Shares in Union Jack Oil (LSE:UJO) have crashed by nearly a third to 0.09p over the last 24 hours thanks to highly disappointing results at its hotly-anticipated, 22pc-held Biscathorpe prospect in Lincolnshire. With the company now expecting imminent newsflow and/or progress at two additional, potentially-material prospects, could its currently depressed £8m market cap provide an exciting buying opportunity?
As many reading this will know, Biscathorpe operator and 35.8pc-owner Egdon Resources (LSE:EDR) announced that it had finished drilling the Biscathorpe-2 well in Lincolnshire on Wednesday afternoon.
The well was targeting a mean prospective resource around 14MMbbls oil with a 40pc chance of success. In a success case, it would be worth around £24m net to Union Jack, which Bramhill had previously described as potentially ‘transformational’ for the organisation.
However, this was not to be, with preliminary analysis at the well indicating that its primary objective – the Basal Westphalian Sandstone – was poorly developed. Indeed, it was not thickened at the location as expected in the pre-drill model, with the indication being that the sandstone could be more thickly extended to the north and north-east. As such, Egdon has still not tested the Biscathorpe play properly.
To put a positive spin on things, Egdon said it now plans to seal the open-hole section with cement and to suspend the well to retain the option for a potential future side-track. This will be considered once the new well data is integrated into an updated subsurface model. However, this is unlikely to be easy, with any further drilling requiring Egdon to once again jump through various regulatory hoops including environmental consents and planning permission.
These concerns do not appear to have gone unnoticed by investors, with Edgon sinking 18pc and Union Jack collapsing by 27.8pc within an hour. Both firms were once again trading down on Thursday as negative sentiment continue to flow through both Twitter and the bulletin boards.
So, what happens next?
Union Jack is now trading at its lowest price in nearly two and a half months. At this point, then, it is therefore worth remembering that the company is presently waiting on developments at two further vital assets in its portfolio- West Newton and Wressle.
As executive chairman David Bramhill highlighted in a message that was largely ignored by investors yesterday: ‘Union Jack’s balanced portfolio remains active with the imminent drilling of the high-impact West Newton-2 appraisal well, followed by the Wressle appeal being heard in respect of a production development decision. Both of these are material projects and success in either of these projects will offer significant value upside to Union Jack.’
To recap, the business completed its farm-in to a 16.7pc interest in licence PEDL183, containing the West Newton A-1 UK onshore discovery, in December. This discovery includes gross best estimate contingent resources of 189Bcf of gas equivalent or 31.5million barrels of oil equivalent. The prospect also houses a deeper oil exploration target with best estimate prospective resources of 79.1MMboe gross.
West Newton has an NPV(10) of $247m with a 52.5pc rate of return for the gas discovery alone. What’s more, it is drill-ready, with a conventional appraisal well planned for the current quarter. Union Jack’s cut is fully funded from its cash resources.
Meanwhile, operator Egdon has once again launched an appeal against the refusal of planning for the development of Union Jack’s 27.5pc owned Wressle discovery in North Lincolnshire. This delays here have become a source of frustration for everyone involved, and the latest refusal comes despite Egdon receiving a recommendation for approval from North Lincolnshire Council’s planning officer.
However, Bramhill maintains that Egdon’s enhanced proposals for Wressle address, comprehensively, the reasons highlighted by the planning inspector in his dismissal of the initial appeals in January 2018. If Egdon and Union Jack do get lucky this time around, then it will provide both firms with a nice boost – Pre-drill gross mean Prospective Resources at Wressle as calculated by Egdon were estimated to be 2.1MMbbls oil.
So, while the disappointment at Biscathorpe is undeniable, Union Jack still boasts two significant opportunities over the short-term that could see its share price re-rate from currently depressed levels. And that doesn’t even take into account the longer-term potential offered by the company’s stakes in a producing field called Keddington as well as fields called North Kelsey, Keddington, Dukes Wood, Kirklington
Obviously, there is no guarantee of success at either West Newton or Wressle. Indeed, past troubles at Wressle suggest the very opposite. However, if you were already interested and see the market’s ‘en-masse’ exit from the firm on Thursday as an over-reaction, then there could remain plenty to get excited at the firm’s current price.