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Should You Buy UK Oil & Gas Investments PLC After A 19% Rise?

In these days of plummeting oil prices — we’re looking at Brent Crude at just $37 today — and with investors deserting even the oil giants like BP and Royal Dutch Shell, many will consider putting money into tiny explorer tiddlers as madness.

With a market cap of £24m and a share price of just 1.45p, they don’t come much tiddlier than UK Oil & Gas (LSE: UKOG). And the risk is apparent in the firm’s share price, which has slipped by 60% since April in line with the falling price per barrel.

But as I write the shares are up 19% on the day, so what gives? Well, the news today is that “its 14th round application for an onshore Isle of Wight licence has been successful“, after the Oil and Gas Authority has authorised a licence covering approximately 200 sq km, in which UK Oil & Gas will have a 65% interest.

There’s oil there!

The licence area apparently covers a number of undeveloped discoveries, with an estimated 63 feet of oil play within an Upper Jurassic Portland reservoir section and a possible further 127 feet of play within underlying limestones. Chief executive Stephen Sanderson described the move as providing “a key combination of near-term low-risk appraisal and development balanced by high potential conventional and tight oil exploration upside” — although it obviously remains to be seen whether there’s actually profit to be had from the assets.

Coming on the heels of the firm’s permit to conduct flow tests at the Horse Hill-1 well discovery in the Weald Basin near Gatwick Airport last month, I can see why those who go for small high-risk (but potentially high reward) oil explorers might be getting excited by these latest developments.

But the problem for me is that such things are always very highly speculative, and I’m minded of the disappointing Humpback exploration well results that sent shares in Falklands Oil & Gas spiraling downwards in October. That really hammered home the extent of the risk to me — that company’s shares are now down 64% to 7.1p over the past 12 months, and it’s one that I felt reasonably confident in as it is already sitting on sizable proven reserves, although thankfully I didn’t buy any.

Extreme risk

These days, even BP and Shell are seeing their share prices gyrating wildly in much the same way the way the small explorers used to in the good old days of oil above $100 a barrel. And that, to me, means we’re looking at a very risky sector at the riskiest it has been for some time.

For me, a totally unquantifiable investment in a very small oil explorer is essentially a pure gamble (and even I was surprised at the extent of the Falklands Oil & Gas fall). I don’t do gambling, and so for me this kind of investment is a non-starter.

But if you like your knuckles white and you have some cash that you can afford to lose, well, I wish you the best of luck.

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