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Is UK Oil & Gas Investments plc’s 82% share price slump a great buying opportunity?

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Silhouette of an oil rig
Image source: Getty Images.

For shareholders in Weald Basin oiler UK Oil & Gas Investments (LSE: UKOG), it’s been a tough few months. The UKOG share price has fallen by 85% from last September’s 52-week high of 10p.

The stock’s dramatic decline has been caused by a run of flow test results which have disappointed the market. In December the group declared that a zone of Broadford Bridge-1 (BB-1) well was “likely not economically viable” after a flow test which produced only “traces” of oil.

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More recently, flow testing a different section of BB-1 produced just 10-72 barrels of fluid per day over a 96-hour test period. The proportion of oil recovered rose to more than 30% during the tests. However, my view is that the short duration of the test and the low and inconsistent volumes of fluid aren’t encouraging.

There’s still hope

The company is now suggesting that parts of BB-1 may be blocked. A sidetrack well may need to be drilled so that the target intervals can be successfully tested. This may be the case, but the firm has already resorted to costly ‘death spiral financing’. Further fundraising could be difficult, in my view.

UK Oil & Gas may yet deliver results for patient investors. But the drilling results so far have been poor, or at best inconclusive. Holding on to this stock seems very risky to me. I’d sell, as the share price could still have further to fall.

One small-cap I’d buy

My second stock today sees us look at a different kind of drilling operation. Shares of Africa-focused mining drill rig contractor Capital Drilling (LSE: CAPD) were up by 8% at noon on Friday, after the firm reported a return to profit in 2017.

After commodity prices recover, as we saw in 2016, there is usually a further lag before new contracts start to be awarded. However, the firm reported eight new contracts in 2017 and now seems to be seeing the benefits of stronger market conditions.

Fleet size was almost unchanged last year, but fleet utilisation rose from 45% to 53%. Rates improved too, as the average revenue per operating rig rose by 10% to $194,000.

Revenue rose by 28% to $119.4m and the group moved back into the black with an operating profit of $11.7m. Earnings of 3.9 cents per share were in line with broker forecasts and shareholders will receive a total dividend for the year of 1.7 cents, giving a yield of about 3.1%.

There could be more to come

I believe this could be a good investment as the mining sector returns to growth. Capital Drilling reported a return on capital employed of 14% for 2017 and said that net cash rose from $0.6m to $4.9m. I expect cash generation to remain strong and support further dividend growth.

The only obvious risk is that some of the company’s main contracts are with gold mining firms in Tanzania. Some of these miners are currently engaged in a dispute with the country’s government. An unfavourable outcome could restrict future activity.

Despite this risk, I’d still be happy to consider Capital Drilling at under 40p per share. Although the forward price/earnings multiple of 17 may look pricey, I believe the group’s recovery is likely to have further to go.

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Roland Head 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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