Doing the maths on Horse Hill

All the Horse Hill shares were suspended this morning pending an announcement in relation to Horse Hill.

It's caused lots of speculation and some think there is a big reserve update coming, I don't agree (I was completely wrong - see update below) but it set me wondering what could be going on. It can't be a placing, as so many companies are suspended, and a co-ordinated placing would be tricky; maybe the plan is to list Horse Hill developments, it could be that. Or maybe their partner has done something that they need to tell the markets about. 

For though the UK market is all of a lather about Horse Hill, the US market is decidedly unexcited about it. Magellan Petroleum who have 35% of the Horse Hill licence have a market cap of about $18m (according to Bloomberg on the 4th of June 2015) and cash and liquid investments of c. $11m at the end of 2014, oh, and nearly 6 mmboe of Proved (1P) reserves in the US.

UK Oil and Gas Investments have about 20% in Horse Hill; and a market cap of £44m. They have other things but just for the sake of argument say £34m of that is Horse Hill, that would be about $50m for their share of Horse Hill, or $250m for the whole licence, which would mean Magellan's share should be worth $90m. Long Magellan, short UKOG seems like a plan, unless Magellan decide to sell their interest for cash, right now.

That would put a market value on the Horse Hill licence and I am just guessing but I think that market value might be a little less than $250m for the whole licence. That could reset value expectations all round and an announcement on that would need to be carefully managed.

Alternatively, the plan could be to put Magellan's share of Horse Hill into Horse Hill Developments Ltd and place those shares on AIM, that might get everyone what they want. Or maybe it is something else entirely.

We will soon know.

Update 5th June 2015: UKOG plc published a new estimate of oil in place this morning. The new numbers for oil in place are even bigger than before and this time the company doing the evaluation is an oil industry household name – Schlumberger. None of that changes the fact that the US market isn't putting a big value on the Horse Hill licence and the UK market is. Something will be done about that soon I would guess.

The new estimate has a bigger headline value but when I zeroed in on the one number that I think could provide the basis for some recoverable reserves from the Kimmeridge, the Lower Limestone 2 in the Middle Kimmeridge sequence from 3082' to 3184', I noticed that Schlumberger had reduced the oil in place in that zone by more than 25% to 9.3 mmbbls.

The Portland sandstone seems to have improved (but I'd like to double check my work on that, when I first did the calculation I thought it had got worse).

My conclusion though, as far as the Kimmeridge play goes, is that the Schlumberger report is more of a downgrade than an upgrade.