A quick flurry of deals has marked the start of consolidation among the small-cap partners in the Horse Hill oil project, onshore UK.
As investors await the start of flow testing at Horse Hill, the various parties have been jostling for position.
Here, we take a closer look at the various transactions and consider what it all means for the project and for the private investors following the increasingly high profile project
Who has bought what?
First, on Monday, it agreed to acquire 8% of the company for £580,000 in cash from its associate Angus Energy (UKOG is a 6% shareholder in Angus).
Then, on Friday, it agreed a £352,000 share-based deal to buy 2% of HHDL from a private company called Danadav Investments Ltd. UKOG will issue 44mln UKOG shares to at the seller, at a price of 0.8p per share.
UKOG will now own 30% of HHDL as a result of the two transactions.
Elsewhere, Alba Minerals (LON:ALBA) on Thursday agreed a £300,000 deal with Regency Mines (LON:RGM) to take back its 5% stake. Alba is also assuming Regency’s outstanding cash calls due to HHDL, which amount to £60,000.
Alba’s stake in HHDL doubled to 10% as a result of the transaction.
What’s the difference between HHDL and Horse Hill?
HHDL is the operating company set up on behalf of several small cap companies that funded the Horse Hill exploration well in 2014.
Horse Hill is a potentially significant oil project in the Weald basin, close to Gatwick airport.
It comprises the reasonably well understood Portland discovery – estimated between 5.7mln and 12mln barrels of oil – as well as the potentially more exciting ‘blue-sky’ Kimmeridge play.
The plans for the Kimmeridge essentially represent a new play concept for the Weald basin. But it is still early stage and high risk.
HHDL owns 65% of the Horse Hill project, and adjoining acreage, alongside Magellan Petroleum, which has the other 35%.
All the small stakeholders have varying levels of investment and involvement in HHDL.
According to UKOG chairman David Lenigas all HHDL ‘ops’ are run from UKOG and Solo Oil, and they have been for a while.
So, what is Horse Hill worth then?
The three deals this week give a somewhat subjective view of Horse Hill.
Friday’s transaction between UKOG and Danadav, effectively giving UKOG 1.3% of Horse Hill for £352,000, implies the oil project is worth some £27mln and that HHDL would be valued at around £17.6mln.
Thursday’s deal between Alba and Regency, meanwhile, implies a value of £6mln for HHDL and that Horse Hill would be worth just over £9mln – this does not account for the monies owed by Regency though.
Monday’s deal between UKOG and Angus gave HHDL a value of £7.25mln, which meant Horse Hill was worth just over £11mln.
Why are these valuations so different?
First and foremost the size and potential of Horse Hill is still prospective, and the project’s economic merits are still unproven.
It should become easier to pin down a more informed valuation in time as the project matures and more is understood about the project, via upcoming well testing and analysis.
But, like any other early stage natural resource project – or any asset for that matter – it is ultimately worth whatever someone is willing to pay for it.
It is also worth noting that some sellers may be stronger than others, and the value of ‘paper’ is relative – as a seller would you prefer cash or shares? And which of the small cap shares would you value more?
Why is this consolidation happening and will there be more deals?
HHDL will shortly start gearing up for a hotly anticipated well testing programme, a programme the stakeholders will have to pay for.
It could also be suggested that some may be taking a view on the pending tests.
If the tests are successful and show that Portland can be produced commercially it could be a significant value kicker. But, if it is not, the project's future prospects would be uncertain.
More consolidation is likely, assuming the well testing phase is a success, as the attention turns to field development and production. The HHDL stakeholders are then likely to face further cash calls and this could be an opportune moment for some to cash out.
Back in January we highlighted that UKOG would likely play a role as a consolidator, and indeed it is now the ‘main player’ according to David Lenigas.
The UKOG chairman says he wants as much of this part of England as he can get for UKOG.
It is also worth highlighting that Doriemus this week raised £1.2mln for acquisitions, as well as covering its share of Horse Hill costs.