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One oil stock I’d buy ahead of UK Oil & Gas Investments plc

The appeal of UK Oil & Gas (LSE: UKOG) is readily apparent. Where some AIM-listed prospective oil producers rely on faraway assets or expensive offshore fields, its portfolio of 10 assets are a short train journey away from London in a region where oil has been drilled for well over a century.

However, you won’t find me investing in the company at this point in time. The reasons are many, with the most worrying being that it’s incredibly difficult to value the company at this point in time. This is because drilling tests are still being conducted at a variety of its fields to determine just how much oil they may contain and, even more importantly, how much may be viably extracted.

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Second, this is a costly process and the company’s two producing sites grossed a grand total of £104,000 in revenue in the half year to March while their cost of sales was £167,000. This means the company is still reliant on shareholders to keep the lights on. It last tapped shareholders for £6.5m in funds in May and increased the share count by some 30% to do so.

There’s no recent information on cash burn rates, but total operating losses of £1m in H1 suggest this latest fundraising won’t last forever. And then, if the company’s drilling tests do turn up significant amounts of oil, shareholders will likely bear the brunt of fundraising in the future.

This isn’t necessarily a bad thing, and it’s part of the reason capital markets exist, but it does mean the current scenario is simply too risky for me to invest in UK Oil & Gas at this point in time.

A less risky option

If I were looking for exposure to the oil and gas industry, a much more appealing option in my eyes is Riverstone Energy (LSE: RSE). This is an investment trust that has stakes in a variety of listed and unlisted upstream and midstream firms primarily in low-cost-of-production fields in the US and Western Canada.

In the quarter to September, rebounding energy prices led to 11% year-on-year and 4% quarter-on-quarter upticks in the company’s net asset value (NAV). Increased valuations for many of its portfolio companies led to its gross multiple of invested capital rising to 1.5 times.

Now, actual returns for investors will be lower due to the portfolio management fee and taxes, but this is still a pretty hearty return considering the fund only began investing in late 2013. As of today, the fund also trades at a large 15% discount to NAV, which could mean hefty gains for investors if management figures out how to close this gap.

As I’m not exactly bullish on the long-term outlook for oil producers and their medium-term outlook is hazy, I don’t see myself investing in Riverstone. But with its shares trading at a steep discount and an attractive portfolio of conventional and unconventional producers, I can understand why oil bulls would.

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Ian Pierce 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.

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