United Oil and Gas (LON: UOG) shares are down 23% in London this morning. The cause of this fall in UOG shares is the unwelcome news that no one’s really very interested in the Jamaican deal that’s on offer. It is true that the world is going to continue to use oil and gas for some time now, that more exploration will take place. It’s also true that interest rates are up so spending on things that might work is distinctly more expensive than it used to be.
So, the announcement: “Jamaica Update: Further to the announcement of 9th November, the Company has been informed by the counterparty that had been identified as a preferred potential partner, that they no longer wish to pursue further discussions in relation to participation in the Walton Morant Licence. The Company will now focus on the recent positive interest that has been shown by other parties in potentially participating in this high impact exploration opportunity and United and our advisors will continue in our efforts to secure a partner. The Board believes that the renewed interest in exploration opportunities worldwide which is being driven by the strong future demand for oil and gas, will support our farmout efforts. The Company continues to engage with the Jamaican authorities to secure an extension to the current licence period which expires at the end of January 2024, with a negotiated work programme that comprises additional technical work that would further de-risk the licence prior to the drilling of the exploration well. This work is aimed at materially enhancing the risked value of the Company's interest in the Licence. Additional updates on both the farmout process and licence extension will be provided in due course.”
United Oil and Gas share price from Google Finance
Yes, OK, the oil price is still doing nicely. But the problem here is that UOG is trying to sell a farmin. Which means that the other company, the other side of the deal, must be the one to spend all the money. On something that may or may not work. Rising real interest rates (as much a function now of falling inflation as rising nominal rates) mean that risk capital is now more expensive.
Further, even upon success it would take some years to be able to exploit any find. Which means that return of risk capital would be worth less - higher interest rates do mean that money in the future is worth less now. So, ther terms of the deal that United is offering to potential parters have got worse. That might mean no one is interested. But what it also means is that whoever does sign up to it will do so on worse terms than we’ve been thinking they might. And thus the fall in UOG shares. That prospective oil play is now just worth less than it was.