UK Oil & Gas (UKOG) share price: hit and hope?

UK Oil & Gas (UKOG) has almost unprecedented investor interest – is it really a long-term winner, or are investor expectations too high?

The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results
UK Oil & Gas (UKOG) share price: hit and hope?

By all metrics, UK Oil & Gas (UKOG) is an extraordinary stock.

A mixture of patriotism, hyperactivity on internet bulletin boards and high trading volumes have led to wild swings in the share price.

Launched by serial entrepreneur, David Lenigas, as a cash shell in late December 2013, UKOG is an oil and gas exploration company with several assets in the Weald Basin of the South of England.

In March 2016 it attracted national news coverage with the discovery of the ‘Gatwick Gusher’, an onshore oil field at Horse Hill in Surrey, and claims of up to 100 billion barrels of oil, which has sparked ongoing investor interest ever since.

The company is AIM-listed, one of many junior exploration and production businesses that have listed on the market. As of April 2019, there were 93 companies in the AIM Energy classification, of which just 15 reported profits.

To finance the firm’s activity to date, UKOG has regularly tapped the markets for more cash to expand operations, with a further placing raising £3.5 million in March 2019. This has caused significant dilution for shareholders, doubling the number of share outstanding over the past two years, to a fraction over 6 billion, a ten fold increase since December 2013.

The result of this is that while the share price has gone nowhere over five years, the market cap has increased from a very low base.

Source: IG, Bloomberg, April 2019

UKOG – the speculator’s favourite

Now sporting a market cap of just over £70 million, but never having got close to generating meaningful revenues, data on search engine queries reveals astonishing search volumes for such a small business. There are more searches in the UK for terms such as 'UKOG' or 'UKOG share price' than for similar searches around HSBC’s share price.

This is reflected in the number of posts on the popular bulletin board, ADVFN; 137,000 posts for the former and just 8000 posts on the latter.

Unusually for a high profile share, it is not covered by any sell side analysts and has a shareholder list that is almost uniformly made up of non-professional investors. For many people that would be a genuine red flag: in the absence of institutional investors, have the necessary levels of due diligence been performed by the shareholders? UKOG’s management have been awarded share options as part of their compensation, but appear not to own many shares (if any) in the business.

Possibly uniquely, the ten largest registered owners are all retail investor platforms, with Hargreaves Lansdown and Interactive Investor alone accounting for 40% of the holders. IG’s clients are also active in this stock, and at the turn of the year nearly 3% of clients had a position in it.

Table: UKOG shareholder list

Owner Holding %
Hargreaves Lansdown 26.0
Interactive Investor 14.0
Halifax Share Dealing 12.8
Barclays (client accounts) 7.5
HSBC Holdings 4.6
Share Centre 3.2
AJ Bell 2.4
Equiniti Shareview 2.4
IG Markets 1.9
Jarvis Investment Management 1.9
Total 76.7

Source: Bloomberg, April 2019

Oil exploration is costly

Finding and the extracting oil is a costly business, particularly in the crowded South East of England, and UKOG is not alone in having its share of disappointments. 2018 saw write-offs totaling £11.56 million, with the announcement in February of ‘formation damage’ at the Broadford Bridge oil well knocking more than £50 million off the market cap in one day.

This is the crux of the problem. Finding oil is relatively simple compared to the challenges of extracting it, and it simply may not be viable to pump commercial quantities of oil to the surface. Revenues of just £0.2 million a year reflect this difficulty.

UKOG clearly outlines its project plans in the latest investor presentation, prospecting in a number of areas, but the reality is that this is very much an exploration company which could be many years from making large revenues. If indeed it ever gets there.

The extract from the presentation below illustrates this point quite neatly.

Source: UKOG Corp Presentation, 19 November 2018

The question investors will inevitably be asking, is why a loss-making business has continued to use precious cash on acquiring further assets from Europa Oil & Gas and Union Jack Oil, if the existing asset at Horse Hill is expected to be so productive?

Another concern for investors would be that company’s share price is determined by speculators, rather than investors, many of whom are waiting for the next big price spike. If, or when, the share price does rally, it’s inevitable that not everyone will be able to sell at once.

Conclusion – UKOG just another ‘lottery stock’?

UKOG has similar characteristics to Sirius Minerals, a North Yorkshire potash miner, only on a scale many times smaller. It’s easy to dismiss these types of loss-making thematic stocks as ones to avoid, and certainly the share price volatility of both these businesses have a casino-like element which offers a high probability of making capital losses – yet by their very nature some of them will pay off.

The academics Bjorn Eraker and Mark Ready, in a 2014 paper, ran an analysis of US-listed penny stocks, finding that a substantial majority of these investments underperformed the wider market when costs were taken into account. However, the dataset (image below) exhibited strong positive skew, meaning that there were very large outsized gains to be made in a smaller subset of names.

Source: Do Investors Overpay for Stocks with Lottery-like Payoffs? Eraker & Ready, April 2014

UKOG may not be a lottery ticket, in the truest sense, but investors should take more care than usual before allocating large amounts of their capital to it.

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