At the end of March our editor, Daniel Flynn, identified Union Jack (LSE:UJO) as a good buying opportunity, following the company’s £1.75m placing. Fully funded at that point, Union Jack’s shares traded at 0.08p. This was a touch over the 0.075p placing price. With the much-anticipated West Newton-2 appraisal well to come, the risk reward seemed favourable and this morning it paid off. The company announced the preliminary results “exceeded expectations” and its shares have taken off, briefly trading at 0.27p. The question now is what to do next?
Starting first with what we know about the initial West Newton-2 results and the headlines are encouraging. Union Jack reported, “substantial hydrocarbon accumulation within a net 65 metre interval encountered in the primary target, the Kirkham Abbey formation” and “significant liquids component identified from core and logging data.” The company has a 16.665% stake in PEDL 183, which hosts the West Newton-1 discovery well and West Newton-2. PEDL 18s is operated by Rathlin Energy (UK) Limited.
An extended well test at West Newton-2, which already has planning permission, is planned for Q3 this year.
But therein lies the rub.
As much as Union Jack heralds the preliminary results for West Newton-2 as being “potentially transformational”, they are by no means a sure thing. To the company’s credit, it has been very careful in its announcement not to hype things too much, lacing it with plenty of caveats.
This contrasts greatly with Reabold Resources (LSE:RBD), one of the West Newton-2 partners, which has gone into full on ramp mode announcing the discovery of “potentially the largest UK onshore gas field”, in its headline. The reality for Union Jack and Reabold is that both companies are likely going to need to place before the Q3 well test. This is just part of the business cycle for up and coming oil and gas companies. It is a capital-intensive business and both firms have just incurred their share of the costs for West Newton-2.
If you were fortunate enough to be in March’s placing for Union Jack, or bought in near the time, there could well be an argument for holding your position and possibly even increasing your average in any future fundraise.
However, a more prudent strategy might be just to take profit.
Apart from the obvious funding risk, the next issue to consider is the well test itself. Despite operating in what is meant to be one of the most stable jurisdictions in the world, such tests can often run into unforeseen problems. While it is positive that planning permission is already in place, these projects have a habit of falling behind schedule, trying the market’s patience. In this instance a Q3 test seems likely, but I wouldn’t bet the house on it.
And then there are the results.
At 0.24p on the mid, Union Jack’s market cap is £26m. Reabold’s announcement helpfully reminds us that the pre-drill NPV for West Newton was $247m. Union Jack’s 16.665% stake in that gives an indicative $41m, which converted into Sterling equals £32.6m.
Now, of course, Union Jack has other assets in its portfolio, so there is an argument that the company’s current valuation has some merit. However, West Newton-2 really is going to have to deliver at the upper end of expectations for this position to be truly defensible. If the stock remains at this level or higher, there will be a lot of pressure on the results to sustain that.
How much upside this leaves on the table now is anyone’s guess. Judging by this morning’s reaction it is quite possible we’ll see a retail spike higher, but at this level that is a racy trade to make.
The more sensible money will probably just cash in and go and hunt for cheaper opportunities elsewhere.
Congratulations to all those that have done well!