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Is UK Oil & Gas Investments plc a millionaire-maker stock?

One of the most talked about AIM stocks on financial discussion boards, UK Oil & Gas Investments (LSE: UKOG), has already made more than a few investors £1m+ profits. And there are plenty of people who are convinced that the gains to date are just the start of what will be a massive upward trajectory for the shares.

Stunning rise in value

UK Oil & Gas Investments (UKOG) came into being in 2013 via a reverse listing. It was renamed to reflect its new investing policy and said “the company will be seeking investments specifically in the domestic conventional oil and gas sector here in the UK.”

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The shares opened at 0.35p on the first day of trading as UKOG and with 677.4m shares in issue, the company’s market cap was £2.4m. Today, with the shares at 8.5p and with multiple fundraisings and exercises of warrants etc. having taken the number of shares to 3,538m, the market cap is £300m.

Controversy

UKOG acquired a significant interest in Horse Hill licences covering 55 square miles of the Weald Basin and was thrust into the limelight on 9 April 2015 when it reported a significant upgrade to the Horse Hill-1 well near Gatwick Airport. The ‘Gatwick Gusher’ hit the national headlines, with the likes of the BBC reporting up to 100bn barrels of oil beneath the whole of the Weald Basin.

This was highly misleading. UKOG chief executive Stephen Sanderson denied that he or anyone at the company had provided this information to the media, but the BBC broadcast video evidence showing that he had. Furthermore, UKOG has been subject to ongoing criticism from a number of sources. An article by David Smythe, Emeritus Professor of Geophysics in the University of Glasgow, is just one example, while reader comments below the article, criticising the criticism further muddy the waters.

Valuation

Oil exploration companies are difficult to asses for a lay investor at the best of times but when the technical data and assumptions based on it are as disputed as UKOG’s appear to be, the task of weighing up the probabilities of different outcomes becomes even more difficult. Add in variables for different scenarios of future funding requirements, shareholder dilution and so on, and assessing investment risk and potential reward at the prevailing share price becomes thoroughly imponderable.

Clearly, UKOG’s current running annualised numbers — revenue of £208,000 and an operating loss of £2.1m — fall light years short of justifying its £300m market cap. Neither can it be anywhere near justified based on the Horse Hill-1 flow tests, UKOG’s 32.4% interest and the current oil price, which give annual revenue of £10m, if we’re generous. So, the 8.5p share price and £300m market cap is already celebrating what is currently promised over the horizon, beyond Horse Hill-1, as assured commercial production.

It’s possible UKOG could go on to be a millionaire-maker stock for investors buying today. But due to the chief executive’s economical-with-the-truth episode, plus the contentious nature of the company’s prospects, and the premium price, it’s a stock I’m personally avoiding.

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G A Chester 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.