The UK Oil & Gas (LSE: UKOG) share price is down 35% over the past 12 months. What’s more, it’s lost 87% of its value since September 2017’s peak, when eager investors were excited over the prospects for the so-called Gatwick Gusher at Horse Hill in West Sussex and the 100bn barrels of oil enthusiasts were claiming could be down there.
I’ve been getting twitchy about the financial situation at UKOG for some time now, and the latest half-year report hasn’t done anything to satisfy my concerns.
After a long statement from the chief executive and details of operational progress, I’ve had to scroll a fair way down to find what I think matters most right now — a financial review.
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Cash burn
The company’s operating loss for the six months to 31 March has dropped, from £3.87m in the same period last year, to £1.56m. But while that might look good, it’s apparently all down to “lower depletion and impairment charges.” Administrative expenses rose from £0.93m to £1.56m.
What seems more significant to me is that net cash outflow from operations climbed from £1.76m last year to £3.45m. And though costs of exploration and asset evaluation dropped from £4.95m, the latest £3.31m outflow was still a significant chunk of cash — for a company that has precious little of the stuff and isn’t making any profits.
Overall cash outflows totalled £5.15m, down from £6.79m, leaving cash and equivalents of £7.2m on the books at 31 March (up from £4.5m in 2018).
Dilution
The obvious question is how is all this cash burn being funded? And the equally clear answer is through new share placings, the most recent of which raised £3.5m (which came after the period end and isn’t included in these half-year figures).
The problem that raises for existing shareholders is dilution. Whatever profits the firm might or might not eventually make from its assets at Horse Hill, that’s being spread across more and more shareholders, leaving less and less for each. When that continues year in, year out, it tends to lead to a share price collapse — which is precisely what we see.
Acquisitions
But the thing that concerns me most is how each new round of funding is being used. Instead of focusing all its efforts on getting commercial quantities of oil flowing from Horse Hill and justifying all the early optimism, UKOG is spending it on acquisitions.
The latest funding round, for example, is to be used to “assess and acquire new opportunities in the UK onshore and elsewhere.” I just don’t see the sense of that, and I really don’t understand why investors continue to stump up new cash.
Production
How’s Horse Hill going? The Horse Hill-1 Test well has achieved “landmark” production of 54,000 barrels of oil so far, and is pumping at a stable rate of around 220 barrels per day. While it’s nice to know there’s actually some oil there, such volumes seem largely insignificant to me.
I just see ongoing cash burn, relentless shareholder dilution, and we’re still waiting for a Competent Person’s Report on proven and probable reserves. UKOG shares are down 6% on the day as I write, and I’m keeping well away.
