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News in early April that oil exploration company, UK Oil & Gas (AIM:UKOG) had received drilling consent from the Turkish authorities has been a boon for the company.

The Turkish Ministry of Energy and Natural Resources has granted UKOG Turkey and Aladdin Middle East formal consent to drill the Basur-3 appraisal well. UKOG Turkey, has a 50% non-operated working interest in the 305 km² Resan licence, which contains the potentially significant Basur-Resan oil discovery.

The location is described by the firm as in a different league from the Weald Basin and the UK onshore oil fields. No wonder then that investors seized the moment and the AIM share jumped from 0.12 to 0.35.


A week later however, the news was not so rosy. UKOG reported a loss of just under £20 million for the year ended 30 September 2020, up from a £5.39 million loss in 2019.

Chairman Allen D. Howard commented: “The Horse Hill] oil field has behaved like a talented but troublesome teenager: plenty of promise but with the expected problems too.”

Horse Hill proves challenging

As well as climate change activists causing problems – they have twice occupied the site in contravention of the UKOG injunction – UK Oil & Gas cited higher costs and a complex geology at Horse Hill as the main contributor to the losses. From January 2020, even though operating costs were reduced by a substantial 66% overall, water handling costs increased substantially.

The oil field incurred a gross loss for the period of £1.63 million compared to 2019 where there was a gross profit of 0.12 million. There was also a £5.79 million write-down due to the sub-economic flow rates resulting from early and significant water ingress, plus an impairment expense of £14.195 million.

Horse Hill was granted full production consent by the Oil and Gas Authority in March 2020 and is one of UKOG’s six oil and gas assets, all of which are situated within the Weald and Purbeck-Wight Basins of southern England.

Granted, the share price dropped back down after the results announcement, but only time will tell whether shareholders keep the faith. At time of writing it now stands at 0.26.

“No control over the price of Brent crude”

Nevertheless, Texas-based Howard’s short-term outlook is candid: “UKOG has no control over the day-to-day share price, it has no control over the price of Brent Crude and no control over the UK’s complex attitude towards the oil & gas industry.”

On the upside, revenue for the year ended 30 September 2020 at £908,000 compared to revenue of £213,000 in 2019. Total liabilities decreased to £5.07 million (from £13.50 million in 2019) partly as a result of repaying a convertible loan note.

Strategy going forward

Longer term, UKOG plans to diversify into geothermal and renewable energy, potentially developing new stand-alone geothermal projects either as operators or joint venture partners. It is also looking at the feasibility of enhancing the UK sites to include renewable energy. The aim is for them to become integrated hybrid energy hubs, encompassing solar, closed loop geothermal, petroleum and battery storage.

What is certain is that expanding into Turkey, particularly in the short term, appears to be crucial to the company’s success and prosperity.

Related

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Philippa Aylmer

Philippa Aylmer

Philippa Aylmer is a freelance writer within the investment management sector.

She began her career in the late 90s writing about emerging markets for the Euromoney titles while based in Pakistan. Since then, she has covered hedge funds, ETFs, wealth management and fintech.

As well as news, on the client side, Philippa advises on media relations and editorial strategy, writing about the topical and technical issues of investment management

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