Why I’d Avoid UK Oil & Gas Investments PLC, Solo Oil PLC And The Rest Of The Horse Hill Mob

Are UK Oil & Gas Investments PLC (LON: UKOG) and Solo Oil PLC (LON: SOLO) set to disappoint investors?

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The discovery of what could be huge amounts of oil beneath the Weald Basin, and successful flow tests from the so-called ‘Gatwick Gusher’ via the Horse Hill exploration well, have excited a good few speculative oil investors.

UK Oil & Gas (LSE: UKOG), with a 30% stake in Horse Hill Developments, has seen its share price turn into a six-bagger since the end of 2014, to 2.5p. Its latest update on 9 March told us that the flow tests have delivered a stabilised rate of 168 barrels of oil per day (bopd) for a nine-hour period. In total, this has apparently achieved “a combined average stable rate of over 1,528 bopd from the two Kimmeridge and Upper Portland zones“.

Meanwhile, Solo Oil (LSE: SOLO), which has a 6.5% interest in the Horse Hill well, has actually seen its share price fall by 50% over the same period, to 0.35p — though it did spike to around 1.2p in late 2014.

Time to buy?

Would I buy into these companies and try to snag my share of the riches that are hopefully to come? Not a chance, and I’ll tell you why.

For one thing, I’m a good bit more risk-averse as I get older, but even in my younger days I doubt I’d have found this one attractive. It’s all about costs and cash… and there’s nowhere near enough of the folding stuff around right now.

As of 30 September, UK Oil & Gas was sitting on £4.6m in cash and equivalents. That was after having invested £3.7m in deals related to assets and acquisitions, and after posting an operating loss of £1.6m with revenue for the year coming to just £240,000. A good chunk of the firm’s cash came from the raising of £8.3m of new capital, mostly through the issue of new shares.

Meanwhile, at its halfway point in 2015, Solo Oil counted £1.3m in cash and equivalents, after having raised £2.7m during the half by issuing new shares. It reported a six-month operating loss of £372,000 with zero revenue, and further charges of £679,000. We’re more than eight months on from that now, and we really don’t know how much of that cash is left — but I can’t see it being a lot.

More share issues

My inescapable conclusion is that both are going to need a good bit more cash, and they’re going to need it soon. With only tiny revenue at one, none at the other, and no idea when either might turn a profit, I can see the need for fresh capital continuing for a few years yet — as is usually the case with smaller oil explorers at this stage in their lives.

There seems to be little appetite for debt funding these days, and after Afren bond holders only managed to get a few percent of their money back, that’s not surprising. So I can’t see how further equity issues can be avoided, and they would dilute existing shareholders to an as-yet-undetermined degree. And that’s just to keep current operations going — we have no idea of the full costs that will be associated with developing the Weald Basin discovery, but it won’t be cheap.

If you have a greater liking for risk than me and you go for it, I wish you well — but I’m out.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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