With the prospect of good news on the horizon is now the time for Union Jack Oil ?
“…though a change of fracking policy would have been an unexpected bonus for UJO, it’s a secondary issue. The company’s fundamentals are robust…”
The value of UK-focused oil and gas producer Union Jack Oil (AIM:UJO) has nearly doubled over the past 12 months, the outstanding performance of the Wressle licence in which the company holds a 40pc stake driving surging revenues allowing it to move into profit for the first time.
UJO’s shares wobbled last month as the UK’s ongoing political drama spilled over into domestic energy policy, and some investors burdened a Wressle Reserves and Resources report with unrealistic expectations. Here we take a step back, and put the whirlwind developments of the past few weeks into the wider perspective of the company’s progress over the past year.
Continued progress at Wressle
UJO has interests in a cluster of producing and exploratory assets in and around the UK’s Humber energy hub, home to a web of world-scale chemical and oil refinery operations. The most lucrative is its two-fifths holding in Wressle’s PEDL180 and PEDL182 fields, both operated by Egdon Resources. Highly successful coiled tubing operations in August 2021 at the Wressle-1 well kickstarted flow rates of nearly 900 bopd, well above pre-production expectations of 500 bopd despite a choke setting constrained by the 10 tonnes per day gas incineration boundary set by the operation’s current Environmental Agency permit. Analysis of bottom hole pressure data indicated that once the field’s surface facilities are optimised the well could flow at rates of 1,200 to 1,500 bopd. The well also produced 480,000 cubic feet of gas per day, indicating a hydrocarbons potential rivalling the prolific Wytch Farm in Dorset. An application to integrate Wressle into the local gas distribution network – and thereby remove production restrictions – was approved earlier this summer by the North Sea Transition Authority (NSTA). The project is scheduled for completion towards the end of the year, in time for gas sales next winter.
The performance of the well, which has produced more than 225,000 barrels of oil with no water cut, has supercharged UJO’s finances. The company’s most recent interim report reported soaring revenues for H1 2022, up from £241,467 to £4,384,254, facilitating a maiden profit of £2,034,086. An update last month stated 2022 revenues to date of more than £6,846,000, and a cash balance of over £10m.
UJO’s share price has risen in lockstep over the past 12 months, up 95pc to 33p at the time of writing, taking the company’s market cap to £37m. Unsurprisingly, perhaps, expectations were sky high for a Wressle Reserves and Resources Report commissioned from energy consultancy Gaffney, Cline & Associates, which, published last month, stated that the licence’s Ashover Grit and Wingfield Flags reserves (as at 30 June 2022) stood at 1P 320,000, 2P 670,000 and 3P 1,030,000. A ‘Speculative Deeper Oil-Water Contact’ assessment of Ashover estimated an increased STOIIP (Stock Tank Oil Initially in Place) of 10.12 million barrels of oil (MMBbl) and a recoverable resource of 2.43 MMBbl. An Illustrative Production Scenario indicated a five year constrained plateau production rate of 800 barrels of oil per day.
Though the report was, as expected, positive, the market’s reaction was volatile. UJO’s share price, which had spiked to 50p in anticipation of its publication quickly fell back to 30p, some investors unsure how to assess it, others deciding to take profits. The price has since stabilised around the 30 to 35p mark, still 10p or so above the 20 to 25p range it had occupied through the summer, reflecting the market’s considered verdict that Wressle is still on course. As UJO noted on its publication, should ‘the Deeper Oil-Water Contact potential of the Ashover Grit reservoir become proven, the incremental value of Wressle as a development would be transformational for the Wressle partners.’
A new CPR for West Newton
Wressle has, understandably, been at the forefront of investors’ minds this year, but UJO has reported significant developments regarding the company’s other major interest, 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.
A conceptual development plan, to be tested by an appraisal well planned for H1 2023, 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 published last month prepared by RPS Energy Canada estimated ‘Best Case Gross Unrisked Contingent Technically Recoverable Sales Gas’ at West Newton at 197.6 Bcf, with an unusually high geological chance of success of 85.5pc. The gross NPV10 risked value of the contingent gas resource was set at $396.1m.
UJO has interests in several other projects, most of them, like Wressle, operated by Egdon. 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 planning permission from Lincolnshire County Council for side-tracking operations.
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 also 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 has an interest in geothermal through a 16.67pc stake 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. The company 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. UJO considers the acquisition an attractive entry strategy to the North Sea offering a reliable return without exposure to operational risk. Under the agreement the company 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 UK energy market: a complex picture
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, later aggravated by the Ukraine conflict. Long-term under investment in gas facilities had left Europe dependent on imported gas. The UK 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 contended with Europe forLNG supplies the US and the Middle East. The phasing out of Russian supplies was an unwelcome, and severe, tightening of the screw.
Fortunately for consumers an immediate crisis has been averted. European gas prices have dropped by almost two-thirds since their summer peak as efforts to build up storage in anticipation of winter demand have so far proved successful, with unseasonably mild temperatures delaying the start of the heating season. But colder weather will run down supplies quickly, and replenishing supplies next year will be even more challenging as the supply of Russian gas is phased out completely. Gas prices are still exceptionally high, around $180 a barrel in oil terms, with futures contracts trading above $200 a barrel equivalent for periods as far ahead as Q1 2024. The European Commission estimates a two to four-year energy crunch.
So the fundamental drivers of demand for hydrocarbons remain. Last year the UK was able to meet 40pc of its gas requirements from domestic supplies, but the NSTA’s most recent 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.
For sure, recent political turbulence has left investors confused about the direction of UK energy policy. Higher taxes may be on the cards for British oil and gas producers as the Government scrambles to deal with its fiscal ‘black hole’. Gas-fired power plants were excluded from the revenue cap on low carbon electricity generators confirmed by Liz Truss before she stepped down. Rishi Sunak, however, is considering scrapping it in favour of extending a proposed energy profits levy on oil and gas producers to all electricity generators: the implications for smaller operators like UJO are as yet unclear.
The Government’s policy on fracking seems less ambiguous. The moratorium introduced in 2019, due to be relaxed by the Truss administration, has now been reinstated, with little prospect of a further reversal. As the company has acknowledged, that is of some material concern to UJO due to its ties with Egdon Resources. Egdon holds a material shale-gas acreage position in Northern England covering a net area of 664km2 with estimated mean volumes of undiscovered gas in place of 37.6 trillion cubic feet of gas. Egdon’s shares dipped 30pc after the fracking reversal, which the company called ‘a highly disappointing and illogical move by the Government’, which would lock ‘the UK into long term reliance on more carbon intensive LNG imported from Qatar, the shale-gas fields of the USA and elsewhere’. UJO, which earlier this year increased its holding in Egdon to 3.13pc, worth more than £0.9m, had welcomed the lifting of ban back in September, which ‘could have a material and positive benefit when applied to progressing the Company’s ongoing development, appraisal and exploration activities across its various UK onshore licence interests.’
The omens for another reversal are not good. Though fracking has its supporters within the Conservative Party, should Sunak work a remarkable political revival for the Tories he will cement his authority. A future Labour government under Keir Starmer would implement a comprehensive ban on fracking. Quite apart from the politics, there is considerable uncertainty as to whether the UK’s geology is suitable for fracking, many geologists believing Britain’s rocks cannot be accessed without causing earthquakes: the moratorium was introduced after more than 120 tremors were recorded during drilling at a Cuadrilla site in Blackpool, including one which lasted almost 100 hours. The UK’s dense population and restrictive planning laws present further obstacles. Nearly half of the population believe the ban should be maintained, with a third in favour.
Plenty to consider, then. But though a change of fracking policy would have been an unexpected bonus for UJO, it’s a secondary issue: the company’s fundamentals are robust. Wressle continues to perform strongly, with a development plan in place to open up its full potential, confirmed by September’s CPR. Drilling at West Newton promises to open a lucrative new revenue front. It should also be noted that the company’s booming profits have allowed it to introduce a capital allocation and distribution policy for the payment of a dividend or share repurchase programme. Last month a Maiden Special Dividend of 0.8p was announced, involving a total payment of £902,927, with the Ex-Dividend date set for 17 November 2022, the Record Date for 18 November, and the Payment Date for 16 December. The share buyback programme got underway late last month, with 200,000 of the company’s ordinary shares purchased at 31.295p (VWAP) each using existing cash resources – a further 100,000 were bought this week at the same price.
UJO has come good this year, just as the UK’s urgent need for indigenous oil and gas has become painfully apparent. The company’s share price now seems on an upward path again: with the prospect of good news on the horizon now may be the ideal time to get on board.