UKOG SWOT analysis - investment fodder or Stupid Waste Of Time

Horse Hill UKOG rig

Here is a SWOT analysis of UKOG as it currently stands, with HH-2 vertical well spud imminent. I would expect on Monday an RNS confirming, drill 30 days, then HH-2z horizontal well, which is the one of interest in terms of flow rates during November. An interesting and potentially transformational period coming up. The overhang from the Riverfort Global Opportunities PCC Limited and YA II PN Ltd £5.5 million loan (confirmed RNS on Friday that £1 million used so far) is a drag on the shares for sure. But positive drilling results (hopefully) during October and November should mean that the shares start to move up from the depressed levels of 1.2p to a target range of 2-3p. The current valuation of the company looks too low if ops proceed as planned and no negative surprises from the 2 wells during Q4 2019.

There are weaknesses and threats of course, but the strengths look very good e.g. Planning consent, prolonged and steady production from Portand and Kimmeridge reservoirs over 2019. All these worries about flows I don’t get, unless Steve Sanderson is telling porkies, and I don’t believe that.

Strengths

  • UKOG has 85.635% controlling interest in Horse Hill Development, located near Horley in Surrey.

  • Surrey County Council's Planning and Regulatory Committee granted full planning consent for long-term oil production, 25 years, 6 wells, on Sep 11th (planning allows up to 3500 bopd). Planning document link. All existing and future wells will be drilled from within the existing 20 x 15 metre concrete pad.

  • Drilling of HH-2 vertical pilot followed directly by the horizontal well section, HH-2z, with a planned trajectory of around 1000m wholly within the Portland reservoir (60 day drill-30 days each). Operations in progress.

  • Rig on site and spud imminent (expected RNS 30th Sep 2019)

  • Good and steady production from Portland and Kimmeridge. Kimmeridge test production is planned to continue throughout the drilling campaign. Kimmeridge test production totalled 39,205 barrels of dry Brent quality crude, with average daily rates of up to 307 bbl of oil per day recorded following the resumption of production on 12 September 2019. Total aggregate Portland and Kimmeridge test production now stands at over 68,773 bbl (29,568 Portland)

  • Dry Brent quality light crude oil, no evidence of water cut

  • The ability to produce over the field's economic lifespan enables the transfer of current and future assigned recoverable resource volumes into the category of Reserves with an accompanying Competent Person Report (CPR) and allowing Reserves based Lending (RBL). New CPR planned to establish the Company's net Reserves following completion of HH-2z production testing in the Autumn.

  • NPV 10 indicates £150 million, current market cap £66 million (Contrarian Estimates see UKOG part 2 analysis)

Weaknesses

  • £5.5 million loan announced 7 August 2019 with Riverfort Global Opportunities PCC Limited and YA II PN Ltd for 35% Tellurian. £4.5 million outstanding with an overhang of shares. Aggregate limit of £3 million per 3 month period.

  • More share dilution expected during Q4 2019. Around 6.5 billion shares in issue.

  • Tankers limited to 32 a day (16 in and 16 out) (200-220 barrels per tanker) = 3500 bopd

  • Potential for higher than expected gas production causing operational issues. Yet to see real evidence for this.

  • No pipeline infrastructure

  • Production from Kimmeridge and/or Portland depletes faster than expected. Planning consent indicates company view that 400 bopd in 20 years time plus

  • New 1000m horizontals disappoint

  • Operational issues drilling new wells (Broadford Bridge scenario) - delays or failure

Opportunities

  • Expansion of HH beyond current pad to adjacent field, dependent on new planning consents.

  • Exploitation of Weald - Dunsfold and Isle of Wight prospect (Broad Bridge failure shows risk here and HH may be in a fracture sweet spot).

  • Buy out of Alba HHDL stake

  • Institutional support for UKOG, all private investors currently.

Threats

  • Change in UK government, suspending all UK onshore drilling (potentially under Corbyn government).(low risk)

  • Excessive seismic activity causing OGA to suspend ops. (low risk)

  • Swampie protester activity suspends ops (low risk, court injunction in place)

  • OGA does not grant long term production licence (Expected Q4 2019)

  • Collapse in oil price