Union Jack Oil is commonly perceived as an explorer. This misconception is likely responsible for the mismatch between its market cap and underlying assets.
by: Charles Archer
Union Jack Oil (LON: UJO) shares are one of those rare FTSE AIM stocks: both highly volatile and consistently profitable. Investors who bought shares a year ago would be up 55%.
However, given the inevitable spikes and crashes associated with most small caps, it’s likely that many short-term traders have lost money on UJO. Like BOIL, another compelling FTSE AIM company with a completely different investment case, this is not a stock to short.
Instead, UJO is a company to buy shares in, wait out the volatility, and let the fundamentals do their work over the passage of time. This appears to be a view that Executive Chairman David Bramhill shares — who kindly gave up his time yesterday to help me create this piece.
As the Chair notes, ‘volatility is the name of the game with the majority of smaller cap shares…the euphoria of the lifting of the fracking ban elevated our share price, only to see it drop when the ban was re-instated.’
Union Jack Oil: business in brief
UJO has interests in 13 hydrocarbon licences across the East Midlands, Humber Basin, and East Yorkshire, of which ‘six have a material near-term impact on the company.’ There is significant detail on all 13 on the investor site, but I think Wressle is the absolute highlight and short-term catalyst to watch.
Bramhill agrees that ‘Wressle is the flagship of our portfolio.’ Describing the discovery as a ‘superb project, with a tremendous amount of upside,’ UJO holds a 40% economic interest in the project alongside partners Egdon Resources at 30% (the operator), and Europa Oil and Gas which holds the remaining 30%.
The initial Wressle licences include PEDL180 AND PEDL182 and are licensed through to 2039. Located in Lincolnshire on the Humber Basin, they are on trend with the producing Crosby Warren oil field and Brigg-1 oil discovery, situated to the immediate northwest and southeast of the licence respectively.
The three new Capstone C65 Microturbines are installed on-site #Wressle installation and commissioning are ongoing. The microturbines will generate all site electricity and are expected to enable up to a 20% uplift in oil production #UJO #EDR #EOG https://t.co/HfzydjpUoi pic.twitter.com/HKfroc66oQ
— Share_Talk ™ (@Share_Talk) February 12, 2023
Discovered in 2014, the project intersects three productive horizons — Penistone Flags, Wingfield Flags, and Ashover Grit, which all returned oil with a gravity of 39-40 API along with up to 456 thousand cubic feet of gas per day. Free-flow oil from Ashover grit has already commenced with produced oil being transported by road tanker to the Phillips 66 Humber refinery, to be sold under existing sales contracts.
Wressle has generated $13 million in net revenue as of 6 February, up from $12 million on 4 January, and $11 million by 14 November last year. I posed some very basic back-of-a-napkin maths to Bramhill that UJO would see circa $4.8 million in revenue from the project in 2023, but the Chairman pointed to Research-Tree analysis by Shore and Arden which forecasts circa £8 million in revenue for the full-year for all projects.
It’s worth noting that Wressle is undergoing optimisation that could see production boosted further, including the installation of three gas microturbines at the site. When pressed for a profit figure, the Chair sadly informed me that he could not discuss the point — though you can’t blame a man for trying.
For perspective, well-known consultancy GaffneyCline retains the speculative view that there could be 2.4 million barrels of recoverable oil from Ashton Grit, a huge upgrade from the initial 600,000 estimate. Bramhill acknowledges that this figure is not certain but thinks that given ‘the way that Wressle has performed over the period one could think maybe they are correct.’
With Penistone Flags ‘another Wressle prize that is yet to be produced,’ the Chairman remains ‘cautiously optimistic’ that ‘the Wressle journey has only just started.’ He is also careful to highlight UJO’s balanced portfolio, ‘a few of which could turn out to be game changers in the future, (including) West Newton in which we hold a 16.665% interest.’
I’d also add Keddington and Biscathorpe as key projects to watch — but these may be further along the timescale.
Financial position: no placing for at least six months
The most recent figures available cover unaudited results for H1 2022, i.e., the six months to 30 June 2022. As the picture has changed since then, it’s worth noting that revenue/profit generation may have improved, but it is important to include these numbers for historical context.
The company generated revenue of £4,384,254, delivering a maiden profit of £2,034,086 in the period. At the time, net cash stood at circa £10.5 million, and the company was debt free, a position that has remained largely unchanged since.
A few days after a timely £1 million loan repayment from Europa to UJO in late October, the company announced a special maiden dividend of 0.8p per share worth £902,927. It also announced a share buyback programme funded from existing cash resources, declaring that ‘the buyback share price does not reflect the intrinsic value of the business.’
At the time, Bramhill commented that ‘Union Jack’s financial position has been transformed during 2022 and it now has a robust balance sheet (and) a fully funded and active work programme for the next 18 months.’ To put investor minds at ease, I did ask whether there was any chance of a placing within the next six months — expecting the usual cagey answer. Instead, I was told that this was ‘the easiest’ of my questions and that there would be ‘NO placing for the foreseeable future.’
Given the value of Wressle alone, UJO’s £10 million cash balance and debt-free position, and its covered capex position through 2023, the company’s sub-£30 million market cap seems far too low to me. Bramhill thoroughly agrees that the company remains ‘undervalued,’ though acknowledges the ‘possibly the market is seeking confirmation of sustainability through 2023.’
To be fair to the market, apparently, rock-solid financial positions have collapsed at other AIM opportunities almost overnight in the past. But this does not seem to be the case here.
Wider macro environment
With Brent trading at circa $86/barrel, oil remains elevated compared to historical levels, and with a global recession incoming, many investors are nervous about a possible fall in hydrocarbon prices.
Posing this dilemma to Bramhill, he notes the risk, saying that ‘to be honest no-one really knows — forecasters can forecast their heart out and invariably are wrong.’ However, he also points out that the majority of UJO’s projects are profitable, including sunk costs at circa $17. This leaves UJO with a ‘massive cushion of support before red flags start popping up.’
A more immediate concern is the UK windfall tax, which I do consider could be increased given the record-beating profits of Shell and BP, despite their protestations and the reduction of investment by smaller operators including Harbour Energy.
Bramhill thinks the tax is ‘very punitive,’ but argues that the effect on 2022 full-year results ‘should not be that material,’ and points to its overall CAPEX spend in 2023 which should significantly reduce its tax liability through 2023 and beyond. However, he agrees that ‘this tax, without doubt, will affect negatively investment in the UK oil sector,’ with the condition that there are worse positions to be in than making profits liable for taxation.
He refused to be drawn on the governmental flip-flopping on fracking over the years, arguing that ‘Union Jack actively made the decision not to become involved.’ Noting that ‘there was bound to be opposition,’ it’s nice to see that management is not swayed by wild swings in the share price caused by catalysts that can be de-catalysed at a moment’s notice.
However, the extension and uplift of the windfall tax combined with on-off ‘final decisions’ on fracking are clearly having a negative effect on the sector.
The Chair very clearly relishes the work — which is probably not too much to ask of a man running a profit-making company. Enjoying ‘every aspect of working as Exec Chairman of the Company,’ Bramhill enthuses that he works alongside an ‘excellent geological and financial team’ and also benefits from ‘great JV partners in Egdon and Rathlin.’
In a moment of rare annoyance, he cites one key frustration we’re all familiar with — not just with UJO but elsewhere — that the company is always held responsible for setbacks after ‘stating a timeline,’ even though unavoidable delays are commonplace in the sector.
Despite protestations of modesty, I asked the Chair what he would say to convince an investor to buy UJO shares with a two-minute time limit to make his case. The words ‘profitable, dividend-paying, and cash-rich all appear, but what stands out is his perception that UJO should no longer be categorised as an explorer by dint of its current production success.
Other than the market seeking confirmation of continued revenue, I suspect this distinction could be a key reason why Union Jack Oil’s share price does not reflect its assets. It’s still seen as an explorer rather than as a producer — and this was my perception of UJO as of a few days ago.
But when investors catch up to the reality, a substantial re-rate could be in the offing.
Questions answered on 14/2/23, information given is not advice, and is only accurate at the time of writing and to the best knowledge of Executive Chairman David Bramhill.
- UJO’s interests are entirely UK-based. Will UJO as an onshore-based company be affected by the UK government’s windfall tax regime, which could well become even more punitive as BP and Shell report record annual profits? Do you think the country risks discouraging investment given Harbour Energy’s reaction?
Yes of course, as you know the “windfall, tax” (Energy Levy Tax), in my opinion, is very punitive. 2022 results for the year ended December will see from the end of May only and should not be that material, relatively speaking – so we will have to wait a full year before the total effect on 2023 results will be known. However, Union Jack has an active drilling and development programme planned for 2023, and beyond, therefore our spending which can be used as OPEX (100%) and CAPEX (especially CAPEX at 120% should go a long way in mitigating our tax liability going forward.
To answer your question – yes, I believe that this tax, without a doubt, will affect negatively investment in the UK oil sector. We are already hearing the rumblings of the majors and mid-caps. From a personal view – why the oil sector and not all profit-making companies.? I guess we all know the answer to that. Finally, one could argue that it is a good position to be in to be able to pay tax on profits.
- On a related note, the government is also pretty fickle when it comes to onshore fracking, which probably isn’t helping UJO to plan investment. What are your personal views on fracking, and is governmental flip-flopping a problem?
Ha! A good question. Union Jack has always been a conventional oil company. Fracking projects have never been a part of our modus operandi. When the government came out with the plan to allow fracking several years ago Union Jack actively made the decision not to become involved. That decision has been well vindicated. There was bound to be opposition. Enough said. Sometimes best to keep one’s views to themselves.
- UJO has demonstrated serious share price volatility over the past five years, including its spike to 50p in mid-September 2022, before correcting to circa 27p today. Do you think more volatility is likely over 2023?
Unfortunately, volatility is the name of the game with the majority of smaller cap shares – not just in natural resources. The euphoria of the lifting of the fracking ban elevated our share price, only to see it drop when the ban was reinstated. Really one could not make it up. Being a company with profit, excellent cash balances and no debt will, in my opinion, help steady the ship going forward. Unfortunately, we have no sway over oil prices, sentiment and geo-political events. As we release results over the next few months, I would like to think that we address volatility.
- Of the 13 licences, Wressle is clearly the flagship project. Is Penistone Flags the second-most important project to the company, or is there another one that investors should be watching closely?
Yes – strange how things turn out – agreed, Wressle is the flagship of our portfolio, however, we do have a balanced portfolio a few of which could turn out to be game changers in the future. West Newton in which we hold a 16.665% interest has been a curate’s egg. The wells we have drilled, without a doubt, contain offshore volumes onshore. The plan is to drill a horizontal well later in the year with our partners and we anticipate a positive result.
Going back to Wressle – this is a superb project, which in our opinion still holds a tremendous amount of upside. Several months ago, GaffneyCline, a world-renowned hydrocarbon consultancy completed an overview of Wressle and came up with a speculative view that there could be some 2.4 million barrels of oil recoverable from the Ashove Grit formation rather than the six hundred thousand bbls originally believed. This figure is speculation, however, the way that Wressle has performed over the period one could think maybe they are correct. Who knows, however, if further work is planned at Wressle will go some way to proving or disproving the theory.
Three gas turbines have recently been installed at Wressle and will help increase oil production.
As you say the Penistone Flags horizon is another Wressle prize that is yet to be produced and yes, does represent a very important development project going forward.
We all know that natural resource projects are not free of risk. However, you have to remain cautiously optimistic to be involved in this arena. In my opinion, the Wressle journey has only just started.
- Brent Crude — widely seen as the benchmark for oil prices — is trading at circa $86/barrel, which despite falling from 2022 highs is still elevated by historical norms. Do you think these prices will stay in place over the longer term, or will they start to fall with the anticipated global recession?
If only we knew. I have seen several cycles throughout my lifetime. To be honest, no one really knows – forecasters can forecast their hearts out and invariably are wrong. However, I do believe that the world is smaller (communications-wise) and the instruments available such as Algorithms and AI have added a degree of sophistication to decisions. Therefore, I suppose we have a base on which to plan forward in respect of future spending and budgets. We always use the forward curve and to date, it appears to provide a degree of reliability and support.
I must add that the majority of our projects are profitable, including sunk costs at circa 17 USD which provides a massive cushion of support before red flags start popping up.
- Wressle has now generated $13 million in net revenue and seems to be generating circa $1 million per month at present. UJO holds a 40% economic interest in the project, so loosely assuming $12 million a year in total revenue — and excluding optimization plans — would it be fair to say that investors can expect UJO to see around $4.8 million in revenue from this one project in 2023? How much of this revenue is pure profit?
I think – if I am understanding your question correctly you might be understating our revenue for 2023. If you take a look at the Research-Tree analysis by Shore and Arden you will see that their forecast is circa £8 million. You can find this research on our website. Do give me a call if you cannot gain access. As far as profit is concerned, I am afraid I cannot discuss profit – you understand this I am sure.
As some guidance can I point you to our Interim Report (on the website) where we have the latest figures. From that, I believe that you will be able to deduce that figure. Give some leeway for 2023 for the Energy Levy Tax. I hope this helps.
- On 3 February, UJO had over £10 million comprised of ‘cash balances, short-term receivables and liquid investments.’ It was (and presumably still is) debt-free, and cash flow positive covering all G&A, OPEX and contracted or planned CAPEX costs, including any drilling activities for at least the next 12 months. At sub-£30 million, is UJO seriously undervalued purely based on fundamental analysis?
Everything is good. No debt, revenue coming in on a monthly basis and the trend is upward. You said undervalued – I could not agree more, however, as you know the market dictates the price. We have had a very good 2022. Possibly the market is seeking confirmation of sustainability through 2023. We have paid a maiden dividend and commenced a share buy-back which will enhance EPS. I have to agree with you though.
- What is your favourite part of working as Executive Chairman at Union Jack Oil? Least favourite? Any interesting anecdotes? Is working with partners, often as the junior partner, occasionally frustrating, or are two heads better than one?
To be honest I enjoy every aspect of working as Exec Chairman of the Company. Every day brings news, and I am still learning. I have an excellent geological and financial team working with me and we have managed to transform from a grass root explorer to a producing profitable company over the years.
We have great JV partners in Egdon and Rathlin and the fact that we have a technical team in my opinion second to none it enables us to prove our worth as JV partners. We have a very healthy relationship with our partners and as far as we are concerned these relationships have plenty of distance to travel in the future.
Frustrations I think are not caused by partners but by outside influences. Impossible to put a time on events – by stating a timeline should there be any unavoidable delays we always are held responsible.
Anecdotes – Ha – there are many. I am afraid in order for me to share these one must buy my book – still, in the editorial I am afraid.
- Given that UJO remains fully capitalized for the next year, can you rule out a share placement for at least the next six months? Fear of placements has always been fear number one among FTSE AIM investors.
The easiest of your questions.
As Simon Cowell would say a big YES – to be clear NO placing for the foreseeable future.
- If you had to convince somebody who had never heard of UJO before to invest in less than two minutes, what would you say to them? What’s the compelling argument to assign portfolio capital to Union Jack in a market filled with explorers?
I hate “tipping” my own Company, however, I do believe that we tick the box in several places.
- A balanced portfolio of production, exploration and development
- Financial transparency
I agree that the market is filled with explorers, however, I believe that we are now not in that category, this is due to our balanced portfolio and our recognition of the value of Wressle where our original investment was circa 8%. Our acquisition strategy has made us the predominant holder right now with 40% of this high-value asset.
Other upside remains with West Newton, Biscathorpe and Keddington where success with the drill bit and future development would create further material value.
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 investment 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.
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