FTSE small-cap energy shares have arguably been oversold in 2023. These companies have been subjected to repeated attacks — Windfall taxes, ESG, Just Stop Oil, Starmer’s insane North Sea oil plan — so on and so forth, such that even if these factors don’t affect any one particular company, it’s being dragged down by the sector as a whole.
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My personal perspective is simple: the UK relies on oil and gas to run its economy. There is a future where nuclear power overtakes the sector, but this is many years from now and shooting ourselves in the foot — like the Dutch have done and Labour wants us to do — in the name of political correctness is madness.
It is possible to accept that there will be an energy transition, but that hydrocarbons remain an incredibly important part of the transition for at least the next 20 years. And it’s not just energy — I’ve yet to understand where petrochemicals, asphalt, lubricants, wax, bitumen, fertilisers, cosmetics, pharmaceutical ingredients, and dozens of synthetic materials will come from if oil stops coming out of the ground.
This gives me confidence in these companies for the long term.
Let’s count them down.
FTSE Oil and Gas shares
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Union Jack Oil (AIM: UJO)
UJO is fast becoming one of my favourite small-cap energy stocks. After interviewing Chair David Bramhill earlier this year, the company continues to go from strength to strength — engaging in share buybacks and continuing to deliver revenue.
Indeed, as of 14 June, flagship Wressle — in which UJO owns a 40% economic interest — had delivered in excess of $16 million in net revenues since August 2021. Encouragingly, the company notes that the well is producing under natural flow with zero water cut, with oil production stable at approximately 780 barrels per day under restricted flow. And the CPR is imminent.
Beyond this, the company has a cash balance of over £9.2 million, alongside liquid investments over £2.3 million. Debt free and ‘highly cash generative,’ it’s even accounted for the next 12 months of capex and has announced an interim dividend of 0.3p per share.
I did enquire as to whether UJO might wish to use this extra cash to buy up further licences, but it seems content to reward shareholders. Bramhill notes that ‘revenues from Wressle continue to bolster the Company’s Balance Sheet, complemented by cash-flow from the Keddington Oilfield (UJO 55% interest), where planning is in place and a side-track well is planned to be drilled.’
Then there’s West Newton and Biscathorpe to consider — where all potential drilling is fully funded. The only fly in the ointment is North Kelsey (UJO holds a 50% economic interest) — see below.
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Egdon Resources (AIM: EDR)
Egdon Resources saw its catalyst on 17 May, when it announced that Petrichor had offered the company an all-cash bid for its entire share capital — for 4.5p per share, a near 100% premium to the previous day’s closing price.
It’s worth noting that Egdon holds a 30% economic interest in Wressle.
The bid values the company at £26.64 million for the multiple licences held across the UK and belies the reality that UK listed oil and gas shares are severely undervalued by current market forces. Investors are simply holding tight — and given that the stock is trading for just 0.2p below the offer price, investors may be hoping that a rival comes in with an increased bid.
The only issue — the same issue as UJO — is North Kelsey. On 6 June, Egdon withdrew its planning application for exploratory drilling at the site because the planning inspector ‘viewed the lateral borehole, which was included in the latest application, as new development which was outside of the original red line boundary of the 2014 planning consent and therefore which could not be properly considered as part of a Section 73 application as made.’
Frustratingly, the relevant local authority had held the position that the borehole was valid, but because it is essentially a fundamental requirement to properly assess the resource, Egdon is being forced to reapply.
This is a classic example of the waste and bureaucracy that haunts UK investment.
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Predator Oil (AIM: PRD)
Predator shares have shot up recently — even after raising £2 million at 5.5p per share in March — after issuing a highly encouraging drilling update on its MOU-3 well in Morocco.
The company is engaged in exploration, appraisal, and development of oil and gas assets in Africa, Europe, and the Caribbean, with a portfolio of interests including a CO2 enhanced project in Trinidad, two gas exploration projects in offshore Ireland, and a gas exploration project in onshore Morocco.
Executive Chairman Paul Griffiths enthuses that ‘the MOU-3 well has validated our pre-drill upside forecast for sand development in respect of the main Moulouya Fan target. A gross interval of 43 metres will be evaluated by a rigless well test.
It has increased our inventory of potential gas reservoirs for a CNG development with the discovery of very shallow over-pressured gas…the shallow gas potential of MOU-3 has exceeded all pre-drill expectations.’
The focus is now on drilling MOU-4, with results from all four wells drilled in 2023 to be assessed and an expanded rigless testing programme to start next month.
Further good news seems inbound.
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IOG (AIM: IOG)
Seeing first gas at the Blythe H2 well as recently as 13 June, IOG seems to have turned over a new leaf.
On 26 June, CEO Rupert Newall noted that ‘we have successfully completed the wireline intervention at Blythe H2 well, which has now flowed at a maximum stabilised rate around 42 mmscf/d… the significant improvement in our operating team performance is also demonstrated by Blythe operating efficiency increasing from 59% in 2022 to 93% over 1H23 to date.’
The company has paused drilling work to maximise near-term cash flow, and production is set at an initial 20 mmscf/d and will be steadily built up to full rate. The plan is to produce only from H2 for the next few months and then start producing at H1 at lower rates to minimise water production.
The company is seeking potential farm-in partners up to 50% of the Goddard licence (P2438) in order to minimise cash outflows — but the recent development has put it in a much healthier position.
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Beacon Energy (AIM: BCE)
On June 13, 2023, Beacon finally announced the arrival of its E202 drilling rig, contracted from RED Drilling & Services. The rig is fully crewed and will be used for the Schwarzbach-2 development well within the company’s Erfelden Field.
At the time, CEO Larry Bottomley expressed his satisfaction with the progress made for the well’s preparations and anticipated drilling to commence around June 19 — a deadline that was happily met. The drilling operations were expected to last approximately 25 days, reaching a target depth of 2255m (1709m True Vertical Depth).
Further, an additional 12 days are scheduled for testing. Following completion, the SCHB-2 well will be connected to the existing production facilities at the Schwarzbach site for production purposes.
The success of the SCHB-2 well could have transformative effects on the company’s production and cash flow, as increased volumes can be tied-back to existing production facilities, benefiting their investment proposition and financial capabilities.
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Arrow Exploration (AIM: AXL)
On 21 June, Arrow Exploration Corp provided an update on its drilling activities in Colombia’s Tapir Block within the Llanos Basin. The Carrizales Norte-1 (CN-1) well in the Carrizales Norte field has yielded positive results, confirming its productive potential.
The well encountered approximately 26 feet of net oil pay in the C7 formation, far exceeding expectations. During a production test, the well exhibited a promising performance, with peak rates reaching 1,272 barrels of oil per day.
Encouragingly, this means that Arrow Exploration has achieved its 3,000 barrels of oil equivalent per day production target for the first half of 2023 — an accomplishment not every analyst thought likely. And encouragingly, as of 1 June 2023, the company boasted a solid cash balance of $11.2 million.
Arrow also provided updates on upcoming drilling activities. Following the CN-2 and CN-3 wells’ production, the rig will be moved to the Rio Cravo Este field for further exploration. The company
has also highlighted the completion of the West Tapir 3D seismic acquisition program and plans for a second program later in the year.
Management has expressed significant optimism for the future and plans to engage a third-party reserve evaluation of the CN field after completing the current drilling program.
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Oneiro Energy (LON: ONE)
Oneiro Energy announced its admission to the Main Market of the London Stock Exchange just over a month ago, raising £1.2 million and starting trading with a market cap of circa £2.3 million — but the shares have since doubled in value.
The company aims to address the urgent need for cleaner energy sources, particularly in the context of coal-fired energy generation still accounts for a significant portion of global energy demand.
Oneiro Energy’s focus includes exploring lower-carbon solutions such as transition energy, technology metals, blue hydrogen, and carbon capture and storage. It has been specifically set up as a SPAC to refocus the energy market away from coal.
With its recent listing and potential in the clean energy sector, Oneiro Energy is clearly positioned as one to watch — though details are scant, and the company needs to engage in some PR.
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Challenger Energy (AIM: CEG)
Challenger Energy shares have stagnated for some time, but multiple catalysts are now in the pipeline. CEG is selling its interest in the Cora Moruga license to Predator for a potential value of $9 million, but with the option to repurchase a portion of Predator’s holding in the future. The sale is expected to be concluded by August 31, 2023.
Challenger also holds two blocks offshore Uruguay with significant resource potential. Volumetric assessment of the first indicates an estimated recoverable resource of 2 billion barrels, with a best-case scenario of over 4.9 billion barrels. The company is conducting additional work to enhance prospectivity and has initiated a farm-out process with strong interest received.
The company views the block as having massive resource potential and aims to complete a farm-out transaction by year-end. Challenger Energy has also bid for an additional license — the sole remaining one in the area, with other licenses held by multiple oil majors.
The new block has an estimated resource potential of approximately 500 million barrels of oil equivalent and 9 trillion cubic feet of gas. The license award is expected within the next month, and investors are hoping for a JV announcement soon.
The company’s Guayaguayare license in Trinidad has also recently received authorisation for negotiations with the Trinidad and Tobago Ministry of Energy and Energy Industries. The block is considered highly prospective, with the potential for near-term production uplift at minimal cost.
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Zephyr Energy (AIM: ZPHR)
Zephyr Energy has also made significant recent progress in its operations and financial performance.
On 6 June 2023, the company raised £3.15 million through a placing (never ideal) and plans to use the funds to support the company’s activities.
In recent full-year results, Zephyr reported a near seven-fold increase in revenues to $41.1 million, with a profit before tax of US$22.6 million. The company’s net profit after tax was $19.3 million, and it finished the year with cash and cash equivalents of $9 million.
The company’s key goals for 2023 include moving its flagship Paradox project in Utah into full commercial production and expanding its non-operated asset portfolio. For context, the company aims to continue generating cash flows from its non-operated assets to support the development of Paradox.
Paradox has already achieved milestones such as the first flowing hydrocarbons, and an increase in working interest to 100% across approximately 45,000 acres.
The company also appears optimistic, thanks to its diverse asset portfolio, solid financial footing, and dedicated team — and the next six months could see shares rise sharply.
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This article has been prepared for information purposes only by Charles Archer. It does not constitute advice, and no party accepts any liability for either accuracy or for investing decisions made using the information provided.
Further, it is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.
