On 6 September, 2014 I recommended my readers to BUY UKOG, then at 1.19 pence. Since then, the stock has been on a wild roller coaster ride, dropping below 0.40 pence then swinging to 4.75 pence to touch a new historic high on 9 April, 2015, and then dropping to 1.57 pence on 17 April, 2015.
I have stressed many times that the UK AIM is subject to high risks as well as rewards. I do hope many did sell into profit above 4.0 pence which would translate to a gain of a few hundred percentage points if you have bought below 1.0 pence.
But why the drop from 4.75 pence to 1.57 pence in a matter of days? Well, I personally think the media overplayed the discovery. UKOG mentioned that the consortium at Horse Hill (which UKOG has a 20% share) discovered potential oil in place of 158 million barrels per sq mile, based on the analysis of electric logs by NUTECH, which is a leader in petrol analysis in the US. The Horse Hill consortium owns 55 sq miles of the prospect. So this works out to a total potential oil in place of 8.7 billion barrels.
The prospect lies in Weald Basin, a widely known area in the UK with ongoing production in several fields. However, the Weald area is 1,100 sq miles and UKOG said that the potential for the entire Weald area could be as much as 50 - 100 billion barrels of oil. This was when the media misinterpreted the information and said that UKOG discovered 100 billion barrels of potential oil in place. And what follows next, were a lot of skepticism by short traders, geologists and journalists who claimed that it was not possible for UKOG to discover so much oil within a prospect and with only ONE well. They even wrote several pieces on the information being unreliable and that the Chairman, David Lenigas has been widely known to ramp up his own companies' shares. Several short traders too wrote damaging articles and said that UKOG was over stating its find.
UKOG later issued another RNS to clarify that they did not say they discovered 100 billion barrels of potential oil in place but merely 8.7 billion barrels. What follows next was another barrage of criticism being leveled at UKOG and David Lenigas, stating that the authorities demanded that UKOG retracted its statement. And the share price tanked further.
In my view the media had gotten many of the facts wrong:
. UKOG did not mention they discovered 100 billion barrels, merely 8.7 billion barrels as reported in its RNS
. The discovery of the 8.7 billion barrels was supported by detailed analysis by NUTECH, a leader in its field. The Bakken oil field was discovered by NUTECH, and you should probably know by now that the Bakken is one of the most prolific producers in US.
. The analysis by NUTECH is not done with reference to only one well, but by extrapolating with more than 113 wells which NUTECH has anlaysed in the Weald Basin. This was completely left out by the media.
. The authorities did not reprimand UKOG. UKOG released the clarification upon the advise of their lawyers. But again the media twisted the facts.
So it is important that one separates the facts from lies or half truths.
Having said that, I must disclose that I am long in UKOG. No, I did not sell into the rise, but for anyone who did, and made a good profit, well done. For those who did, they did nothing wrong. A bird in hand is still worth more than two in the bush.
My reason for not selling:
. NUTECH is still in the process of analysing the Portland Sandstone structure at Horse Hill and the Kimmeridge Clay structure at the Isles of Wight. UKOG has a 77.5% interest on the PEDL (Petroleum Exploration and Development Licence) at the Isles of Wight. These news are still pending and could increase the amount of potential oil in place, benefiting UKOG further
. Besides Horse Hill and the Isles of Wight, UKOG also holds interests in several oil producing companies. UKOG does earn a revenue.
. NUTECH estimated that the 8.7 billion barrels have a recovery factor of 3% - 15%. Supposing we adopt the lowest at 3%, the amount will be
8.7 billion x 3% x 20% (UKOG share in Horse Hill) = 52.2 million barrels.
Using the minimum of 1 Pound per barrel of potential oil in place, this is equivalent to having 52.2 million Pounds.
Dividing that with the current market cap of 30 million Pounds, that is equivalent to a price of at least 3.20 pence.
The 3.20 pence does not even include the following:
.The potential of the Isles of Wight which NUTECH estimated contain 40 million barrels in the Portland Limestone, and 76.5 million barrels in the Triassic Sherwood Sandstone. On top of that, the Triassic Sherwood Sandstone is estimated to contain 197 billion standard cubic feet of gas (bcf).
. The Kimmeridge Clay structure at the Isles of Wight which NUTECH is presently analysing.
. The estimate of the Portland Sandstone, Oxford and Lias structures at Horse Hill which NUTECH is also presently assessing.
. All other interests in companies which are currently producing.
Now, some have opined that the value of potential oil in place in the ground could be anywhere between 5 - 7 Dollars or 3 - 4 Pounds per barrel. Now multiply that by 3.20 pence. Remember, we assume that only 3% of the amount is recoverable. What if it is 9% or 15%? If UKGO can prove commercial success in extracting the oil then it will worth a lot more - A LOT MORE.
That is why I am holding. But neither am I encouraging you to hold as well. Our risk appetite differs so you have to evaluate the potential yourself. The worst case is that UKOG fails to prove that the oil can be extracted commercially, then the share price will tank. The tough decision is that whether you can afford to lose more than 1.0 pence per share (based on 1.57 pence close on 17 April, 2015) vs the gain of many multiples. That is why I always tell my readers, never invest in anything you can't afford to lose.
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