The last time I covered UKOG (LSE: UKOG), I concluded that shares in the oil minnow might be an attractive investment if the company manages to execute its drilling and production plans without any setbacks over the next six-to-12 months.
That was at the beginning of October. Since then, the firm has continued to push ahead with its drilling and testing schedule. The company is currently concentrating on developing its Horse Hill-2z (HH-2z) Portland horizontal well. This is designed to tap into the Portland reservoir’s most oil-productive zone, or “sweet spot“, which was defined by the HH-2 pilot well’s successful coring and electric logging programmes.
These operations were completed in the middle of October, and management is hoping to get the HH-2z well into production by year-end.
Drilling for oil is a risky business, and there’s never any guarantee everything will go to plan. However, UKOG’s operations at HH-2z are making progress. We should find out in the next week or two if the company has successfully managed to complete drilling at the prospect. The next stage will be the clean-up and flow testing.
As I noted last time I covered the business, the results from HH-2z could be make-or-break for UKOG. Management claims this new prospect could be “capable of delivering flow rates significantly higher” than the HH-1 vertical Portland discovery well, which has been recorded as being able to produce just over 300 barrels of oil per day.
As my Foolish colleague Alan Oscroft recently noted, on October 9 the company reported production from the Horse Hill-1 test well had reached 41,800 barrels although, as he went on to add, this figure “tells us nothing whatsoever about any prospective daily production rate.” However, what does tell us is that UKOG is now producing oil and, perhaps more importantly, producing revenues.
So what does this all mean for investors? Well, the next few months are going to be critical for the UKOG share price. If the company does have success at its HH-2z well, then there’s a genuine chance this business could become a fully operational oil producer in 2020. On the other hand, if the new prospect fails to live up to expectations, then there will be more delays, costs, and dilution for shareholders ahead.
With this being the case, I’m not a buyer of the stock at current levels. While I believe there could be a significant upside on offer for shareholders if the company does push through and strike black gold. But if it doesn’t, there’s no telling how far the stock could fall. I would rather sit on the sidelines and wait for news of further progress before initiating a position on this particular oiler.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019