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UK Oil and Gas Plc (UKOG)

JULY 2018

ATLANTIC ADVISORY

UK Oil and Gas Plc (UKOG) 01

owned by Conoco, is located 20km north west of Horse Hill.

Production started in 1990 and continues to this day. The wells initially produced around 9,000 barrels of oil a month but that has since tapered off to around 2,000.

While Palmers Wood is considered small fry by global standards, it at least confirms the area has oil and it can be extracted. Today, there are 13 producing sites in the Weald Basin, but none are of a major scale.

However, the discovery at Horse Hill has put the area well and truly back on the radar.

The Gatwick GusherIn late 2014, UKOG made a massive breakthrough.

Preliminary results from drilling at Horse Hill indicated a resource much bigger than previously thought.

UKOG had discovered potential oil not only in the Portland sandstone, but also in the vast layers of the Kimmeridge limestone deposits below.

The excitement really hit the roof in April 2015 when Nutech, a world leader at reservoir analysis, independently estimated the P50 (most likely) oil in place to be 158 million barrels per square mile.

The media went into a meltdown, nicknaming the find the ‘Gatwick Gusher’.

After extrapolating the numbers, the BBC announced that there could be 100 billion barrels of oil in the Weald Basin.

UKOG then hired Schlumberger to give a second opinion. They came up with an even bigger number – 271.4 million barrels oil in place per square mile.

Both Nutech and Schlumberger then calculated the potential oil in place for the entire Weald basin.

UK Oil and Gas remains one of the most talked about and actively traded stocks in the UK.

A series of discoveries has led to speculation that the UKOG could be sitting on a vast oil resource just south of London.

Let’s take a closer look at the facts behind the hype.

A brief background UKOG hasn’t been around very long, having been formed in December 2013. Its straightforward strategy is to build stakes in UK oil and gas assets.

To date, UKOG has built up portfolio of 9 oil and gas assets. Two of these are at production stage and therefore generate cash for the company; four are at appraisal stage and the remaining three are exploration licences.

Its core assets cover a vast acreage of 650 sq km in the Weald and Purbeck-Wight basins of Southern England.

The fact most of UKOG’s assets are onshore is a point of difference as most other UK energy plays are focused on offshore exploration – which comes with additional costs, complexities and risks.

To date most of the attention has been given to its first investment, Horse Hill, of which it has a 31.2% interest.

Horse Hill is located in a geological structure called the Weald Basin. Of more interest is that Horse Hill also happens to be only about 3km north of Gatwick Airport.

The Weald has long been considered an area with hydrocarbon potential with oil and gas drilling taking place for over 100 years.

But it was not until 1983 that a commercial find of any significance was found. Palmers Wood,

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UK Oil and Gas Plc (UKOG) 02

Nutech arrived at 9.245 billion barrels (P50) and Schlumberger at 10.993 billion barrels (mean oil in place).

It should be stressed that these are oil-in-place (OIP) estimates and are not to be confused with Resources or Reserves, but the point being the discovery looks massive.

On the road to recovery Like all major discoveries, Horse Hill is only as good as its recovery potential.

UKOG fully admits it’s still in the early stages of estimating the overall recovery rates of its discovery.

For now, based on comparisons with geologically similar fields in the US and Siberia, the best estimate is between 3-15% of the oil-in-place. But that is fairly loose analysis, so should not be taken too seriously.

However, flow testing from Horse Hill has so far produced encouraging results. The first of three zones to be flow tested at Horse Hill delivered 450 barrels of oil over a two-day period without a pump – a flow rate the company believes “probably hasn’t happened onshore UK for decades”. This rate was subsequently improved to 1,688 barrels per day.

The flow rate suggests that the Kimmeridge limestone that sits below the Portland sandstone is naturally fractured rock, allowing the oil to move freely to the surface.

If this is true, there would be no need for fracking.

This is a critical point because there is an army of protestors from the environmental movement, not to mention local residents, who will kick and scream at anything seen as ‘risky’.

Large scale onshore production will be difficult to execute no matter where its carried out in the UK. If the area is populated, there is perceived risk to people. If the area is not populated, there is perceived risk to the environment. And large parts of the Weald are protected ‘Green Belt’.

UKOG has countered the voices of discontent by pointing out that the UK oil and gas industry employs hundreds of thousands of people and contributes over £5 billion in tax revenues annually to HM Treasury. On top of that, as North Sea reserves dwindle, energy security is fast becoming a national issue.

UKOG has plenty of time in which to explore its licence areas.

The Oil & Gas Authority (OGA), the regulator of the industry, has granted a four year extension to the exploration licences that cover Horse Hill and nearby sites. This gives UKOG until the summer of 2021.

Back in the spotlightUKOG successfully raised £12.5 million of new capital in recent months. The money was raised from institutional investors at only a small discount to the market price, which is a positive sign.

This alleviates financial pressure as the cash with fund its projects over the next 18 months.

The priority is to appraise and develop its core projects, in particular Horse Hill. Further well drilling and testing is expected to reveal an update on the estimated oil reserves as well as the flow rates, which were last tested in 2016. The flow rates are critical in determining the commercial viability of the discoveries.

The new work programme has already begun. The aim is to prove the potential for commercial production with a view to possibly kicking things off next year.

Investors will be hoping the new data moves the company closer to production and in doing so, will propel the shares higher.

SummaryUK Oil & Gas is without a doubt one of the most exciting prospects in the UK energy sector.

The major discoveries at Horse Hill and Broadford Bridge have uncovered a potentially huge new resource that’s been buried in the

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Kimmeridge limestone of the Weald Basin.

UKOG as the largest licence holder in the region is perfectly positioned to reap the rewards from what’s been called the “Kimmeridge limestone play”.

There’s still much to be done in terms of determining the scale of recoverable oil but the results of previous flow testing at Horse Hill have been promising. The results from the latest flow testing could be the next catalyst for the shares.

Investors should note that since listing the shares have had several huge upward spikes only to gradually fall back down again. This is a typical pattern among small cap resource plays as positive newsflow brings a short-lived surge of attention.

For example, the shares reached around 9p towards the end of 2017 but can now be bought for less than 3p. Investors may wish to take advantage of the dips and cash in on the spikes.

Longer term, we believe UKOG has the potential to deliver significant upside for shareholders, particularly as it moves closer towards proving the commercial viability of its finds.

Strengths • Two potentially significant oil discoveries • Long-dated exploration licence• Huge acreage yet to explore• Could attract a heavyweight partner or takeover • Energy security threat will bolster political support • Low market cap relative to potential

Weaknesses• Major onshore developments could be met with resistance• Longer-term funding situation unclear• Recoverable oil still uncertain

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