UKOG RNS share options and Employee Benefits explained - A positive sign for the future

UKOG horse hill rig Sept 30 2019

As someone who works for an AIM-listed company myself where every one of the staff gets share options, I am a big believer in employees owning a share of the company they work in. I don’t agree with many of Jeremy Corbyn’s policies on the business including the 4 day week and a wave of nationalisations, but I think owning shares in your employer is a good way to drive behaviour and a win-win.

So I saw a lot of fuss on the bulletin boards regarding UKOG this morning with the release of the Share Options update and incentives plan. Quite normal for a listed company. Just look at any larger listed oil company and you will that directors and staff usually get shares, either options or restricted units.

The UKOG share options and incentive programme explained

Steve Sanderson and the other directors were given a total of 121 million options at a price of 0.13p. It is interesting that only Allen Howard is a current shareholder, with 4.5 million shares. Shame that the other directors haven’t bought in as shareholders. Maybe this will change!

These are options, not RSU (restricted stock units), so the management has an option to buy the shares at 1.13p. Therefore it is only worth taking up their options when they are vested if the price is significantly higher. The Options vest immediately and will expire in five years from the date of grant. So there is no point exercising these options they have been given until the share price is much higher.

So Sanderson etc. have an incentive to drive the price higher than 1.13p, as only then will they make a profit. So for example, he has been granted 25 million options at 1.13p. IF the price rises to 3p when they vest, he will make (3p-1..13p)* 25 million = £71,000 profit (less capital gains etc.)

The shares must rise in price for him to benefit! If the shares vest now and they are 0.6p in 3 years time, he will not take them up (exercise them) and he will not make a profit. Free shares at 1,13p are not given as they are share options not RSUs.

In addition, the company is issuing 201 million incentive shares in the EBT ( the UK Oil & Gas Investments Employee Benefit Trust ). These are free shares, not options but are linked to corporate performance and it usual to have to wait 3 years for such shares to vest. The share profits (if any) are taxed.

It is quite normal for an AIM company and all FTSE companies to have employee incentive plans as a way to retain “golden handcuff employees” to stay.

Sp rather than look at the 201 million shares (out of 6.65 billion) as a warning sign, it seems that Sanderson and the management team are preparing the company for bigger and better things to encourage employees to be part of the growth of the company. Employees benefit from the full share they are given, not the rise, like an option, so they are very appealing. But you need to stay around a company to get them if you leave you to lose your right to these Benefit Trust shares if they have not vested.

UKOG share plan Sep 2019

The RNS stated:

UK Oil & Gas PLC announces that options over a total of 121,500,000 new ordinary shares in the capital of the Company were awarded on 27 September 2019 at an exercise price of 1.13 pence (being the closing price of an Ordinary Share on 27 September 2019). The Options vest immediately and will expire in five years from the date of grant.

The Options represent, in aggregate, approximately 1.8% of the existing Ordinary Share capital of the Company and have been issued to employees and the Directors of the Company. Following the issue, the Company has a total of 291,000,000 options and warrants outstanding, representing approximately 4.4% of the existing Ordinary Share Capital of the Company.

Following the grant of these options, the Directors will hold the following Ordinary Shares and options.

Incentive plan

On 29 September 2014, the Company established a share incentive plan ("SIP"). The purpose of the SIP was to reward and incentivise officers, employees and consultants of the Company and any investee companies or subsidiaries by the award of ordinary shares in the capital of the Company at nil cost.

Awards of Ordinary Shares to beneficiaries under the SIP are subject to appropriate vesting and other performance conditions in line with normal market practice, which will be set by the Remuneration Committee as and when any awards are made. Awards of Ordinary Shares under the SIP will not, in any 2-year rolling period, exceed 10 per cent of the Company's issued share capital from time to time without the prior approval of shareholders of the Company. To date, no shares under the SIP have been awarded to any current directors, employees or consultants.

In order to implement the SIP, the Company established an employee benefit trust called the UK Oil & Gas Investments Employee Benefit Trust ("EBT"). The EBT may hold up to a maximum of 10 per cent of the Company's issued share capital from time to time for the beneficiaries of the EBT. The EBT is a discretionary trust for the benefit of directors, employees and consultants of the Company and any investee company or subsidiary.

The Company was notified today by the trustees of the EBT, LGL Trustees Jersey, that they intend to subscribe for 201,000,000 new ordinary shares of 0.01p each in the Company, at par value per Ordinary Share at an aggregate cost to the Company of £20,100, such new Ordinary Shares representing 3.1% of the existing issued share capital of the Company (the "New Ordinary Shares"). The Company has today, therefore, agreed to make a loan of £20,100 to the Company to fund the subscription by the EBT. The Ordinary shares held in the EBT are intended to be used to satisfy any future awards made by the Company's Remuneration Committee under the terms of the SIP. Awards of Ordinary Shares to beneficiaries by the EBT will be subject to appropriate vesting and other performance conditions, in line with normal market practice, which will be set by the Remuneration Committee.

As such the Company has today allotted 201,000,000 new ordinary shares to the EBT, the shares will rank pari passu in all respects with the existing ordinary shares. It is anticipated that the EBT Shares will be admitted to trading on AIM on or around 4 October 2019 ("Admission").

Following Admission of the Investor Shares, the Company's issued share capital will comprise 6,658,567,170 ordinary shares. As the Company does not hold any shares in treasury, this figure of ordinary shares may be used by shareholders in the Company as the denominator for the calculations by which they will determine if they are required to notify their interest in, or a change in their interest in, the share capital of the Company under the FCA's Disclosure and Transparency Rules.