Unaudited results for the six-month period ended 31 March 2016
KEY HIGHLIGHTS TO DATE (during and post-period)
— Strong progress at Horse Hill with game-changing commercially viable initial oil flow rates from 3 horizons
— 1,688 bopd total aggregate stable dry oil flow rate from the Kimmeridge plus the overlying Portland
— Proof of concept and first commercially viable initial flow rates from the Kimmeridge Limestones at Horse Hill
— 1,365 bopd aggregate stable dry oil flow rate from two naturally fractured Kimmeridge Limestones
— Post period-end, key further acquisitions made the Company the leading player in the Kimmeridge Limestone oil play, more than doubling UKOG’s gross overall acreage in the prime Weald Basin Kimmeridge “sweet spot”
— 100% ultimate ownership of multiple Horse Hill Kimmeridge look-alike prospects in the Broadford Bridge licence
-- On track for two further permitted Kimmeridge exploration wells in 2017 -- Accelerated appraisal and development plans at Horse Hill and Markwells Wood oil discoveries
— 37% increase in Horse Hill licence interests and hence in any associated recoverable oil resources
— New Isle of Wight Licence added 17 MMbbl net P50 recoverable Contingent and Prospective Resources
— Godley Bridge Portland gas discovery extension into Broadford Bridge added potential Contingent Resources
— 370% increase in net attributable conventional P50 Contingent and Prospective Resources, from 4.64 MMbbl to 21.64 MMbbl (note: excludes all Kimmeridge resources and Portland in Horse Hill and Broadford Bridge)
-- Stable oil production from Horndean, Avington, Brockham and Lidsey fields
-- Key licence extensions in process of signature by the Oil & Gas Authority ("OGA")
-- GBP4 million raised from institutional investors via a share placing.
CHAIRMAN’S STATEMENT
I present the unaudited results of UK Oil & Gas Investments PLC for the six-month period ended 31 March 2016, which has seen significant success and the growth of our investments in the march towards monetising successful conventional oil exploration and appraisal activities in the south east of England.
The Company and its investments are on an exciting journey thanks to the intense efforts of our technical team and the related investment in leading edge science and technology, which has underpinned the rationale for our recent strategic acquisitions.
As a result of the ground-breaking flow test at Horse Hill and our recent acquisitions, UKOG is now a key investor and player in the UK onshore oil and gas industry, and in pole position in the new Kimmeridge Limestone oil play. The growth in our asset base has seen corresponding rapid growth in our net recoverable oil resources across the Weald Basin and the Isle of Wight.
The ground-breaking flow test results at Horse Hill in February and March were considerably above our expectations and the recent acquisitions of the Holmwood and Broadford Bridge licences have significantly increased our overall acreage within the prime Kimmeridge “sweet spot” in the Weald. We enjoy the leading technical knowledge and acreage positions within this new and exciting resource play.
The Company has a very clear two-year strategy to advance the Kimmeridge oil play to the point of commercial development. Broadford Bridge is “drill-ready” and has the necessary permits. In conjunction with the permitted Holmwood site, they offer UKOG exposure to look-alike potential to Horse Hill and we hope to be able to demonstrate and replicate similar drilling results to Horse Hill by the end of 2017.
In parallel, we will be pushing Horse Hill dubbed by the media as the “Gatwick Gusher”, towards extended long-term production tests, appraisal wells and 3D seismic acquisition and analysis. The Company will also be seeking regulatory approvals for a well to test the Portland gas discovery and Kimmeridge at Godley Bridge.
It should be noted that the onshore industry has now recognised the Kimmeridge potential since we are aware of two planned Kimmeridge wells from existing Weald oil fields by competitors. However, we will continue to have an appetite for further acquisitions, to strengthen and consolidate our position in the Weald sweet spot and maintain our leading position.
INVESTMENT AND OPERATIONAL SUMMARY
Horse Hill (“HH-1”)
The HH-1 flow tests in February and March 2016 were an outstanding success. On 21 March 2016 UKOG reported a commercially viable initial aggregate stable dry oil rate of 1,688 barrels of oil per day (“bopd”) from the Kimmeridge Limestones and Portland Sandstone. Approximately 1,940 barrels of crude in 14 road tankers were delivered to the Fawley Oil Refinery, which was a significant milestone for the Company.
Most importantly, the flow test gave initial proof that the Kimmeridge oil play in the Weald works and that the Kimmeridge Limestones can deliver high, commercially viable initial flow rates, in this case from a simple vertical well. The two naturally-fractured Kimmeridge Limestones showed an aggregate dry stable natural oil rate of 1,365 bopd without any clearly interpretable depletion.
The Portland Sandstone reservoir also far exceeded our expectations, producing a record-breaking commercial dry stable pumped oil rate of 323 bopd. This rate can likely be further improved using a larger pump.
To put the results into context, our pre-test expectations assumed that a Kimmeridge horizontal well could deliver at an initial rate of around 400 bopd. This case offered break-even economics at around $40 per barrel crude prices. Our aggregate stable dry oil flow rate of 1,365 bopd from a vertical well significantly exceeded these initial assumptions and could likely be further increased by use of horizontal wells, which historically has delivered flow rates in excess of three times that of a vertical well.
We now expect that Kimmeridge oil development economics will be boosted by higher than expected well rates, delivering faster payback of investment capital, and a significant reduction in operating costs per barrel.
UKOG’s net interest in the Horse Hill licences now stands at 27.3%, following the purchase of Angus Energy’s interest in Horse Hill Developments Ltd (“HHDL”).
Horse Hill next steps
UKOG will accelerate the appraisal and development plans to include testing a third deeper Kimmeridge Limestone, longer-term production tests, a Kimmeridge horizontal appraisal well and 3D seismic acquisition and analysis.
Similarly, we plan a longer flow test of the Portland Sandstone reservoir, to be followed, in the success case, by a new Portland appraisal well. All necessary permissions are currently being sought with a plan to re-start operations at the HH-1 site in early 2017.
Kimmeridge Limestone oil resource
UKOG established itself as the leading player in the Kimmeridge oil play, increasing its overall acreage holding in the prime basin centre sweet-spot by 260% with the acquisition of the Holmwood licence and Broadford Bridge licence, the latter post the period end. This provided the Company with an additional gross 398 sq km of acreage. Both licences include regulatory approvals to drill two prospects (similar to Horse Hill) and we hope to prove a repeat of the HH-1 results by end-2017.
Utilising Nutech’s extensive regional evaluations, our acquisitions have been carefully targeted to contain the highest calculated oil in the ground. These acquisitions have also delivered us two further drill-ready well locations with planning consents enabling Kimmeridge drilling momentum to be maintained. We have an appetite for further growth and expansion over the prime basin sweet spot.
Broadford Bridge
In June this year UKOG agreed to purchase 100% ownership of PEDL234 with a Share Purchase Agreement with Celtique Energie Petroleum Limited and an Asset Transfer Agreement with Magellan Petroleum (UK) Limited. The total consideration for these two transactions was GBP3.5 million, GBP1.25 million (36%) of which will be paid in cash and the remainder settled with the issue of new UKOG ordinary shares. The licence will be owned by the fully owned UKOG subsidiary, Kimmeridge Oil & Gas Limited (“KOGL”). The overall transaction is subject to formal consent by the Secretary of State. Both Celtique and Magellan have now signed the necessary Deed of Variation with the OGA to confirm a two-year extension of PEDL234 to 30 June 2018.
Previous analyses of BB-1, primarily by US-based Nutech, strongly indicate that the licence presents look-alike Kimmeridge Limestone oil potential to that seen at Horse Hill. It should be noted that the Company’s net interest in these prospects and the potential net recoverable resources, if successful, is over three times that of Horse Hill and Holmwood.
The Broadford Bridge licence also adds contingent gas resources via the eastern extension of the Godley Bridge Portland gas discovery into PEDL234. This discovery is a prime target for a gas-to-wire electrical generation project. A Competent Person’s Report (CPR) has been commissioned.
Broadford Bridge next steps
Regulatory permissions to drill Broadford Bridge-1 (“BB-1”) are in place from West Sussex County Council and the Environment Agency. The well pad has already been constructed and KOGL will seek the necessary remaining consents from the Health and Safety Executive and OGA to will drill and test the Kimmeridge Limestones in 2017. KOGL will also seek permission to drill an appraisal of the Godley Bridge Portland gas discovery and also test the Kimmeridge Limestones in the same well.
The Company has commissioned independent external studies from Nutech to assess the Kimmeridge oil in the ground contained within the Licence, which will be reported in due course.
Holmwood
In two separate farm-in transactions, UKOG acquired a 30% direct interest in PEDL143, which as previously described, contains look-alike potential to Horse Hill in the Kimmeridge and Portland sections. The operator is making good progress towards drilling the Holmwood-1 well in early 2017. The OGA has consented to a two-year extension of PEDL143 to 30 September 2018.
The Isle of Wight
UKOG expects to shortly be awarded PEDL331 as part of the OGA’s 14(th) Onshore Licence Round following its offer to UKOG in December 2015. This award will add an estimated 17 MMbbl of net recoverable resources, including 10.2 MMbbl of Contingent Resources in the Arreton fractured Portland Limestone oil discovery and 6.8 MMbbl of prospective resources in two look-alike undrilled conventional oil prospects.
Significantly, the addition of this licence increased UKOG’s net recoverable resources within conventional reservoirs (excluding Horse Hill, Broadford Bridge and offshore IoW) almost five-fold to 21.64 MMbbl and Contingent Resources by a factor of three to 13.81 MMbbl recoverable.
Markwells Wood
Planning and Environment Agency permission applications are now being sought to develop this oil discovery. A submission to drill up to four horizontal production wells is planned to be made before the end of September 2016.
Other Assets
Horndean, Avington, Brockham and Lidsey continued stable production throughout the period.
Baxters Copse is currently in the process of receiving a two-year licence extension from the OGA and we continue to review the economics of an appraisal well.
FINANCIAL REVIEW
The retained loss for the six-month period to 31 March 2016 amounted to GBP1.26 million (2015: GBP0.43 million). The primary driver for this was the increased activity associated with our investments, particularly the Horse Hill flow tests, which have resulted in higher professional service costs, including that of external consultants. These costs along with movements in working capital resulted in GBP2 million net cash being used in operating activities for the six-month period ending 31 March 2016 (2014: GBP1.2 million). Netting off the proceeds from the issuance of shares the net decrease in cash and cash equivalents was GBP1.79 million resulting in cash and cash equivalents at the end of the period of GBP2.79 million.
On 26 May 2016 UKOG raised GBP4 million through the placing of 266,666,667 new ordinary shares in the Company at 1.5 pence per share.
OUTLOOK
Over the next twelve-month period the Directors expect to see a number of positive developments for the Company.
— In conjunction with HHDL, UKOG plan to return to the HH-1 well to conduct long-term well testing, and to drill two appraisal wells; this will establish the most likely expected recoverable volume of oil from the discovery.
— Preparations are now underway to submit the necessary documentation to acquire the regulatory permissions to proceed towards further appraisal of the Kimmeridge and Portland zones.
— KOGL is planning to drill the Broadford Bridge-1 exploration well in PEDL234, and progress regulatory approvals for a Godley Bridge exploration/appraisal well in the north of the licence.
-- Europa is planning to drill the Holmwood-1 exploration well (UKOG 30%)
— UKOG is well advanced in the preparation of a Field Development Plan for the Markwells Wood oil discovery (UKOG 100% and Operator). Planning permission will also be sought from the South Downs National Park Authority, plus necessary consents from the Environment Agency.
— UKOG will finalise the onshore Isle of Wight licence (PEDL331, UKOG 65%) with OGA, following the 14th Round award.
— UKOG will continue with regulatory steps necessary to drill an appraisal well on the Arreton Main oil discovery in PEDL331 (UKOG 65%) and an exploration well on the M Prospect in P1916 offshore Isle of Wight (UKOG 77.5% and Operator).
— UKOG is considering drilling an appraisal well on the Baxters Copse discovery (IGas 50% Operator, UKOG 50%).
— New production wells are being planned on two of Angus Energy’s producing licences (Lidsey and Brockham).
— UKOG plans to continue to expand its licence position in the UK onshore, particularly in its core Weald Basin Kimmeridge oil play, with additional exploration, development and production investments.
Your Board of Directors will continue to seek out further attractive investments in line with the UKOG’s investment strategy.
