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UK Oil & Gas share price: what to expect from annual results

Small cap oil firm UK Oil & Gas (UKOG) announces earnings next week, but there is little sign that production has reached a sustainable footing yet.

When is UKOG’s earnings date?

UKOG reports earnings on 28 June.

What does the City expect?

UK Oil & Gas (UKOG) suffered an operating loss of £3.7 million last year, while net debt stood at almost £9 million. The company is focused on securing more results from its Horse Hill project in the south of England. A recent pressure test was reported to be successful, the company said, with results better than previous tests earlier in the year. Production volumes from the Portland reservoir have now reached 20,500 barrels, with a production rate of 220 barrels per day (bpd).

Overall testing costs have now been offset by sales revenues, according to the company. Fresh drilling in coming months is expected to boost production in due course. The firm has also signalled its intent to make acquisitions overseas, though this has required a share placing which has diluted investors.

As noted by IG’s Oliver Smith, the company’s focus on acquiring new assets is odd, given that it is still far from producing profits on a sustainable footing. Drilling and test production across a range of assets is expected to take until the end of 2020, with little sign that its oft-mentioned ‘Gatwick Gusher’ is close to providing the level of output needed to restore UKOG’s finances.

UKOG falls into the ‘high risk, high reward’ category. The list of oil exploration firms that have disappeared without a trace is a long one. Everyone remembers the firms that have gone on to great success, or have been acquired by an oil major at a substantial premium to the share price. But small cap oil firms follow a crucial rule of trading and investing; most of the gains come from one or two firms, and the profits made here have to make up for the small losses incurred in the majority of the others.

Good traders know that, out of ten trades, only two or three need to be big winners, so long as the other seven or eight are only small losers. This is where risk management comes in, risking only a small amount of capital on each trade. The same principle applies to small cap oil exploration firms, and small cap miners too. A portfolio of ten such stocks could see two succeed, but eight record small losses.

UKOG could be one of those winners, although at present it has a long way to go before it sees sustainable production levels.

How to trade UKOG’s share price

Volatility in UKOG’s share price has risen over the past month, with the fourteen-day average true range (ATR) hitting 0.06, 16% of the current share price value. The overall downtrend in the shares seen since mid-2017 suggests that looking to sell the rallies is still an effective strategy.

UKOG share price: technical analysis

As noted above, UKOG has steadily lost ground since the middle of 2017. A rally in February to 2p hit trendline resistance from the 2017 peak, creating a lower high. Support has been found around 0.9p, with a break below this level representing a notably bearish development. A rebound above 1.3p might suggest that more near-term upside is on the way, targeting the 2p high from February.

UKOG still needs to prove itself

UKOG could turn out to be one of the great oil exploration firms of our time. However, it has yet to show a firm record of production growth. Investors have found it difficult to keep faith with the firm, as witnessed by the decline in the share price over the past two years (although part of this is down to dilution through share placings). The risks of investing in it are high, and traders will be looking to take advantage of the prevailing downtrend.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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