UKOG made the headlines around three years ago with its so-called Gatwick Gusher. But far from the Weald Basin soon being awash with the black stuff, the company has encountered several disappointments leading to delays. By my reading between the lines, I reckon the company has been navel-gazing and back-peddling from its earlier enthusiastic announcements when the Horse Hill well gushed.

Unsustainable gushing?

Indeed, Chester builds a good case for the ‘gushing’ being just a short-term, transient anomaly, and I urge you to read his article for more colour. The bottom line is he thinks UKOG is probably worth around half the £59m market capitalisation it currently sports.

I think even that valuation could be generous. Based on the company’s performance to date, and the highly speculative nature of operations, I reckon there’s a good chance UKOG could be one of those stocks that eventually runs its shareholders’ investments to the ground – a big, fat zero.

That’s the risk you run by ‘investing’ in highly speculative situations. On the other hand, the shares could multi-bag if things go well from here, of course, and that’s what keeps some investors interested. But I’m too focused on protecting my portfolio from downside risk to be one of them.

Frustrating oil exploration history of the Weald

According to a 2014 report produced by the British Geological Survey (BGS), hydrocarbon exploration of the Weald “entered its first major phase” between the 1930s and the 1960s. Several wells were drilled, and then the discovery of the Wytch Farm Oilfield in 1973 in the adjacent Wessex-Channel Basin “led to a resurgence of interest and activity in the Weald Basin.”

Yet, despite all this exploration over the years and a few relatively minor oil and gas producing wells being established in the region, no company, big or small, has so far managed to bring blockbusting torrents of oil to the surface. It’s hard work getting hydrocarbons out of the Weald Basin it seems, because the geology is difficult.

Call me sceptical, but I doubt whether a tiddly firm such as UKOG, with its limited resources, is likely to triumph where bigger enterprises have failed or encountered disappointment before.

I reckon the individual-company risk you take on by investing in UKOG is enormous. However, I’m keen to invest in the small-cap sector because the growth potential overall is attractive when it comes to smaller firms.

A promising small-cap investment

One investment vehicle I like the look of is the Vanguard Global Small-Cap Index Fund – Accumulation. This tracker has a stake in around 4,425 small-cap companies globally. It’s a neat way of getting instant diversification across small-cap companies, mitigating the risks from any one share performing badly, and getting exposure to the upside potential of the small-cap sector.

If you are sold on the idea of investing in small-cap trackers, why not use this article as a starting point and research some of the other small-cap trackers available as well?

The post Forget UKOG! I’d invest in this small-cap opportunity instead appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More assets

In mid-December, UKOG agreed to buy Solo Oil’s 30% shareholding in the PEDL331 onshore Isle of Wight licence, which includes the Arreton conventional oil discovery. The deal completed last week and UKOG has a 95% operated interest in the licence. UKOG paid just over £90k in cash and issuing more shares to cover the balance of the £350k total consideration. So that’s more dilution for existing shareholders, which is something we’ve become used to from the firm following a long line of similar transactions as it built up its assets.

Chief executive Stephen Sanderson said in the news release the first Arreton appraisal well is scheduled to be “drilled, cored and tested in the first quarter of 2020.” Meanwhile, the extended well test going on at Horse Hill has continued to produce oil. In an update on the 16 January, UKOG told us it has exported 114 road tankers full of the stuff to Perenco’s Hamble oil terminal and sold it at prevailing Brent crude oil prices, “less a small deduction for handling and marketing.” The company announced its exciting development and production schedule last Wednesday.

Cash flow versus expenses

However, I’m sceptical that UKOG’s near-50% financial interest in Horse Hill will deliver enough incoming cash flow to offset the development and drilling expenses it will face on all its licences. It takes a lot of money to develop an oil field, and UKOG is a serial fundraiser. It has a history of coming back to the stock market repeatedly for more money to cover trading expenses and to buy into exploration and development licences. Every time it issues more shares, existing shareholders see their interests diluted.

Despite the firm’s fledgeling revenue from oil production, my Foolish colleague G A Chester pointed out in December that the current share price could already be over-valuing the company by more than 100%, based on the prices it paid for its oil assets. I reckon the firm has a long way to go and must invest a lot more capital before revenue from oil production will be capable of funding ongoing operational expenses.

We could see fast multi-bagging of the share price again if ongoing drilling and operational activity shows up oil reserves or gets the black stuff flowing faster to the surface. But, set against that possibility is the firm’s ongoing need for cash to keep things running, and I believe there’s a lot of pressure to the downside for the share price right now. So, for me, the stock is highly speculative and risky and that’s why I’d avoid the shares and look for growth opportunities elsewhere.

The post This is what I’d do about the UKOG share price right now appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The mix of production problems in Venezuela, Libya and Canada, combined with the impact of sanctions on major producer Iran by the US, has helped lift the black gold price in recent months. And these problems are not likely to be spirited away easily or possibly very soon either.

This is why industry commentators have been frantically upgrading their oil price estimates in recent weeks. Morgan Stanley for one believes that crude has much more territory to claim and is forecasting that the Brent benchmark will average $85 per barrel during the second half of 2018, quite an improvement from levels around $70 seen recently.

Not shelling out

Although investor appetite for Shell has moderated recently, it wouldn’t be a surprise to see its share price barge through the multi-year peaks above $28 sooner rather than later.

I remain concerned, however, over whether oil prices can remain perky over the medium-to-long term and the consequences for Shell’s share value, given that output looks set to continue booming across both North and South America in the years ahead and threatens to sail above global demand growth.

Indeed, some commentators are tipping the oil surplus to return during the latter half of this year. And the decision by OPEC and Russia to take an extra 1m barrels of oil per day out of the ground adds to the likelihood of this material overflow coming back sooner rather than later.

Right now City analysts are expecting Shell to deliver a 77% earnings increase in 2018, and to keep the full-year dividend locked at 188 US cents per share.

A low forward P/E ratio of 12.7 times and a chunky dividend yield of 5.2% may be enough to tempt new investment in the fossil fuel leviathan. But my worries concerning booming production in the years ahead, allied to Shell’s modest exposure to renewable energy sources, still discourage me from buying the stock today.

High risk

The same concerns are deterring me from splashing the cash on UK Oil & Gas Investments (LSE: UKOG), you probably won’t be surprised to hear.

The company is an even riskier selection than Shell though, of course — it currently has no income to offset the colossal cost of dragging its considerable oil reserves out of the ground. UKOG has raised funds via share placings in recent weeks to continue testing work at its core assets like Horse Hill in Surrey, but given the rate of cash burn, further cash-raising efforts could be just around the corner.

On top of this, flow testing figures from the project have so far been underwhelming. And further disappointing results from upcoming tests would prompt a fresh exodus of investors, such is the volatility associated with investment in small-cap oil explorers.

UKOG clearly has plenty of promise but that is all it has right now. In my opinion the risks continue to overshadow the potential rewards at this stage.

The post Why I’m not buying Royal Dutch Shell or UKOG today appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Temporary setback

Yesterday’s notification began positively with the small-cap announcing it had recovered “measurable volumes of light oil and solution hydrocarbon gas to surface” during clean-up operations at the Kimmeridge Limestone reservoir. This was “significant and encouraging news”, according to experienced executive chairman Stephen Sanderson. He went on to say that periods of free flow from the well during the clean-up sequence, along with the identification of additional reservoir zones, “add further positive outcomes“.

So why the big fall? According to the company, two independent analyses had revealed that the cement bond over some of the reservoir zones within the well are “less than optimal”, thus preventing the proper evaluation of the full flow potential of UKOG’s reservoir sequence. Keen to calm investors’ nerves, the company stated that rectifying this bonding is “standard oilfield practice” and achieved by squeezing a whole load of fresh cement through perforations in the well’s steel casing. This work has been scheduled to commence after the aforementioned clean-up operations have been completed. A new test flow programme will, the company hopes, also go some way to demonstrating the well’s “near-term commercial viability“.

Risky bet

Clearly, efforts by the company to reassure investors that the aforementioned bonding issues are nothing more than a temporary setback hasn’t had the desired effect. Short-term holders have headed for the exits, no doubt inspiring at least some of those who imagined they would remain invested for longer to follow suit. 

Quite where the share price goes from here is difficult to predict, especially since it has already recovered to be ‘only’ 15% down from when markets opened this morning. All this volatility suggests that many retail investors – particularly those lacking the technical knowledge to give them an edge over other market participants – might do well to sit on the sidelines for now. While this setback appears temporary, today’s reaction is also a helpful reminder that questions still remain over just how just how big the company’s assets really are, how easy it will be to extract the black gold further down the line, and whether UKOG’s valuation has got ahead of itself.

Regardless of whether it makes sense to be bullish on UKOG’s prospects or not, what can’t be disputed is that yesterday’s news underlines just how unpredictable oil exploration is, and why only the most risk-tolerant need apply. The binary bet nature of this kind of investment means that anyone thinking of buying into a story on the hope of dramatically increasing their wealth over a relatively short period of time must also be prepared to lose a large proportion – if not all of their money – if events go against them.

At times like this, it’s worth remembering that our exposure to risk is the only thing we can control. Personally, I like to sleep at night.

The post Is UK Oil & Gas Investments plc a falling knife worth catching after sinking 15% today? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The firm, which provides insulation products for roofs, wall and floors, was last 9% higher in end-of-week business and trading at six-week peaks after declaring a stunning rise in half-year sales.

Kingspan saw revenues jump 19% between January and June, to €1.75bn, a result that pushed trading profit 6% higher to €177.8m.

At its core Insulation Boards division, the Irish company saw turnover rev to €1.1bn in the period, up 17% year-on-year. As well as enjoying continuing improvement in Western Europe and solid demand in the UK, Kingspan also noted resilient performances in North America and Eastern Europe, despite tougher trading conditions.

And chief executive Gene Murtagh painted a rosy picture for the rest of 2017, saying: “We expect end market activity to be broadly positive for the remainder of the year and at current exchange rates to deliver a full-year result at least in line with consensus. Whilst margins contracted somewhat, we anticipate further recovery of input increases in the second half.”

He added that “our balance sheet is strong and ready to support our development agenda as the opportunities unfold.” Kingspan noted that its bolt-on buys contributed 10% to sales growth, and 6% to trading profit growth, in the first half.

On the rise

City analysts certainly expect earnings to continue marching northwards, and have pencilled in advances of 5% and 7% for 2017 and 2018 respectively.

And it is easy to see why as environmental considerations drive healthy demand for Kingspan’s insulation products steadily higher, and the company’s ambitious acquisition plan sees it enter exciting new territories. Indeed, the Kingscourt company’s appetite for bolt-on buys has seen it enter the lucrative South American marketplace recently.

While current projections leave the insulation play dealing on a forward P/E ratio of 19.7 times, I consider this to be fair value given its ambitious growth strategy and proven record of earnings generation.

Barrels of risk

I am not as enthused by the investment case over at UK Oil & Gas (LSE: UKOG), however.

The London company, which invests in fossil fuel assets in southern England, has seen its share price explode in recent weeks following a spate of positive operational releases.

In the latest update last week it advised that a sidetrack for its Broadford Bridge-1 exploration well in the Weald basin had been successfully drilled. UK Oil & Gas had also secured all necessary permission to conduct the work, it added, meaning that a comprehensive multiple zone extended flow test could now be run.

The business is clearly making terrific headway right now, and could continue to do so, meaning that its stock value may keep on shooting skywards. But the unpredictable nature of oil and gas exploration means that the firm’s stock value could of course easily retreat as sharply as it has ballooned, meaning that it is a poor choice for those intolerant of high degrees of risk.

And in my view, when you also factor in the possibility that crude oil prices could remain weak for a very long time, I’m afraid I for one won’t be tempted to plough my money in right now.

The post One hot growth stock I’d always buy over UK Oil & Gas Investments plc appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.