--ADDS BACKGROUND AND BROKER COMMENT--
David Lenigas’s UK Oil & Gas (LON:UKOG) has struck a deal with Egdon Resources (LON:EDR) to acquire a 20% stake in the Holmwood project in the Weald basin in the south east of England.
Holmwood, which is operated by Europa Oil & Gas (LON:EOG), lies in the exploration licence adjacent to the UKOG’s Horse Hill project and it is also in the same neighbourhood as UKOG’s Brockham field.
Lenigas says the group now has “a lot of contiguous ground in a great area.”
“Wanted to get this deal sorted before the next Schlumberger and Nutech assessments come out,” the UKOG chairman said in an exchange on Twitter.
Schlumberger and Nutech, consultants for the Horse Hill project, have in recent months provided very significant estimates of potential oil-in-place within the Weald basin.
Work is ongoing to understand how much of the ‘in-place’ oil might be recoverable.
To acquire the stake in the neighbouring acreage UKOG proposes to pay for 40% of the cost of drilling a well at Holmwood (up to £1.2mln).
Since 2011, Holmwood has been tangled up in a planning dispute – a second planning enquiry got underway in April - and the completion of the UKOG transaction is subject to a Egdon and Europa securing planning permission for a well.
Following the successes at the Horse Hill project it is envisaged that Holmwood will now assess Upper and Lower Portland Sandstone reservoir targets and, significantly, it will test the full Kimmeridge Clay section and the underlying Middle Jurassic Corallian Sandstone reservoir objective.
The latter targets are considered a ‘hybrid’ play and have been likened to world class fields in the United States. They are the basis of the very large oil-in-place estimates at Horse Hill (estimated recently at over 9bn barrels).
A 2012 assessment of Holmwood estimated the project’s prospective resources at 5.6mln barrels of oil, and estimated a well would have a one-in-three (32%) chance of success.
Stephen Sanderson, chief executive of UKOG, described the transaction with Egdon as a “sensible and mutually beneficial transaction” for the licence.
"The opportunity to increase our interests in the Weald Basin adjacent to Horse Hill and to participate in the drilling of Holmwood's potentially significant low to moderate risk prospective resources is both exciting and a logical growth step in the company's core business area,” Sanderson said in a statement.
“The company's interest in the Horse Hill-1 Portland oil discovery, along with our interest in the producing Portland Sandstone reservoir of the Brockham oil field, likely represent the best subsurface analogues for the Holmwood prospect.
“Consequently, we can utilise our key proprietary knowledge and experience of these analogues to the benefit and future success of the project.”
Mark Abbott, Egdon’s managing director, meanwhile, highlighted that the transaction allows his company to retain a material stake in Holmwood whilst minimising the company's exposure to financial and technical risks.
Welcoming UKOG to the Holmwood partnership, Europa chief executive Hugh Mackay described the project as “one of the best undrilled conventional prospects” onshore UK.
“We are currently focused on securing planning permission to drill an exploratory well and undertake a short-term test for conventional hydrocarbons at Holmwood,” Mackay added.
Europa owns 40% of Holmwood and, assuming planning is secured, UKOG will have 20% and Egdon will have 18.4% alongside fellow partners Warwick Energy and Altwood Petroleum with 20% and 1.6% respectively.
“This is a positive development for Egdon in our view, effectively streamlining its portfolio in line with its stated strategy of concentrating resources on fewer, higher impact projects,” said Sam Wahab, analyst at Cantor Fitzgerald.
“The transaction means that should planning consent be granted for the well, Egdon will retain a material interest in the Holmwood prospect whilst minimising the company’s financial exposure and managing its technical risk while evaluating the prospect’s potentially significant prospective resource.”
Cantor has a ‘buy’ recommendation for Egdon, with a 39p price target (which is about 150% more than the current price).
“Despite the market’s focus on the company’s considerable shale acreage, Egdon retains material interests in conventional prospects and discoveries, which we feel could represent near-term upside in this year,” the analyst added.