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UK Oil & Gas – Revisited

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Is the notorious ‘Gatwick Gusher’ worth re-visiting now flow testing has begun?
flow HH test.jpg
Credit @Anton13579

June marked a milestone month for the controversial Horse Hill discovery in Surrey thanks to the launch of a critical well test program that will test its commerciality. With a lot of the so-called ‘Gatwick Gusher’s’ future potential resting on the results of this test, we have taken another look at the project’s history and how UK investors can get exposure.

What is it?

The Horse Hill-1 well covers 143km2 to the north of Gatwick Airport in Surrey’s Weald basin, targeting conventional Portland sandstone and unconventional Kimmeridge Limestone (KL3/KL4) oil discoveries.

As many will know, the much-hyped well was dubbed the Gatwick Gusher in 2015 following claims of a 100bn barrel find that had the potential to transform Britain’s onshore industry and bring billions to its economy. Memorably, one involved party even claimed that it could be ‘the greatest onshore oil discovery in UK history’.

But these grandiose promises have given rise to widespread criticism, with many questioning whether the site can economically recover oil given its tough geological formations. These worries have only been made worse by repeated delays and ongoing criticism from environmental groups.

The Gatwick Gusher is operated and 65pc-owned by Horse Hill Developments (HHDL), which is itself backed by several AIM firms. The biggest of these are UK Oil & Gas (UKOG) and Alba Minerals (ALBA), which own respective 31pc and 18pc positions in the operator. Meanwhile, Solo Oil (SOLO) owns a 15pc holding, Primorus Investments (PRIM) holds 5pc and Gunsynd (GUN) 2pc.

Weald BAsin

What happened?

After a period of notable silence, on 14 June the UK Oil and Gas Authority announced that it had granted consent for an extended well test program at HH-1. With the site already receiving approval from the Surrey County Council (SCC) and the Environmental Agency, this secured the final piece of regulatory approval needed for the 150-day, fully-funded programme.

The well-test was launched on 27 June and will aim to confirm the commerciality of the Portland and Kimmeridge Limestone discoveries. It follows short-term flow tests at the site in 2016 that achieved an aggregate stable rate of 1,688boepd but faced criticism for covering short periods that may not have allowed the well to settle correctly.

If the latest well test program delivers successful results, then it will pave the way for first permanent oil production at Horse Hill, slated for delivery in 2019. More specifically, a positive outcome is expected to result in the drilling of an appraisal well called HH-2 in late 2018/early 2019. All the planning approval and environmental permits for drilling are already in place. Although this will be drilled as an appraisal well, HHDL has indicated that it will use the site for Portland production in the future.

In the event of success, HHDL is also planning to drill a Kimmeridge side-track called HH-1z in 2019 with the aim of extending HH-1. Finally, it will also submit a further production planning application to the SCC this summer. The licence will seek consent to produce oil initially from HH-1 & 1z, and HH-2, and additional production wells beyond this.

How have the companies involved performed?

Following the news on 14 June, UKOG shares rose 18.7pc to 1.5p, with the firm quickly capitalising on this by announcing a £5m institutional placing at 0.9p the following day. Pre-empting accusations of raising in the wake of a significant share price rise the firm argued that the placing price was in face done at a 12pc discount to its price on 13 June, the day before well test approval.

The company’s shares have continued to soar in subsequent weeks and currently sit at 2.05p. To the business’s credit, it has been boosted by positive sentiment from brokers, with analysts at WH Ireland sharing their belief that flow testing at Horse Hill could add value: ‘Success would be transformative, particularly if a commercial production rate can be achieved from either the KL4 or KL3 horizons, given the massive lateral scale of this potential resource,’ they said.

On 4 July, the firm caused further controversy by announcing another £2m placing at 2p. However, as at the time of writing, it is unclear whether this has a long-lasting effect on sentiment.

Aside from UKOG, the rest of the HHDL partners have seen mixed performance since the Horse Hill update. On the one hand, Alba and Primorus have risen from 0.3p to 0.4p and 0.13p to 0.18p respectively since 14 June. But on the other, Gunsynd has fallen from 0.04p to 0.035 and Solo has dropped to 2.4p after rising to 2.8p.

What can investors do?

The flow testing objectively marks a significant step for Horse Hill in its mission to meet market expectations. Success could initiate a hectic period of newsflow that many investors will want exposure to, but failure could see the bold promises made about the Gatwick Gusher evaporate into hot air. Those who still want exposure at this stage have several options available to them.

Perhaps the most obvious of these is UKOG. As many readers will be aware, UKOG is a highly divisive stock, with Ex-Chairman David Lenigas repeatedly proving himself to be the closest thing to Marmite on AIM. Indeed, one only has to look at the Twitter response to the firm’s most recent placing to see the colourful range of praise to vehement criticism his actions and words create.

You can read last years guardian article by clicking the link here

Regardless, there are arguments to be made on both sides when it comes to buying UKOG. Many will continue to claim that the firm is over-valued given Horse Hill’s early development, and its recent rise will have sealed this belief in the minds of many of detractors. On the flipside, some will argue that the firm has now got its funding out of the way and is gaining momentum. With this in mind, if current work at Horse Hill is successful the business could be well set to benefit. Who knows?

Those who like Horse Hill but want to steer clear of UKOG may be better off looking at HHDL’s other stakeholders. As mentioned, these companies -particularly Gunsynd and Solo Oil- have not enjoyed as much support as UKOG since flow testing was approved. If you believe that Horse Hill will end up knocking it out of the park, then these firms could offer a cheaper alternative for exposure.

Beyond Horse Hill’s partners, another decent opportunity could be Angus Energy (ANGS), which majority-owns and operates conventional oil fields Brockham and Lidsey near Horse Hill in the Weald basin.

The company sank 16pc on 4th July after announcing a that it had received notice of exercise of a £400,000 convertible security, and, as at the time of writing, it sits at 5.6p, down from 26.6p in November. Given that the firm reported the presence of multiple oil composites at Kimmeridge on Monday, this price could provide a great way of getting exposure to the Weald basin’s potential.

The company made headlines last summer featuring On South East Today, Evening News.
The authour holds no shares however was remunerated for the article