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United Oil & Gas – A mid-tier oil player in the making? (UOG)

Background

United Oil and Gas (LSE:UOG) was formed by Brian Larkin four years ago who shortly after incorporation initiated a standard listing in July 2017 by way of the reverse acquisition of a cash shell called Senterra Energy and the flotation of two licences called Selva and Waddock Cross (the former in Italy and the latter in the UK where it is currently awaiting development drilling later this year).

Today, United trades at just under 4p per share and has a market capitalisation of approximately £13m. Since listing, the company has executed several fundraises to advance its portfolio – most recently placing shares at 5.5p each. As such, it currently has a healthy cash balance of c.3m.

United has also made two commercial discoveries since entering the market- the Podere Gallina Selva field in Italy and Colter South in the UK’s Wessex Basin. The two discoveries alone represent a fantastic start to the firm’s journey. However, what is perhaps most striking is that the business has achieved a c.800pc uplift in its portfolio risked valuation in just under two years- this works out at roughly 16p per share.

Given the high-impact nature of some of the assets in United’s portfolio (as discussed below), this results in an un-risked valuation based on recent broker notes of around 70p per share. This is an incredible achievement and perhaps something the market has not quite yet digested.

Management

Not only has United achieved impressive growth in portfolio value and a considerable uplift in its share price, but it has also set about building a ‘blue-chip’ calibre management team. Using its shared knowledge and expertise, this team can quickly assess and execute off-market transactions and reach out to industry contacts when required to participate in joint ventures and secure/structure innovative financing solutions.

In fact, at the time of writing, United’s board now features no less than four former Tullow Oil senior executives. Likewise, Larkin has also spent time at Providence Resources while chairman Graham Martin was centrally involved in Tullow’s growth story and is well recognised across the industry. Meanwhile, chief operating officer Jonathan Leather has held senior exploration positions at Tullow and has a strong geological background while recently-appointed chief financial officer David Quirke established and led the Tullow Oil Treasury group function for 15 years.

The industry weight and pedigree of United’s management team clearly separates the business from other oil and gas juniors. In fact, when asked about the company’s exit strategy recently following commercial success and several acquisitions, Larkin was quoted as responding ‘there is no exit strategy, we are building an oil company’.

Strategy

United’s strategy is relatively simple. It centres around building and developing a balanced and risk diverse portfolio that can deliver significant company growth and shareholder value. At the same time, United aims to provide the opportunity for transformational growth by way of high-risk, high-impact opportunities that will not break the firm or its shareholders.

To achieve this, the organisation’s portfolio is split into two fundamental categories- low-risk appraisal/production/development and exploration assets and higher-risk, higher-impact assets with low capital commitments but potentially transformational upside.

Low-risk growth opportunities

The key driver for this strategy is Europe, where United is working to acquire lower-risk assets that will incrementally add value to its portfolio by way of development or divestment.

As an example, the company’s recently-awarded licenses in the North Sea only require small capital commitments for de-risking measures that can unlock materially-higher value and potentially facilitate a sale at multiples of United’s original commitment.

Conversely, some of United’s assets are worth developing towards production because of their secure local infrastructure and minimal cash commitments. For example, the outfit’s Italian licenses offer material exploration upside over and above the business’s initial production plan.

Larkin has also made it clear that United will look to bolster its portfolio with production acquisitions if the right deal can be struck. This would likely involve an innovative mix of funding options such as reserves-based debt lending rather than relying on equity alone. In recent interviews, Larkin has said that United is close to securing such an acquisition that, upon execution, should be a material or even a transformational step forward for its operations.

As it stands, Italy, the North Sea and the Wessex Basin are the current drivers of United’s lower risk portfolio, with production expected from Italy and Waddock Cross in the UK next year. This will take the firm into cash generative territory.

Additionally, both of these assets offer further exploration upside. Indeed, the Selva East field in Italy recently received a 74pc reserves upgrade to 91.5Bcf of un-risked mid-case gross prospective resources. With Italy being a premium gas market, this was a significant result for United.

Likewise, while the result of the Colter appraisal well drilled earlier this year in the Wessex Basin was unexpected, United and its partners struck upon a discovery at Colter South containing upwards of a 15mmbbls resource. This compares favourably to the 4mmbbls that United was initially targeting as commercially viable. As such, the discovery was an extremely positive result, and United is now analysing volumetric data and discussing a follow-on drill programme alongside its partners.

Meanwhile, United and its partners have been awarded further licences since the initial Colter drilling that now cover the entirety of the Colter South discovery as well as adding additional discovered resources. This should result in an exciting future drilling campaign in a region that United has focused on for a number of years and believes to offer a great deal of potential.

To complete the European element of its portfolio, United was last year awarded blocks covering the North Sea Crown discovery amidst stiff competition. This was a significant win for the organisation and a testament to the quality of its application, given its position as a newly-listed firm. It has since been awarded a further four blocks fewer than 10km away from Crown near the Marigold and Yeoman discoveries.

The latest area covers 500km2 with multiple targets in a highly prospective region. Handily, it also adds considerable value to Crown (where United have now completed the seismic programme) in the eyes of any potential Joint Venture partners who could help to advance the relatively low-risk plays towards commercialisation.

High-impact opportunities

While United has a substantial and very active low-risk element to its portfolio that should see it gradually unlock value and provide growth, perhaps the main attraction for some investors will be the firm’s potentially transformational high-impact opportunities. Here, we run through those assets:

Jamaica – Walton Morant

Back in 2018, United struck a landmark deal with Tullow Oil to obtain a 20pc stake in Walton Morant, a frontier exploration opportunity based in Jamaica. In exchange, the business agreed to spend a relatively modest $1.5m on 3D seismic following the completion of Tullow’s initial $20m 2D seismic commitment. 

Based on historic expenditure, the value and opportunity at Walton Morant are both clear to see and illustrate the likelihood that United will continue to enjoy a strong relationship with the FTSE-listed major moving forward.

Since penning the deal, the JV has completed 3D seismic over a whopping 32,000km2, identifying up to 20 possible targets. The license and its acreage have also provided clear evidence of numerous elements key to working petroleum systems. These include on-and-offshore oil seeps and 11 historic wells that have encountered hydrocarbons.

3D Seismic completed across 2,250sq km covering the Colibri prospect May 2018

Following seismic and detailed technical work, Colibri has been identified as Walton Morant’s primary target, with recent 3D resulting in an increase in the site’s prospective resources from 200 to 229mmbbls. This also increased the site’s chance of success to 20pc – comparatively high for frontier exploration.

Not only would success at Colibri be transformational for United and its shareholders, but it would also de-risk the company’s additional Jamaican targets significantly. This could conceivably result in a multi-billion-barrel prospect!

A drill decision will be made in 2019, and targeted drilling will follow in 2020. United could further benefit by divesting part of its 20pc interest for a free carry on the drill, essentially providing a free roll of the dice for shareholders.

Africa – Benin Block B on-shore

Benin is another frontier exploration opportunity that United currently has an option to farm-in to pending successful passive seismic results. The firm will part-fund this work in exchange for less than $200,000 and the opportunity to take a 20pc position in the asset.

The onshore asset covers 4500km2, and the Benin shelfal area has demonstrated a working petroleum system. Indeed, the nearby Seme and Dahomey fields currently sport 100mmbbls reserves. What’s more, gas and oil seeps have been reported within Benin’s block B, with tar sands occurring in an extensive belt to the east. The Central Allada structure within block B is also thought to have the potential to hold more than 200mmbbls.

Once again, this opportunity could provide transformational upside for United. The firm will make a decision to farm-in and progress the project following a seismic review shortly.

Conclusion

United is clearly a compelling early stage oil and gas investment opportunity for those seeking a mixture of low and high-risk exposure. The low risk opportunities will provide investors with gradual growth and value uplift while the high-impact assets expose them to potentially-transformational opportunities along the way.

Perhaps even more compelling, however, is United’s management team. Indeed, the leadership of numerous former senior FTSE-firm executives is not the norm for a small cap player. As such, the industry connections, expertise and knowledge this group can provide should put United in a strong position as it works towards becoming a successful oil and gas business – after all, that is how Tullow Oil started. 

Since listing, United has delivered impressive portfolio growth, making high impact acquisitions while also unlocking the value across its existing assets. With a packed forward roadmap of significant news-flow, United’s investors could see significant returns over a relatively short period – especially if one of its high impact prospects comes in.

Author: Money Sponge (@TheMoneySponge)

The author holds a position in the stock(s) and/or financial instrument(s) mentioned in the piece.

The author has not been paid to produce this piece by the company or companies mentioned above.

Dynamic Investor Relations Ltd, the owner of ValueTheMarkets.com, has not been paid for the production of this piece by the company or companies mentioned above.

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