There’s more than three-times upside to Union Jack Oil PLC (AIM:UJO)'s stock market valuation, that’s according to City broker SP Angel which today repeats a ‘buy’ recommendation for the British small-cap oil share.
Analyst David Mirzai said Union Jack, which is the largest stakeholder in Lincolnshire’s Wressle field, gives investors exposure to an unhedged portfolio of oil and gas production that generates free cash flow for reinvestment and shareholder returns.
It comes after Union Jack announced a substantial upgrade to Wressle’s resources, alongside partners Europa Oil & Gas and Egdon Resources.
“Over the past two years, Wressle production has transformed Union Jack`s financial position … We expect the company’s cash generation over the medium term to continue to not only provide potential for further direct return of value to shareholders, via share buybacks or special dividends, but also allow for additional investment in the portfolio,” Mirzai said in a note.
Mirzai pitches a 66p price target with his ‘buy’ recommendation, versus a price of around 20p per share at the start of 2024.
Among the proposed new investments is the development of Wressle’s Penistone reservoir which has yet to be unlocked at the field, despite the stronger performance at Wressle to date.
Also in the frame are the Keddington reservoir and the West Newton project, both of which are also onshore UK, as the analyst eyes value creation catalysts.
“The partners plan a side-track well on an infill drilling opportunity at the Keddington field (55% WI), for which planning consent is already in place,” he added.
“A final well trajectory has been decided upon and procurement of a rig and services is progressing towards an expected spud date during early 2024.
“On West Newton (16.7% WI), the operator continues with third party financing discussions ahead of an anticipated horizonal appraisal well in 1H24, subject to rig availability, which on success would materially de-risk the project and allow a decision on sanctioning the field development plan to be taken.
“The uptick in drilling and development activity across the portfolio should provide investors with the greatest potential for value creation.”
Elsewhere, Shore Capital analyst Craig Howie was impressed with Tuesday’s resource estimates.
“The substantial reserves upgrade announced today is notwithstanding production to date from this flagship asset and, whilst we had previously flagged scope for a material reserves upgrade, we had not necessarily expected this to exceed ERCE’s prior assessment quite so significantly,” Howie said in his note.
“Whilst the updated CPR for Wressle has taken time to produce, and comes following the installation of a jet pump in the second half of last year, it has certainly been worth the wait in our opinion.
“Union Jack explains today that CPR publication follows a comprehensive technical evaluation including reprocessed and reinterpreted 3D seismic data, results from well testing and production data to July 2023.
“We therefore have great confidence in the updated volumetric assessment released today and also agree that this is indicative of very effective production management to maximise recoveries from the Wressle field.”
The upgrade
A new competent person's report (CPR) for the Wressle project has upgraded the field’s estimated reserves by some 263% - with around 1.8 million barrels added to its inventory which now stands at 2.3 million barrels proved and probable.
Plus ‘ultimate recoverable reserves’ rose by 59% thanks to improved estimates of the Ashover Grit and Wingfield Flags reservoirs at Wressle.
Meanwhile, the review of resources for the Broughton North (an exploration prospect) saw prospective resource estimates boosted by some 23% to 608,000 barrels oil equivalent in the ‘best estimate’.
"The increase in Wressle's reserves vindicates the focus by the JV partners management of the field's production to maximise recoverable volumes,” Union Jack chair David Bramhill said in a statement.
“This provides further support to the development approach we have undertaken to date.
"The installation of artificial lift on the Wressle-1 well marked the start of the next phase of Wressle's development, which will also focus on the export of gas production to the UK National Transmission System, recently approved by the joint venture.”
The report was produced by ERC Equipoise Limited (ERCE), commissioned by operator Egdon Resources, and it included the adoption of the 2018 ‘standard’ Petroleum Resources Management System for the classification and reporting of reserves and resources. It included the reclassification of inventory in the Penistone Flags reservoir into Proved and Probable (2P) reserves.
Bramhill added: “Following the identification of the material increase in reserves and resources, we look forward to 2024 with enthusiasm, where we expect to be able to continue to crystallise the potential additional value of Wressle for the benefit of UJO's shareholders."
Union Jack holds a 40% economic interest in Wressle alongside partners Egdon and Europa which each owns 30%.