RE: Kimmeridge a different ball game11 Sep 2018 17:47
Earlier today I posted some thoughts on what is and isn’t in the price already. I was hoping to spark a debate on valuation, but the thread I posted in diverted into a discussion on the profitability of US shale plays...
I’m going to repeat the post here in the hope of some discussion. I have tried to outline a rough methodology for valuing Weald oil flows based on the recent Solo transaction and a simple valuation model. From this I have tried to draw conclusions on what is and isn’t in the price. Also on what would be required to support the 3p that many posters reference.
“A few parameters for a conversation on valuation.
UKOG paid £4.5m for Solo’s 15% of HHDL. That implies a valuation (agreed between the knowledgeable professionals at the two oil companies involved) of £30m for HHDL. UKOG now owns 72% of HHDL, worth £22m on the same basis.
Yesterday’s RNS declared a produceable 362bopd, of which UKOG is interested in 47% or 170bopd. Applying a simple valuation model based on what we know suggests (170bopd x 360days x $50prof_per_barrel / 1.3usdgbp) x an industry multiple in the range of 6x-10x. At 6x that is £14m, at 10x it is £23m. This is quite close to the agreed valuation from the Solo purchase, so lends some support to the methodology and permits the establishment of an estimate of £10m mcap per 100bopd of Weald production.
UKOG has perhaps £12m in cash after allowing for the likelihood that it has been the principal funder of the costs incurred at the HH site.
UKOG’s interest in HH + cash on hand therefore represents about £35m of the company’s current £125m market cap.
The “missing” £90m is represented by:
1. The potential value from Portland production above and beyond the 362bopd
2. The potential value from the Kimm layers
3. The value of the company’s other licences elsewhere eg BB
4. Something else we don’t yet know about
For the current valuation to make sense, the “missing” production therefore needs to amount to 900bopd.
For 3p/share (eg mcap £160m) the “missing” production needs to amount to 1250bopd
Where might the “missing” production come from?
1. HH Portland production can be increased to 1000bopd as discussed in the RNS
47% of an additional 668bopd would be 314bopd worth £31m in mcap terms
2. Production from the Kimm layers
The upper Kimm layer indicated 901bopd according to DHC. 47% of that would be 423bopd worth £43m in mcap
3. & 4. Other licences incl BB
Don’t know, but won’t be negative.
It’s easy to see how these figures can be exceeded, and that is precisely the reason that I am a long-term holder. However we should be all be aware that the share price is not yet supported by the announced production capability.”
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