horse hill

UKOG update October 9 - HH-2z Portland and HH-1 Kimmeridge wells in long term production by end of 2019

Horse hill october 8th 2019 rig

UK Oil & Gas PLC (UKOG) have just announced that the planned simultaneous drilling and test production operationsat Horse Hill have been successfully implemented.

Continuous Kimmeridge oil production from Horse Hill-1has been maintained since the start of the Horse Hill-2/2z horizontal drilling campaign on 29 September 2019. Total HH-1 Kimmeridge test production now stands at over 41,800 barrels of light, sweet 40° API crude, pushing combined total aggregate Portland and Kimmeridge production to over 71,368 bbl. No discernible Kimmeridge formation water has yet been recovered to surface.

The establishment of safe sim-ops is designed to permit the continued collection of further essential reservoir performance data from the Kimmeridge oil pool and to provide significant oil sales revenues to offset the Company's operational costs. UKOG's innovative use of bespoke safety equipment to protect the HH-1 wellhead and pump during sim-ops places the Company at the forefront of safe UK onshore operational practices.

Following a planned extensive HH-2z production flow-testing campaign, both HH-2z Portland and the HH-1 Kimmeridge well are expected to be put into long term production by the end of 2019.

UKOG holds a controlling 85.635% interest in the Horse Hill oil field and surrounding highly prospective PEDL137 and PEDL246 licences, which are operated by UKOG's subsidiary company, Horse Hill Developments Ltd.

Stephen Sanderson, UKOG's Chief Executive, commented: "The establishment of safe and innovative sim-ops at Horse Hill marks another significant operational milestone for the Company in 2019. "

News and share price outlook

share price ukog october 8th 2019

Great news from UKOG this morning. All on track and HH-2z Portland and HH-1 Kimmeridge wells in long term production by end of 2019. Plenty of £££ into the account. 1.1p is ridiculous. Some were sceptical after the Broadford Bridge “cement job” disaster, but Horse Hill is progressing well and no ramping needed. Very undervalued IMHO.

Revenue per day and month key assumptions

UKOG are pumping around 250 barrels a day currently whilst the new wells are drilled during October and November.

Brent Crude = $57 a barrel

Net revenue after lift, marketing and transport = $37 a barrel ($20 assumed costs)

UKOG share of HH = 87%

250 bbl a day x 87% x $37X 30 = $241,000 a month net to UKOG! Once the Horizontal HH-2z Portland super happy days since more like 1000 bopd.

The assumptions going into my NPV 10 model seem more than valid now. See below:

What is UKOG worth part 2 - UKOG Detailed revenue analysis for Horse Hill September 26 2019

ukog logo

The UKOG planning application for Horse Hill included the following:

The development period being sought is for 25 years and the development is divided into five phases briefly summarised as:

 Phase 1 – involves well site modifications and new construction works;

 Phase 2 – to be split into 4 activities which includes the mobilisation and demobilisation of equipment to facilitate initial workover operations for HH-1/1z and HH-2 wells, the mobilisation and demobilisation of the drilling rig and drilling of 4 new hydrocarbon wells (HH-3 to HH-60 and 1 water reinjection well;

 Phase 3 – involves 4 stages comprising; installation of production equipment, production of oil, maintenance workovers and sidetrack drilling;

 Phase 4 – comprises the plugging, abandonment and decommissioning of the wells; and

 Phase 5 – is for the final phase which involves restoration and aftercare of the site.

The applicant (UKOG/Alba) proposes the maximum HGV movements to the site per day across all five phases will be no more than 32 movements (16 HGV arrivals and 16 HGV departuresout). The applicant anticipates it is during the early production stage of Phase 3 that will generate the envisaged peak of 32 HGV daily movements and will last approximately 4 months. The potential traffic according to the phase of the development is set out below.

So during phase 3 drilling, 4 months of 32 tankers a day (3500 barrels of oil), 24 months of 24 tanker a day (2640 bopd), 48 months at 16 tankers a day (1760 bopd), 60 months at 8 tankers a day (880 bopd), 104 months at 4 tankers a day (440 bopd)

Peak flow of 3500 bopd maybe only for 4 months, but lets face it even in 2039, Horsehill will be churning out 440 bopd, or around $15,000 a day, 86% net to UKOG. The swampies keep talking about 32 tankers, only lasting 4 months, but the subsequent 6 years,((24*2640)+(48*1760))/72 = 2,053 bopd, which isn’t bad at all. At $39 barrel next after costs and 86% net to UKOG that equates to $69,000 a day, (£55,000). £24.7 million a year net to UKOG after costs!

Net Present Value based on planning projections of BOPD (tankers)

An NPV 10 of revenue £156 million, shows that the current market cap of £70 million hugely undervalues the Horse Hill asset and hence UKOG (no Dunsfold, Isle of Wight etc).

Key assumptions behind NPV calculation

  • 10 percent discount rate

  • Horse Hill production : 2020 1750 bopd (reduced to allow drilling of additional wells to target kimmeridge and portland reservoirs in full, 2000 BOPD in first half 2020, 3500 in Q3/Q4 2020), 2021-2022 2640 bopd (12 tankers a day - 12 in and 12 out), 2023-2028 8 tankers a day (8 in and 8 out), 2027+ 4 tankers (4 in and 4 out)

  • Brent crude average price $60

  • Lift costs $18 a barrel a, marketing and transport to Fawley refinery $2 a barrel

  • HH owned 86% by UKOG in 2021 and 100% in 2022

  • 1GBP = $1.25

Shareprophets article extract (for education purposes only) Expose: UK Oil & Gas - What's the latest on the "Gatwick Gusher"? What is it actually worth? (June 26th 2019) Peter Brailey

Brailey says in his article (extract only)

Shareprophets article extract June 26th 2019

Observations on Shareprophets article

  1. A new CPR is being prepared for the Horse Hill development following the Extended Well Test. The CPR done in 2018 is largely irrelevant as the kimmeridge and portland zones have now been fully assessed over many weeks.

  2. The horizontal wells 1000m in length are expected to produce 1000 bopd, not 780-1080 (source UKOG)

  3. Rates of decline and water injection need overly pessimistic

  4. 2C recoverable of 2 million is out of date.

  5. NPV10 projection at $40 a barrel netback giving £22 million seems widely pessimistic. I would love to see the spreadsheet behind these assumptions. Contrarian NPV of £156 million backed up by solid assumptions which anyone can challenge and relate to data in the recent SCC planning doc and also UKOG sources

  6. Planning consent at Horsehill has been achieved 6 weeks for 25 years

What is UKOG really worth

Tom Winnifrith believes that UKOG is worth zero as a result of the YA (Yorkville Associates) “death spiral” finance.This financing helped acquire the increased stake in Horse Hill from Tellurian (35% interest), meaning that UKOG now hold a controlling 85.635% interest.

What is UKOG really worth when full production fires up at Horse Hill with the 6 wells approved at the Surrey County Council (SCC) planning meeting last week? 3500 BOPD is the maximum amount of oil allowed over 25 years, 16 tankers a day. The SCC meeting was one of the most important decisions in UKOG’s history and significant given Nimby and Swampie concerns in Surrey.

At a share price of 7p, the price/earnings ratio (p/e) is only 14 (3500 bopd) and at 2000 bopd the p/e is 25. The current share price of 1.25p is equivalent to a p/e of 2.56.

Based on this analysis, 5p-7p looks realistic in the medium term and 1.28p(current share price close Sep 20th 2019) looks way too low if the wells at Horse Hill are drilled in optimal condition by the rig arriving any minute.

All marketing, transport and well lift costs have been included as well as increase in share in issue from 6.4 to 7 billion and a conservative average oil price of $61 Brent. If a CPR (competent persons report) is forthcoming based on the EWT (Extended well test), then further cash will be raised from Reserves Based Lending (RBL) not equity placings. (All being well anyway).

This is a top line illustrative exercise to demonstrate that UKOG shares are cheap if the HH-2 vertical well and subsequent horizontal well can be delivered during Q4 2019 without technical issues. Given the EWT has been running for some months with no water issues and steady flows which have been choked due to planning constraints. After the Broadford Bridge mess up, lessons should have been learnt by Steve Sanderson and others.

Dunsfold, Isle of White not added as production not likely during 2020, but 2021 +.Horse Hill, Horley, near Gatwick only.

If a reasonable p/e of 10 is applied this gives 5p per share and even with a 50% risk applied, 2.5p, approximately double the current 1.28p.

UKOG horse hill flare
UKOG3500 bopd
UKOG 2000 bopd

Further reading