Whatever else you think about Horse Hill, there are very few other stories on AIM that have attracted so much attention and bitterly divided opinion as this. This morning UK Oil & Gas’ (LSE:UKOG) share price was slammed to below 2.5p. after the company announced the latest delay in the planning approval process for the long awaited HH-1 flow test. The question for speculators now is whether this latest blow to sentiment is a mortal one or not?
In case you’ve had your head buried in the sand and are somehow unaware of Horse Hill, here is what UKOG had to say about the project in April:
“The HH-1 Kimmeridge Limestone and Portland oil discovery well is located within onshore exploration Licence PEDL137, on the northern side of the Weald Basin, 3 km north of Gatwick Airport. As previously reported in February and March 2016, two naturally-fractured limestone members within the Kimmeridge section, known as KL3 and KL4, flowed dry, 40-degree API oil, at an aggregate stabilised natural flow rate of 1,365 barrels per day (“bopd”) with no clear indication of depletion. The overlying Portland flowed dry, 35-degree API gravity oil at a stable pumped rate of 323 bopd. The Portland oil was produced at the rod-pump’s maximum achievable rate and thus flow was constrained by the pump’s mechanical capacity.”
This all sounds wonderful, but a large number of market participants have not been buying the story at all. Part of the problem comes down to news flow management. In the same April 2017 RNS quoted above UKOG went on to say:
“As previously reported in October 2016 and February 2017, an application for long term production testing and further appraisal drilling was submitted to Surrey County Council in October 2016, and is now scheduled to be decided at the Council’s planning committee meeting in July 2017. The Company therefore envisages that these operations will commence in the second half of 2017 upon grant of the necessary remaining regulatory permissions.”
The stock dump then came this morning, after UKOG admitted that the planning application for production testing and further appraisal drilling will not be reviewed by Surrey County Council’s planning committee until “either August or September 2017”. To some this might not seem a big deal. UKOG believes there will only be a 2-month delay. What genuine investors in the company are now asking themselves is whether or not they believe this?
After all the spin and hype of the Horse Hill stock promotion over the last few years it is little wonder the mood surrounding the shares involved is as fraught as it is. UKOG is the most heavily exposed AIM-listed company to Horse Hill and has experienced the greatest share price gains over recent weeks. It was only last Tuesday that its shares traded as high as 4.1p (data: Yahoo! Finance). Anyone sucked into that hysteria a week ago will be nursing pretty hefty paper losses this morning, which is no doubt hard to stomach.
This pattern has been repeated a number of times, but still Horse Hill seems able to maintain its speculative appeal.
And this is what interests me most about the stocks involved. I wouldn’t ever treat UKOG, or any of the Horse Hill participants, as genuine investments. Even though the flow rates achieved in February and March 2016 were surprisingly positive (very few people expected oil to flow to surface naturally from below the Kimmeridge Clay, let alone at the rate it did), there are too many other red flags flying to justify the risk. From planning risk, to infrastructure to the track records of many involved, there are significant obstacles in the way of Horse Hill ever reaching commercial production. That is not to say it can never happen, but the chances are it won’t.
However despite this, it should still be possible to make a good turn on Horse Hill. That is if the market allows the right entry prices at the right time.
Ultimately any position I take won’t be dependent on whether or not HH-1 turns out to be the “Gatwick Gusher” or the “Dorking Dribbler”. It will be a straight trade on price and sentiment. We can be pretty certain if Surrey County Council awards planning permission for the development of Horse Hill, then there will be at least one more heavy promote of the stocks involved. If you can get in at the right level, it should be possible to make a tidy profit.
For the time being I’ll maintain a watching brief.