HH23 Aug 2018 09:41
We noted with great interest yesterday’s announcement by UK Oil & Gas^ regarding its acquisition of a further interest in the high profile Horse Hill discovery near Gatwick. Under the terms of its deal with Gunsynd^ and Primorus^, UKOG is acquiring from the vendors a combined 7% shareholding in operator Horse Hill Developments Limited (HHDL). The consideration totals £1.9m in cash and shares. We compare this to the £1m (also in cash and shares) that Solo paid earlier this year for its additional 5% interest in HHDL. Solo acquired this interest in March for the equivalent of £200,000 for each percentage point holding in HHDL, compared to the £275,000 implied by the deal announced by UKOG yesterday. In our opinion, this provides strong anecdotal evidence of the value that has been added at Horse Hill since the 150 day programme of extended well testing commenced in June. Early results from testing of the Portland zone have been very promising and we see excellent scope for the full testing campaign (covering the Portland and primary Kimmeridge objectives) to confirm commerciality at a discovery which has already seen record-breaking flow rates achieved.
The Horse Hill discovery (in which Solo has a 9.75% beneficial interest via its 15% holding in HHDL) was successfully flow tested in 2016, achieving record-breaking deliverability for a UK onshore well. With relevant approvals successfully secured, a 150 day programme of extended well testing is currently underway, with “high rate” daily flow rates from the Portland zone hitting the limits of pump capacity at 470bopd. A larger pump is being mobilised to accommodate these strong flow rates, and the Portland test sequence will now seek to ascertain sustainable flow rates and potential commerciality (which already appears very likely to us). Extended well testing of two naturally fractured Kimmeridge limestone zones will then follow. These two horizons flowed at a combined 1,360bopd on natural flow during short term testing in 2016, and we therefore have very high hopes for extended well testing of the Kimmeridge. We would highlight the fact that other projects in the area (e.g. UKOG’s Broadford Bridge discovery) have also successfully encountered the Kimmeridge zone, providing us with further confidence in this regionally extensive play.
Extended well testing is expected to continue for another three to four months and we expect associated newsflow to provide some important share price catalysts, as flow rates are announced in line with the various test sequences, the already significant volumetric estimates for Horse Hill are re-assessed and commerciality is hopefully declared prior to permanent production (which we believe could occur as early as next year). In the short term, whilst implying a £4.1m value to Solo’s interest in HHDL on a pro rata basis, the latest M&A activity would certainly appear to demonstrate that Solo’s decision to increase its interest prior to the commencement of exte
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