Over the last seven months, the share price of UK Oil & Gas Investments plc (LSE: UKOG) has fallen from 9p to around 1.5p. This is a decline of over 80% at the same time as a number of its industry peers have experienced relatively positive performance.
Looking ahead, further volatility seems to be on the cards. However, with the oil price set to offer an improved outlook than it has in the past, could the stock be a successful turnaround? Or is it now set to continue its recent downward trend?
News released by UKOG in recent months is a key reason for its share price decline. The company has disappointed investors on multiple occasions in recent months, with test results calling into question the economic viability of its Broadford Bridge-1 well. Certainly, there is the potential for improving news flow, and there may be a blockage which can be worked though, but in the near term there seem to be significant risks ahead.
Of course, as with any smaller oil and gas exploration company there are challenges surrounding financing. The terms of its current financing arrangements have been called into question, and could cause investor sentiment to remain weak over the short run.
However, with the company fully funded until the end of 2018 and it having significant exploration potential, it could prove to be a highly-rewarding stock in the long run. Investor sentiment may be more buoyant than it has been in the past due to a stronger outlook for the wider oil and gas sector. And while there may be less risky options available elsewhere within the industry, UKOG could be of interest to less risk-averse investors.
Also offering upside potential within the oil and gas industry is Nostrum (LSE: NOG). The oil and gas producer, developer and explorer has experienced a difficult recent past, with its financial performance being highly disappointing. This has weighed on investor sentiment to some degree, with its share price fall of 36% in the last year being evidence of this.
The company’s future performance, though, may be a surprise to generally downbeat investors. Nostrum is expected to deliver a black bottom line over the next two years, with its earnings forecast to generate growth of 145% in the next financial year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.1, which suggests that it may be undervalued at the present time.
While Nostrum is heavily dependent upon the oil price over the medium term, its risk/reward ratio seems to be favourable. Although there could be downgrades to its forecasts as well as a high degree of volatility in its share price, a wide margin of safety suggests that now could be the right time to buy it for the long term.
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Peter Stephens 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.