It’s a stock to avoid for me.

The post Could UKOG shares be the bargain of the decade? appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

You expect to find the usual FTSE 100 stalwarts in the top five buys. This year it’s Lloyds Banking Group at number one, Vodafone in second place and another big boy, oil major BP at number four.

Fertile ground

However, the third most popular trade is a company that doesn’t generate any revenues, and may not do so for years. Ladies and gentlemen, I give you Sirius Minerals (LSE: SXX). The Yorkshire-based polyhalite fertiliser miner has entranced investors but also tested their nerves and patience. Today’s share price of around 22p is roughly half its 52-week high of almost 40p.

Sirius is all about the future. Its £3.2bn mining project would make it a leading global producer of unique multi-nutrient fertiliser polyhalite, but means boring a 23-mile tunnel system to handling and export facilities at Teesside, now one of the UK’s biggest engineering projects.

Boring, boring

If all goes to plan, exports will total £2.5bn a year and single-handedly reduce the UK’s trade deficit by a whopping 7%. It has struck supply agreements all over the world, including a 10-year deal with BayWa Agri Supply and Trade just a few days ago, and has just launched its first tunnel boring machine.

The £1bn FTSE 250 group tempts investors with the prospect of “low operating costs, healthy margins and a very long asset life”. It should add ‘short-term anguish as management scrabbles around how to raise the necessary funds’. The deadline is tight, too. As Rupert Hargreaves has pointed out, Sirius has until the end of June.

I’m itching to hear more about last month’s news of a conditional proposal from a major global financial institution in respect of the £3.5bn Stage 2 financing. If that comes through, expect the share price to fly. If it doesn’t, then it’s squeaky bum time. The nation’s investors await. I’m one of them

Real Weald deal?

The UK’s fifth most popular stock last year was an even bigger surprise, AIM-listed UK Oil & Gas (LSE: UKOG) of ‘Gatwick Gusher’ fame, which has a market cap of just £71m. This is another stock with great potential, but one with even greater funding concerns than Sirius.

Its prime focus is on oil and gas assets in the Weald Basin, where it is building up interests in “a portfolio of dynamic and innovative oil and gas exploration and production assets”, but has yet to deliver on them.

Risk on

This article by GA Chester is a must-read as he warns the group has pursued multiple dilutive share placings in its quest to raise the necessary funds, tapping private shareholders amid a lack of institutional interest. He also warns that it has pursued new acquisitions before monetising existing ones.

The nation’s investors are taking a real punt here. If UK Oil & Gas lives up to its ambitions, you could make a small fortune. But my the risks! Risk is fine as long as you only invest a small corner of your portfolio, money you are willing to lose. That’s what I’ve done with Sirius Minerals. I’m not brave enough to repeat the trick UK Oil & Gas, though. 

The post Investors are taking a gamble on Sirius Minerals and the UKOG share price appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

Harvey Jones owns shares of Sirius Minerals. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Uncertainty over the possible payloads at its West Sussex site isn’t its only problem, though. Once it finally begins pulling oil out the ground with gusto, there’s no guarantee that energy prices will be conducive to the kind of profits growth investors are hoping for.

Uncertainty over the possible payloads at its West Sussex isn’t the only problem facing UKOG, though. Once it finally begins pulling oil out the ground with gusto, there is no guarantee that energy prices will be conducive to the kind of profits growth investors are hoping for.

Fears of surging supply from the US, Canada and Brazil, a theme which has long been doing the rounds, are only likely to get worse as industry investment clicks through the gears. Latest data from Baker Hughes illustrates the scale of the problem, its weekly rig count showing another 10 oil units plugged into the ground in the last full week of January, taking the total to 862.

Too much risk?

Make no mistake though, the probability of a yawning supply/demand imbalance as global production heats up is an afterthought for UKOG investors right now. Right now, questions concerning whether the company is spreading itself too thinly is the major headache for investors. The acquisition of assets in the Isle of Wight last month also require yet another heavy cash call to the tune of around £260,000.

With the profits column predicted to remain barren until the beginning of the 2020s, additional cash raisings represent a very real threat to shareholders over the next couple of years, possibly longer should development work at Horse Hill disappoint in terms of either cost or timeframe.

There’s no doubting the quality of UKOG’s assets. They give the business all the potential in the world, but potential doesn’t create shareholder returns. Whether related to the balance sheet, the quality of its assets, or the business of bringing its oil to the surface, there are plenty of risks that investors need to consider today. And this makes the stock an unappealing destination for my cash, to say the least.

Blue chip beauty

Why splash the cash on such a speculative stock, then, when there’s plenty of great shares on the FTSE 100 with great growth and dividend prospects? Whitbread (LSE: WTB) is one such business that I’m convinced can generate great returns in the years ahead and without the stress that UKOG brings to the party.

Admittedly the Premier Inn owner isn’t having the best of it right now. A weak regional market is offsetting strong trading conditions for its London hotels and, added to this, its cost reduction programme is running below expectations. This is expected to contribute to zero profits growth in the next fiscal year to February 2020.

I prefer to concentrate on the excellent profits potential of Premier Inn’s expansion across the UK and into Germany in the coming years, a strategy I’m confident should get profits firing again following predicted short-term turbulence. And this means that Whitbread should keep its mega progressive dividend policy in business, too.

The post Should I buy the UKOG share price? Or is this cheap FTSE 100 dividend stock a better buy? appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

With so little proved reserves (just 39,000 barrels net to UKOG), I think a useful starting point for considering the valuation of the company is the price it has paid for its various assets. Or, put another way, the price at which knowledgeable trade parties have been happy to sell.

The table below summarises UKOG’s current interests and the valuations I’ve assigned to them. Following the table, I discuss the trade deals from which the valuations are derived, before going on to consider whether the company’s shares offer good value at their current level.

(1), (2) UKOG announced its acquisition of interests in the Horndean, Avington and Markwell’s Wood licences on 24 July 2014. It paid £1.3m. I assign this value to its 10% interest in Horndean and 5% interest in Avington. These are currently UKOG’s only production assets, albeit Avington is temporarily shut in, with it believed an oil price of over £90 a barrel is needed to give confidence economic production could be restarted. I assign no value to exploration site Markwell’s Wood. Interests in the Markwell’s Wood licence have only ever changed hands for a nominal sum (e.g. £1). Furthermore, UKOG said this week that the future of Markwell’s Wood is “under internal review,” although an oil news website reported last month that the company has already informed local residents it’s abandoning the site.

(3) It has done a number of deals that have increased its interest in the Horse Hill licences to 46.735%. The latest of these was announced on 30 August this year and values its interest at £21.6m.

(4) The company announced its acquisition of a 100% interest in the Broadford Bridge licence for £3.5m on 13 June 2016. A minority interest in an offshore licence was included in the deal but I attribute the full value to Broadford Bridge. Interests in the offshore licence only ever changed hands for a nominal sum and UKOG subsequently allowed it to lapse.

(5) UKOG built its 40% interest in the Holmwood licence via three deals. The latest of these was announced on 25 September 2017 and values its interest at £3m.

(6) It has done a number of deals that have increased its interest in the Isle of Wight licence to 95%. The latest of these was announced on Wednesday this week and values UKOG’s interest at £1.1m.

Valuation

UKOG has been a willing buyer, and numerous trade parties have been willing sellers, of assets totalling £30.5m, which equates to 0.55p a share. How does this compare with its current market valuation? Well, the market cap is £74m at yesterday’s closing share price of 1.325p.

It does have prospects of adding to its proved oil reserves, with an extended well test in progress at Horse Hill. However, it remains a highly speculative proposition. I might consider it at nearer 0.55p but at 1.325p, I’m happy to avoid.

The post Why I think the UKOG share price could be worth just 0.55p appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Today I want to explain why I’m concerned about the outlook for UKOG shareholders. I’ll also consider another oil stock which I believe could beat the market over the next few years.

These numbers worry me

UKOG recently published the results of short-term flow tests from its Portland oil discovery. The HH-1 well flowed 401 barrels of oil per day (bopd) over a six-hour period and 414 bopd over a two-hour period.

However, the company warned that these flow rates “are not the long-term sustainable flow rates that will be utilised to assess the Portland’s commercial viability”.

Those long-term tests are still ongoing. But to be honest, I don’t understand why UKOG published the results of the short-term ones. In my view, they suggest that longer-term flow rates are likely to disappoint shareholders.

Positive cash flow?

The company hopes to generate positive cash flow in 2019. The key challenge it faces is to convert some of the group’s 13.2m barrels of discovered resources into commercial reserves. The drilling and testing operations required to attempt this are not expected to complete until the end of 2019.

In my view this is a risky situation. I’m not encouraged by the evidence so far and would prefer to invest in a company with proven reserves and production.

This stock could double

One possible choice in this sector is North Sea operator Enquest (LSE: ENQ). During the six months to 30 June, production rose by 46% to 53,990 barrels of oil equivalent per day (boepd). This increase was mainly due to the ramp up of production from the firm’s flagship Kraken field.

Higher oil prices and higher production lifted revenue for the first half by 86% to $548m. Operating profit for the period tripled to $105.2m.

The company also announced a deal to acquire a further 75% of the Magnus oil field from BP. Enquest’s debt-laden state means that this will have to be funded by shareholders, so today the firm launched a rights issue to raise $138m (£107m).

Good and bad news

The Magnus deal should add 60m barrels of reserves to Enquest’s assets, which the firm says will have a net present value of $500m. Expanding its ownership of Magnus should also deliver meaningful increases to production and cash flow.

However, the rights issue shares are being sold at 21p each, which is a 45% discount to yesterday’s closing price of 39p. Enquest’s share price is 13% lower at the time of writing, in response to this news.

The problem is the firm’s massive net debt, which was down $18m but was still at a hefty $1,973m at the end of June. To put this in context, analysts’ forecasts suggest that full-year profits for 2019 will be $239m.

I think shareholders face the risk that the company will be run only for the benefit of its lenders. But cash generated from operations rose by 132% to $318m during the first half. If this trend continues, debt could soon start to fall.

The stock currently trades on just 2.3 times forecast earnings for 2019. If debt starts to fall, I believe the shares could easily double from current levels.

The post Are you tempted by the UKOG share price? Here’s what I’d buy instead appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Of course, over the same time period, the wider oil and gas sector has enjoyed an improved performance, with the oil price moving higher. As a result, it could be argued that the stock may enjoy a tailwind from improving investor sentiment over the medium term.

Looking ahead, the company could have turnaround potential. Could it therefore be worth buying alongside another possible recovery share that reported an improving performance on Thursday?

Turnaround potential

The company in question is retirement housebuilder McCarthy & Stone (LSE: MCS). It released an encouraging full-year trading update on Thursday, which showed it’s made progress in a tough year for the company. Revenue is expected to increase to £670m, from £661m in the previous year, with a 10% increase in the average selling price reflecting continued improvements in the sales mix.

The company continued to suffer from economic uncertainty, as well as a slower secondary market. This constrained volumes so that completions were down from 2,302 units in 2017 to 2,134 units in the 2018 financial year. A strategy review means that a more measured growth trajectory will be sought over the medium term, with the company seeking to smooth its workflow in order to create a more efficient business.

Looking ahead to the 2019 financial year, McCarthy & Stone is expected to report a rise in earnings of 3%. With the stock trading on a price-to-earnings (P/E) ratio of around 12, it could offer good value for money. While its near-term performance may disappoint, it seems to have a strong position in what could be a growing sector.

Uncertain outlook

Also offering turnaround potential is the UKOG share price. The company has continued to experience negative investor sentiment in recent months, and this trend could realistically continue in the short run. Since the company is presently generating relatively little revenue, it’s difficult to place an accurate valuation on its shares. That’s especially the case since its prospects remain uncertain in terms of production potential, while further fundraisings could dilute its shares yet further.

Despite this, the outlook for the wider oil and gas sector remains upbeat. Demand may increase at a faster pace than supply over the medium term, and this could mean that the 40% rise in the price of oil over the last 12 months will continue.

Therefore, an increasing number of investors may be willing to take risks on smaller operators which offer greater risk, such as UKOG. In the long run, the returns could be significant, although a volatile share price, which could move lower at times, seems likely after a challenging year for the business. For less risk-averse investors, the company could offer appeal over an extended time period.

The post The UKOG share price performance is getting worse! Time to sell up? appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

An extended well test is now in progress at Horse Hill. Some dedicated shareholders seem to virtually live by the site and have been tweeting about tanker movements and pump-stroke rates at the wellhead. Is UKOG on the brink of declaring commerciality and is its share price primed to rocket?

Portland

Testing is currently focused on the Portland Sandstone level, which flowed 323 barrels of oil per day (bopd) for 8.5 hours in 2016. Higher rates have been recorded over shorter periods during the current testing, but investors are awaiting news of a lengthy stabilised flow test. This seems to be in progress, based on the observations of the Twitterati.

A Portland well at nearby Brockham has been a marginal producer for many years. In its peak year (2005) it averaged 98 bopd. While Horse Hill may prove higher, UKOG’s interest in the licence is only 37%, so I view the value of the Horse Hill Portland in isolation as only a fraction of the company’s current market cap of £122m at a share price of 2.3p.

Kimmeridge

I’d say much of the current market cap reflects hope value for the Kimmeridge Limestone (KL) levels. In 2016, KL3 flowed 464 bopd (for 7.5 hours) and KL4 flowed 901 bopd (for four hours). A lengthy stabilised flow test of these levels will follow that of the Portland.

Between the 2016 initial tests and the current extended tests, UKOG shifted attention to its 100%-owned Broadford Bridge well — described by the company as a geological lookalike to Horse Hill, where it hoped to replicate the Gatwick Gusher. Unfortunately, despite many months of trying, it was unable to get oil to flow from any of Broadford Bridge’s six Kimmeridge horizons, which is why the focus has shifted back to Horse Hill.

As well as the disappointment at Broadford Bridge, there are a couple of other reality checks I note about the Kimmeridge. First, cutting through a much-touted 100bn+ barrels of oil in place across the Weald is a statement by UKOG boss Stephen Sanderson in a recent podcast with Vox Markets (20 July at 12 mins, 30 secs): “We think that we have 100 million barrel net reserve potential to UKOG over the coming years, if it all pans out” (my emphasis).

Mr Sanderson has also spoken in the past about how flow from Kimmeridge-type deposits can generally decline 60%-70% over a year, meaning you have to drill a lot of wells almost back to back to maintain a certain level of production. I’d say this industrialised process could be problematic in the Weald basin, as well as requiring relatively high capital investment.

Price and value

I’m expecting the Portland to be declared commercial and because the company’s shareholder base is largely small retail investors, the share price could spike higher on sentiment and momentum trading. However, I believe UKOG’s current valuation is too rich on a fundamental basis as things currently stand. Like the institutional investors who are noticeable by their absence from the company’s list of major shareholders, I’m avoiding the stock for the time being.

The post Is the UKOG share price primed to rocket? appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The mix of production problems in Venezuela, Libya and Canada, combined with the impact of sanctions on major producer Iran by the US, has helped lift the black gold price in recent months. And these problems are not likely to be spirited away easily or possibly very soon either.

This is why industry commentators have been frantically upgrading their oil price estimates in recent weeks. Morgan Stanley for one believes that crude has much more territory to claim and is forecasting that the Brent benchmark will average $85 per barrel during the second half of 2018, quite an improvement from levels around $70 seen recently.

Not shelling out

Although investor appetite for Shell has moderated recently, it wouldn’t be a surprise to see its share price barge through the multi-year peaks above $28 sooner rather than later.

I remain concerned, however, over whether oil prices can remain perky over the medium-to-long term and the consequences for Shell’s share value, given that output looks set to continue booming across both North and South America in the years ahead and threatens to sail above global demand growth.

Indeed, some commentators are tipping the oil surplus to return during the latter half of this year. And the decision by OPEC and Russia to take an extra 1m barrels of oil per day out of the ground adds to the likelihood of this material overflow coming back sooner rather than later.

Right now City analysts are expecting Shell to deliver a 77% earnings increase in 2018, and to keep the full-year dividend locked at 188 US cents per share.

A low forward P/E ratio of 12.7 times and a chunky dividend yield of 5.2% may be enough to tempt new investment in the fossil fuel leviathan. But my worries concerning booming production in the years ahead, allied to Shell’s modest exposure to renewable energy sources, still discourage me from buying the stock today.

High risk

The same concerns are deterring me from splashing the cash on UK Oil & Gas Investments (LSE: UKOG), you probably won’t be surprised to hear.

The company is an even riskier selection than Shell though, of course — it currently has no income to offset the colossal cost of dragging its considerable oil reserves out of the ground. UKOG has raised funds via share placings in recent weeks to continue testing work at its core assets like Horse Hill in Surrey, but given the rate of cash burn, further cash-raising efforts could be just around the corner.

On top of this, flow testing figures from the project have so far been underwhelming. And further disappointing results from upcoming tests would prompt a fresh exodus of investors, such is the volatility associated with investment in small-cap oil explorers.

UKOG clearly has plenty of promise but that is all it has right now. In my opinion the risks continue to overshadow the potential rewards at this stage.

The post Why I’m not buying Royal Dutch Shell or UKOG today appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.