After several years of consistent determination and promising results, Union Jack is now witnessing a sea change in its business and prospects
“…there’s no doubt this is a British energy company that has come good just as the UK’s pressing need for indigenous oil and gas has become apparent, and energy prices are soaring. UJO’s share price has come a long way over the past few months, but may still be somewhat undervalued…”
The fortunes of Union Jack Oil (AIM:UJO) have continued to rise since TMS last reported on the UK oil and gas producer. Robust production at the Wressle field in which the company holds a 40pc stake has driven surging revenues, up from £158,004 in 2020 to £1,894,875 to last year, and to more than $8m this summer, allowing UJO to move into profit for the first time.
UJO has interests in a cluster of producing and exploratory assets around the Humber, a key UK energy hub, host to a web of world-scale chemical and oil refinery operations. The most lucrative is its two-fifths ownership of the PEDL180 and PEDL182 licences at Wressle, operated by exploration and production independent Egdon Resources (EDR:LON), which are on-trend with the producing Crosby Warren field and the Broughton B-1 and Brigg-1 discoveries.
Wressle still going strong
Coiled tubing operations undertaken last August at the Wressle-1 well have proved transformative for the venture partners, kickstarting flow rates of nearly 900 bopd, well above pre-production expectations of 500 bopd, despite a significantly restricted choke setting. The well also produced 480,000 cubic feet of gas per day, indicating its potential to be the UK’s second largest onshore producer after the prolific Wytch Farm in Dorset. Analysis of bottom hole pressure data indicates that once the field’s surface facilities are optimised, and assuming a flowing tubing head pressure of 400 pounds per square inch gauge (psig) is maintained, the well could flow at rates of 1,216 bopd (or at 1,543 bopd at a pressure of 300 psig). Though instantaneous rates of more than 1,000 bopd have been recorded, production is currently controlled by the 10 tonnes per day gas incineration boundary set by the operation’s current Environmental Agency (EA) permit.
A revised field development plan, allowing for higher production, was approved earlier this summer by the North Sea Transition Authority (NSTA) – formerly known as the Oil and Gas Authority. The plan is to export gas through a short pipeline (of approximately 600 metres) from the Wressle site into the local gas distribution network. If planning and EA consents are granted work is scheduled for completion towards the end of the year, in time for gas sales next winter. Environmental monitoring throughout operations to date has shown no measurable impact on surface or groundwater quality or related seismicity, and noise levels are within the permitted levels. Work is also underway to tap Wressle’s Penistone Flags reservoir, which has gross mid-case contingent resources of 1.53 million barrels of oil and two billion cubic feet of gas. UJO has commissioned energy consultancy Gaffney Cline to undertake a Reserves and Resources Report to further define Wressle’s potential by analysing 1P, 2P and 3P reserve values for the field’s Ashover Grit and Wingfield Flags reservoirs, setting an indicative 2C profile for the Penistone Flags reservoir, and to highlight any additional potential reservoirs.
Wressle continues to supercharge UJO’s financial performance, even under the prevailing operational restrictions. Producing under natural flow with zero water cut, the well has now earned the company cumulative net revenues of $8m. UJO’s most recent Wressle update stated cash balances of more than £9m, with a maiden profit due to be reported for the unaudited half year period ended 30 June 2022. The company is debt free, and ‘funded for G&A, OPEX and contracted or planned CAPEX costs, including any drilling activities for at least the next 12 months.’ Given UJO’s current capital expenditure programme, the company ‘does not expect’ the Government’s new Energy Profits Levy to be material.
Progress at West Newton
UJO’s other flagship interest is its 16.665pc stake in the WNA-1, WNA-2 and WNB-1z discoveries at the PEDL183 field in West Newton, majority owned by Reabold Resources. The wells are on-trend with the established offshore Hewett gas complex, and target Permian Basin carbonates analogous to those extensively explored and produced onshore in the Netherlands, Germany and Poland.
Extended well testing undertaken last year reported ‘substantial hydrocarbon discoveries’ within the prospect’s Kirkham Abbey formation. Gas and light oil/condensate was recovered to surface from both the field’s WNA-2 and WNB-1z wells, and multiple samples gathered for analysis. Best estimates of the reservoir’s in-place oil and gas volumetrics indicate thicknesses of 68 to 75 metres at depths of around 1,700 and 1,800 metres. UJO reports that ‘two key issues which constrained hydrocarbon production during last year’s tests were local formation damage and a lower than anticipated benefit from the acidisation process, as the acid stimulation used is now interpreted as only having interacted with a small section of the perforated intervals.’ The partners believe ‘optimised development well designs could deliver good hydrocarbon productivity by drilling horizontal wells.’
A planned conceptual development plan envisages a phased eight well gas development that will target recoverable hydrocarbon volumes of 35 million boe with a sales gas component of 203 Bcf. An initial five well development drilling campaign, with first gas anticipated as soon as 2025, anticipates plateau production rates of 44 Mcf per day of sales gas. A further three wells drilled from 2028 to 2030 would maintain plateau production of sales gas. Economic modelling calculates a gross pre-tax NPV(10pc) of $448m and a pre-tax IRR of 87pc, based on recoverable sales gas and small volumes of associated liquids. A Competent Person’s Report is expected in Q3 2022, and a horizontal appraisal well is planned for H1 2023, paving the way for a decision on a field development plan. It is envisaged that – aside from the programme’s first well – future drilling costs will be funded from initial production.
Other interests
UJO has interests in several other projects, most of them, like Wressle, operated by Egdon Resources. The company has a 45pc interest in the PEDL253 field at Biscathorpe, situated within the proven hydrocarbon fairway of the South Humber Basin, and on-trend with the Saltfleetby gasfield prospect. Drilling and logging operations carried out in 2019 at the field’s Biscathorpe-2 well indicated the presence of a 68 metre live oil column, and a full suite of gases ranging from methane through to pentane. The gross mean prospective resources associated with the targeted Basal Westphalian formation are estimated in the range of 3.95 to 6.69 million barrels of oil. The venture partners are currently seeking to appeal against the refusal of planning permission.
UJO has a 55pc stake in the PEDL005(R) field at Keddington, located along the prospective East Barkwith Ridge, an east west structural high on the southern margin of the Humber Basin, and currently producing from Carboniferous Westphalian sandstone reservoirs. The company says that geological and geophysical studies indicate that potentially significant resources remain unswept at Keddington, with opportunities to potentially increase production by drilling a development well from the existing production site. A subsurface review has highlighted a viable drilling location in the east of the field targeting up to 180,000 barrels of oil: planning consent is already in place for a potential side-track from one of the field’s existing wells. There are also near-field exploration opportunities at Keddington South (mean prospective resources of 635,000 barrels of oil) and the Louth Prospect (mean prospective resources of 600,000 barrels of oil).
UJO has a 50pc interest in the PEDL241 field at North Kelsey, a conventional oil prospect along trend and analogous to the Wressle oil development. 3D seismic data indicates gross prospective resources ranging from 4.66 million barrels up to 8.47 million barrels of oil, with an aggregated mean resource volume of 6.47 million barrels. The partners are appealing a decision by Lincolnshire County Council to block an application to extend the permit to drill the North Kelsey-1 exploration well. UJO confirmed this week that appeal documentation has been submitted to the council’s planners and the appeal will now be validated before an inspector is appointed and a timetable defined.
UJO has stakes in two other EDR prospects that may be repurposed for geothermal production. It has a 20pc interest in Fiskerton Airfield, where the current focus is on maximising oil production from existing wells, after which they may be used to manage water produced from other sites, with longer term possibilities for geothermal. It also has a 16.67pc interest in Dukes Wood, where a programme to plug the existing oil well and recomplete it for geothermal heat production has been developed and submitted to the NSTA.
UJO expanded its portfolio into the North Sea last year by taking a 2.5pc interest in the Claymore Piper Royalty Complex, which has so far produced more than 1.8 billion barrels of oil and 262 Bcf of gas. The company considers the acquisition an attractive entry strategy to the North Sea offering a reliable return without exposure to operational risk. Under the agreement UJO will receive income from the Claymore/Piper Complex for the rest of its operating life, which independent estimates put at 15 years. The transaction has generated some £170,000 to date.
The demand for energy
Wressle came on-stream just as the UK, along with the rest of Europe, began to grapple with profound energy supply issues exposed by the pandemic, and later aggravated by the Ukraine conflict. Energy policy oriented towards net zero infrastructure had constrained investment in gas facilities, leaving Europe dependent on imported gas: the continent’s domestic gas supplies have fallen by a third or so in the past decade. The UK’s predicament is particularly acute in some respects, its storage capacity run down during the decades in which it could rely on a ready North Sea supply. Britain now bids for some 20pc of its gas in an increasingly competitive liquefied natural gas (LNG) market. As Asia’s fast-growing economies have moved away from coal they have become rivals for the same supplies of LNG that Europe has come to rely on from countries such as the US and Qatar. The phasing out of Russian supplies was an unwelcome, and severe, tightening of the screw.
The threat of recession may temper demand for energy somewhat. But the fundamental drivers of demand for hydrocarbons remain. Last year the UK was able to meet 40pc of its gas requirements from domestic supply, but the NSTA’s most recent domestic oil and gas supply forecast suggested native production was well below what would be required to meet the Government’s Balanced Net Zero Pathway to 2050. A report by energy consultants Wood Mackenzie examining the levers the North Sea can pull to increase production said ‘the UK is sorely lacking in gas and will be heavily reliant on imports in all scenarios.’ The Government’s energy security strategy aims to produce 95pc of the UK’s electricity from low-carbon sources by 2030 and reduce the country’s vulnerability to volatile global commodity markets. But it also stresses the imperative to source more fossil fuels domestically, both to meet urgent immediate demand and ensure sufficient residual gas production to meet 2050 net zero targets. This year the UK’s North Sea regulator will hold its first oil and gas licensing round since 2020.
Outlook
UJO’s final results for the year ended 31 December 2021, published in May, tell the story of the company’s financial turnaround. A gross profit of £782,562 was recorded against a loss of £158,004 for the previous year. There was still a loss for the year of £853,013, but down from £1,865,515 for 2020. As noted above UJO expects to report a maiden profit for the half year period ended 30 June 2022.
The company’s strengthened financial position is allowing it to develop a capital allocation and distribution policy for the payment of a dividend or share repurchase programme. UJO will maintain ‘a consistent and disciplined approach to capital allocation’ to continue to develop its operations, but will seek shareholder approval to free up capital to allow for the payment of dividends or share repurchase, in accordance with regulations specifying that such programmes can only be funded through distributable reserves. Following shareholder approval at the company’s AGM , held in June, UJO is now pursuing a reduction of capital exercise through the standard court procedure. When complete ‘the Company will issue a further announcement outlining details of a share buy back scheme or the payment of a maiden dividend.’
In UJO’s annual report Executive Chairman David Bramhill said: ‘After several years of consistent determination and promising results, Union Jack is now witnessing a sea change in its business and prospects, where production from Wressle has materially transformed the financial position of our Company.’ UJO seems to have earned the right to make such a bold claim, and shareholders agree: the company’s share price has surged since Wressle’s supercharged performance, up 95pc over the past six months to around 28p at the time of writing, taking the company’s market cap to just over £31m.
A few catalysts could drive the price higher still. Gaffney Cline’s forthcoming Reserves and Resources Report is likely to paint a bright picture for Wressle’s prospects. The company and its partners have set out a new course for West Newton. Planning breakthroughs at Biscathorpe and North Kelsey could be on the horizon, particularly given the UK’s newly favourable climate for hydrocarbons exploration. Prospective investors may wish to review a detailed analyst’s note by consultants Research Tree recently published to the company’s website.
Nothing is guaranteed of course. The company’s current momentum depends on Wressle’s continuing strong performance. And it should be noted that UJO has had to return to the market over the years to fund exploration, most recently for a £3 fundraise last September. That, however, was before the cash started rolling in from Wressle, sufficient, it would seem, to pay for new development. Investors will need to exercise their own judgement as to how much of UJO’s upside might be priced into the company’s present value. But there’s no doubt this is a British energy company that has come good just as the UK’s pressing need for indigenous oil and gas has become apparent, and energy prices are soaring. UJO’s share price has come a long way over the past few months, but at 28p may still be somewhat undervalued.
